20 Apr It’s Boeing but it ain’t going
How a race between competitors resulted in safety risks materialising
For decades, Boeing’s reputation among airline pilots was exemplary. Pilots had a saying that showed their faith in the company’s aircraft: “If it ain’t Boeing, I ain’t going.” Yet, the Boeing 737-MAX-8 has been grounded since March 2019 after two crashes killed 346 people. What is going on and what can risk managers learn?
Finding the competitive edge
There are around 28,000 operational airliners in the world, and nearly half of these are either an Airbus A320, or a Boeing 737. For years, Airbus and Boeing have competed to nudge market share in the crucial, single-aisle, medium-range segment their way. In December 2010, Airbus changed the game, stunning the aviation world with the surprise announcement that it had completed the A320neo, which delivered a massive 6% fuel efficiency improvement over the 737NG Boeing had been ambushed. Just a few weeks later, Boeing announced it would make the next generation 737 (MAX) in the shortest possible time. They had to – the plane was responsible for 40% of their profits.
Building safe and economical aircraft for airlines is the basis for creating customer value. The Boeing 737-MAX had to fly just like older models. This way, the regulators and pilots wouldn’t need to do new aircraft certification; pilots could just do a few hours of computer-based training on iPads.
A commercial imperative was to develop and deliver in the shortest possible time, using more modern technology, materials and components. Not least because de-regulation of airline markets from the late 1970s had triggered unprecedented cost-cutting in every aspect of the aviation industry.
Boeing engineers pushed the specifications of the aircraft to its technical limits and the knock-on effects of those changes had deadly consequences.
Initial investigations after the 737-MAX crashes found that aircraft sensors had failed, causing incorrect data to be given to computer systems developed to counteract new behaviours of changes made to the aircraft introduced to compete with Airbus. Because pilots did not properly understand the computer system, they were powerless to act when the aircraft was forced to descend at very high speeds shortly after take-off.
Change focus; change fortunes
Over time, Boeing took actions that accelerated metamorphosis from being engineering-centred to financial management-centred. Their business focus was set on maximising shareholder value, a strategic decision that has a way of detaching the production of a piece and its attendant cost away from being able to perceive and measure the quality of the ‘whole’. It shifted from safety as priority, with the attendant risk mindset that requires, to a ‘risk to financial objectives’ way of thinking.
This shift is easily recognised when company results announcements are fused with the language of “maximising shareholder value”. Trade-offs against delivering value for customers are never elaborated, yet this is the place where risks are born. It took 8 years from the announcement of the 737-MAX, until the first one plummeted to earth.
A strategic feature of this focus was Boeing’s decision in the early 2000s to offshore the supply chain. Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. A period of rapid innovation began with new materials such as carbon fibre wings and fuselages. Ordinarily, an organisation would pay additional attention to risks when innovating. But Boeing opted for the opposite – to outsource responsibility to contractors and suppliers and to take greater distance from the procurement and engineering challenge.
Without regular interaction between design and manufacturing engineers, decision-making focuses on time and cost at the expense of maintaining deep knowledge about quality issues. That becomes the responsibility of the supplier. Perception of risk is also shaped by the language used in that environment. When money is the lens through which all challenges are seen, money also becomes the way to fix things.
Hindsight shows that Boeing gradually shifted from being an engineering-centric company making products, to a financial management company producing “results”. It’s an oft-told story where Head Office functions are geographically detached from engineering realities for some good reason, and real disaster scenarios become feasible because the organisation forgets how to recognise, or prioritise, critical safety issues.
When managers (be that for production or risk management), manage with a spreadsheet rather than real-world knowledge about what is actually going on in the factory, they overlook the hidden costs of the degrading of skills, the loss of quality and the erosion of risk safety margins. Everything is normalised behind the successful production of profit, while the span of control separating the business from disaster silently reduces.
Sorry, that risk is just not my typology.
Mission-critical knowledge gradually fades, as does the seniority of the people with this knowledge, until risks can no longer be elaborated with conviction or credibility. This loss is both hard to see happening and even harder to write up in a risk report, especially if there is no category of risk typology that makes it organisationally permissible to identify this kind of uncertainty.
If a sharp-eyed risk analyst perceived such a threat, but had to justify its inclusion in a reporting system where it would seem rude to even mention it, it’s highly unlikely this risk will be adequately captured or made visible to senior figures. This is sometimes called a “CLM” – Career Limiting Move!
But surely somebody noticed?
At the request of the United States Federal Aviation Authority (FAA), Boeing conducted an internal audit in December 2019 to determine whether it had accurately assessed the dangers of key systems in the 737-MAX. Part of that audit was a discovery of safety-related information passed between employees. It brought to light a number of embarrassing comments made by employees to express their concerns about the safety, along with substantive technical vulnerabilities. The findings suggest that engineering-centric risks were being downplayed because financial decision-makers had insufficient understanding of engineering issues and were acting with a pre-loaded conviction that the 737 was a safe plane.
