BOEING 737 MAX PLANE CRASHES

Submitted in partial fulfilment of the requirements for

ELEPHANTS AND CHEETAHS: SYSTEMS, STRATEGY AND
BOTTLENECKS

Submitted to:
Prof. SARAL MUKHERJEE

Academic Associate:
Ms. ANJALI ABHICHANDANI

Submitted by:
Group 31
DIVYA GONDWAL (19124)
KAPGATE MANISH MARKAND (19329)
NARINDER GAUTAM (19342)
RAVNEET KAUR (19052)
SHANTANU AGARWAL (19360)
UTKARSH BAGHEL (19374)
VIVEK MAIDA (19074)

Indian Institute of Management Ahmedabad

Date:
12-Sept-2020

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Executive Summary

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Background

A new kind of Boeing plane, 737 Max, operated by the Indonesian airlines, Lion Air Airlines
crashed on 29th October 2018. A very similar accident occurred on 10th March 2019. This time
the aircraft was part of Ethiopian Airlines. In both cases, the aircraft's unexpectedly gained and
lost altitude, shortly after the take-off killing 189 and 157 people, respectively. It may have been
triggered by the faulty MCAS (Maneuvering Characteristics Augmentation System), which was
intended to limit a plane from losing lift power. The device automatically pushes down the nose
of the aircraft if the angle of attack is too high.

Most likely one of the MCAS sensors was faulty in both cases which transmitted false info to the
engine control module which continuously pushed down the nose of the aircraft. The pilots were
unable to react to this situation as they were unaware of the presence of MCAS. Usually, in such
a situation, a pilot should respond and stabilise the plane within 10 seconds, otherwise, a
catastrophic accident is unavoidable.

Following this second tragedy, the public completely lost trust in the 737 MAX, particularly after
the release of preliminary speed data showing similarities to the Lion Air crash. Airlines and
countries around the world grounded the 737 MAX, led by china which grounded all 737 Max
within 24 hours of the 2​nd crash. Other countries and organisations also followed, with the
European Union halting flights via its member states just one day later. In fact, the last country to
follow was the United States, where the FAA remained defiant and insisted on the airworthiness
of the US-made jet until a full day after the European decision.

Market Conditions

The major customers of the aircraft producers were huger airline operators (Elephants) that
demanded more efficient planes to save on their fuel costs, which formed a major proportion of
their operating cost. With rising fuel costs and increasing competitions in the market, these
airline operators were putting more pressure on aircraft suppliers.

Airbus, the only competitor of Boeing, had launched two products since the last product by
Boeing in 1997. Since then Airbus had launched Airbus A318 in 2003 and Airbus A320 Neo in
2010. The Airbus A320 Neo was less expensive and faster than the competitor. Hence Boeing
was under immense pressure to launch a new product quickly.

Boeing announced the 737 Max 7 on 30​th August 2011. Boeing commercialised the Boeing 737
Max in 4 variants that are 737 Max 7, 737 Max 8, 737 Max 9, 737 Max 10. Boeing 737 MAX 10
holds up to 230 seats, competing with the Airbus A320Neo, with a capacity of 206 seats. Under

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immense pressure to deliver quickly, Boeing also concealed information from the FAA regarding
technical issues with the planes. Despite all the efforts it took Boeing almost five years for its
inaugural flight of 737 Max on 29th January 2016.

The Boeing 737 Max system was built similar to its predecessor, 737 Next-generation (launched
in the 1990s). The main objective of building according to continue with the old system airframe
was to reduce the pilot training hours to the minimum required, i.e. 2 hours of the training course
on an iPad. Though the industry segment had a duopoly, still there was a huge competition
among both players. Both players competed for their share in US$ 191 billion market size. The
market is expected to grow at a CAGR of 2.93% to a value of US$ 255.1 billion by 2028[A]

Organisational Issues

On the surface, the crashes of Boeing Max 737 Max can be attributed to technical problems,
improper plane design, etc. A deeper investigation shows that several of the causes leading to the
crashes had origins in the changing organisation culture of Boeing. The Boeing culture rooted in
focus on engineering and safety standards started to be driven by finance with the merger of
McDonnell Douglas in 1997.

