FAR EASTERN

Case: North- South Airlines

Operations Management
MBA 703
FEU-Manila

Submitted by:
BELDA, CHRISTINNE
DE JESUS, MARK LOUIE
GALES, GEORGETTE ANN MARIE
TORRES, CELINE

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I. Case Background
In January 2012, Northern Airlines merged with Southeast Airlines to create
the fourth largest U.S. carrier. The new North-South Airline inherited both an
aging fleet of Boeing 737-200 aircraft and Stephen Ruth. Stephen was a tough
former secretary of the Navy who stepped in as new president and chairman of the
board.

His first concern in creating a financially solid company it the costs of

maintenance of the aircrafts. It was common problem in the airline industry that
maintenance costs rise with the age of the aircraft. He quickly noticed that
historically there had been an aircraft. He quickly noticed that historically there
had been a significant different in the reported B737-200 maintenance costs in
both the airframe and engine areas between Northern Airlines and Southern
Airlines, with Southeast having the newer fleet.

II. Statement of the Problem

On November 12, 2010, Ruth assigned Peg Young, vice president for operations
and maintenance, to study the issue of the following:

 Correlation of the average fleet age to direct airframe maintenance costs

 Linear relationship between the average fleet age and direct engine
maintenance

III. Assumptions
Creating a financially solid company is their goal, the costs of
maintenance of the aircrafts was a common problem in the airline industry that
maintenance costs rise with the age of the aircraft. He also noticed that
historically there had been a significant different in the reported B737-200

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maintenance costs in both the airframe and engine areas between Northern
Airlines and Southern Airlines, with Southeast having the newer fleet.

Facts of the Case

1. The average age fleet each fleet is calculated by multiplying the total
number of calendar days each aircraft had been in service at the relevant point in
time. By the average day of utilization of respective fleet to total fleet hours
flown.

2. The average utilization for Southeast was 8.3 hours per day, and the
average utilization for Northern was 8.7 hours per day. Because the available
cost data were calculated for each yearly period ending at the end of the first
quarter, average fleet age was calculated at the same points in time.

Table 1

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IV. Areas of Consideration

a. Human Resource and Development

The development of the aircrafts is mostly the problems of the

Airlines, but with people which is

b. Operations

Southeast Airlines has newer planes than Northern Airlines. On the

other hand, Northern Airlines has a higher maintenance cost as it wants
to maintain it features as years goes by. The flight safety should be the
priority if the Airlines. Also, Southeast Airlines has the newer fleet than
Northern Airlines as its maintenance cost is more affordable than the
Northern Airlines.

c. Finance

There is a strong positive correlation shown between the age and

maintenance cost, However the maintenance costs of Southeast Airlines
are lower compared to that of Northern Airline given that it is more
utilized and high maintenance costs. Therefore, the maintenance cost is
more dependent on the airline and on the age of the carrier.

d. Marketing

Known as the fourth largest U.S. carrier, that both has aircraft fleets
from North and South Airlines that provides both northern and southeast
passenger flight with their inherited aircrafts since the introduction of
the aircraft to service by each airline in late 2001 and early 2002.. The

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new president and chairman of the board Mr. Stephen Ruth wants to
study the issue about their maintenance cost.

e. IT / R & D Business Development etc.

The maintenance procedure of the two airlines should be evaluated.

Because the older the aircraft is the more maintenance it needed. It also
shows that the age factors of an aircraft is determining its maintenance
costs in Northern Airline. The care of aircrafts for Northern Airline
should also be applied to Southeast Airline to anticipate the cost for
maintenance care. Technological Advancement is may one of the
factors that the maintenance costs of the airlines may increase.

