Boeing’s Management Crisis | Part Three: Business School Professors Weigh In

The Boeing 737 MAX catastrophe—which is expected to cost the company more than $18 billion—has been examined at length in this three-part series. This appears to be a rare situation where neither domestic regulation, nor market economics, nor Boeing’s own culture seem capable of providing incentives for the company to institute needed reforms. First, we examine the regulatory failure.

Including the MAX, the FAA has only grounded three commercial aircraft models. But the last two of those groundings occurred to Boeing jets within the past five years. That record has led vocal critics like Representative John Garamendi of California to assail the firm for poor quality and compromised safety.

Boeing’s current challenges differ from those that prompted past groundings. The problems arise not solely from mechanical failures but also, as the Seattle Times put it, “involve oversight problems and how pilots respond to an emergency.”

The FAA’s History of Planes Decertified

The MAX’s failures place it in the same league as the infamous McDonnell Douglas “flying coffin.” That’s the DC-10, the first jetliner to have been decertified by the Federal Aviation Administration for safety reasons. The DC-10 and its updated descendant, the MD-11, finally ended passenger service in 2014.

Starting with the horrific American Airlines crash just outside Chicago’s O’Hare International Airport in 1979 because an engine shot off a wing during takeoff—still the deadliest aviation accident in United States history—the DC-10 suffered a string of crashes around the world. Those disasters, often resulting from cargo doors that blew off the fuselage during pressurization, include the famous United Airlines fireball crash landing in 1989 at Sioux City, Iowa.

The FAA’s second decertification was for another Boeing jet, the Boeing 787 Dreamliner. The agency grounded fifty of these planes in 2013 because of lithium-ion battery fires.

Boeing engineers selected batteries containing positive electrodes employing lithium cobalt oxide even though those electrodes were known to supply oxygen for fires and pose thermal runaway hazards. The National Transportation Safety Board faulted Boeing’s engineers for not adequately testing the batteries for safety, along with the FAA for not recognizing the risks involved with the firm’s battery and vendor selection.

Does the FAA Still Inspect Planes?

As the Wall Street Journal pointed out, the FAA no longer carries out safety inspections of aircraft. The agency outsources those inspections to the plane manufacturers. That’s because in 2005, the Bush Administration loosened regulations to permit aircraft manufacturers’ employees to certify the safety of their own planes. The FAA called this cost-slashing initiative the Organization Delegation Authorization program (ODA).

So, in other words, in contrast to the arm’s-length independent regulatory functioning of the FAA during earlier years, today, Boeing’s employees certify the safety of Boeing’s own products.

Critics attack the ODA system for institutionalizing conflicts of interest. Defenders, by contrast, say that it’s impossible to operate the FAA without such a system because Congress has repeatedly refused to appropriate budgets sufficient for the agency to operate independently.

But the MAX crisis shines a spotlight on the deficiencies of the ODA arrangement. Every major aviation regulatory agency in the world had grounded the 737 MAX before our own FAA finally followed the other nations’ lead. The agency at last grounded the MAX after investigators at the Ethiopian crash site found a jackscrew that controlled the plane’s pitch stuck in the full nose-down position. Reportedly, that disclosure immediately preceded a direct order to the FAA’s administrator from the President of the United States.

Stung by withering, relentless press and social media criticism for allowing the MAX to continue flying, the FAA will probably be slow to re-certify the MAX until at least mid-2020. That recertification will probably follow civil aviation authorities on other continents taking similar steps after performing their own simulator and flight testing of MAX jetliners retrofitted with new sensors, computers, and software.

This may pose an unusual regulatory situation where the fate of America’s airline passengers may indirectly lie with regulatory agencies in other nations with large civil aviation industries like Britain, France, Germany, Japan and China. No longer willing to follow the FAA’s lead, the agencies in those nations now appear to be regulating commercial aviation in the United States by proxy.