Focus on Profits While Ignoring Quality & Safety: Harry Stonecipher, formerly the CEO of
McDonnell Douglas became the CEO of Boeing in 2003. His statement," When people say I
changed the culture of Boeing, that was the intent, so that it's run like a business rather than a
great engineering firm" [1], perfectly captures the changing approach of Boeing towards
business. An extreme focus on improving profits and thereby reducing costs through outsourcing
of critical components resulted in the Boeing 787 program getting delayed by 3 years and
engineering failures like electrical fires in batteries of two of the planes [2]. The same
cost-cutting mentality led to the outsourcing of 737 Max software development to lower-paid
engineers in India [3], which caused the faulty designing of MCAS and contributed to 737 Max
Crash.

Shareholder First Attitude and R&D takes a Backseat: The firm also moved from R&D
focus to shareholder first attitude. Over the years, the R&D spending has been continuously
decreasing ($2.47 billion annually since 2013) while more money is spent on buyback of shares
($6.2 billion annually since 2013). This increasing focus on finance at the cost of R&D (Exhibit
1 and 2) [4] is one of the reasons for failing safety that led to the 737 Max crash.

Culture of Concealment​: The earlier Boeing culture was focused on creating visibility [5]
turned to one of concealment. The efforts were made to hide information regarding technical
issues from the FAA and the pilots were not even made aware of MCAS, which ultimately led to
the crash of 737 Max [6]. The concerns raised by a whistle-blower regarding the issues with 737

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Max were also ignored by the managers, as opposed to the past then employees were encouraged
to highlight their concerns.

Flawed Reporting Structure: There is also a problem with the reporting structure of top
engineers. They primarily report to the business executives, while secondary reporting is to the
company's chief engineer. In this structure, engineers who identify problems that might result in
delaying the plane development process can face opposition from executives, as for executives'
primary goal is to meet customer deadlines and timely delivery of products.

Background of kinds of risk faced by Boeing

Just like any other organisation Boeing also faces a multi of risks along several dimensions.
Listed down are some of the primary among them:

Financial Risk: Aircraft development is very capital intensive and requires upfront investments
of billions with no guarantee of success. Hence, Boeing faces huge financial risks in each of its
decision.

Market Risk: Sales of Boeing's products is largely influenced by the customers' requirements,
which in turn are depend upon various factors like fuel prices. Changing regulatory environment
makes it challenging for Boeing to design right type of products.

Reputational Risk: S single mistake in one of million components can cause serious accident
and even deaths of passengers. This can severally affect the share price, loss of reputation and
customer confidence for a foreseeable future.

Shifting of Risks during Production of 737 Max

Competition from Airbus A320Neo put heavy pressure on Boeing to come up with a new fuel
efficient in short time duration. Otherwise, there was a risk of losing the market share to Airbus.
Boeing choose to build 737 Max using the airframe of 737, which had been in use for past 50
years. As a result, Boeing managed to develop the plane at a very low cost of $2.5 billion, which
was less than a quarter of cost of developing an all new plane. This helped to reduce the financial
risk.

The 737 MAX was developed by only mounting the bigger and more fuel-efficient engines on
the 737. The position of new engines on created several problems due to low ground clearance
and change in plane aerodynamics. Thus, while 737 Max helped to reduce financial and market
risks, new safety risks were introduced. Despite using measure like MCAS system, newly
emerged safety risk couldn't be completely eliminated and some ​residual risk remained​.

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Deviation from 4 Safety Principles in the development of 737 MAX

1​. ​Ignoring Facts and Relying on Assumptions: There were evidences available that clearly
showed that Boeing had made fundamentally wrong assumptions regarding the MCAS software.
Boeing considered that MCAS was not a critical system for safety and will automatically adjust
AoA. There were two sensors for measuring the AoA and the MCAS got triggered with data
from just one sensor, without verifying the data with another sensor. Boeing ignored the fact that
a sensor can get damaged and can give faulty readings. Boeing also ignored the fact that a pilot is
capable of maneuvering plane safely in case of stall and removed pilots' access to overwrite
MCAS command. ​(HCTI, 2020)

2. No use of Redundancies​: There were 2 sensors for measuring the AoA, but there was no
system incorporated in the MCAS software to validate the data of both the sensors. Hence the
use of the redundant sensor was ignored form the system which increased the risk and ultimately
became a cause of 2 flight accidents. The MCAS system also made pilots a redundant source
who were unable to overwrite the commands of the software and the whole system (aircraft) was
unable to utilise the expertise of a pilot which increased the risk.

3. Lack of Proper Check and Balances​: The board of directors did not do proper risk
assessment while approving the 737 Max planes [a]. No detailed questions were raised as to how
mounting on larger engines on the older structure of 737 would create new safety problems. One
of the reasons for such poor assessment is that the board lacked technical expertise.

