BACKGROUND OF THE COMPANY
Northern Airlines merged with Southeast Airlines to create the fourth largest U.S. carrier in January 2008. The new North–South 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
Stephen’s objective is to gear the company’s financial performance towards stability and continuous growth. This made him concern that the aging fleet of Boeing 727-300 aircraft’s 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 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 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
Southern Airlines Data
Southeast Airline—airframe maintenance cost:
Cost = 4.60 + 0 (airframe age) = 4.60
Coefficient of determination = 0.39
Coefficient of correlation = 0.62
Northern Airline—airframe maintenance cost:
Cost _ 36.10 _ 0.0025 (airframe age)
Coefficient of determination _ 0.7694
Coefficient of correlation _ 0.8771
Northern Airline—engine maintenance cost:
Cost _ 20.57 _ 0.0026 (airframe age)
Coefficient of determination _ 0.6124
Coefficient of correlation _ 0.7825...
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