Market Failure: When “Vote with Your Feet” Doesn’t Work

Even more troubling seems to be the way market economics may provide insufficient incentives for Boeing to change. Despite all the ongoing media hype to the contrary, a professor at MIT’s Sloan School of Management cited as “the nation’s leading expert on aviation safety” has demonstrated that airline passengers do not “vote with their feet” by refusing to fly on aircraft with terrible safety records.

Early in his career, Dr. Arnold Barnett, who holds a PhD in mathematics from MIT and an endowed chair in economic statistics and operations research at Sloan, published a classic paper showing that passengers did not avoid the DC-10 after the Chicago disaster—even during the days immediately following the crash.

What’s more, Dr. Barnett has recently demonstrated that aviation incidents generating tremendous hype on broadcast and social media don’t dissuade passengers from flying a particular carrier, either. That was the case when, in 2017, police dragged a physician off a sold-out United Airlines jet at O’Hare Field. According to Professor Barnett, the resulting “boycott” of United never exerted anything more than an insignificant effect on the airline’s revenue.

Industry insiders like Dr. Robert Meyer, a professor of marketing at the Wharton School and co-director of Wharton’s Risk Management and Decision Processes Center, concur with Dr. Barnett’s research. “The reality is that people have short memories. There is such dependence on aircraft, and such inherent trust that somehow or the other they’re going to get safely from here to there,” says Professor Meyer.

Finding other business school faculty who agree with Barnett and Meyer isn’t difficult. Crisis management expert Helio Fred Garcia, who teaches at Columbia University and has taught in New York University’s executive MBA program since 2002, explained to the Seattle Times that “once the MAX is back in action and part of the ordinary flight lineup, people are likely to forget there was even an issue.”

Additionally, Professor Barnett argues that even if passengers refused to fly on the MAX, the airlines’ revenue management software would rapidly kick in. Those programs would quickly raise prices on full non-MAX flights while offering discounts on the empty MAX flights. Because demand for airline tickets is so acutely price-sensitive and elastic, the software would thus fill the seats on the MAX in short order.

This effect amounts to an unusual failure of market economics. Despite all the hours of TV and online video coverage, despite thousands of reports published about “the jet nobody will fly,” Boeing’s top management has little economic incentive to change. Their executives and board of directors know that their airline customers will fill the seats on the 737 MAX as soon as the jetliner returns to service. That’s one of the reasons why only four months after the latest of these disasters, British Airways nevertheless signed for about 200 new MAX jets, an audacious act that probably set a record for the largest purchase commitment of a decertified jetliner model in history. Boeing then booked orders for an additional 60 MAX jets at the Dubai Air Show in November 2019.

Furthermore, what other alternatives do Boeing’s customers have? The business models of budget carriers like Southwest depend on saving maintenance and crew training costs by flying only a single airplane type produced by a single manufacturer. Airbus—now the only other Boeing alternative after buying Canada’s Bombardier—can’t build planes fast enough. They are booked with orders at least three years in advance, and most of Boeing’s customers can’t afford to wait that long.

When Corporate Culture Impairs Safety

The failure of the corporate culture that produced the MAX might be Boeing’s most disturbing failure of all.

Cited by U.S. Representative Albio Sires, here is an excerpt from a June 2018 exchange between a Boeing employee and the 737 program’s general manager that took place about four months before the Lion Air crash. The employee writes:

I have some safety concerns that I need to share with you as the leader of the 737 program.

My first concern is that our workforce is exhausted.

Employees are fatigued from having to work at a very high pace for an extended period of time.

Fatigued employees make mistakes.

New York Times writer Natalie Kitroeff interpreted those remarks to mean that the schedule’s pressure was promoting “a culture where employees are either deliberately or unconsciously circumventing established processes.”

The employee continues:

And for the first time in my life, I am sorry to say that I am hesitant about putting my family on a Boeing airplane.

That email was read by Dennis Muilenburg, Boeing’s CEO who also served as chairman of the board at the time. During his two-day grilling by Congress on Capitol Hill in October 2019, he testified:

Congressman, I’m familiar with that last communication that you referenced, and we did have several follow-up sessions with him. I told him I appreciated the fact that he brought up those issues and concerns.

