The Faculty of Institute of Accounts, Business and Finance

Far Eastern University

Case Study 3A: North-South Airlines

By:

Acio, Glaiza
Del Rosario, Joyce
Rico, Charlie

May 18, 2019

I. Case Background

A merger between Northern Airlines and Southeast Airlines had been consummated
to create the fourth largest U.S. carrier, North-South Airline. The merged company inherited,
as part of its assets, an aging fleet of Boeing 737-200 aircraft. North-South Airlines is
headed by the new president and chairman, Stephen Ruth, who deems that the company
should manage its maintenance costs in order to ensure the liquidity of the company. This is
because maintenance costs rise along with the aging of the aircrafts. However, it is noted
that there has been a significant difference in the reported maintenance costs, both in the
airframe and engine areas, between Northern Airlines and Southeast Airlines, with the latter
having a newer fleet. Vice president for operations and maintenance, Peg Young, had been
assigned to study the issue and determine if there is a correlation/relationship between the
average fleet age and maintenance costs (airframe and engine).

II. Statement of the Problem

It is commonly believed that in the airline industry, maintenance costs rise along with
the aging of aircrafts. It has also been observed by Stephen Ruth that the there is a
significant difference in the reported maintenance costs of B737-200 aircrafts of North
Airlines and Southeast Airlines. This case study was made to address the matter and
determine the following:

1. Is there a correlation/relationship between average fleet age and direct airframe

maintenance costs?
2. Is there a correlation/relationship between average fleet age and direct engine
maintenance costs?
3. What can be recommended to effectively manage the maintenance costs of the
B737-200 fleet of North-South Airline?

III. Assumptions Commented [1]: Sbi ni sir jubac, pag nilagay sa

assumptions, ilagay din sa swot. Example daw, the
company is assumed profitable. So later sa SWOt,
Northern Airlines merged with Southeast Airlines and formed the fourth largest U.S. air ilagay din ito sa strength
transport company. Due to its company size, it is assumed that the company can purchase
new aircraft(s), if necessary, and currently has enough financial resources to fund its current
maintenance cost. Moreover, the merger constitutes accumulation of assets from two
companies. It is therefore assumed that North-South Airlines has relatively large fleet of
aircraft.

Stephen Ruth noted that creating a financially solid company necessitates managing its
maintenance costs since such expenses are believed to rise along with the aging of the
aircrafts. Maintenance costs are assumed to be composed of labor costs and replacement
materials required to perform repairs, modification, restoration, inspection and
troubleshooting tasks. If correlation between age and maintenance costs will not be strongly
proven, it will be assumed that there are other factors affecting such expenses (e.g. lack of
care, lack of preventive measures/inspection).

Since Southeast Airlines brings forth newer fleet of Boeing 737-200 tp the merged company,
it is assumed that the company is somehow “younger”, in terms of establishment, than
Northern Airlines. Also, it is assumed that low level management, including operations and
maintenance, is separate for Northern and Southeast Airlines.

It is assumed that the company currently does not use forecasting techniques and other
methods to budget their maintenance costs. Hence, the company only measures or
accounts for the maintenance costs once these are actually incurred.

IV. Areas of Consideration

4.1 Marketing
The Marketing Department must be responsible for advertising and selling company’s
product. TO gain more customer and generate higher sales, the company should provide
perks like creating an entertaining in-flight experience with features lie in-seat system that
play current TV shows, music, games or movies. Also providing, promo flights like piso-fare
promotion, so customers will encourage to book flights in the company.
4.2 Operations
The Operation Department must focus on the evaluation of maintenance procedure of the
two airlines. We believe that the older the aircraft is, the more maintenance it should have.
Since the Southeast Airlines has newer fleet, the company may focus on the emergency
repairs while Northern Airlines may focus their attention in preventive maintenance.
4.3 Finance
The Finance Department should focus on the expenses/cost for maintenance care of the
aircrafts. They should also consider in buying new aircrafts for the customers be safe during
flights.
4.4 HR
The Human Resource Department should hire employees who has expertise in managing
aircraft.
4.5 MIS/IT/R&D
The IT Department is responsible for maintaining the company’s information system. The
integrated information system (software) enables the operation department to keep track on
their sales and information of their clients.

V. Analysis

5.1 SWOT Analysis

Strength Weakness

1. The merged company, North-South 1. Business is highly affected with

Airline is the fourth largest U.S. airline fluctuating fuel costs and increasing aircraft
company. maintenance costs.

