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BOEING 737-无代写
时间：2024-05-08
Journal of Business and Accounting
Vol 13, Number 1; Fall 2020
4
COST SAVINGS VERSUS REDUNDANT
SYSTEMS: THE CASE OF THE BOEING 737
MAX DEBACLE
John B. MacArthur
University of North Florida
ABSTRACT: It is difficult to find an issue of The Wall Street Journal published
in 2019 or the early months of 2020 without one or more articles covering various
aspects of the 737 MAX grounding stemming from two fatal crashes of the aircraft.
This paper covers a number of failures that have been reported as likely
contributing to the two fatal crashes. These failures included making “angle-of-
attack-sensor” redundancy and other safety features optional upgrades for its
Maneuvering Characteristics Augmentation System (MCAS) that is a cost saving
measure, possibly insufficiently experienced pilots flying the 737 MAX planes that
crashed, the lack of pilot training and training manuals covering the MCAS newly
installed in the 737 MAX, and the failure of the FAA to conduct a sufficiently
independent safety review of the aircraft before flight certification, although there
are disagreements over whether or not there was a FAA failure that contributed to
the two 737 MAX plane crashes. Also, Boeing’s responses are outlined.
Key Words: Boeing 737 MAX crashes; cost savings; redundant systems; safety;
cost management.
INTRODUCTION
In order to secure a new order from American Airlines in 2011, facing fierce
competition from the new Airbus A320neo, Boeing decided to update its 737
airplane over a six-year period rather than develop a new fuel-efficient jet airplane
that would take 10 years to design and build (Gelles, et al., 2019). It was announced
on November 30, 2011, that Boeing’s “board of directors had approved the launch
of the new engine variant of the market-leading 737, based on order commitments
for 496 airplanes from five airlines and a strong business case” (Boeing, 2011).
Boeing workers designed and built the 737 MAX aircraft under the intense
pressure of tight deadlines, with the initial 737 MAX 8 being completed in
November 2015 (Gelles, et al., 2019). The 737 MAX 8 received FAA certification
on March 9, 2017 (Boeing, 2017). The first 737 MAX 8 commercial flight took
place on May 22, 2017, from Kuala Lumpur to Singapore, operated by the
Malaysian airline Malinda Air (Hashim, 2017).
The Lion Air Flight 610 737 MAX 8 crash occurred soon after the plane took off
from Jakarta, Indonesia, on October 28, 2018, with 189 fatalities. The Ethiopian
Airlines Flight 302 737 MAX 8 airplane crash similarly took place soon after it
took off from Addis Ababa, Ethiopia on March 10, 2019, which resulted in 157
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5
fatalities. The second crash led to the grounding of all 737 MAX aircraft world-
wide for well over a year at the time of writing and was still in effect when this
article was published. The day after the second fatal crash, it was estimated the 737
MAX “fatal-accident rate” is 4 flights per million versus only 0.2 flights per
million for the “prior version of the 737” (Newman, 2019). An emergency order
stopping operations of the 737 MAX in the U.S.A. was issued by the FAA on
March 13, 2019 (JATR, 2019, I), the final civil aviation authority (CAA) in the
world to do so (Reals, 2019). A common problem in both crashes was an apparent
failure of the angle-of-attack (AOA) sensor that controls the Maneuvering
Characteristics Augmentation System (MCAS); e.g., see Pasztor, et al., (2019) and
Wall, Pasztor, and Wexler (2019) for details of the first and second crashes,
respectively, which are eerily similar. The MCAS system will be discussed next.
MANEUVERING CHARACTERISTICS AUGMENTATION SYSTEM
The MCAS was installed in Boeing 737 MAX aircraft as an “automated stall-
prevention system” and was designed “to compensate for the extra pitch up caused
by its bigger engines at elevated angle-of-attack (AOA)” (Pasztor, et al., 2019).
Tabuchi and Gelles (2019) explain the MCAS system in layperson terms, as
follows:
The jet’s software system takes readings from one of two vane[-]like
devices called angle of attack sensors that determine how much a plane’s
nose is pointing up or down relative to oncoming air. When MCAS detects
that the plane is pointing up at a dangerous angle, it can automatically push
down the nose of the plane in an effort to prevent the plane from stalling.
The 737 MAX planes have two AOA sensors but only one interacts with the
MCAS at a time (Pasztor, Tangel, and Sider, 2019). It is remarkable to a layperson
that a critical safety system in an aircraft would rely on the input of one AOA
sensor only, with no redundancy. Even bookkeeping has been based on the double-
entry system for many centuries, with its built-in redundancy. It was reported that
using a single AOA sensor to trigger the MCAS system was a decision made early
in the design process by Boeing engineers “to make the stall-prevention system
simple” and “the plane maker’s analysis determined that a pilot would be able to
address the flight-control system misfiring with switches to counteract it or turn it
off” (Pasztor, et al., 2019). However, Nicas, et al. (2019) reported that the decision
to rely on one AOA sensor, not two, was made only a year before the plane was
completed.
Given that the AOA sensors are outside, one each side of the nose of the 737 MAX
aircraft, they can be damaged in various ways, including lightning and bird strikes,
as well as becoming frozen and being improperly installed (Devine and Griffin,
2019). The final report of the Indonesian investigators of the first 737 MAX 8
crash, stated: “The installed left AOA sensor had a 21o bias which was undetected
during the installation test in Denpasar” (KNKT, 2019, xviii). In the case of the
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second 737 MAX 8 crash, it is believed by investigators that “a bird strike damaged
the captain-side vane” (Tangel, Pasztor, and Maremont, 2019). Also, it was
reported that “[t]he FAA has received at least 216 reports of AOA sensors failing
or having to be repaired, replaced or adjusted since 2004 […] about one-fifth of
which involve Boeing planes” (Devine and Griffin, 2019). However, 216 is an
infinitesimally small number of sensor failures in comparison with the many
millions of commercial plane flights that have taken place over the 15-year period
from 2004-2019. Even so, when even one fatal crash might be avoided, it seems to
a good idea from the flying public’s perspective for both 737 MAX AOA sensors
to be monitored simultaneously and to report to the pilots whenever there is a
significant disagreement between both measurements as a standard feature.
Interestingly, before the first crash, American Airlines and Southwest Airlines had
already added an alert to indicate when there is disagreement between the two
sensors and displays that show the actual sensor readings were added by American
Airlines a long time before, and by Southwest Airlines, following the first crash
(Pasztor, Tangel, and Sider, 2019). These features add about $50,000 to the 737
MAX airplane cost, per government records, and are not purchased by many non-
U.S. budget airlines (Pasztor, Tangel, and Sider, 2019). However, even with the
additional safety features, American’s and Southwest’s 737 MAX aircraft were
still grounded by the FAA and other CAAs. Clearly, the FAA and other CAAs are
not convinced that even these enhanced MCAS systems provide sufficient
protection for the flying public. It is interesting to note that United Airlines decided
against purchasing both “the angle of attack indicator” option that shows the
readings of both sensors, and the disagree light option that displays when both
sensors give different readings (Tabuchi and Gelles, 2019). It was reported that a
United Airlines spokesperson stated “the airline does not include the features
because its pilots use other data to fly the plane” (Tabuchi and Gelles, 2019).
