The 737 Max Crash: What’s the Fallout for Boeing?

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Wharton’s Robert Meyer, Indiana University’s Clinton Oster and John Strong from the College of William & Mary discuss the grounding of Boeing’s 737 Max.

Last week’s crash of a Boeing 737 Max aircraft, coming five months after another crash involving the same aircraft, has impacts on multiple fronts. Aviation regulators in many countries, airlines and passengers are now questioning the plane’s safety. China took the lead to ground the 737 Max, and a handful of countries followed suit. The U.S. Federal Aviation Administration (FAA) also has temporarily grounded two versions of the plane.

A total of 157 people died in the March 10 crash of an Ethiopian Airlines flight, minutes after takeoff from Addis Ababa, while 189 people died in a Lion Air crash last October in Indonesia, 12 minutes after takeoff.

Tough questions are being raised regarding the FAA’s safety assessment processes after a Seattle Times investigative report flagged apparent lapses, including allowing Boeing itself to conduct safety certifications for the 737 Max and fast-tracking approvals. Meanwhile, a grand jury in Washington, D.C., has called for documents to scrutinize the development of the plane. Boeing would conceivably need to invest in fresh training for pilots, as well as any fixes in plane design or safety features the regulator may order.

The big uncertainty is how much time any 737 Max fixes would consume, according to John Strong, professor of business administration and area head for economics and finance at the College of William & Mary’s Raymond School of Business. Boeing has nearly 600 deliveries of the plane scheduled for 2019, and most of them would have been pressed into service in the peak summer travel season, noted Strong, who is an expert on airline industry economics and safety issues.

Initial investigations have found “clear similarities” between the Lion Air and Ethiopian Airlines crashes, according to a Washington Post report, but it is too early for conclusive findings to be available. “We really don’t know what happened with those two crashes yet, and that means Boeing doesn’t have as much information from the crash records to see whether there are common underlying problems,” said Clinton Oster, professor emeritus in the O’Neill School of Public and Environmental Affairs at Indiana University, whose areas of expertise include transportation policy and safety.

“There is such dependence on aircraft, and there’s such inherent trust that somehow or the other [people are] going to get safely from here to there.” Robert Meyer

Public memories of airline disasters tend to fade over time, said Robert Meyer, Wharton professor of marketing and co-director of the school’s Risk Management and Decision Processes Center. “The reality is that people have short memories. There is such dependence on aircraft, and there’s such inherent trust that somehow or the other they’re going to get safely from here to there.”

Strong, Oster and Meyer discussed the fallout from the 737 Max crashes on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)

A Question of Time

Getting the 737 Max back on its feet might take some time. Boeing is currently on a monthly production schedule of 52 aircraft in the coming year, and that is now likely to be disrupted. At last count, it had nearly 5,000 pending orders for the aircraft. “It represents a big, potential risk in terms of liquidity and carrying cash flow if [Boeing has to] push this out six, nine or 12 months into the future,” Strong said. With uncertainty over the fixes needed for the 737 Max along with software updates, training, operations manuals and so on, “the implementation of any kind of remedy is likely to be longer and be more measured than [just fixing] the mechanical problems.”

In an open letter on Boeing’s website, CEO Dennis Muilenburg wrote that the company intends to release a software update for the aircraft “soon,” along with related pilot training, to address concerns about the plane’s safety. The software fix itself could cost billions, according to a Bloomberg report. The same article cited Canaccord Genuity analyst Ken Herbert as saying that each month the Max 737 remains grounded will cost the company approximately $2 billion in lost cash flow.

Boeing’s stock price shed 13% last week as concerns mounted that the company could take a revenue hit of $1.8 billion in the next quarter. Signs of the collateral financial damage of the 737 Max groundings came last week from Air Canada, when it suspended its 2019 financial forecast. Meanwhile, Boeing is continuing production of the plane even as deliveries are temporarily disallowed by the FAA order.