The board that approved the production of 737 Max, had James McNerney, the Boeing CEO, as
the Chairman. The two (​Mike S. Zafirovsky a​ nd ​David Calhoun)​ of the other 4 board members,
were colleagues of McNerney when working at General Electric. Hence, the board of directors
was not truly independent and might have further jeopardised the decision-making process for
the approval of the new plane.

Boeing concealed information from FAA, Airline operators and general public also. The info
that AOA disagree feature is inoperable, despite being standard feature, was hidden from pilots.
Boeing also withheld that pilots would need to diagnose and respond to 'stabiliser runaway'
condition due to malfunctioned MCAS. The FAA representative in the Boeing should have
raised all these issues but he did not. There might be a conflict of Principal – agent interests also.

4​. ​Lack of Risk Sharing​: The safety risks with operating of a new plane can be reduced by
sharing of information with airlines & pilot and providing proper training to pilots. In case of
737 Max, airlines were not given accurate information about the risks and pilot manual did not
even contain proper information on MCAS system. Also, the pilots were not provided enough
training for flying the new planes. [c]

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Exhibits

Year Percentage of Revenue

1993 7.73%

2013 3.55%

2018 3.23%

Exhibit 1: R&D as a percentage of Revenue at Boeing

Year Percentage of Revenue

1995 0

2013 3.23 %

2018 8.91%

Exhibit 2: Stock buybacks as a Percentage of Revenue at Boeing

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 1. https://www.theatlantic.com/ideas/archive/2019/11/how-boeing-lost-its-bearings/602188/
2. https://fortune.com/longform/boeing-737-max-crisis-shareholder-first-culture/
3. https://www.bloomberg.com/news/articles/2019-06-28/boeing-s-737-max-software-outso
urced-to-9-an-hour-engineers
4. https://newrepublic.com/article/154944/boeing-737-max-investigation-indonesia-lion-air-
ethiopian-airlines-managerial-revolution#:~:text=How%20Boeing's%20managerial%20re
volution%20created%20the%20737%20MAX%20disaster&text=In%202000%2C%20B
oeing's%20engineers%20staged,they%20lost%20the%20culture%20war​.
5. https://hbsp.harvard.edu/product/688040-PDF-ENG#:~:text=Boeing%20767%3A%20Fro
m%20Concept%20to%20Production%20(B)&text=Describes%20the%20evolution%20o
f%20the,of%20estimating%20and%20management%20tools​.
6. https://www.theguardian.com/business/2020/mar/06/boeing-culture-concealment-fatal-73
7-max-crashes-report
7. https://www.businessinsider.in/business/news/a-boeing-whistleblower-says-he-tried-to-ra
ise-concerns-about-sloppy-737-max-production-but-was-ignored-by-the-ceo-board-faa-a
nd-ntsb/articleshow/72458341.cms
8. https://www.seattletimes.com/business/boeing-board-to-call-for-safety-changes-after-737
-max-crashes/

A) https://www.researchandmarkets.com/reports/4583619/the-global-commercial-airc
raft-market-2018-2028#:~:text=The%20global%20commercial%20aircraft%20mar
ket%2C%20valued%20at%20just%20over%20US,trillion%20over%20the%20fore
cast%20period​.
B) HCTI (2020). The Boeing 737 MAX Aircraft: Costs, Consequences, and Lessons
from its Design, Development, and Certification -Preliminary Investigative
Findings. Retrieved from
https://transportation.house.gov/imo/media/doc/TI%20Preliminary%20Investigativ
e%20Findings%20Boeing%20737%20MAX%20March%202020.pdf, on 10th
April 2020
C)

a. https://www.washingtonpost.com/business/2019/05/06/safety-was-just-given-inside-boeings-
boardroom-amid-max-crisis/
b. https://clsbluesky.law.columbia.edu/2019/05/20/did-boeings-compensation-committee-play-a
-role-in-the-737-max-scandal/

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c. https://www.arabianbusiness.com/transport/442479-boeing-pilot-training-on-737-max-inadeq
uate

2.
https://www.researchgate.net/publication/340621972_COULD_BOEING_737_MAX_CRASHE
S_BE_AVOIDED_FACTORS_THAT_UNDERMINED_PROJECT_SAFETY

[3] Crash Corse pdf

[4] The boeing 737 max : lessons for engineering ethics – will share on whatsapp

This is for reference. Please put these in right format.

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