Aad Analysis

In January 2008, 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

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.

Stephen's first concern in creating a financially solid company

was maintenance costs. It was commonly surmised in the

airline industry that maintenance costs rise with the age of the

aircraft. He quickly noticed that historically there had been a

significant difference in the reported B727-300 maintenance

costs (from ATA Form 4ls) both in the airframe and engine areas

between Northern Airlines and Southeast Airlines, with

Southeast having the newer fleet.

On February 12, 2008, Peg Jones, vice president for opera-

/ tions and maintenance, was called into Stephen's office and

asked to study the issue. Specifically, Stephen wanted to know

whether the average fleet age was correlated to direct airframe

maintenance costs, and whether there was a relationship between

average fleet age and direct engine maintenance costs.

MONTH DJIA STOCK I STOCK2

11,168 48.5 32.4

2 11,150 48.2 31.7

3 II, 186 44.5 31.9

4 II ,381 44.7 36.6

5 11,679 49.3 36.7

6 12,081 49.3 38.7

7 12,222 46.1 39.5

8 12,463 46.2 41.2

9 12,622 47.7 43.3

10 12,269 48.3 39.4

11 12,354 47.0 40.1

12 13,063 47.9 42.1

13 13,326 47.8 45.2