United Airlines has a problem with mishandled baggage leading to customer complaints. This document analyzes two alternatives to improve baggage handling efficiency at United - pick and place robot arms or RFID baggage tags. An economic analysis finds that RFID tags have a higher net present value and shorter payback period, making them the recommended option. The implementation plan is to start with a pilot program and expand RFID use over several years while continuously evaluating performance metrics like accuracy and handling speed.

1. Economic Analysis of Baggage Handling Process Optimization
Yiyang Gu & Brian Pippenger AT524 Managerial Economic Decision-Making
ABSTRCT
For the airline industry, mishandled baggage has contributed to a significant part of customer
complaints. Therefore, in this report, problems associated with baggage handling is analyzed using United
Airline as a base case. United Airlines is a strong passenger carrier in the United State, however, its
baggage mishandle report number is much worse than other competitors in the market. Therefore,
improvement can be made to the companies through implementing new baggage handling technologies.
Two alternatives selected are pick and place robot arms and RFID baggage tags. Then an economic
analysis includes Net Present Value (NPV) decision model and payback period is conducted for each of
the alternatives mentioned above. Based on the economic analysis and lessons learned from Denver
Airport, only RFID is accepted for implementation. The implementation will include three steps: pilot
program at main hub and several small airports, extended test in medium airports and final full
implementation at all destinations. After the implementation, evaluations will continue for 6 months in
term of accuracy and speed. An employee survey will also be conducted to achieve direct input from
baggage handlers about the new system.
Purdue University Aviation Department
ROBOT ARMS
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
2015 2016 2017 2018 2019 2020
Project initiation
Printer cost ($634,000)
Reader cost ($7,800,000)
Software ($150,000)
Training cost ($222,300)
Total cost ($8,806,300)
Project operationReduced cost for
mishandled baggage* $5,400,000 $5,535,000 $5,673,375 $5,815,209 $5,960,590
Reduced labor cost $3,500,000 $3,500,000 $3,500,000 $3,500,000 $3,500,000
Label cost* ($3,250,000) ($3,331,250) ($3,414,531) ($3,499,895) ($3,587,392)
Cash in flow $5,650,000 $5,703,750 $5,758,844 $5,815,315 $5,873,198
*Assume passenger and flight number increase 2.5% per year
Table 3. Estimated RFID cash flow
RFID Cash Flow Estimated
Objectives Measures Targets Initiatives
Sustainability
﹒ Reduce worker
injuries
﹒ Increase fleet fuel
efficiency
﹒ Lower Co2 emission
﹒ Number of worker
injuries
﹒ Fuel efficiency
(available seat miles
/gallon)
﹒ Intensity ratio (metric
tons CO2e/1,000
RPMs)
﹒ Reduce work injuries by 5%
﹒ Increase fuel efficiency by 5% per
year
﹒ Reduce intensity ratio by 3% per
year
﹒ Worker safety training
﹒ Operate modern fuel
efficient fleet
﹒ Auxiliary power unit
usage reduction
Financial
﹒ Reduce labor cost
﹒ Increase revenue
﹒ Increase profit
﹒ NPV
﹒ Operating revenues
﹒ Net income
﹒ NPV greater than 0
﹒ Increase operation revenues by 4%
﹒ Increase net income by 10%
﹒ Apply automatic
technology
﹒ Introduce new product
﹒ Network optimization
Customer
﹒ Improve on time
performance
﹒ Reduce mishandled
baggage report
number
﹒ Enhance safety
﹒ Percentage of reported
flight operations
arriving on time
﹒ Mishandled baggage
reports per 1000
passengers
﹒ Incident number
﹒ Increase on-time flight percentage
by 5%
﹒ Reduce mishandled baggage
reports per 1000 passengers by
50%
﹒ Reduce incident number by 10%
﹒ Quality management
﹒ Introduce RFID baggage
tag
﹒ Safety management
system
Internal
﹒ Fast ground
turnaround time
﹒ Aircraft turn-around
time
﹒ Reduce aircraft turn-around time
by 10%
﹒ Network optimization
Learning
﹒ Employee retention
and productivity
﹒ Develop necessary
skills
﹒ Employee satisfaction
﹒ Ground operation
training hours
﹒ Increase employee satisfaction by
10%
﹒ Increase ground operation
training hours by 10%
• Employee satisfaction
survey
• Ground crew cross
training
United Airline is large company with strong network, brand recognition and work force, but also
suffers from bad customer reputation, weakness on lagging behind on technology implementation and
high dependence on third party supplier. The steady growth of airline market and technology
advancement will be opportunities for the company. Meanwhile, a growth of LCCs is leading to a
deepening threat. A balanced scorecard (table 1) is created for summarizing company strategic goals
and aligning activities with those goals. The bold items are areas that will be affected by new baggage
handling technology.
BAGGAGE HANDLING
Modern automated baggage handling technologies range from sorting,
conveying, and tracking systems to explosives detection and early bag storage and
retrieval. Together, the goal of a baggage handling systems provider is to make
baggage handling as efficient and as convenient to passengers as possible.
Baggage handling which seem to be insignificant plays a critical role on the
area of customer service. First of all, surely no airline passenger would like to see
their baggage getting delay or damage which can create a mess for their travel plan.
Moreover, some baggage may contains valuable articles, and mishandling this
kind of baggage may lead to legal affairs and a loss of reputation for the company.