It was almost as if a collective belief had formed, that any changes they introduced were incapable of reducing the safety of the plane. A defective risk culture like this ensured that safety threats were dismissed as insignificant and should remain unreported. After all, wasting money on “over-engineering” is a risk to profits, so why do “gold-plating” safety efforts when the plane was already safe?
Senior management had prioritised speed in bringing the new aircraft to market, and were convinced that underlying problems amounted to little more than easily fixable software failure that was not worth disrupting a global supply chain for. This is a good example of irrational groupthink. A reliable risk framework should always have mechanisms in place to identify and counteract these types of cognitive bias, preferably early in a project.
“Regulatory partnership” – two words that don’t belong together.
The aviation industry is carefully regulated, but Boeing had an outstanding reputation with the FAA. So much so, that in a decades-old system, the FAA let engineers employed by manufacturers themselves, oversee tests and vouch for safety. An audit in the 1990s by the US Transportation Department (which oversees the FAA), found that 95% of the Boeing 777 development was inspected and certified by Boeing itself.
Just when aircraft manufacturing techniques and technologies were radically changing, with ever-greater development budgets and more sprawling ecosystems of global supply chains, the FAA was facing budget cuts, hiring freezes and furloughs. Its ability to identify risks and to hold the manufacturers to account was rapidly disintegrating. How to write a Key Risk Indicator that suggests your regulator is becoming weaker and less capable, with significant safety implications, when those very things are part of your unwritten corporate leadership strategy?
Over time, the relationship between Boeing and the FAA became even cosier. In the past, the FAA could choose the best engineers to work for it. Now Boeing was able to discard their least capable and knowledgeable staff and transfer them to the FAA payroll, fundamentally altering the balance of power as the Boeing team could “outgun” their regulator.
From 2009, FAA staff had to refer to airlines and manufacturers as “customers” making it even more likely that they would behave in a docile manner.
Enterprise Risk Management (ERM) experts might furrow their brows at such an arrangement, and with good reason. Relationships such as these are not usual between a business and its regulatory overseer. This is readily identifiable as a risk to safety, but employees who did so drew attention to themselves, as a risk to the business objectives. This was more than a hypothetical danger; evidence has emerged that former Boeing employees had tried to sue for being fired because they had flagged safety concerns.
Surrendering the safety risk objective meant Boeing also failed to sustain its financial objectives. In the last ten months, Boeing has lost a quarter of its market capitalisation, equivalent to $65bn. It has sucked cash out of Boeing’s ability to invest in renewing other other aircraft in its portfolio.
More than that, it lost its reputation and a CEO along the way. It is highly likely that it will be diminished as a competitor for many years to come. When it comes to type approval for new aircraft, other regulators around the world such as the European Union Aviation Safety Agency (EASA) may no longer be willing to accept and reproduce FAA approvals, greatly increasing the time, cost and uncertainty of bringing new aircraft to market.
The FAA is forging a new relationship with airlines and manufacturers on these risk principles. Perhaps Boeing’s new CEO, Dave Calhoun, (himself a long-standing part of the Boeing management regime), will revive its engineering-led, safety-first approach to save the company. The fate of the 737-MAX is much less certain and almost certainly will not take to the skies before the FAA have re-built their own credibility for diligence and independence.
It is almost impossible to know whether anyone ever consciously decided to subordinate engineering safety risk to financial risk, but it still happened. Effective Enterprise Risk Management must be able to reveal when an organisation’s risk priorities are shifting. The gradual erosion of safety margins is an oft-repeated error of organisational thinking. Risk awareness must include a culture of purposefully avoiding groupthink, of welcoming robust challenge, and this needs to be a basic part of every risk management programme.
Update April 2020
Since the Coronavirus became a worldwide phenomenon, around the time this article was originally written (end of January), air travel has “essentially fallen to zero” (so say United Airlines). “If you’re an airline today, your last focus these days is buying airplanes, your primary focus is survival,” said Ron Epstein, aerospace analyst with Bank of America Merrill Lynch. Although Boeing have a backlog of 5,400 orders to complete, the problem is that the airlines who have ordered them are also deferring receipt (and payment) for new aircraft as they seek to preserve their own, rapidly diminishing liquidity.
Although the US government committed $17Bn of federal loan guarantee support for Boeing, recognising that the business was “critical to maintaining national security”. This aid has a number of strings attached to it, one of which is an obligation to not make any workers redundant. However, given the long-term likelihood that demand for passenger jets will be subdued, analysts are expecting that Boeing will be under great pressure to lose 20-25% of their workforce.
From a risk point of view, it is not uncommon for older, more experienced staff to be let go of, as they have typically risen to the top of their pay grades and are not considered to be the future of the business. This might make financial sense but it is questionable as to whether this will strengthen the safety consciousness and expertise that Boeing was formerly known for. All that can be said for the public right now is that “If it’s Corona-ing, we ain’t going”.