It might seem surprising that Boeing did not fix the software problem soon after
the first crash in Indonesia on October 29, 2018, which was 133 days prior to the
second crash in Ethiopia. However, Boeing had hoped to have a software repair by
mid-January, 2019, but it was reported that its completion was delayed because of
disagreements between Boeing and the FAA over the need for “mandatory cockpit
alerts” about MCAS misfiring and whether two sensors were needed to be
operating at the same time rather than one sensor only (Pasztor, Tangel, and Sider,
2019). Also, fatal airline crashes are remarkably rare and another similar crash
might have seemed to have a low probability of occurrence. It was reported that
the FAA and U.S. airlines stated that there was not one occurrence of MCAS
failure in about 50,000 737 MAX flights through March 2019 (Pasztor, Tangel,
and Sider, 2019). The Boeing 737 MAX Flight Control System Joint Authorities
Technical Review (JATR, 2019) cover letter stated: “The FAA's aircraft
certification process has played a major role in producing airliners with an
exemplary safety record consisting of a five-year worldwide average of only one
fatal airliner crash for every 2 1/2 to 3 million flights, and a U.S. record of only one
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airline passenger fatality in more than 10 years.” Also, Neil (2020) reported that
“the fatality rate for commercial jet travel globally in 2018 was on the order of one
death per three million flights, not flight hours.” These statistics represent enviable
performance by commercial airliners in terms of passenger safety.
It might be significant that the 737 MAX crashes occurred in Indonesia and
Ethiopia, which were both considered developing countries as of March 2018
(USTR, 2018), with, possibly, inferior aircraft maintenance facilities and less-well
trained commercial pilots than in developed nations, such as the U.S.A. Pasztor,
Otto, and Tangel (2019) reported that “Indonesian investigators blamed Boeing
Co.’s design and inadequate U.S. safety oversight, combined with lax maintenance
and poor piloting skills, for a Lion Air 737 MAX’s fatal nosedive into the Java Sea
over a year ago.” Also, in response to early investigation crash findings in
November 2018, it was reported that “Boeing issued a lengthy statement drawing
attention to possible maintenance deficiencies and pilot error” (Pasztor, Tangel,
and Sider, 2019). Further, it was reported that “a top Boeing official told a
gathering of U.S. pilots they wouldn’t encounter similar problems, contending they
were better trained than their counterparts in other countries, according to a person
familiar with the meeting” (Pasztor, Tangel, and Sider, 2019). Also, it was reported
that some pilots and safety experts in the U.S.A. were critical of some of the
Ethiopian pilots’ actions prior to the second crash in March 2019 (Wall, Pasztor,
and Wexler, 2019). Clearly, pilot experience and training are particularly important
as the complexity of jet airliners increases. However, on page 5 of the “Lion Air
Comments” to the Indonesian KNKT (2019, 316) report, comments from “a
recently disclosed letter” were included from the famous Captain Sullenberger that
began with the following two sentences (with [P] and emphasis included):
[P]ilots must be capable of absolute mastery of the aircraft and the
situation at all times, a concept pilots call airmanship. Inadequate pilot
training and insufficient pilot experience are problems worldwide, but
they do not excuse the fatally flawed design of the Maneuvering
Characteristics Augmentation System (MCAS) that was a death trap.
It is pertinent to note that an earlier version of MCAS used in the United States Air
Force KC-46A Pegasus refueling plane was designed to be controlled by safety
features, such as “inputs from multiple sensors and with limited power to move the
tanker’s nose,” which complied with military specifications, that were omitted in
the MCAS installed in the 737 MAX plane over a decade later (Sider and Tangel,
2019). Boeing decided that a single AOA sensor was enough for the 737 MAX and
that “it complied with safety and regulatory requirements,” with pilots being able
to “quickly identify” and successfully deal with a MCAS failure using “a
longstanding cockpit procedure” (Sider and Tangel, 2019). Clearly, pilot action
was unable to prevent the two 737 MAX crashes that appear to be linked to failure
of the single AOA sensor in operation at the time. Indeed, Tangel, Pasztor, and
Maremont (2019) graphically describe the actions of the two pilots during the
terrifying six minutes of flight-time of Ethiopian Airlines Flight 302 before the
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plane crashed in the ground at close to the speed of sound and then made the
following salutary statement: “In designing the flight controls for the 737 MAX,
Boeing assumed that pilots trained on existing safety procedures should be able to
sift through the jumble of contradictory warnings and take the proper action 100%
of the time within four seconds.” Next, cost savings versus redundant systems will
be considered.
COST SAVINGS VERSUS REDUNDANT SYSTEMS
Having optional upgrades has a benefit for both aircraft manufacturers and the
airlines. They are an additional source of revenue for aircraft manufacturers, such
as Boeing and Airbus, and they give the airlines the choice to purchase the options
or not to purchase them to reduce the cost of buying aircraft (Tabuchi and Gelles,
2019). Also, having optional upgrades saves aircraft manufacturers the costs of
installing expensive features that the customer doesn’t value enough to purchase.
The FAA did not mandate the “angle of attack indicator” nor the “disagree light”
that shines when the AOA sensors give different readings for 737 MAX aircraft
(Tabuchi and Gelles, 2019). However, the FAA’s apparent indifference towards
the importance of these two options for safety might be the result of ignorance on
how the MCAS operates (e.g., see JATR, 2019). Tragically, it was reported that
the crashes “might have been avoided, if employees and regulators had a better
understanding of MCAS” (Nicas, et al., 2019). The preliminary investigative
findings of The House Committee on Transportation and Infrastructure
(THCOT&I, 2020, 7) criticized both Boeing and the FAA for failing “to
appropriately designate MCAS a safety-critical system.”
The JATR (2019, VII) found that “the FAA had inadequate awareness of the
MCAS function which, coupled with limited involvement, resulted in an inability
of the FAA to provide an independent assessment of the adequacy of the Boeing
proposed certification activities associated with MCAS.” Controversially, later
“[a] federal advisory panel evaluating the safety-approval process for Boeing Co.’s
737 MAX concluded regulators adhered to policies in certifying the plane and
determined it wouldn’t have been safer if it had received the scrutiny of an all-new
aircraft” (Pasztor and Cameron, 2020).
One commentator stated the following concerning the importance of the AOA
indicator and disagree light (Tabuchi and Gelles, 2019): ‘“They’re critical, and
cost almost nothing for the airlines to install,’ said Bjorn Fehr, an analyst at the
aviation consultancy Leeham. ‘Boeing charges for them because it can. But they’re
vital for safety.’” The Indonesian final report on the Lion Airlines 737 MAX 8
crash pointed out that the AOA Disagree alert has been a standard feature on 737
NG airplanes since 2006 and should have been on the 737 MAX, too, although
Boeing did not consider it as a safety feature (KNKT, 2019, 45). However, the
AOA Disagree alert was only operational on 737 MAX aircraft if the optional
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AOA position indicator was chosen by an airline and only about 20 percent of
airlines had selected this option at the time when the first 737 MAX accident
occurred and Lion Airlines was not one of them (KNKT, 2019, 45-46). As Boeing
did not consider the AOA Disagree alert as an aircraft safety feature or necessary
for aircraft operations, it decided to wait to restore the operation of the AOA
Disagree alert until “a display system software upgrade, scheduled for the third
quarter of 2020” (KNKT, 2019, 46). Following the first 737 MAX crash, a Safety
Review Board assembled by Boeing agreed that the absence of the AOA Disagree
alert was not a safety issue, but Boeing decided “to accelerate the software change”
(KNKT, 2019, 46).
The MCAS was designed to make the 737 MAX aircraft behave similarly to earlier
737 versions, which would help to achieve an objective of minimizing any extra
training costs for airlines buying the 737 MAX (Pasztor, Tangel, and Sider, 2019).
In particular, Boeing “had promised Southwest Airlines Co., the plane’s biggest
customer, to keep pilot training to a minimum so that the new jet could seamlessly
slot into the carrier’s fleet of older 737s, according to regulators and industry
officials” (Pasztor, et al., 2019). Also, an ex-Boeing engineer, Mr. Ludtke,
“recalled midlevel managers telling subordinates that Boeing had committed to
pay the airline $1 million per plane if its design ended up requiring pilots to spend
additional simulator time” that was an unheard-of commitment (Pasztor et al.,
2019). It was reported that another person who had worked on developing the 737
MAX airplane recalled the $1 million commitment by Boeing, along with Mr.
