FAR EASTERN UNIVERSITY

Case: The North – South Airline

Operations Management
MBA 703
FEU-Manila

Submitted by:
 Reporting Group  Reacting Group
CASUGA, ELY
GIANAN, ANGELICA
MADURAR, ABEGAIL

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I. Case Background

To create the fourth (4th) largest U.S. carrier, Northern Airlines merged
with Southeast Airlines in 2010. Following this, the new airline company
inherited both an aging fleet of Boeing 737–200 aircraft and the new
President and Chairman of the Board, Stephen Ruth.

In relation to the establishment of a financially solid company, Ruth’s

first concern was the maintenance cost, which was commonly believed in the
airline industry to rise with the age of the aircraft. Ruth quickly noticed that
there was a significant difference on airframe and engine maintenance cost
between Northern and Southeast Airlines, having newer fleet compared to the
other.

Hence, Peg Young has been assigned by Ruth to study the issue on 1)
whether the average fleet age was correlated to direct airframe maintenance
costs and 2) whether there was a relationship between average fleet age and
direct engine maintenance costs.

II. Statement of the Problem

How much would the maintenance cost of the inherited fleet impact the
company in the long run?

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III. Assumptions

1. Merger has caused the company to be more cautious on its

expenses and usage of resources.
2. Possible increase in fuel costs in the future.
3. Airlines have different routes during service time.
4. Growth in the Tourism Industry.

IV. Areas of Consideration

a. Human Resource and Development

- New President
- Re-organizational structure after the merger, e.g., might
undergo redundancy procedures
- Organizational culture conflicts

b. Operations

- Increased operating and maintenance activities

- Increased complexity in operations due to merging
- Integration of different processes between Airlines

c. Finance

- Increased operational and maintenance costs

- Increased administrative costs
- Increased consolidated revenue and income

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- Increased resources
- Regulatory and tax implication of the merger

d. Marketing

- Merger of the 2 Airline Companies carrying the line as the 4th

largest U.S. carrier
- Increased market share
- Decreased competition

e. Information Technology

- Advanced system to support the merger of 2 Airline

Companies

V. Framework (e.g. SWOT, Porter’s etc)

STRENGTHS WEAKNESSES

 Merging of 2 Airlines to be the 4 th  Aged aircrafts of Northern Airlines

largest U.S. Carrier  Increased complexity in operations
 Expanded market share  Organizational conflicts
 Increased Revenue and  Integration and cultural differences
Operations (having more aircrafts between merged companies.
to accommodate more passengers)  Increased operational,
 New fleet of aircraft of Southeast administrative and maintenance
Airlines cost.

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OPPORTUNITIES THREATS

 Established brand name in the  Challenge in competing for low

industry cost offerings
 Increase travel demand as a result  Safety concerns on aged
of growth in the Tourism Industry aircrafts of Northern Airlines
 Decreased competition  Regulatory Implication of the
 Wider products and services to Merger
offer
 Advertising of being the 4th
largest U.S. carrier

We prepared a scatter plot to visualize the relationship of the given data

for both Northern and Southeast Airlines as to Airframe and Engine
Maintenance Costs.

Airframe Maintenance Cost to Average Age of Aircraft

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Figure 1 – Airframe Cost as to Average Age of Northern Airline

The Figures 1 and 2 show that in both graphs for Northern and
Southeast Airlines, their airframe cost and average age are linearly correlated.
To further verify this data relationship, correlation coefficient were
performed. It showed values of “r” for Northern and Southeast at 0.88 and
0.62, respectively.

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Figure 2 – Airframe Cost as to Average Age of Southeast Airline

For Northern Airlines, it can be interpreted that there is a high positive

correlation between the airframe maintenance cost and average age of the
aircraft, while a moderate positive correlation for Southeast Airlines.

Furthermore, a regression equation has been establishing for the

Northern Airlines on airframe cost, [Airframe Cost = 36.0968 +
(0.0026*Average Age)]. Accordingly, the airframe cost increases by $0.0026
for every increase in the average age of the aircraft by an hour.