Boeing, of course, would hope “that this is resolved pretty quickly, and that it’s a very specific type of fix that everyone can understand and move on,” said Meyer. The last time the FAA ordered a major, systematic shutdown was for the McDonnell Douglas DC-10 jumbo jets in 1979, he noted. That action came after concerns over a possible design problem following an American Airlines crash that killed 275 people. “In that case, they could pinpoint it to a very specific maintenance problem, which they were able to remedy. Afterwards, even though there was a short-term hit, the aircraft continued to go on for a long while in service.” The DC-10’s last flight was in December 2017 before it was retired.

Airline travelers in the U.S. may not face major disruptions from the groundings of the 737 Max because it accounts for just one percent of global flights. The 737 Max was commercially launched just two years ago, and 371 of them are currently in service. Some airlines, like Southwest, have a much higher concentration of those planes (about 5% of its fleet); American Airlines and United Airlines are two other strong patrons of the aircraft.

“[The 737 Max crashes] will engender a rethinking about aviation safety oversight and regulation worldwide.” — John Strong

To be sure, some airlines have a better safety record than others, irrespective of which aircraft model they patronize. Southwest Airlines, for example, has claimed that it has flown 40,000 flights with the 737 Max without a problem, Oster noted. For airlines, it is important to maintain a public perception of safety, Meyer said, adding that they wouldn’t want their customers asking, “Am I taking a roll of the dice when I book a flight?” However, that is exactly the question that air travelers in the U.S. have been asking following the Ethiopian Airlines crash, he added.

How Effective Is Training?

If a fix involves training pilots to cope with a flaw that occurs, say, once every 10,000 takeoffs, pilots would find it difficult to practice for that eventuality, Meyer noted. “It is difficult to train [people] for potential disaster situations,” he said.

However experienced a pilot is, their response in a panic situation when a flight is taking off is typically to switch into a mode called auto reflex, Meyer pointed out. “It is very difficult to all of a sudden remember that little clause that was in some manual that you got a while back.”

The 737 Max fixes cannot be done in a hurry. “How to solve the immediate problem of what’s going wrong [with the 737 Max], what remedies are required and how long that will take is becoming a bigger and bigger question,” said Strong. “It’s clear that updates to software systems, changes in pilot displays, changes in operations manuals and additional crew training will take months to roll out across the fleet.” He expected it would take months for simulator programs to be designed and built for different scenarios and rolled out across the training platform worldwide.

Research that Oster and Strong have conducted on air accidents found that safety records vary by the regions where airlines are based. For example, Africa had a safety record that was eight times worse than North America, and Southeast Asia had a safety record that was three-and-a-half times worse, Oster said. “So, there are some other things going on in these places potentially related to pilot training, and potentially related to maintenance issues.”

“[The 737 Max probe] is happening in a perhaps more political environment for aviation safety than has happened in the past.” –Clinton Oster

Focus on Regulators

Civil aviation authorities around the world have typically acted independently, but that may change now, said Strong. He expected “a revisiting of how civil aviation authorities around the world [could] work together to make sure that we’re thinking about safety in a consistent way and in ways that bring everybody on board.” Historically, Canada, the U.K. and the U.S. have taken the lead on matters relating to aviation safety standards, he noted. The 737 Max crashes “will engender a rethinking about aviation safety oversight and regulation worldwide,” he predicted.

Oster noted that while the FAA applies safety standards based on evidence and data, it may face public pressures this time around to raise the bar for airlines. “Once there’s more information on what was really going on [with the 737 Max] and once Boeing makes the [required] changes and fixes, the FAA then has to decide — ‘Is this good enough?’” he said. “The problem [the FAA will] run into is that it may well be good enough from the perspective that they’ve always used in the past. But now, there’s a lot of public pressure. There are a lot of politicians sounding off. It’s happening in a perhaps more political environment for aviation safety than has happened in the past. That will be a challenge for the FAA.”

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