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

STRENGTH
 Northern Airlines merged with
Southeast Airlines to create the
fourth largest U.S. carrier
“North-South Airlines”
 Inherited both an aging fleet of
Boeing 737—200
 Southeast Airline has newer
fleets.
OPPORTUNITY
WEAKNESSES
 Possible high maintenance costs
as it was an old aircraft, The
introduction of the aircraft to
service by each airline in late
2001 and early 2002.
THREATS

 Growth in tourism  Price increase in aircrafts raw

 Expected investment
 Development of new products
and services.
 Technological advancement
materials such as equipment and
machines
 Release of new models of
Aircrafts with new technology.
 Higher competition

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 Downturn in economy
 Government legislation

VI. Alternative Courses of Action (at least 4)

Care Costs of Aircrafts

Advantages: The care of aircrafts from North Airlines should be studied
and applied to Southeast aircrafts to forestall the rapid addition in aircraft
care.

Disadvantages: Higher maintence costs of the fleets.

Hire a contractor to standardize the care of aircrafts all throughout North-

South Airlines.

Advantages: This will make the aircrafts fleet machines and equipment’s
long lasting and the safety of the passengers and employees will be sure as
there is in-charge personnel in maintaining the features and quality of the
aircrafts.

Disadvantages: Additional costs for manpower.

Regression Analysis

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FIGURE 1

Engine Costs vs. Average Fleet Age of North Airlines

The engine maintenance costs increase by 0.0026 as average age of the

aircraft increase by a unit. There is 61% of the changes in engine maintenance
costs that can be explained by aircraft age. The 39% remaining attributes to other
variables not mentioned in the case.

The regression equation is ‘Engine Cost = 20.5744 + 0.0026 * Average

Age.’ There is a positive relationship between the ‘engine cost’ and the ‘average
age’ because the coefficient of correlation is 0.7826.

Engine Costs vs. Average Fleet Age Southern Airlines

Engine cost per aircraft increases by 0.0041 1as the airline increase
average age of aircraft by a unit. There is only 46% of the changes in engine cost
that can be explained by aircraft age. The 54% remaining attributes to other
variables not mentioned in the case.

The regression equation is ‘Engine Cost = -0.6709 + 0.0041 * Average

Age.’ There is a positive relationship between the ‘engine cost’ and the ‘average
age’ because the coefficient of correlation is 0.6782.

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VII. Action Plans

Activity Responsible Person/s, or Timeline

Department/s, Team/s, etc
Maintenance of the Air Operations, Finance Monthly
crafts
Hiring of Maintenance Operations Within a month
Contractor
The Employees be HR, Finance and Operations Within a month
assigned to new
services/department under
the new merged airline
company for their
sustentation

VIII. Recommendation
For the recommendation. The pressure to continually meet market
demands and to reduce maintenance costs, North- South Airlines may implement
strategies and actions that tend to hamper the quality and safety of their airline
service. Since their now-merged fleet is comprised of both old and new aircraft,
North- South Airlines may have a difficulty of balancing cost minimization and
the maintenance of safe and quality services.

Passengers who have tried both airlines surely know of what both can
offer. WIth the merger being North - South Airline, passengers should expect a
new experience while flying to their destination and this should be served by the
new North - South Airline. It is possible to apply what each airlines had did in
their previous voyages, but they need to establish a new brand or mark because

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they are now a new airline company as one.

IX. Conclusion
Maximixing profit and minimixing cost are among the goals of all
managers to be able to succeed financially. However, in order to achieve such, a
lot of considerations in terms of the business operation must be taken into
account. Considering the merging of Northern and Southeast airlines, changes in
the practices and functions of each must be expected. Changes and improvement
on the current practices will initially happen after the review and analysis of both
companies’ historical data. With new President Stephen Ruth’s attempt to create a
financially solid company, significant differences in the numbers/data of each
company were noticed specifically the maintenance costs that lead to our group’s
quantitative analysis.

For Southeast Airline, neither airframe nor engine shows a correlation

between costs and average age per aircraft. There is failure in tests for
significance and there is low correlation coefficients and coefficient of
determination. Obviously, engine costs have higher correlation coefficients and
coefficient of determination while the costs of airframe have lower MSE.

With the foregoing, we can conclude that there are other factors that affect
the movement of airframe and engine costs in Southeast Airlines aside from
aircraft age.

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