Ludtke (Tangel, Pasztor, and Maremont, 2019). THCOT&I (2020, 9-10) also
reported this $1 million commitment to Southwest Airlines. Southwest, Airlines,
with a cost leadership strategy, is Boeing’s biggest customer of 737 planes and
likely exerts great influence over the design of the various versions of the aircraft
(e.g., see Sanders, 2010).
It was reported that one “Boeing Co. engineer involved in the development of the
737 MAX claims the aerospace giant’s managers overly prized controlling costs
and schedules at the expense of safety, allegations that are currently part of a
federal criminal investigation after two fatal crashes of the aircraft” (Tangel and
Pasztor, 2019). Also, the Seattle Times was reported to have earlier written the
following regarding this engineer’s complaint (Tangel and Pasztor, 2019): “His
complaint, totaling more than 5,000 words, offers an inside glimpse at what one
engineer alleges was a pattern of Boeing managers playing down safety threats
over the years, using cost as a primary reason to reject various proposed design
enhancements to make the 737 MAX and predecessor models less prone to
accidents.”
Under the subheading of: “Boeing Production Pressure – Costs, schedule, and
production pressures at Boeing undermined safety of the 737 MAX,” THCOT&I
(2020, 5-6) gave several cost saving examples, including a business goal of
excluding existing 737 NG pilots from simulator training, receiving an exception
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from the FAA to not install an Engine Indicating and Crew Alerting System, and
reducing the testing hours and engineering flight deck simulator hours in the 737
MAX program. In respect of simulator training being opposed, THCOT&I (2020,
10) later quoted from an email sent by Boeing’s 737 Chief Technical Pilot to a
colleague, stating: “Boeing will not allow this to happen. We’ll go face to face with
any regulator who tries to make that a requirement.” Belatedly, Boeing now backs
737 MAX flight simulator and other new training for pilots (Cameron and Tangel,
2020a). The new Boeing CEO, David Calhoun, said: “It took us too long to do it”
(Cameron and Tangel, 2020a).
Like many companies world-wide, Boeing has used lean manufacturing for many
years that focuses on improving efficiency and reducing costs, facilitating
competitive aircraft pricing (Jenkins, 2002). Also, Boeing was recognized as one
of four companies using “best practices” in target costing that “can best be
described as a systematic process of cost management and profit planning”
(Swensen, et al., 2003, 12). However, cost management has been defined as: “The
approaches and activities of managers to use resources to increase value to
customers and to achieve organizational goals” (Datar and Rajan, 2018, 937,
emphasis added). Increasing value to customers would include improved safety in
the context of the flying public as the customer, even if reducing costs was one of
the organizational goals.
STEPS TAKEN BY BOEING
On April 5, 2019, less than a month after the second 737 MAX crash, Boeing’s
CEO announced his request to the Board of Directors (BOD) for a four-person
board-level investigation (Muilenberg, 2019). The committee was tasked with
confirming “the effectiveness of our policies and processes for assuring the highest
level of safety on the 737-MAX program, as well as our other airplane programs,
and recommend improvements to our policies and procedures” (Muilenberg,
2019). This internal review by Boeing board members added to the investigations
of “Federal prosecutors, congressional committees and regulators” (Tangel, 2019).
Interestingly, the committee didn’t identify any indications of “undue pressure or
other lapses that compromised the safety of the 737 MAX or other aircraft” with
the caveat that its “review didn’t focus on the accidents specifically” (Tangel,
2019). This differs from the “undue pressures” reported by JATR (2019) and others
(e.g., see THCOT&I, 2020, 6).
On September 25, 2019, Boeing’s BOD announced that it had formed a new
Aerospace Safety Committee at its August 2019 board meeting, with a “primary
responsibility […] to oversee and ensure the safe design, development,
manufacture, production, operation, maintenance and delivery of the company’s
aerospace products and services” (Boeing, 2019). Along with helping to improve
how design and safety matters are handled, the Aerospace Safety Committee “is
aimed at giving senior company leaders and directors tighter oversight, as well as
Journal of Business and Accounting
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reduce the influence of schedules and cost pressures on engineering decisions”
(Tangel and Cameron, 2020, emphasis added). Boeing’s BOD also announced six
recommendations following “the five-month independent review […] by the
Committee on Airplane Policies and Processes of the company’s policies and
processes” (Boeing, 2019).
The BOD’s six recommendations largely pointed to Boeing making organizational
changes to centralize the supervision of safety matters throughout the organization,
to make sure no safety issues slip through the cracks and are overlooked. For
example, the BOD’s second recommendation commenced with (Boeing, 2019):
“Realign the Engineering function: The board recommends that engineers
throughout Boeing, including the new Product and Services Safety organization,
report directly to the chief engineer, who in turn reports directly to the company's
chief executive officer.” Implementation of this recommendation should mean that
any engineering concerns, including safety issues, will receive proper attention at
an executive level by a qualified engineer. Previously, Boeing’s top engineers
would “report primarily to the business leaders for each airplane model, and
secondarily to the company’s chief engineer” and, therefore, “engineers who
identify problems that might slow a jet’s development could face resistance from
executives whose jobs revolve around meeting production schedules” (Gelles and
Kitroeff, 2019). The latest “737 MAX Updates,” which were grouped under six
main headings at the time of writing, were posted on the Internet (see Boeing,
2020).
On September 30, 2019, it was announced by Boeing that the Product and Services
Safety Organization had been formed to “centralize safety oversight,” as
recommended by the BOD Committee on Airplane Policies and Processes
(Cameron, 2019). Also, Boeing announced “that it had expanded an anonymous
reporting system for employees to flag concerns and strengthened existing
safeguards such as safety review boards” while earlier it had “amended its
governance rules to make safety-related experience a criterion for choosing future
directors” (Cameron, 2019). Consistent with this new criterion, Boeing announced
on February 24, 2020, that “two new outside directors with safety and engineering
experience” were nominated for Boeing’s board (Tangel and Cameron, 2020),
which added more safety and engineering expertise at the highest level.
Poor management of the MAX crisis led to the CEO, Dennis Muilenburg, being
fired on December 22, 2019, with David Calhoun named as his successor,
commencing January, 2020, but some doubted that replacing the CEO would
correct Boeing’s widespread management and cultural problems (Tangel and
Cameron, 2019). For example, it was stated that the CEO was only part of the
culture of excessive cost-control at Boeing that some believe stemmed from buying
McDonnell Douglas in 1997 and the HQ move away from the engineering center
in Seattle to Chicago (Sindreu, 2019). Interestingly, it is possible that “Boeing’s
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cost-cutting culture” contributed to the delays in developing the 787 Dreamliner
and its grounding in 2013 (Sindreu, 2020b).
A VERY COSTLY FAILURE
Whatever short-term cost savings were gained for Boeing and/or airlines by MCAS
design decisions and reduced training decisions regarding the 737 MAX, they have
been dwarfed by the long-term costs that are being incurred by Boeing and the
airlines that adopted the 737 MAX aircraft, after the two 737 MAX 8 crashes, as
well as the grief and sorrow of those who lost family members and friends in the
crashes. For example, a family who lost a family member in the Ethiopian Airlines
737 MAX crash, filed a wrongful death lawsuit against Boeing, Ethiopian Airlines,
and Rosemount Aerospace, Inc., which “accuses Boeing of putting ‘profits over
safety,’ and rushing the 737 Max 8 to market to compete with rival Airbus and that
company’s A320 aircraft” (Devine and Griffin, 2019).
