CASE : AAA WASHINGTON

AAA Washington is one of the two regional automobile clubs affiliated with the
American Automobile Association (AAA or Triple A) operating in Washington State.
In 1993, 69% of all people belonging to automobile clubs were members of the
American Automobile Association, making it the largest automobile club in North
America. AAA is a national association that services its individual members through
a federation of approximately 150 regional clubs that have chosen to be affiliated
with the national association. The national association sets a certain number of
minimum standards with which the affiliated clubs must comply in order to retain
their affiliation with the association. Its own board of trustees and management
administer each regional club locally. The local management and trustees are
responsible for recruiting and retaining members within their assigned territories
and for ensuring the financial health of the regional club. Beyond compliance with
the minimum standards set by the AAA, each regional club is free to determine what
additional products and services it will offer and how it will price these products
and services.
AAA Washington was founded in 1904. Its service territory comprises the 26
Washington counties west of the Columbia River. The club offers its members a
variety of automobile and automobile-travel-related services. Member benefits
provided in cooperation with the national association include emergency road
service; a rating service for lodging, restaurants, and automotive repair shops; tour
guides to AAA-approved lodging, restaurants, camping, and points of interest; and
advocacy for legislation and public spending in the best interest of the motoring
public. In addition to these services, AAA Washington offers its members expanded
protection plans for emergency road service; financial services, including affinity
credit cards, personal lines of credit, checking and savings accounts, time deposits,
and no-fee American Express travelers checks; access to a fleet of mobile diagnostic
vans for determining the health of a members vehicle; a travel agency; and an
insurance agency. The club provides these services through a network of offices
located in Bellevue, Bellingham, Bremerton, Everett, Lynnwood, Olympia, Renton,
Seattle, Tacoma, the Tri-Cities (Pasco, Richland, and Kennewick), Vancouver,
Wenatchee, and Yakima.
Club research has consistently shown that the emergency road service benefit is the
primary reason that people join AAA. The importance of emergency road service in
securing members is reflected in the three types of memberships offered by AAA
Washington: Basic, AAA Plus, and AAA Plus RV. Basic membership provides
members 5 miles of towing from the point at which their vehicle is disabled. AAA
Plus provides members with the 100 miles of towing from the disabled point. AAA
Plus RV provides the 100-mile towing service to members who own recreational
vehicles in addition to passenger cars and light trucks. Providing emergency road
service is also the clubs single largest operating expense. It is projected that
delivering emergency road service will cost $9.5 million in the next fiscal year., 37%
of the clubs annual operating budget.
Michael DeCoria, a CPA and MBA graduate of Eastern Washington University, had
recently joined the clubs management team as vice president of operations. One of
the responsibilities Mr. DeCoria assumed was the management of emergency road
services. Early in his assessment of the emergency road service operations, Mr.
DeCoria discovered that emergency road service costs had increased at a rate faster
than could be justified by the rate of inflation and the growth in the club
membership. Mr. DeCoria began by analyzing the way the club delivers emergency
road service to determine if costs could be controlled more tightly in this area.
Emergency road service is delivered in one of four ways: AAA Washington service
fleet, contracting companies, reciprocal reimbursement. AAA Washingtons fleet of
service vehicles responds to emergency road service calls from members who
become disabled in the downtown Seattle area. Within AAA Washingtons service
area, but outside of downtown Seattle, commercial towing companies that have
contracted with AAA Washington to provide this service respond to emergency road
service calls. Members arrange for both of these types of emergency road service by
calling the clubs dispatch center. Should a member become disabled outside of AAA
Washingtons service area, the member can call the local AAA-affiliated club to
receive emergency road service. The affiliated club pays for this service and then
bills AAA Washington for reciprocal reimbursement through a clearing service
provided by the national association. Finally, members may contact a towing
company of their choice directly, paying for the towing service and then submitting
a request for reimbursement to the club. AAA Washington reimburses the actual
cost of the towing or $50, whichever is less, directly to the member. After a careful
examination of the clubs four-service delivery methods, Mr. DeCoria concluded that
the club was controlling the cost of service delivery as tightly as was practical.
Another possible source of increasing costs was a rise in the use of emergency road
service. Membership had been growing steadily for several years, but the increased
cost was more than what could be attributed to simple membership growth. Mr.
DeCoria then checked to see if there was a growth in emergency road service use on
a per-memebr basis. He discovered that between fiscal year 1990 and fiscal year
1991 the average number of emergency road service calls per member grew by
3.28%, from an average of 0.61 calls per member to 0.63 calls( AAA Washingtons
fiscal year begins July 1). Concerned that a continuation of this trend will have a
negative impact on the club financially, Mr. DeCoria has gathered the data on
emergency road service call volume as presented in Table 5-5.
1. Examine the components of AAA emergency road service calls data by the
time series plot and autocorrelation analysis.
2. Perform a time series decomposition on the AAA emergency road service
calls data. Write a memo to Mr. Decoria in summarizing the important
insights into changes in emergency road service call volume that you
discovered from decomposition analysis.
Mr. DeCoria would like to predict emergency road service call volume for future
years.
3. Develop an appropriate exponential smoothing model to forecast the
emergency road service call volume for rest of 1993.
Other research done by the club discovered several factors that have an impact on
emergency road service call volume. Among these factors are average daily
temperature and the amount of rainfall received in a day. This research has shown
that emergency road service calls increase as rainfall increases and as average daily
temperature falls. The club also believes that the total number of emergency road
service calls it receives is dependent on the number of members in the club. Finally,
Mr. DeCoria feels that the number of calls received is related to the general
economic cycle. Unemployment rate for Washington State is used as a good
surrogate measurement for the general state of Washingtons economy. Data on
unemployment rate, the average monthly temperature, monthly rainfall, and the
number of members in the club have been gathered and are presented in Table 6-
15.

4. Run four simple linear regression models using total number of emergency
road service calls as the dependent variable and unemployment rate,
temperature, rainfall, and number of members as the four independent
variables.
5. Perform the residual analysis and examine the fit.

Mr. DeCoria has observed that the cyclical trend of the time series seems to be
lagging behind the general economic cycle. He has suggested that the
unemployment rate for Washington State would be a good surrogate measurement
for the general state of Washingtons economy. Data on the average monthly
temperature and the Washington State unemployment rate are presented in Table
7-21.

6. Develop a multiple regression equation using unemployment rate, average

monthly temperature, rainfall and number of members to predict emergency
road service calls.
7. Examine the multicollinearity and serial correlation problem.
8. Create a new unemployment rate variable i.e. 11 months prior to the current
month as the data for the unemployment independent variable. Is this a good
predictor of emergency road calls?
9. Prepare a memo to Mr. DeCoria recommending the regression model you
believe is most appropriate for predicting the cyclical nature of emergency
road service call volume.