2. The merged company owns a relatively 2. The company's primary operating assets,
large fleet of aircraft. aircraft (Boeing 737-200), are subject to
aging.

3. No forecasting technique and any other

 methods were employed to budget the
company's maintenance costs.

Opportunities Threats

1. Due to advancement of technologies, 1. Potential entry in the market of new

new models of aircraft will continuously be budget airline companies.
designed and released by Boeing and
Airbus. Such models may also include cost
saving and sustainable features (especially
in terms of fuel consumption).

5.2 Computational Analysis

Pearson r. Correlation interpretation

Pearson’s Correlation (n.d.). Retrieved from

http://www.statstutor.ac.uk/resources/uploaded/pearsons.pdf

Computations for Correlation, Coefficient of Determination and Simple Regression

NORTHERN AIRLINES

AIRCRAFT MAINFRAME

Total
Average Age Maintenance
(Hours) Costs
x y xy x^2 y^2
6,512 51.8 337,321.60 42,406,144.00 2,683.24
 8,404 54.92 461,547.68 70,627,216.00 3,016.21
11,077 69.7 772,066.90 122,699,929.00 4,858.09
11,717 68.9 807,301.30 137,288,089.00 4,747.21
13,275 63.72 845,883.00 176,225,625.00 4,060.24
15,215 84.73 1,289,166.95 231,496,225.00 7,179.17
18,390 78.74 1,448,028.60 338,192,100.00 6,199.99
84,590 472.51 5,961,316.03 1,118,935,328.00 32,744.15

Correlation Coefficient 0.8771575909 Very Strong Correlation

Check 0.8771575909 Very Strong Correlation

Coeficient of determination 0.7694054393

It shows that Age and Aircraft Mainframe Maintenance cost
Interpretation has a very strong relationship.
76.94% of the variability in maintenance costs can be
explained (attributable to) the fleet's age.

b 0.0026
a 36.08
Simple Regression f = 36.08 + 0.0026t

NORTHERN AIRLINES
ENGINE

Total
Average Age Maintenance
(Hours) Costs
x y xy x^2 y^2
6,512 43.49 283,206.88 42,406,144.00 1,891.38
8,404 38.58 324,226.32 70,627,216.00 1,488.42
11,077 51.48 570,243.96 122,699,929.00 2,650.19
11,717 58.72 688,022.24 137,288,089.00 3,448.04
13,275 45.47 603,614.25 176,225,625.00 2,067.52
15,215 50.26 764,705.90 231,496,225.00 2,526.07
18,390 79.6 1,463,844.00 338,192,100.00 6,336.16
84,590 367.6 4,697,863.55 1,118,935,328.00 20,407.77
Correlation Coefficient 0.7825924937 Strong Correlation
Check 0.7825924937 Strong Correlation

Coefficient of Determination 0.6124510112

It shows that Age and Aircraft Mainframe Maintenance cost has a

Interpretation strong positive relationship.

However, only 61.2 % of the variability in maintenance costs can

be explained (attributable to) the fleet's age.

b 0.0026
a 21.10
Simple Regression f = 21.1 + 0.0026t

SOUTHEAST AIRLINES
AIR FRAME

Total
Average Age Maintenance
(Hours) Costs
x y xy x^2 y^2
5,107 13.29 67,872.03 26,081,449.00 176.62
8,145 25.15 204,846.75 66,341,025.00 632.52
7,360 32.18 236,844.80 54,169,600.00 1,035.55
5,773 31.78 183,465.94 33,327,529.00 1,009.97
7,150 25.34 181,181.00 51,122,500.00 642.12
9,364 32.78 306,951.92 87,684,496.00 1,074.53
8,259 35.56 293,690.04 68,211,081.00 1,264.51
51,158 196.08 1,474,852.48 386,937,680.00 5,835.83

Correlation Coefficient 0.624867994 Strong Correlation

Check 0.624867994 Strong Correlation

Coefficient of Determination 0.39046001

It shows that Age and Aircraft Mainframe Maintenance cost has a

Interpretation strong positive relationship.
 However, only 39.05 % of the variability in maintenance costs can
be explained (attributable to) the fleet's age.