Also, Boeing has “established a $100 million relief fund to meet family and
community needs of those affected by these [737 MAX 8] accidents” (Boeing,
2020). It was reported that “Boeing has set aside more than $9 billion to cover
customer compensation and higher costs to work through an order backlog of 4,500
MAX jets, but analysts expect this figure to climb to $16 billion or more”
(Cameron and Tangel, 2020a). In addition, it was reported that in 2019 Boeing
experienced its first annual loss ($636 million) in over 20 years, with more than
$19 billion in costs from the 737 MAX debacle (Cameron and Tangel, 2020b).
In 2019, Boeing delivered only 380 aircraft, lowest in 14 years, versus 806
deliveries in 2018 and 863 deliveries by Airbus in 2019; also, new orders for
Boeing’s commercial jets were reported to be at a 16-year low (Cameron and Katz,
2020). Airlines cancelled about 200 737 MAX contracts in 2019 and there were
zero Boeing jetliner orders in January 2020 (Warren, 2020). It was reported that
Air Canada cancelled 11 out of its 61 orders for 737 MAX aircraft in March 2020,
to gain “more fleet flexibility” according to its [Deputy CEO and] CFO (Horton,
2020). On May 12, Boeing announced that for the first time in seven years its
jetliner orders fell below 5,000 as its customers continued to cancel orders for 737
MAX aircraft (Cameron and Tangel, 2020c).
The grounding of the 737 MAX aircraft following two crashes has severely hurt
its suppliers and customers financially. It has led to worker lay-offs by some of
Boeing’s suppliers (Cameron and Tangel, 2020b). General Electric experienced a
$1.4 Billion reduced cash flow impact in 2019 from the 737 MAX grounding
(Gryta, 2020b). Because Boeing temporarily halted its 737 MAX production, GE
sought new Airbus business for its engines (Katz, 2020). United Technologies
expected its Collins Aerospace Division to experience a $375 Million drop in
adjusted operating income stemming from Boeing’s suspension of 737 MAX
production (Gryta, 2020a; Sindreu, 2020a) It was reported that the 737 MAX
Journal of Business and Accounting
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production halt would adversely impact Honeywell’s aerospace business (Gryta
and Sebastian, 2020). Also, hundreds of millions of dollars have been lost by its
airline customers with the grounding of the 737 MAX airliner (Cameron and
Tangel, 2020b).
In addition, Boeing’s stock price dropped dramatically following the second 787
crash on March 10, 2019. For example, it was reported that the Boeing’s stock
reached its highest price of $446 shortly before the second crash but was only
$154.84 about one-year later on March 12, 2020 (Gates, 2020). Exhibit 1 shows
Boeing’s 5-year stock price history from June 1, 2015, until May 11, 2020, with
its stock price at only $128.88 at 3.59 p.m. and $128.91 at close (Yahoo! Finance,
2020). The 737 MAX problems, coupled with the Coronavirus Pandemic impact,
had significant adverse impact on Boeing’s stockholders, at least, in the short term.
On October 16, 2020, Boeing received some positive news regarding the 737 MAX
that gave hope of the jet’s return to service even before the end of 2020 (Philip,
2020). The Executive Director of the European Union Aviation Safety Agency
(EASA), Patrick Ky, expressed his opinion in an interview that the “proposed
changes sufficiently address problems with a faulty flight-control system
implicated in two fatal MAX crashes” that was later confirmed by another EASA
official (Grossman and Katz, 2020). It was reported that Boeing’s share price
increased by 1.9 percent on October 16, 2020, closing at $167.35, with the news
that indicated a return to service for the 737 MAX could be only a few months
away, at least from a European Union perspective (Grossman and Katz, 2020).
Also, it was reported that the stock price of two major Boeing suppliers, General
Electric Co. and Spirit AeroSystems Holdings, Inc., rose in response to the good
news (Philip, 2020).
Interestingly, it was reported that the EASA requires the “development of a so-
called synthetic sensor to add redundancy [that] will take 20-24 months, [Patrick
Ky] said. The software-based solution will be required on the larger MAX 10
variant before its debut targeted for 2022, and retrofitted onto other versions, ‘Our
analysis is showing that this is safe, and the level of safety reached is high enough
for us,’ Ky said in an interview. ‘What we discussed with Boeing is the fact that
with a third sensor, we could reach even higher safety levels.”’ (Philip, 2020).
Earlier, the FAA Administrator made positive comments after a personal test flight
of a 737 MAX airplane on September 30, 2020 (Pasztor and Tangel, 2020b) but,
unlike the EASA, the FAA had “held back from making predictions about timing”
(Phillip, 2020). However, Boeing’s share price rose by 1.0 percent on September
30, 2020, closing at $165.26 (Yahoo! Finance, 2020).
Also, the 737 MAX grounding has hurt the U.S. economy significantly. As the
USA’s leading exporter, three economists forecast that Boeing’s production halt
would reduce the GDP of the first quarter of 2020 by 0.5 percent (Mitchell and
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Cameron, 2020). This forecast was made before the negative impact of the
Coronavirus on the U.S. economy.
Exhibit 1: The Boeing Company’s 5-year Stock Price History, June 1, 2015 –
May 11, 20201
1 Source: Yahoo! Finance, Downloaded May 11, 2020, at 3:59 p.m.,
https://finance.yahoo.com/quote/BA?p=BA.
SUMMARY AND CONCLUSIONS
This paper discussed a number of failures that have been reported as likely
contributing to the two fatal crashes of the 737 MAX aircraft and led to its
grounding. The focus of the paper was on cost savings versus redundant systems
in the context of the 737 MAX aircraft’s recent history. One limitation of this study
is that it is based on publicly available sources of information that are sometimes
contradictory. Future research can explore the final events of the 737 MAX
grounding. Also, some researchers may wish to investigate the entire 737 MAX
grounding episode using avenues of research not related to cost savings and
redundant systems.
The enhanced scrutiny of the 737 MAX aircraft means the flying public will
benefit from the improved pilot training, safety and reliability features built into
the Boeing 737 MAX and likely other Boeing aircraft. While installing updated
software into a test 737 MAX plane, Boeing engineers discovered another software
problem that is being corrected (Pasztor, 2020a). Inspections discovered debris in
the fuel tanks of undelivered 737 MAX planes that needs to be cleared (Cameron
and Pasztor, 2020). This could result in “a civil-enforcement action and […] a
multimillion-dollar fine” (Pasztor and Tangel, 2020a). The FAA identified
Journal of Business and Accounting
15
“assembly-line lapses that could result in dual-engine power loss in the event of a
lightning strike” that requires 12 hours to repair each aircraft (Pasztor, 2020b).
Also, the FAA required the modification of wiring on 737 MAX aircraft to comply
with a 2009 regulation for wire separation that will reduce the remote possibility
of a devastating electrical short circuit (Gates, 2020).
In conclusion, what lessons can be learned from Boeing’s experience with the 737
MAX jetliner? Some lessons to be learned are summarized as things to embrace
and things to avoid in Exhibit 2.
Exhibit 2: Some Lessons to be Learned from Boeing’s Experience with the
737 MAX Jetliner
Embrace Avoid
1. Cost management to satisfy
customers’ safety and other
needs and achieve
organizational objectives
that can include careful cost
reduction.
1. Cost savings without
satisfying the safety and
other needs of all customers
(e.g., airlines and airline
passengers).
2. Safety first and cost savings
second.
2. Cost savings first and safety
second.
3. Sufficient consideration of
the risk of extra long-term
costs exceeding short-term
cost savings.
3. Excessive focus on short-
term cost savings and
insufficient focus on the risk
of extra long-term costs.
