BACKGROUND OF THE COMPANY

Northern Airlines merged with Southeast Airlines to create the fourth largest U.S. carrier in
January 2008. The new NorthSouth Airline inherited both an aging fleet of Boeing 727-300
aircraft and Stephen Ruth. Stephen was a tough former Secretary of the Navy who stepped in
as new president and chairman of the board. Peg Jones on the other hand is the vice president
for operations and maintenance.

DEFINE THE PROBLEM
Stephens objective is to gear the companys financial performance towards stability and
continuous growth. This made him concern that the aging fleet of Boeing 727-300 aircrafts
maintenance cost may impede realization of this goal.

The significant difference in the reported B727-300 maintenance costs (from ATA Form 41s)
both in the airframe and engine areas between Northern Airlines and Southeast Airlines made
him to probe through Peg Jones assistance on determining the quantitative and graphical
report 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 costs

CASE FACTS AND INFORMATION (INCLUDING LIMITATIONS & CONSTRAINTS)

In addition to the aging formulas below, Peg constructed the average age of Northern and
Southeast B727-300 fleets by quarter since the introduction of that aircraft to service by each
airline in late 1993 and early 1994 respectively.

TOTAL FLEET HOURS = TOTAL DAYS IN SERVICE X AVERAGE DAILY UTILIZATION

AVERAGE AGE OF EACH FLEET = TOTAL FLEET HOURS FLOWN
# OF AIRCRAFT IN SERVICE
AVERAGE DAILY UTILIZATION = TOTAL FLEET HOURS FLOWN
TOTAL DAYS IN SERVICE

In getting the average utilization, Peg used the actual fleet hours flown on September 30, 2007
from Northern and Southeast data, and dividing by the total days in service for all aircraft at that
time. The average utilization for Southeast and Northern were 8.3 and 8.7 hours per day
respectively. In addition, available cost data including the average fleet age were calculated for
each yearly period ending at the end of first quarter.


ALTERNATIVE APPROACHES TO SOLVING THE PROBLEM
Business asset depreciation depends on the cost of asset and its useful life. What is distinct about
aircraft depreciation is that each component of an airplane is depreciated at different rates and
depreciation methods. The North-South Airline problem for this instance may also be resolved
by using depreciation methods as follows:
straight line with salvage value method = Asset Cost/ Useful Life
o The advantage of using the straight line method involves the ease of
calculating the annual depreciation amount. The disadvantage of
using the straight line method is that this method does not consider
the rate the asset will actually depreciate in value.
Declining balance method = Remaining Asset Value x Depreciation Rate
o The advantage of using this method is that it accelerates the depreciation
recorded early in the asset's life and thus reduces the taxable income and the taxes
owed during the early years. The disadvantage is that the method can be applied
only when there is a residual value of the asset.


QUANTITATIVE METHOD/S EMPLOYED AND THE SOLUTION TO THE PROBLEM

Northern Airlines Data

AIRFRAME













ENGINE











Southern Airlines Data

AIRFRAME





Southeast Airlineairframe maintenance cost:
Cost = 4.60 + 0 (airframe age) = 4.60
Coefficient of determination = 0.39
Coefficient of correlation = 0.62









ENGINE











Northern Airlineairframe maintenance cost:
Cost _ 36.10 _ 0.0025 (airframe age)
Coefficient of determination _ 0.7694
Coefficient of correlation _ 0.8771
Northern Airlineengine maintenance cost:
Cost _ 20.57 _ 0.0026 (airframe age)
Coefficient of determination _ 0.6124
Coefficient of correlation _ 0.7825


Southeast Airlineengine maintenance cost:
Cost __0.671 _ 0.0041 (airframe age)
Coefficient of determination _ 0.4599
Coefficient of correlation _ 0.6782

ETHICAL CONSIDERATIONS
DEPRECIATION USED = SAFETY



The units of production method involves determining the cost to depreciate and dividing that
amount by the estimated production units the company expects to manufacture over the life of
the asset. The advantages of using the units of production method include the ease of calculating
the annual depreciation amount and that the depreciation is matched to the production quantity.
The disadvantage of using the units of production method is that this method assumes the asset
will depreciate evenly over its productive life.


The graphs below portray both the actual data and the regression lines for airframe and engine
maintenance costs for both airlines.Note that the two graphs have been drawn to the same
scale to facilitate comparisons between the two airlines.

Northern Airline: There seem to be modest correlations between maintenance costs and
airframe age for Northern Airline. There is certainly reason to conclude, however, that airframe
age is not the only important factor.

Southeast Airline: The relationships between maintenance costs and airframe age for
Southeast Airline are much less well defined. It is even more obvious that airframe age is not
the only important factorperhaps not even the most important factor.

OVERALL CONCLUSION

Overall, it would seem that:
1. Northern Airline has the smallest variance in maintenance costs, indicating that the day-to-
day management of
maintenance is working pretty well.
2. Maintenance costs seem to be more a function of airline than of airframe age.
3. The airframe and engine maintenance costs for Southeast Airline are not only lower but more
nearly similar than those for Northern Airline, but, from the graphs at least, appear to be rising
more sharply with age.
4. From an overall perspective, it appears that Southeast Airline may perform more efficiently on
sporadic or emergency repairs, and Northern Airline may place more emphasis on preventive
maintenance.

Ms. Youngs report should conclude that:
1. There is evidence to suggest that maintenance costs could be made to be a function of
airframe age by implementing more effective management practices.
2. The difference between maintenance procedures of the two airlines should be investigated.
3. The data with which she is presently working do not provide conclusive results.