b 0.0032
a 4.62
Simple Regression f = 4.62 + 0.0032t

SOUTHEAST AIRLINES
ENGINE

Total
Average Age Maintenance
(Hours) Costs
x y xy x^2 y^2
5,107 18.86 96,318.02 26,081,449.00 355.70
8,145 31.55 256,974.75 66,341,025.00 995.40
7,360 40.43 297,564.80 54,169,600.00 1,634.58
5,773 22.1 127,583.30 33,327,529.00 488.41
7,150 19.69 140,783.50 51,122,500.00 387.70
9,364 32.58 305,079.12 87,684,496.00 1,061.46
8,259 38.07 314,420.13 68,211,081.00 1,449.32
51,158 203.28 1,538,723.62 386,937,680.00 6,372.57

Correlation Coefficient 0.6781750964 Strong Correlation

Check 0.6781750964 Strong Correlation

Coefficient of Determination 0.4599214614

It shows that Age and Aircraft Mainframe Maintenance cost has a

Interpretation strong positive relationship.

However, only 45.99 % of the variability in maintenance costs can

be explained (attributable to) the fleet's age.

b 0.0041
a (0.92)
Simple Regression f = -0.92 + 0.0041t
 As shown in the computations above, for northern airlines, average fleet age has a
very strong positive correlation with direct airframe maintenance costs. Also, it is observed
that 77% of the variability in airframe maintenance costs is explainable by changes in
average fleet age. In other words, the primary predictor for direct airframe maintenance
costs of Northern Airlines is average fleet age. On the other hand, average fleet age has a
strong positive correlation with direct engine maintenance costs. Also, it is observed that
61% of the variability in airframe maintenance costs is explainable by changes in average
fleet age. In other words, the primary predictor for direct engine maintenance costs of
Northern Airlines is average fleet age.

For Southeast Airlines, average fleet age has a strong positive correlation with direct
airframe maintenance costs. However, it is observed that only 39% of the variability in
airframe maintenance costs is explainable by changes in average fleet age. In other words,
there are other factors, other than average fleet age, that affects variability in airframe
maintenance costs. Additionally, average fleet age has a strong positive correlation with
engine airframe maintenance costs. However, it is observed that only 46% of the variability
in airframe maintenance costs is explainable by changes in average fleet age. In other
words, there are other factors, other than average fleet age, that affects variability in engine
maintenance costs.
A significant difference is noted between the coefficient of determination of average
fleet age and maintenance costs between Northern and Southeast Airlines with the latter
only garnering 39% and 46% coefficients for airframe and engine maintenance costs,
respectively. This means that for Southeast Airlines, age is not the primary variable that
affects maintenance costs. This may arise from the difference in level of care between the
two companies.

VI. Alternative Courses of Actions Commented [2]: miniminum of 4 accdg to sir jubac
indicate advantages and disadvantages
Commented [3]: Nakatable nga pala to. Baka lang
maguluhan kayo pag nag-edit
1 To purchase a new fleet of Boeing 737 200 and sell their aging fleet.
Advantages
a The company will not be concerned about their aging fleet because these
will be sold and the newly purchased fleet will be used for operations.
b Maintenance costs to be incurred will start at minimal amounts since the
fleet is brand new.
Disadvantages
a It costs too much capital to purchase a new fleet. The company may incur
large loans for this course of action.
b There can be an absence of potential buyer/s for the aging fleet.
c Purchasing a new fleet of aircraft may mean purchasing the newest
airplane models. New models require new replacement parts and different
procedures for repairs and maintenance.
2 To manage and budget maintenance costs through forecasting. In this alternative, the
company will first forecast the average age of the fleet per succeeding years through
linear trend because as the years go by, the age of the fleet increases in a trend.
Next, the company will compute the average maintenance costs through the simple
 regression equation computed previously (please refer to 5.2 Computational
Analysis).
Advantages
a Since budgeted maintenance costs will be forecasted, the company can set
aside ample funds for the maintenance costs whilst reserving other funds
for other operational activity.
b No cash outflows will be incurred when forecasting procedures will be
incurred unlike the previous alternative to buy a new fleet.
c Through forecasting, it can be predicted on which future year the company
would incur excessive maintenance costs that can no longer be sustained.
This will give an indication as to when the company should sell some of its
aircrafts and purchase new ones.
Disadvantages
a Forecasting through linear trend and simple regression (associative
forecasting similar to linear trend) only works validly if the given variables
are highly correlated with each other.
3 Retain the company's current policy on maintenance costs. It is assumed that the
company currently does not use forecasting techniques and other methods to budget
their maintenance costs. Hence, the company only measures or accounts for the
maintenance costs once these are actually incurred.
Advantages
a Since no new procedure will be introduced, the company will not
experience any resistance to change from its employees.
Disadvantage
a No funds are set aside for maintenance costs. Money for operational costs
and maintenance costs are commingled.
4 Hire a contractor that standardize the care of aircrafts all throughout North-South Commented [4]: Please add 4th alternative. minimum
Airlines. of 4 daw according to sir Jubac.
Advantages
a This may not be endangered the safety of their passengers as due to
possible aircraft failure.
Disadvantage
a Additional expenses for the company.