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Vol 13, Number 1; Fall 2020
4
COST SAVINGS VERSUS REDUNDANT
SYSTEMS: THE CASE OF THE BOEING 737
MAX DEBACLE
John B. MacArthur
University of North Florida
ABSTRACT: It is difficult to find an issue of The Wall Street Journal published
in 2019 or the early months of 2020 without one or more articles covering various
aspects of the 737 MAX grounding stemming from two fatal crashes of the aircraft.
This paper covers a number of failures that have been reported as likely
contributing to the two fatal crashes. These failures included making “angle-of-
attack-sensor” redundancy and other safety features optional upgrades for its
Maneuvering Characteristics Augmentation System (MCAS) that is a cost saving
measure, possibly insufficiently experienced pilots flying the 737 MAX planes that
crashed, the lack of pilot training and training manuals covering the MCAS newly
installed in the 737 MAX, and the failure of the FAA to conduct a sufficiently
independent safety review of the aircraft before flight certification, although there
are disagreements over whether or not there was a FAA failure that contributed to
the two 737 MAX plane crashes. Also, Boeing’s responses are outlined.
Key Words: Boeing 737 MAX crashes; cost savings; redundant systems; safety;
cost management.
INTRODUCTION
In order to secure a new order from American Airlines in 2011, facing fierce
competition from the new Airbus A320neo, Boeing decided to update its 737
airplane over a six-year period rather than develop a new fuel-efficient jet airplane
that would take 10 years to design and build (Gelles, et al., 2019). It was announced
on November 30, 2011, that Boeing’s “board of directors had approved the launch
of the new engine variant of the market-leading 737, based on order commitments
for 496 airplanes from five airlines and a strong business case” (Boeing, 2011).
Boeing workers designed and built the 737 MAX aircraft under the intense
pressure of tight deadlines, with the initial 737 MAX 8 being completed in
November 2015 (Gelles, et al., 2019). The 737 MAX 8 received FAA certification
on March 9, 2017 (Boeing, 2017). The first 737 MAX 8 commercial flight took
place on May 22, 2017, from Kuala Lumpur to Singapore, operated by the
Malaysian airline Malinda Air (Hashim, 2017).
The Lion Air Flight 610 737 MAX 8 crash occurred soon after the plane took off
from Jakarta, Indonesia, on October 28, 2018, with 189 fatalities. The Ethiopian
Airlines Flight 302 737 MAX 8 airplane crash similarly took place soon after it
took off from Addis Ababa, Ethiopia on March 10, 2019, which resulted in 157
Journal of Business and Accounting
5
fatalities. The second crash led to the grounding of all 737 MAX aircraft world-
wide for well over a year at the time of writing and was still in effect when this
article was published. The day after the second fatal crash, it was estimated the 737
MAX “fatal-accident rate” is 4 flights per million versus only 0.2 flights per
million for the “prior version of the 737” (Newman, 2019). An emergency order
stopping operations of the 737 MAX in the U.S.A. was issued by the FAA on
March 13, 2019 (JATR, 2019, I), the final civil aviation authority (CAA) in the
world to do so (Reals, 2019). A common problem in both crashes was an apparent
failure of the angle-of-attack (AOA) sensor that controls the Maneuvering
Characteristics Augmentation System (MCAS); e.g., see Pasztor, et al., (2019) and
Wall, Pasztor, and Wexler (2019) for details of the first and second crashes,
respectively, which are eerily similar. The MCAS system will be discussed next.
MANEUVERING CHARACTERISTICS AUGMENTATION SYSTEM
The MCAS was installed in Boeing 737 MAX aircraft as an “automated stall-
prevention system” and was designed “to compensate for the extra pitch up caused
by its bigger engines at elevated angle-of-attack (AOA)” (Pasztor, et al., 2019).
Tabuchi and Gelles (2019) explain the MCAS system in layperson terms, as
follows:
The jet’s software system takes readings from one of two vane[-]like
devices called angle of attack sensors that determine how much a plane’s
nose is pointing up or down relative to oncoming air. When MCAS detects
that the plane is pointing up at a dangerous angle, it can automatically push
down the nose of the plane in an effort to prevent the plane from stalling.
The 737 MAX planes have two AOA sensors but only one interacts with the
MCAS at a time (Pasztor, Tangel, and Sider, 2019). It is remarkable to a layperson
that a critical safety system in an aircraft would rely on the input of one AOA
sensor only, with no redundancy. Even bookkeeping has been based on the double-
entry system for many centuries, with its built-in redundancy. It was reported that
using a single AOA sensor to trigger the MCAS system was a decision made early
in the design process by Boeing engineers “to make the stall-prevention system
simple” and “the plane maker’s analysis determined that a pilot would be able to
address the flight-control system misfiring with switches to counteract it or turn it
off” (Pasztor, et al., 2019). However, Nicas, et al. (2019) reported that the decision
to rely on one AOA sensor, not two, was made only a year before the plane was
completed.
Given that the AOA sensors are outside, one each side of the nose of the 737 MAX
aircraft, they can be damaged in various ways, including lightning and bird strikes,
as well as becoming frozen and being improperly installed (Devine and Griffin,
2019). The final report of the Indonesian investigators of the first 737 MAX 8
crash, stated: “The installed left AOA sensor had a 21o bias which was undetected
during the installation test in Denpasar” (KNKT, 2019, xviii). In the case of the
MacArthur
6
second 737 MAX 8 crash, it is believed by investigators that “a bird strike damaged
the captain-side vane” (Tangel, Pasztor, and Maremont, 2019). Also, it was
reported that “[t]he FAA has received at least 216 reports of AOA sensors failing
or having to be repaired, replaced or adjusted since 2004 […] about one-fifth of
which involve Boeing planes” (Devine and Griffin, 2019). However, 216 is an
infinitesimally small number of sensor failures in comparison with the many
millions of commercial plane flights that have taken place over the 15-year period
from 2004-2019. Even so, when even one fatal crash might be avoided, it seems to
a good idea from the flying public’s perspective for both 737 MAX AOA sensors
to be monitored simultaneously and to report to the pilots whenever there is a
significant disagreement between both measurements as a standard feature.
Interestingly, before the first crash, American Airlines and Southwest Airlines had
already added an alert to indicate when there is disagreement between the two
sensors and displays that show the actual sensor readings were added by American
Airlines a long time before, and by Southwest Airlines, following the first crash
(Pasztor, Tangel, and Sider, 2019). These features add about $50,000 to the 737
MAX airplane cost, per government records, and are not purchased by many non-
U.S. budget airlines (Pasztor, Tangel, and Sider, 2019). However, even with the
additional safety features, American’s and Southwest’s 737 MAX aircraft were
still grounded by the FAA and other CAAs. Clearly, the FAA and other CAAs are
not convinced that even these enhanced MCAS systems provide sufficient
protection for the flying public. It is interesting to note that United Airlines decided
against purchasing both “the angle of attack indicator” option that shows the
readings of both sensors, and the disagree light option that displays when both
sensors give different readings (Tabuchi and Gelles, 2019). It was reported that a
United Airlines spokesperson stated “the airline does not include the features
because its pilots use other data to fly the plane” (Tabuchi and Gelles, 2019).
