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

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.

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.

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.

Answers to Above Case Study Questions

Answer 1: In the given case study of Comair, it is evaluated that the airline is struggling and it requires a successful turnaround strategy for its revival. The principles of operation management that can be applied in this context includes re-designing the product and services, focus on achieving quality management, optimising process and capacity design, supply chain management enhancement, human resource management etc.