PROGRAMME: POSTGRADUATE DIPLOMA SUPPLY CHAIN MANAGEMENT

MODULE: OPERATIONS MANAGEMENT

Total Marks: 70

QUESTION ONE [30]

Read the case study carefully and then answer the questions that follow:
Comair flew headlong into a perfect storm of problems

A perfect storm of bad luck, fate and dirty dealing led to the demise of Comair, the budget
airline of choice for many South Africans. Bad luck was the disastrous order of Boeing 737
Max planes, for which Comair had paid $45 million in deposits for 8 of the planes, but had only
taken delivery of one plane before a worldwide grounding of the planes between 2019 and
2020 following two fatal crashes. Fate took its toll with the arrival of the global Covid-19
pandemic and subsequent collapse of tourism; and dirty dealing – the Competition
Commission’s finding that SAA had paid travel agents’ commissions to divert customers away
from Comair’s flights between 2001 and 2006, for which only an initial amount of R383 million
was paid before SAA itself was declared insolvent. Not to mention the significant rise in fuel
prices and suspension of all Comair flights by the SA Civil Aviation Authority on the 12th of
March owing to concerns over its risk and safety management systems. Poor Comair: it didn’t
stand a chance. – Sandra Laurence

Comair collapse: A story of crisis and government overreach

The impending demise of airline operator Comair (unless a late-stage miracle investor
intervenes) is a long, winding story of multiple crises, unfortunate events beyond Comair’s
control, and government overreach in the form of SAA’s distortive effect on the airline industry.
All of this is especially troubling because Comair’s liquidation will have knock-on effects in a
tourism sector already battered by Covid-19 and the effects of various lockdowns. Higher
airline fees will dissuade already under pressure consumers to cancel travel plans because it
will take time for other airlines to fill the seat capacity void left by Comair.
The original problem
Comair voluntarily entered business rescue proceedings on the 5th of May 2020 owing to the
operator’s inability to repay its debt. In a published version of the operator’s business rescue
plan prepared by business rescue practitioners Shaun Collyer and Richard Ferguson, the
primary cause of Comair’s financial distress was that its debt burden had been growing for
years, as a result of a disastrous order of Boeing 737 Max planes.
Comair had paid $45 million in deposits for 8 of the planes, but had only taken delivery of one
plane before a worldwide grounding of the planes between March 2019 and December 2020
following two fatal crashes. This had the effect of ballooning the company’s total operating
costs and eroding its profitability and liquidity, which contributed to the inability to properly
service its debt. The airline has an ongoing legal battle in a US court to cancel the purchase
agreement of the 737 Max planes from manufacturer Boeing.

What exacerbated the problem

Comair’s financial struggles were exacerbated by the arrival of Covid-19 and the subsequent
lockdowns imposed by the government, during which airlines were grounded. During level 4
and 5 of lockdown Comair was unable to generate revenue, but was still obliged to meet its
financial obligations where legally required to do so. This caused the company to be under-
capitalised which contributed to its inability to recommence flights. The Omicron variant added
further struggles as overseas governments put South Africa on a “red list”. The airline has also
had to contend with a significant rise in fuel prices over the last five months, and the
suspension of all flights operated by Comair by the SA Civil Aviation Authority (SACAA) on
the 12th of March owing to concerns over its risk and safety management systems.
In a statement regarding the grounding, the SACAA said that the decision was reached
“following an investigation into the recent spate of safety incidents at the Operator. Just in the
past month, Comair operations experienced occurrences ranging from engine failures to
engine malfunction and landing gear malfunctions, among others,” they said.

These problems have ultimately forced the hand of the Comair Rescue Consortium (CRC)
which, according to the terms of the business rescue plan, were to invest R500 million for a
99% equity stake once the suspensive conditions set out the business rescue plan were met.
The CRC is unwilling to pump even more funds into keeping Comair afloat.

The lingering shadow of SAA

In February 2019, Comair and SAA reached a settlement agreement in which SAA was to pay
Comair R1.1 billion. This was after Comair lodged a complaint with the Competition
Commission that SAA had paid travel agents’ commissions to divert customers away from
Comair’s flights between 2001 and 2006. In terms of the settlement agreement, SAA made an
initial payment of R383 million on the 28th of February 2019, with the balance payable in
monthly instalments, until the 28th of July 2022. These payments were terminated once SAA
was placed in voluntary business rescue on the 5th of December 2019, with R790 million of
the settlement still outstanding.

Considering that SAA has been receiving government bailouts since 2009, it is infuriating to
note that taxpayers have ultimately been paying not just for SAA’s incompetence, but also
their malfeasance in intentionally hobbling a competitor.

What makes Comair’s almost certain demise even more galling is that SAA subsidiary
Mango will, unlike Kulula, receive an infusion of yet more taxpayer money to fund its business
rescue. In a status report published on the 1st of June, Mango’s business rescue practitioner
noted that Public Enterprises Minister Pravin Gordhan released funding worth R225 million to
the state airline for its continued survival.

Will anyone rescue Comair from liquidation?