It might seem surprising that Boeing did not fix the software problem soon after
the first crash in Indonesia on October 29, 2018, which was 133 days prior to the
second crash in Ethiopia. However, Boeing had hoped to have a software repair by
mid-January, 2019, but it was reported that its completion was delayed because of
disagreements between Boeing and the FAA over the need for “mandatory cockpit
alerts” about MCAS misfiring and whether two sensors were needed to be
operating at the same time rather than one sensor only (Pasztor, Tangel, and Sider,
2019). Also, fatal airline crashes are remarkably rare and another similar crash
might have seemed to have a low probability of occurrence. It was reported that
the FAA and U.S. airlines stated that there was not one occurrence of MCAS
failure in about 50,000 737 MAX flights through March 2019 (Pasztor, Tangel,
and Sider, 2019). The Boeing 737 MAX Flight Control System Joint Authorities
Technical Review (JATR, 2019) cover letter stated: “The FAA's aircraft
certification process has played a major role in producing airliners with an
exemplary safety record consisting of a five-year worldwide average of only one
fatal airliner crash for every 2 1/2 to 3 million flights, and a U.S. record of only one
Journal of Business and Accounting
7
airline passenger fatality in more than 10 years.” Also, Neil (2020) reported that
“the fatality rate for commercial jet travel globally in 2018 was on the order of one
death per three million flights, not flight hours.” These statistics represent enviable
performance by commercial airliners in terms of passenger safety.
It might be significant that the 737 MAX crashes occurred in Indonesia and
Ethiopia, which were both considered developing countries as of March 2018
(USTR, 2018), with, possibly, inferior aircraft maintenance facilities and less-well
trained commercial pilots than in developed nations, such as the U.S.A. Pasztor,
Otto, and Tangel (2019) reported that “Indonesian investigators blamed Boeing
Co.’s design and inadequate U.S. safety oversight, combined with lax maintenance
and poor piloting skills, for a Lion Air 737 MAX’s fatal nosedive into the Java Sea
over a year ago.” Also, in response to early investigation crash findings in
November 2018, it was reported that “Boeing issued a lengthy statement drawing
attention to possible maintenance deficiencies and pilot error” (Pasztor, Tangel,
and Sider, 2019). Further, it was reported that “a top Boeing official told a
gathering of U.S. pilots they wouldn’t encounter similar problems, contending they
were better trained than their counterparts in other countries, according to a person
familiar with the meeting” (Pasztor, Tangel, and Sider, 2019). Also, it was reported
that some pilots and safety experts in the U.S.A. were critical of some of the
Ethiopian pilots’ actions prior to the second crash in March 2019 (Wall, Pasztor,
and Wexler, 2019). Clearly, pilot experience and training are particularly important
as the complexity of jet airliners increases. However, on page 5 of the “Lion Air
Comments” to the Indonesian KNKT (2019, 316) report, comments from “a
recently disclosed letter” were included from the famous Captain Sullenberger that
began with the following two sentences (with [P] and emphasis included):
[P]ilots must be capable of absolute mastery of the aircraft and the
situation at all times, a concept pilots call airmanship. Inadequate pilot
training and insufficient pilot experience are problems worldwide, but
they do not excuse the fatally flawed design of the Maneuvering
Characteristics Augmentation System (MCAS) that was a death trap.
It is pertinent to note that an earlier version of MCAS used in the United States Air
Force KC-46A Pegasus refueling plane was designed to be controlled by safety
features, such as “inputs from multiple sensors and with limited power to move the
tanker’s nose,” which complied with military specifications, that were omitted in
the MCAS installed in the 737 MAX plane over a decade later (Sider and Tangel,
2019). Boeing decided that a single AOA sensor was enough for the 737 MAX and
that “it complied with safety and regulatory requirements,” with pilots being able
to “quickly identify” and successfully deal with a MCAS failure using “a
longstanding cockpit procedure” (Sider and Tangel, 2019). Clearly, pilot action
was unable to prevent the two 737 MAX crashes that appear to be linked to failure
of the single AOA sensor in operation at the time. Indeed, Tangel, Pasztor, and
Maremont (2019) graphically describe the actions of the two pilots during the
terrifying six minutes of flight-time of Ethiopian Airlines Flight 302 before the
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plane crashed in the ground at close to the speed of sound and then made the
following salutary statement: “In designing the flight controls for the 737 MAX,
Boeing assumed that pilots trained on existing safety procedures should be able to
sift through the jumble of contradictory warnings and take the proper action 100%
of the time within four seconds.” Next, cost savings versus redundant systems will
be considered.
COST SAVINGS VERSUS REDUNDANT SYSTEMS
Having optional upgrades has a benefit for both aircraft manufacturers and the
airlines. They are an additional source of revenue for aircraft manufacturers, such
as Boeing and Airbus, and they give the airlines the choice to purchase the options
or not to purchase them to reduce the cost of buying aircraft (Tabuchi and Gelles,
2019). Also, having optional upgrades saves aircraft manufacturers the costs of
installing expensive features that the customer doesn’t value enough to purchase.
The FAA did not mandate the “angle of attack indicator” nor the “disagree light”
that shines when the AOA sensors give different readings for 737 MAX aircraft
(Tabuchi and Gelles, 2019). However, the FAA’s apparent indifference towards
the importance of these two options for safety might be the result of ignorance on
how the MCAS operates (e.g., see JATR, 2019). Tragically, it was reported that
the crashes “might have been avoided, if employees and regulators had a better
understanding of MCAS” (Nicas, et al., 2019). The preliminary investigative
findings of The House Committee on Transportation and Infrastructure
(THCOT&I, 2020, 7) criticized both Boeing and the FAA for failing “to
appropriately designate MCAS a safety-critical system.”
The JATR (2019, VII) found that “the FAA had inadequate awareness of the
MCAS function which, coupled with limited involvement, resulted in an inability
of the FAA to provide an independent assessment of the adequacy of the Boeing
proposed certification activities associated with MCAS.” Controversially, later
“[a] federal advisory panel evaluating the safety-approval process for Boeing Co.’s
737 MAX concluded regulators adhered to policies in certifying the plane and
determined it wouldn’t have been safer if it had received the scrutiny of an all-new
aircraft” (Pasztor and Cameron, 2020).
One commentator stated the following concerning the importance of the AOA
indicator and disagree light (Tabuchi and Gelles, 2019): ‘“They’re critical, and
cost almost nothing for the airlines to install,’ said Bjorn Fehr, an analyst at the
aviation consultancy Leeham. ‘Boeing charges for them because it can. But they’re
vital for safety.’” The Indonesian final report on the Lion Airlines 737 MAX 8
crash pointed out that the AOA Disagree alert has been a standard feature on 737
NG airplanes since 2006 and should have been on the 737 MAX, too, although
Boeing did not consider it as a safety feature (KNKT, 2019, 45). However, the
AOA Disagree alert was only operational on 737 MAX aircraft if the optional
Journal of Business and Accounting
9
AOA position indicator was chosen by an airline and only about 20 percent of
airlines had selected this option at the time when the first 737 MAX accident
occurred and Lion Airlines was not one of them (KNKT, 2019, 45-46). As Boeing
did not consider the AOA Disagree alert as an aircraft safety feature or necessary
for aircraft operations, it decided to wait to restore the operation of the AOA
Disagree alert until “a display system software upgrade, scheduled for the third
quarter of 2020” (KNKT, 2019, 46). Following the first 737 MAX crash, a Safety
Review Board assembled by Boeing agreed that the absence of the AOA Disagree
alert was not a safety issue, but Boeing decided “to accelerate the software change”
(KNKT, 2019, 46).
The MCAS was designed to make the 737 MAX aircraft behave similarly to earlier
737 versions, which would help to achieve an objective of minimizing any extra
training costs for airlines buying the 737 MAX (Pasztor, Tangel, and Sider, 2019).
In particular, Boeing “had promised Southwest Airlines Co., the plane’s biggest
customer, to keep pilot training to a minimum so that the new jet could seamlessly
slot into the carrier’s fleet of older 737s, according to regulators and industry
officials” (Pasztor, et al., 2019). Also, an ex-Boeing engineer, Mr. Ludtke,
“recalled midlevel managers telling subordinates that Boeing had committed to
pay the airline $1 million per plane if its design ended up requiring pilots to spend
additional simulator time” that was an unheard-of commitment (Pasztor et al.,
2019). It was reported that another person who had worked on developing the 737
MAX airplane recalled the $1 million commitment by Boeing, along with Mr.
