CASE STUDY 4 AND 5
NORTH-SOUTH AIRLINE
In January 1999, 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.
Ruth’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 an aircraft. He quickly noticed that historically there had been
a significant different in the reported B727-300 maintenance costs (from ATA Form 41s) both in the
airframe and engine areas between Northern Airlines and Southern Airlines, with Southeast having
the newer fleet.
On February 12, 1999 Peg Jones, vice president for operations and maintenance, was called into
Ruth’s office and asked to study the issue. Specially, Ruth 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. Young was to report back by
February 26 with the answer, along with quantitative and graphical descriptions of the relationship.
Young first step was to have her staff construct the average age of Northern and Southeast B727300 fleets, by quarter, since the introduction of that aircraft to service by each airline in late 1990 and
1991. The average age of each fleet was calculated by first multiplying the total number of calendar
days each aircraft had been in service at the pertinent point in time by the average daily utilization of
the respective fleet to total fleet hours flown. The total fleet hours was then dividend by the number
of aircraft in service at that time, giving the age of the “average” aircraft in the fleet.
The average utilization was found by taking the actual total fleet hours flown on September 30, 1998,
from northern and Southeast data, and dividing by the total days in service for all aircraft at that time.
The average utilization for Southeast was 8.3 hours per day, and the average utilization foe 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.
The fleet data are shown in the following table. Airframe cost data and engine cost data are both
shown paired with fleet average age in that table..
Prepare Peg Young’s response to Stephen Ruth.
North- South Airline Data for Boeing 727-300 Jets
NORTHERN AIRLINE DATA
SOUTHEAST AIRLINE DATA
YEAR AIRFRAME ENGINE
AVERAGE
AIRFRAME
ENGINE
AVERAGE
COST PER COST PER AGE
COST PER
COST PER
AGE
AIRCRAFT AIRCRAFT (HOURS)
AIRCRAFT
AIRCRAFT
(HOURS)
1992
P51.80
P43.49
6,512
P13.29
P18.86
5,107
1993
54.92
38.58
8,404
25.15
31.55
8,145
1994
69.70
51.48
11,077
32.18
40.43
7,360
1995
68.90
58.72
11,717
31.78
22.10
5,773
1996
63.72
45.47
13,275
25.34
19.69
7,150
1997
84.73
50.26
15,215
32.78
32.58
9,364
1998
78.74
79.60
18,390
35.36
38.07
8,259
AKRON ZOOLOGICAL PARK
During the late 1980s, the decline in Akron’s tire industry, inflation, and changes in governmental
priorities almost resulted in the permanent closing of the Akron Children’s Zoo. Lagging attendance
and a low level of memberships did not help matters. Faced with uncertain prospects of continuing,
the city of Akron opted out of the zoo business. In response, the Akron Zoological Park was organized
as a corporation to contract with the city to operate the zoo.
The Akron Zoological Park is an independent organization that manages the Akron Children’s Zoo for
the city. To be successful, the zoo must maintain its image as a high-quality place for its visitors to
spend their time. Its animal exhibits are clean and neat. The animals, birds, and reptiles look well
cared for. As resources become available for construction and continuing operations, the zoo keeps
adding new exhibits and activities. Efforts seem to be working, because attendance increased from
53,353 in 1989 to an all-time record of 133,762 in 1994.
Due to its northern climate, the zoo conducts its open season from mid-April until mid-October. It
reopens for 1 week at Halloween and for the month of December. Zoo attendance depends largely on
the weather. For example, attendance was down during the month of December 1995, which
established many local records for the coldest temperature and the most snow. Variations in weather
also affect crop yields and prices of fresh animal foods, thereby influencing the costs of animal
maintenance.
In normal circumstances, the zoo may be able to achieve its target goal and attract an annual
attendance equal to 40% of its community. Akron has not grown appreciably during the past decade.
But the zoo became known as an innovative community resource, and as indicated in the table,
annual paid attendance has doubled. Approximately 35% of all visitors are adults. Children accounted
for one-half of the paid attendance. Group admissions remain a constant 15% of zoo attendance.
The zoo does not have an advertising budget. To gain exposure in its market, then, the zoo depends
on public service announcements, the zoo’s public television series, and local press coverage of its
activities and social happenings. Many of these activities are but a few years old. They are a strong
reason that annual zoo attendance has increased.
Although the zoo is a nonprofit organization, it must ensure that its sources of income equal or exceed
its operating and physical plant costs. Its continued existence remains totally dependent on its ability
to generate revenues and to reduce its expenses.
ADMISSION FEE ($)
YEAR ATTENDANCE ADULT CHILD GROUP
1998 117,874
4.00
2.50
1.50
1997 125,363
3.00
2.00
1.00
1996 126,853
3.00
2.00
1.50
1995 108,363
2.50
1.50
1.00
1994 133,762
2.50
1.50
1.00
1993 95,504
2.00
1.00
0.50
1992 63,034
1.50
0.75
0.50
1991 63,853
1.50
0.75
0.50
1990 61,417
1.50
0.75
0.50
1989 53,353
1.50
0.75
0.50
Discussion Questions
1. The president of the Akron Zoo asked you to calculate the expected gate admittance
figures and revenues for both 1999 and 2000. Would simple linear regression analysis
be the appropriate forecasting technique?
2. What Factors other than admission price influence annual attendance and thus should
be considered in the forecast?