Representative DeFazio then asked Muilenburg, “Did you reduce the rate of production at that point in time, given his concerns?”

Muilenburg said he did not: “Sir, we did not change the production rate.”

The CEO said that the Boeing plant kept cranking out 52 completed planes each month. He then said something completely ridiculous: “…a production slowdown would have compromised safety.” If so, that probably would have been the first time in the history of manufacturing that slower production had adversely affected safety. The more likely reason that Muilenburg kept exhausted workers toiling away was that each reduction of ten aircraft per month costs Boeing $1 billion in lost revenue.

Harvard Business School Professor Dr. Amy C. Edmondson has written at length about the toxic managerial culture at Boeing that produced the MAX. In an article in the Harvard Business Review, she writes about a similar situation at another Boeing factory:

Workers in the troubled Boeing 787 Dreamliner plant in South Carolina were pushed to maintain an overly ambitious production schedule and fearful of losing their jobs if they raised concerns. This is a textbook case of how the absence of psychological safety—the assurance that one can speak up, offer ideas, point out problems, or deliver bad news without fear of retribution—can lead to disastrous results.

The accidents and the resulting media attention together create a real wake-up call for Boeing, which I expect will now embark on an examination of every aspect of its operations. What’s required, however, is more than operational fixes. It is nothing less than a full organizational culture change.

Citing Toyota along with Steve Jobs’ Pixar Animation as examples, Professor Edmondson implies that the only way Boeing will reform will be if “the culture—and by culture I especially mean the behavior of managers up and down the line—vehemently and continuously supports psychological safety.”

New Republic contributor Maureen Tkacik, a former Wall Street Journal reporter, concurs. Tkacik argues that the MAX’s crashes happened because Boeing was never able to disinfect itself of the dysfunctional, retaliatory culture the firm absorbed from McDonnell Douglas following the merger.

Using passive, bureaucratic language, Muilenburg testified glibly about how Boeing planned to improve safety by setting up new committees among the firm’s board of directors, new reporting structures through the engineering chain of command, and a new channel for employees to anonymously submit safety concerns.

But Muilenburg never conveyed the impression that he, his board of directors, or the company’s leadership personally cared about safety—psychological or otherwise—in a meaningful way that seemed even remotely compelling. In fact, twice during the hearings he told Congress that the Boeing company “does not sell safety.” If Boeing doesn’t sell safety, one wonders what their value proposition might entail.

Professor Edmondson took particular exception to Muilenburg’s plans to set up a system so employees can anonymously voice concerns about safety. She told Fortune that even though it may remove fears over retaliation, “anonymous reporting is a double-edged sword [that] inadvertently implies that speaking up is dangerous, and reinforces the idea that it’s not safe.”

Another professor at MIT’s Sloan School, Hal Gregersen, suggested to Fortune that executives like Muilenburg could cripple their companies because they may not realize how isolated they are: “If I were a representative on the committee, I would ask, ‘Where and when do people ask fearless questions systematically?'”

Muilenburg, in his Congressional testimony, and Chairman of the Board Dave Calhoun in a CNBC interview both vehemently denied allegations levied by Professor Edmondson, Congressman DeFazio, and a host of employee whistleblowers that Boeing suffers from a toxic corporate culture. And in one of the more alarming statements of his testimony, Muilenburg assured Representative Debbie Mucarsel-Powell that he would not be stepping down as CEO.

In December 2019, Boeing finally fired Muilenburg.

The stakes have never been higher for Boeing—or the American economy, since Boeing is the nation’s largest single exporter. One can only hope that the Federal Aviation Administration and the President recognize the consequences of a premature return to service of the 737 MAX. After all, within the next several months a third such disaster involving the MAX will probably result in the demise of Boeing as we know it—and possibly end commercial aircraft manufacturing in the United States.