Ludtke (Tangel, Pasztor, and Maremont, 2019). THCOT&I (2020, 9-10) also
reported this $1 million commitment to Southwest Airlines. Southwest, Airlines,
with a cost leadership strategy, is Boeing’s biggest customer of 737 planes and
likely exerts great influence over the design of the various versions of the aircraft
(e.g., see Sanders, 2010).
It was reported that one “Boeing Co. engineer involved in the development of the
737 MAX claims the aerospace giant’s managers overly prized controlling costs
and schedules at the expense of safety, allegations that are currently part of a
federal criminal investigation after two fatal crashes of the aircraft” (Tangel and
Pasztor, 2019). Also, the Seattle Times was reported to have earlier written the
following regarding this engineer’s complaint (Tangel and Pasztor, 2019): “His
complaint, totaling more than 5,000 words, offers an inside glimpse at what one
engineer alleges was a pattern of Boeing managers playing down safety threats
over the years, using cost as a primary reason to reject various proposed design
enhancements to make the 737 MAX and predecessor models less prone to
accidents.”
Under the subheading of: “Boeing Production Pressure – Costs, schedule, and
production pressures at Boeing undermined safety of the 737 MAX,” THCOT&I
(2020, 5-6) gave several cost saving examples, including a business goal of
excluding existing 737 NG pilots from simulator training, receiving an exception
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from the FAA to not install an Engine Indicating and Crew Alerting System, and
reducing the testing hours and engineering flight deck simulator hours in the 737
MAX program. In respect of simulator training being opposed, THCOT&I (2020,
10) later quoted from an email sent by Boeing’s 737 Chief Technical Pilot to a
colleague, stating: “Boeing will not allow this to happen. We’ll go face to face with
any regulator who tries to make that a requirement.” Belatedly, Boeing now backs
737 MAX flight simulator and other new training for pilots (Cameron and Tangel,
2020a). The new Boeing CEO, David Calhoun, said: “It took us too long to do it”
(Cameron and Tangel, 2020a).
Like many companies world-wide, Boeing has used lean manufacturing for many
years that focuses on improving efficiency and reducing costs, facilitating
competitive aircraft pricing (Jenkins, 2002). Also, Boeing was recognized as one
of four companies using “best practices” in target costing that “can best be
described as a systematic process of cost management and profit planning”
(Swensen, et al., 2003, 12). However, cost management has been defined as: “The
approaches and activities of managers to use resources to increase value to
customers and to achieve organizational goals” (Datar and Rajan, 2018, 937,
emphasis added). Increasing value to customers would include improved safety in
the context of the flying public as the customer, even if reducing costs was one of
the organizational goals.
STEPS TAKEN BY BOEING
On April 5, 2019, less than a month after the second 737 MAX crash, Boeing’s
CEO announced his request to the Board of Directors (BOD) for a four-person
board-level investigation (Muilenberg, 2019). The committee was tasked with
confirming “the effectiveness of our policies and processes for assuring the highest
level of safety on the 737-MAX program, as well as our other airplane programs,
and recommend improvements to our policies and procedures” (Muilenberg,
2019). This internal review by Boeing board members added to the investigations
of “Federal prosecutors, congressional committees and regulators” (Tangel, 2019).
Interestingly, the committee didn’t identify any indications of “undue pressure or
other lapses that compromised the safety of the 737 MAX or other aircraft” with
the caveat that its “review didn’t focus on the accidents specifically” (Tangel,
2019). This differs from the “undue pressures” reported by JATR (2019) and others
(e.g., see THCOT&I, 2020, 6).
On September 25, 2019, Boeing’s BOD announced that it had formed a new
Aerospace Safety Committee at its August 2019 board meeting, with a “primary
responsibility […] to oversee and ensure the safe design, development,
manufacture, production, operation, maintenance and delivery of the company’s
aerospace products and services” (Boeing, 2019). Along with helping to improve
how design and safety matters are handled, the Aerospace Safety Committee “is
aimed at giving senior company leaders and directors tighter oversight, as well as
Journal of Business and Accounting
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reduce the influence of schedules and cost pressures on engineering decisions”
(Tangel and Cameron, 2020, emphasis added). Boeing’s BOD also announced six
recommendations following “the five-month independent review […] by the
Committee on Airplane Policies and Processes of the company’s policies and
processes” (Boeing, 2019).
The BOD’s six recommendations largely pointed to Boeing making organizational
changes to centralize the supervision of safety matters throughout the organization,
to make sure no safety issues slip through the cracks and are overlooked. For
example, the BOD’s second recommendation commenced with (Boeing, 2019):
“Realign the Engineering function: The board recommends that engineers
throughout Boeing, including the new Product and Services Safety organization,
report directly to the chief engineer, who in turn reports directly to the company's
chief executive officer.” Implementation of this recommendation should mean that
any engineering concerns, including safety issues, will receive proper attention at
an executive level by a qualified engineer. Previously, Boeing’s top engineers
would “report primarily to the business leaders for each airplane model, and
secondarily to the company’s chief engineer” and, therefore, “engineers who
identify problems that might slow a jet’s development could face resistance from
executives whose jobs revolve around meeting production schedules” (Gelles and
Kitroeff, 2019). The latest “737 MAX Updates,” which were grouped under six
main headings at the time of writing, were posted on the Internet (see Boeing,
2020).
On September 30, 2019, it was announced by Boeing that the Product and Services
Safety Organization had been formed to “centralize safety oversight,” as
recommended by the BOD Committee on Airplane Policies and Processes
(Cameron, 2019). Also, Boeing announced “that it had expanded an anonymous
reporting system for employees to flag concerns and strengthened existing
safeguards such as safety review boards” while earlier it had “amended its
governance rules to make safety-related experience a criterion for choosing future
directors” (Cameron, 2019). Consistent with this new criterion, Boeing announced
on February 24, 2020, that “two new outside directors with safety and engineering
experience” were nominated for Boeing’s board (Tangel and Cameron, 2020),
which added more safety and engineering expertise at the highest level.
Poor management of the MAX crisis led to the CEO, Dennis Muilenburg, being
fired on December 22, 2019, with David Calhoun named as his successor,
commencing January, 2020, but some doubted that replacing the CEO would
correct Boeing’s widespread management and cultural problems (Tangel and
Cameron, 2019). For example, it was stated that the CEO was only part of the
culture of excessive cost-control at Boeing that some believe stemmed from buying
McDonnell Douglas in 1997 and the HQ move away from the engineering center
in Seattle to Chicago (Sindreu, 2019). Interestingly, it is possible that “Boeing’s
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cost-cutting culture” contributed to the delays in developing the 787 Dreamliner
and its grounding in 2013 (Sindreu, 2020b).
A VERY COSTLY FAILURE
Whatever short-term cost savings were gained for Boeing and/or airlines by MCAS
design decisions and reduced training decisions regarding the 737 MAX, they have
been dwarfed by the long-term costs that are being incurred by Boeing and the
airlines that adopted the 737 MAX aircraft, after the two 737 MAX 8 crashes, as
well as the grief and sorrow of those who lost family members and friends in the
crashes. For example, a family who lost a family member in the Ethiopian Airlines
737 MAX crash, filed a wrongful death lawsuit against Boeing, Ethiopian Airlines,
and Rosemount Aerospace, Inc., which “accuses Boeing of putting ‘profits over
safety,’ and rushing the 737 Max 8 to market to compete with rival Airbus and that
company’s A320 aircraft” (Devine and Griffin, 2019).