While rescue is theoretically possible, it is highly unlikely to occur as foreign investors are
restricted to a 25% ownership stake of South African air service licence-holders under the
South African Air Services Licensing Act No 115 of 1990. Comair cited the restriction in a
September 2013 press release (https://bit.ly/3yNHC3L) when Tanzanian airline Fastjet applied
to be exempted from the restriction in order to gain access to the South African domestic
airline market. Fastjet was planning to purchase 100% of the shareholding in 1Time, which
was insolvent. In light of resistance to their efforts to obtain such an exemption, Fastjet
abandoned its application before a final decision could be made by the Minister of Transport
and the Air Services Licensing Council.
Comair went on to say: “Comair believes that the same principles and similar objections should
apply to the Safair scheduled licence application. The real risk, present in the precedent set
by the granting of a scheduled air service licence to Safair (Operations) is that it will allow
large foreign aviation companies to enter the South African domestic airline market by setting
up “front” companies but where in reality the majority financial and operational control of the
airline does not resort with South African residents.”
Comair added: “The precedent will allow more substantial global airlines to set themselves up
in South Africa and extract the economic benefit of our air space, without our own airlines
having reciprocal legal rights. The use of South Africa as a flag of convenience by foreign
airlines will tarnish South Africa’s image when negotiating for route rights with other
countries”.
Comair’s own previous arguments against foreign ownership work against the company, if
they were to attempt to argue for an exemption to the restriction

Source: https://www.biznews.com/travel/2022/07/27/comair-perfect-storm-
problems#:~:text=During%20level%204%20and%205,its%20inability%20to%20recommence
%20flights.

Question:
A local group of investors have shown a keen interest reviving this airline. Demonstrate how
the ten (10) decision areas in Operations Management can be applied to develop a turnaround
strategy for Comair.

Mark Allocation:
Theoretical framework: 10 marks
Application of the 10 decision areas to Comair: 20 marks

QUESTION TWO [20]

Efficient operational management includes the ability to develop a strategy and how to
successfully implement this strategy by using key success factors as well as core
competencies. Provide an overview of the strategy development and implementation process
you would recommend for Comair.

Mark Allocation:
Theoretical framework: 8 marks
Application to Comair: 12 marks

QUESTION THREE [20]

Case Study: Apple’s Supply Chain Vulnerability

Apple has an extensive network of third party suppliers in its supply chain. According to
recent research, Apple has 785 suppliers in 31 countries worldwide, 349 of which are based in
China. A security researcher has detailed how he was able to hack into systems belonging to
Apple, Microsoft, PayPal, and other major tech companies in a novel software supply chain
attack. Bug hunter Alex Birsan detailed in a blog post published yesterday (February 9) how
he gained access to his targets’ internal systems by exploiting a vulnerability dubbed
‘dependency confusion’.
Dependency confusion is the name given to a vulnerability that can allow an attacker to
execute malware within a company’s networks by overriding privately-used dependency
packages with malicious, public packages of the same name.

Latest News

Apple executives warned that the group could sustain a hit of up to $8bn in the current
quarter from headwinds including supply chain shortages and factory shutdowns in China,
underscoring how the challenges posed by the pandemic are far from over for the world’s
most valuable company. “Supply constraints caused by Covid-related disruptions and
industry-wide silicon shortages are impacting our ability to meet customer demand for our
products,” Apple’s finance chief Luca Maestri told analysts on Thursday.
“We expect these constraints to be in the range of $4bn to $8bn, which is substantially larger
than what we experienced during the March quarter,” he said, adding that “Covid-related
disruptions are also having some impact on customer demand in China”. Apple’s stock, which
rose 4.5 per cent in Thursday’s trading session, initially gained 2 per cent in after-hours trading
following the earnings report, which showed the iPhone maker’s revenues had risen 9 per cent
from a year ago to $97.3bn in the first three months of 2022.
That was well above the $94.1bn expected by analysts. But shares subsequently reversed
course to fall more than 4 per cent after the call during which executives detailed the
challenges ahead for the company. “Covid is difficult to predict,” said Apple’s chief executive
Tim Cook. “And I think we’re doing a reasonable job currently navigating what is a challenging
environment.” The comments highlighted that the tech group, known for the sophistication of
its supply chain, was braced for a period of prolonged uncertainty this year. Pre-pandemic,
Apple routinely offered quarterly revenue guidance, but it stopped doing so as coronavirus
spread.
The projected $4bn to $8bn hit for the June quarter compared with a more than $6bn dent in
its revenue in the December quarter, and was the starkest warning Apple has offered since
February 2020, when it signalled “a slower return to normal conditions than we had
anticipated”. The pessimistic commentary on supply chain woes came after Apple’s March
quarter results showed a 6 per cent jump in net profits to $25bn, making it Apple’s third most
profitable quarter on record despite not being a holiday period.
Maestri cited silicon constraints in the supply chain. Reports have indicated that Apple has
prioritised the chips it has for the iPhone rather than the iPad. Regionally, results were mixed.
Apple’s board also authorised another $90bn of share buybacks and raised its dividend 5 per
cent, the 10th straight annual increase, according to Maestri. Analysts had called the report
more important than usual given broad concerns about the health of consumer spending amid
higher inflation. Zino applauded Apple’s “aggressive” moves to please Wall Street with
buybacks and dividends and characterised its overall results as “extremely” good.

Question

Integration of the supply chain by managers result in substantial efficiencies. The flow of
materials from suppliers, to production, to warehousing, to distribution, to the end-user takes
place among separate and independent organisations. This may lead to sub-optimal
efficiencies within the entire chain. Evaluate the issues that Apple would face in managing
their integrated supply chain.

Answer requires a page count of six (6) pages maximum.

End of assignment questions