PV@MARR 10% PV@MARR 5%
0 ($8,806,300) ($8,806,300) ($8,806,300)
1 $5,650,000 $5,136,364 $5,380,952
2 $5,703,750 $4,713,843 $5,173,469
3 $5,758,844 $4,326,705 $4,974,706
4 $5,815,315 $3,971,938 $4,784,274
5 $5,873,198 $3,646,794 $4,601,804
NPV $12,989,343 $16,108,906
Payback Period 1.9
RFID NPV & Payback period calculation
RFID TAGS
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
2015 2016 2017 2018 2019 2020
Project initiation
Robot cost ($58,500,000)
Training cost ($333,450)
Total cost ($58,833,450)
Project operationReduced cost for
mishandled $8,100,000 $8,302,500 $8,510,063 $8,722,814 $8,940,884
Reduced labor cost $7,000,000 $7,000,000 $7,000,000 $7,000,000 $7,000,000
Maintenance ($390,000) ($390,000) ($390,000) ($390,000) ($390,000)
Cash inflow $14,710,000 $14,912,500 $15,120,063 $15,332,814 $15,550,884
*Assume passenger and flight number increase 2.5% per year
Robot Arms Cash Flow Estimated
PV@MARR 10% PV@MARR 5%
0 ($58,833,450) ($58,833,450) ($58,833,450)
1 $14,710,000 $13,372,727 $14,009,524
2 $14,912,500 $12,324,380 $13,526,077
3 $15,120,063 $11,359,927 $13,061,278
4 $15,332,814 $10,472,518 $12,614,344
5 $15,550,884 $9,655,876 $12,184,525
NPV ($1,648,022) $6,562,298
Payback Period 3.9
Robot Arms NPV & Payback period calculation
The first alternative is the use of robots to pick up the luggage at the
end of the conveyor line and move it to a Unit Load Device (ULD) or
cart. The process is totally automatic. Labor cost for moving baggage
from sorting system to baggage cart can be avoided. Computers will
analyze the size of each baggage and use mathematic model to
optimize the use of space in a ULD or baggage cart. So it can put in
more baggage in a certain space than manual loading. Also, robot
arms are programed to gently handle baggage. Hence, a lot of
baggage damage can be avoided. Lastly, computers can
automatically reconcile all the baggage which can cut down another
staff from manually reconcile baggage. New robotic arms, complete
with controllers and teach pendants, typically cost from $50,000 to
$80,000. Once application-specific peripherals are added, the system
costs anywhere from $100,000 to $150,000.
Radio-frequency identification (RFID) system which is a chip that
can communicate digital information with readers through short
range radio while move through the conveyor system. In the
recent years, due to its decreasing cost and potential added value,
RFID has been adapted in industries like manufacturing and
logistic majorly for tracking and monitoring objects. In the
aviation industry, RFID technology is emerging on tracking
passenger baggage and optimizing the baggage handling process.
Using this system at the airline check-in with the printing of RFID
tags for the passenger’s bag or to issue RFID tag as they are
checked in to the system. By using the tags at airport arrival, the
ability of a 100% tracking to the final destination is usually
possible. Real time tracking information can be sent to passengers
via text messages. Also, RFID cut down a considerable number of
re-work items which increase efficiency for both airlines and
airports.
SELECT DESIRED ALTERNATIVE
Do Nothing
New
RFID
New
Robots
Combination of
RFID and
robots
Cost (initial) 10 5 1 1
Cost (Continued) 5 10 10 10
Training 10 5 1 1
Accuracy 1 10 10 10
Global Strategy 1 10 5 5
Flexability 1 5 5 5
Infrustructure
Compatibility
10 5 5 5
Down time for
Installiation
10 10 1 1
Cost Savings 1 5 10 5
49 65 48 43
Red amber green chart is created for better support the decision
making. The base case, two alternatives and combined RFID and
robot arms are evaluated in terms of different parameter parameters.
The higher score is considered the better alternative. The total score
shows RFID is superior to other alternatives.
IMPLEMENTATION PROVIDE ONGOING EVALUATION
Small
Scale
Pilot
program
Medium
Size
Airport
Large
Size
Airport
Fully
implementation
The new system will be implemented in four stages. The first
will be a pilot program from United’s home base in Chicago to
several of the smaller airports that are technologically ready for
the implementation of this type of technology. The second phase
will be brought into many of the medium and larger sized airports
and the third will include all of the large airports as well as some
of the foreign airports that can utilize newer technology. The last
step will be fully implementation at all service destinations.
For the airport tests, the focus has been on system durability,
user friendliness (stakeholders are able to work with applications
easily) and whether the system users can manage other related
tasks without any additional workload. Another focus has also
been to check if there are any bugs, which still exist in the system
Once the RFID system is installed it will be closely
monitored for several milestone in its performance. The system
will be evaluated in its ability to read the RF tags accurately on
a first time thru basis. The advertised rate for the tags is
approximately a 99.8% read rate which will provide a less than
1% baggage lose rate. The evaluation will also look at the speed
at which the planes are loaded and unloaded. The current time
to ready the baggage for flight is approximately 45 min or less.
The system will need to improve this number by a minimum of
10% or 4.5 min eliminated from the process. The ideal result from
this implementation will be that the baggage will be ready for
flight before all of the passengers have boarded. While the
evaluation is being executed. A survey will also be given to the
baggage handlers to get their direct input from the use of the
new system. With these inputs the project will be able to
determine the sustainability of the new system and review the
system for improvement its user ratings.