Also, Boeing has “established a $100 million relief fund to meet family and
community needs of those affected by these [737 MAX 8] accidents” (Boeing,
2020). It was reported that “Boeing has set aside more than $9 billion to cover
customer compensation and higher costs to work through an order backlog of 4,500
MAX jets, but analysts expect this figure to climb to $16 billion or more”
(Cameron and Tangel, 2020a). In addition, it was reported that in 2019 Boeing
experienced its first annual loss ($636 million) in over 20 years, with more than
$19 billion in costs from the 737 MAX debacle (Cameron and Tangel, 2020b).
In 2019, Boeing delivered only 380 aircraft, lowest in 14 years, versus 806
deliveries in 2018 and 863 deliveries by Airbus in 2019; also, new orders for
Boeing’s commercial jets were reported to be at a 16-year low (Cameron and Katz,
2020). Airlines cancelled about 200 737 MAX contracts in 2019 and there were
zero Boeing jetliner orders in January 2020 (Warren, 2020). It was reported that
Air Canada cancelled 11 out of its 61 orders for 737 MAX aircraft in March 2020,
to gain “more fleet flexibility” according to its [Deputy CEO and] CFO (Horton,
2020). On May 12, Boeing announced that for the first time in seven years its
jetliner orders fell below 5,000 as its customers continued to cancel orders for 737
MAX aircraft (Cameron and Tangel, 2020c).
The grounding of the 737 MAX aircraft following two crashes has severely hurt
its suppliers and customers financially. It has led to worker lay-offs by some of
Boeing’s suppliers (Cameron and Tangel, 2020b). General Electric experienced a
$1.4 Billion reduced cash flow impact in 2019 from the 737 MAX grounding
(Gryta, 2020b). Because Boeing temporarily halted its 737 MAX production, GE
sought new Airbus business for its engines (Katz, 2020). United Technologies
expected its Collins Aerospace Division to experience a $375 Million drop in
adjusted operating income stemming from Boeing’s suspension of 737 MAX
production (Gryta, 2020a; Sindreu, 2020a) It was reported that the 737 MAX
Journal of Business and Accounting
13
production halt would adversely impact Honeywell’s aerospace business (Gryta
and Sebastian, 2020). Also, hundreds of millions of dollars have been lost by its
airline customers with the grounding of the 737 MAX airliner (Cameron and
Tangel, 2020b).
In addition, Boeing’s stock price dropped dramatically following the second 787
crash on March 10, 2019. For example, it was reported that the Boeing’s stock
reached its highest price of $446 shortly before the second crash but was only
$154.84 about one-year later on March 12, 2020 (Gates, 2020). Exhibit 1 shows
Boeing’s 5-year stock price history from June 1, 2015, until May 11, 2020, with
its stock price at only $128.88 at 3.59 p.m. and $128.91 at close (Yahoo! Finance,
2020). The 737 MAX problems, coupled with the Coronavirus Pandemic impact,
had significant adverse impact on Boeing’s stockholders, at least, in the short term.
On October 16, 2020, Boeing received some positive news regarding the 737 MAX
that gave hope of the jet’s return to service even before the end of 2020 (Philip,
2020). The Executive Director of the European Union Aviation Safety Agency
(EASA), Patrick Ky, expressed his opinion in an interview that the “proposed
changes sufficiently address problems with a faulty flight-control system
implicated in two fatal MAX crashes” that was later confirmed by another EASA
official (Grossman and Katz, 2020). It was reported that Boeing’s share price
increased by 1.9 percent on October 16, 2020, closing at $167.35, with the news
that indicated a return to service for the 737 MAX could be only a few months
away, at least from a European Union perspective (Grossman and Katz, 2020).
Also, it was reported that the stock price of two major Boeing suppliers, General
Electric Co. and Spirit AeroSystems Holdings, Inc., rose in response to the good
news (Philip, 2020).
Interestingly, it was reported that the EASA requires the “development of a so-
called synthetic sensor to add redundancy [that] will take 20-24 months, [Patrick
Ky] said. The software-based solution will be required on the larger MAX 10
variant before its debut targeted for 2022, and retrofitted onto other versions, ‘Our
analysis is showing that this is safe, and the level of safety reached is high enough
for us,’ Ky said in an interview. ‘What we discussed with Boeing is the fact that
with a third sensor, we could reach even higher safety levels.”’ (Philip, 2020).
Earlier, the FAA Administrator made positive comments after a personal test flight
of a 737 MAX airplane on September 30, 2020 (Pasztor and Tangel, 2020b) but,
unlike the EASA, the FAA had “held back from making predictions about timing”
(Phillip, 2020). However, Boeing’s share price rose by 1.0 percent on September
30, 2020, closing at $165.26 (Yahoo! Finance, 2020).
Also, the 737 MAX grounding has hurt the U.S. economy significantly. As the
USA’s leading exporter, three economists forecast that Boeing’s production halt
would reduce the GDP of the first quarter of 2020 by 0.5 percent (Mitchell and
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Cameron, 2020). This forecast was made before the negative impact of the
Coronavirus on the U.S. economy.
Exhibit 1: The Boeing Company’s 5-year Stock Price History, June 1, 2015 –
May 11, 20201
1 Source: Yahoo! Finance, Downloaded May 11, 2020, at 3:59 p.m.,
https://finance.yahoo.com/quote/BA?p=BA.
SUMMARY AND CONCLUSIONS
This paper discussed a number of failures that have been reported as likely
contributing to the two fatal crashes of the 737 MAX aircraft and led to its
grounding. The focus of the paper was on cost savings versus redundant systems
in the context of the 737 MAX aircraft’s recent history. One limitation of this study
is that it is based on publicly available sources of information that are sometimes
contradictory. Future research can explore the final events of the 737 MAX
grounding. Also, some researchers may wish to investigate the entire 737 MAX
grounding episode using avenues of research not related to cost savings and
redundant systems.
The enhanced scrutiny of the 737 MAX aircraft means the flying public will
benefit from the improved pilot training, safety and reliability features built into
the Boeing 737 MAX and likely other Boeing aircraft. While installing updated
software into a test 737 MAX plane, Boeing engineers discovered another software
problem that is being corrected (Pasztor, 2020a). Inspections discovered debris in
the fuel tanks of undelivered 737 MAX planes that needs to be cleared (Cameron
and Pasztor, 2020). This could result in “a civil-enforcement action and […] a
multimillion-dollar fine” (Pasztor and Tangel, 2020a). The FAA identified
Journal of Business and Accounting
15
“assembly-line lapses that could result in dual-engine power loss in the event of a
lightning strike” that requires 12 hours to repair each aircraft (Pasztor, 2020b).
Also, the FAA required the modification of wiring on 737 MAX aircraft to comply
with a 2009 regulation for wire separation that will reduce the remote possibility
of a devastating electrical short circuit (Gates, 2020).
In conclusion, what lessons can be learned from Boeing’s experience with the 737
MAX jetliner? Some lessons to be learned are summarized as things to embrace
and things to avoid in Exhibit 2.
Exhibit 2: Some Lessons to be Learned from Boeing’s Experience with the
737 MAX Jetliner
Embrace Avoid
1. Cost management to satisfy
customers’ safety and other
needs and achieve
organizational objectives
that can include careful cost
reduction.
1. Cost savings without
satisfying the safety and
other needs of all customers
(e.g., airlines and airline
passengers).
2. Safety first and cost savings
second.
2. Cost savings first and safety
second.
3. Sufficient consideration of
the risk of extra long-term
costs exceeding short-term
cost savings.
3. Excessive focus on short-
term cost savings and
insufficient focus on the risk
of extra long-term costs.
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