Alternatives
1. Purchase a new fleet
2. Use forecasting to manage
and budget maintenance costs
Advantages Disadvantages Total Commented [5]: Sir Jubac said that weights should be
given on to weigh each alternative. What I did is based
2 3 -1 on the number of advantages and disadvantages.
Higher weight = recommendation.
3 1 2

3. Retain current 1 1 0
policy/procedures on
maintenance

4. Hire a contractor that 1 1 0 Commented [6]: Please add alternative 4 and its
standardize the care of aircrafts corresponding weights
VII. Action Plans

It is observed that under Northern Airlines, average fleet age exhibits very strong
correlation to direct airframe maintenance costs and strong correlation to engine
maintenance costs. Meanwhile, under Southeast Airlines, average fleet age has a strong
correlation to both airframe and engine maintenance costs. However, Southeast Airlines
garnered a coefficient of determination of 39% and 46% for airframe and engine
maintenance costs, respectively. This means that only 39% to 46% of the variability of
maintenance costs is explainable by the changes in average fleet age. Therefore, fleet age
is not the primary predictor or Northern Airlines has a higher level of care to its fleet since
age is the primary factor that affects maintenance costs. Meanwhile, Southeast Airlines has
a lower level of care to its aircrafts because it is deemed that a lot of other factors aside from
age are influencing the amount of maintenance costs incurred. This is because of the
separate low level management, including maintenance, for Northern and Southeast
Airlines. With this analysis, the following activities are planned as a solution to the
problem:influencer of maintenance costs for Southeast Airlines. Since the difference of
coefficient of determination between Northern and Southeast airlines are significant, it can
be concluded that there is a difference in the level of care given by the two companies to its
fleets of aircraft.

Activity Responsible Person/s, or Timeline

Department/s, Team/s,
etc.

Inform both the operations Peg Young 1 week

managers of Northern
Airlines and Southeast
Airlines of the following:
1) Forecasting methods will
be implemented in order to
budget and manage
maintenance costs to its
fleet.
2) The forecasting methods
will first be implemented in
Northern Airlines.
3) The forecasting methods
will be implemented to
Southeast Airlines once the
gap in the level of care of
Northern and Southern
Airlines is closed.
4) Assign a team to evaluate
the reasons for the
difference in the level of care
under Southeast Airlines

Managers from both Operations Managers 1 month

Northern and Southeast (Northern and Southeast
Airlines should relay the Airlines unit)
 information to its
subordinates.

For Northern Airlines, start Operations Managers 2 weeks

with the forecasting (Northern Airlines, only)
procedure and create a
budget plan for succeeding
year’s maintenance costs

For Southeast Airlines, the Assigned Team to 1 month

assigned team will evaluate investigate the difference in
the difference in the level of level of care
care between Northern and
Southeast Airlines. Submit
the gathered information to
the operations managers.

For Southeast Airlines, think Operations Managers 1 month

of solutions to close the gap (Southeast Airlines unit)
on its difference in the level
of care with Northern Airlines

For Southeast Airlines, Operations Managers and 1 year

implement the changes to subordinates (Southeast
the care, repairs and Airlines unit)
maintenance procedures of
its fleet.

For Southeast Airlines, Operations Managers 1 month

evaluate if the changes on (Southeast Airlines unit)
the level of care are effective

Once, the level of care of Operations Managers 1 month

Southeast Airlines had been (Southeast Airlines unit)
made parallel to the level of
Northern Airlines, the former
should begin implementing
forecasting procedures and
creating a budget plan for
each year’s maintenance
costs

VIII. Recommendations Commented [7]: I can't draft the recommendation and

We recommend that the care of aircraft from North Airlines should be studied and applied to conclusion without your suggestions. You might be
opposed of the ideas i have written previously. Revise
South Airlines to forestall the rapid addition in aircraft care. the paper as you may

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