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Engine Maintenance Cost to Average Age of Aircraft

Figure 3 – Engine Cost as to Average Age of Northern Airlines

Figures 3 and 4 depicts the scatter graph of engine cost as to average

age for both Northern and Southeast Airlines. Both seemly showed a linear
correlation of data. Further verification has been done thru correlation
coefficient. Computed “r” values are 0.78 and 0.68 for Northern and
Southeast, respectively.

Same with the airframe cost, Northern Airlines’ engine cost showed a
high positive correlation whereas Southeast posted a moderate positive
correlation. With this, a regression equation for Northern Airline has been
establish at Engine Cost = 20.5712 + (0.0026*Average Age), wherein engine

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cost increases by $0.0026 for every increase in the average age of the aircraft
by an hour.

Figure 4 – Engine Cost as to Average Age of Southeast Airlines

Table 1 – Summary of Correlation Coefficient (North and South)

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VI. Alternative Courses of Action (at least 4)

1. Manage Utilization of Aircrafts

Advantages:

a. Utilization of new aircraft fleet should be maximized

b. Keep utilization of aged aircrafts at a minimum to prevent
additional maintenance cost.

Disadvantages:

a. All aircrafts, regardless of age, will come to a point of being fully

depreciated.

2. Gradual shift into having newer aircraft fleet

Advantages:

a. Increased the safety and trust rating of passengers

b. Low maintenance cost
c. Increased total productivity of aircrafts

Disadvantages:

a. High capital investment

b. Will take considerable time to acquire the ordered aircraft

3. Inclusion of the valuation of aircraft for possible insight for

refurbishing the older aircrafts

Advantages:

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a. Assess the remaining book value of the aircrafts

b. Identify aircrafts for refurbish, scrap and new aircrafts to be
maximized

Disadvantages:

a. Increased cost for refurbishing

b. Added workloads

4. Create a regression analysis for the engine cost and airframe cost to
determine its relation overtime.

Advantages:

a. To determine the correlation of the variables

b. To have better cost decision making over time

Disadvantages:

a. Accuracy of cost relationship

VII. Action Plans

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Activity Responsible Person/s, or Timeline
Department/s, Team/s, etc.

Clearly identify the age among Operations 1-2 weeks

aircraft and assign optimal
schedules and routes to each one,
with minimum flying hours for
aged aircraft and additional for
newer ones.

Study the pricing of maintenance Operations/Finance 1-3 weeks

providers and engage the service
of the most feasible one.

Prepare a forecast of maintenance Finance 1-3 weeks

costs to be incurred and prepare a
budget for the related expenses.

Streamline the operations. Align Operations 1-2 weeks

the processes of the Northern and
Southeast Airlines to identify gaps
and take appropriate
improvements.

Prepare a campaign of the merger Marketing 1 week

and slogan as the 4th Largest U.S.
Carrier to boost Revenue.

Hire contractual and temporary Human Resource 1 week

manpower to aid the Operations
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Team in carrying out the action
plans.
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VIII. Recommendation

We recommend the increased utilization of new aircraft fleet to

maximize maintenance cost. Aged aircrafts of Northern Airlines should be
used at a minimum so as not to increase maintenance cost. As shown in the
previous illustrations, Northern Airline’s airframe cost increases by $0.0026
per aircraft for every hour. Same with its engine cost wherein additional
$0.0026 is incurred per aircraft for every hour.

IX. Conclusion

It can be concluded for Northern Airline that maintenance cost rise

with the increase in age of the aircraft but not with the new aircraft fleet
under Southeast Airline. In order for the newly merged company to
maximize its profits, the management should be able to efficiently schedule
the usage and flights of aircrafts accordingly (e.g., increase flight hours of
new fleet as it do not directly increase maintenance cost over time). With
this, additional revenue has been generate and maintenance costs have been
maximized.

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References:

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