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Boeing’s fraud case shows that some businesses are still too big to fail

  • Written by Akhil Bhardwaj, Associate Professor, School of Management, University of Bath
Boeing’s fraud case shows that some businesses are still too big to fail

In January, Alaska Airlines flight 1282 nearly fell out of the sky when it lost a door plug at an altitude of more than 10,000ft, leading to rapid decompression of the main cabin of the plane.

Although no one was killed, the incident happened after two similar Boeing-manufactured 737 Max planes crashed[1] in 2018 and 2019, killing 346 people.

These crashes sparked investigations by the US Department of Justice (DoJ), leading to Boeing[2] being charged with one count of conspiracy to defraud regulators in 2021.

The DoJ agreed not to prosecute Boeing if the firm promised to pay a US$243.6 million (£190 million) criminal fine and enter a three-year probationary period[3] that involved enforcing a compliance and ethics programme. But the Alaska Airlines incident prompted the DoJ to reopen the case and has resulted in Boeing agreeing to plead guilty[4] to the original charge and paying an additional US$243.6 million.

The US government is now in the position of having to decide whether to do business with a company that has admitted a felony. This is particularly ignominious for a country that routinely strips felons[5] of their right to vote.

But apparently, the US government is willing to look the other way. In 2006, the US Air Force cited “compelling business interest”[6] in letting the corporation settle criminal charges related to felony violations[7], which allowed Boeing to continue competing for defence contracts.

Boeing is not the only major corporation with a chequered history that the US government is willing to do business with. In 2008, Siemens pleaded guilty to routinely using bribes to secure public contracts but avoided a conviction, which allowed it to maintain its status as a “responsible contractor”[8].

Pleading guilty to all sort of felonious acts, for the purpose of doing business with the US government, apparently does not make a corporation irresponsible. You might say some corporations are too big to fail because the government is far too dependent on them.

Path dependencies[9] run deep, switching costs are far too high, and bilateral dependencies[10] exist between these parties. For Boeing, being too big to fail means continuing to secure billions of dollars[11] in defence contracts.

What does this mean for Boeing’s customers – both airlines and passengers? And, more importantly, will Boeing mend its ways? Its behaviour indicates that it has fallen into a confidence trap[12] – since past risk-taking paid off, it seems to believe that continuing to do so in the future would also be lucrative.

Even when Boeing encountered clear signs that something was amiss – two planes that it manufactured crashed – it did not lead to soul-searching. Rather, the giant apparently continued to do business as usual including requesting safety exemptions[13] from the US Federal Aviation Administration (FAA).

Not only is Boeing a major defence contractor, it is also part of a duopoly (with European rival Airbus), with orders secured for years into the future. Certainly, Airbus cannot simply ramp up production to grab more of the market share. Meanwhile, Boeing’s executives[14] continue to be awarded tens of millions of dollars in remuneration.

Quite simply, there seems to be no real impetus for key decision-makers at Boeing to change their ways – they are paid handsomely[15] for their public humiliation[16].

On the face of it, the terms of the present agreement are also not very different from the 2021 deal, except for third-party oversight (although observers await more details). But this oversight involves auditing[17] Boeing’s safety and compliance practices, which is what the FAA is supposed to be doing routinely in any case.

In calling for third-party oversight, the DoJ does not seem to have much confidence in the FAA’s ability to monitor Boeing effectively. Perhaps this move marks the beginning of a new era of much more “privatised” regulatory oversight in aviation.

Are airlines worried? Some seem to be, and others are not. Emirates has warned Boeing that it must act to fix problems, and its president Sir Tim Clark had said that the airline would send its engineers[18] to monitor quality.

United Airlines CEO Scott Kirby reportedly asked Boeing to stop making[19] more advanced versions of the Max.

In contrast, Ryanair has expressed wholehearted support[20] for Boeing. In fact, CEO Michael O’Leary reversed course from calling Boeing management “headless chickens”[21] in 2022 to praising them in 2024 saying that safety was their “number one byword”[22].

Boeing plane with door plug missing after mid-air blowout
The mid-air door plug blowout on the Alaska Airlines flight forced an emergency landing. NTSB/Alamy Stock Photo[23]

But as these events unfold and the turmoil at Boeing continues, passengers are likely to face higher fares[24]. Those wishing to avoid flying in Boeing planes such as the 737 Max can[25], but it’s often complicated and expensive.

There are, however, bigger concerns. Namely, the perception that the arc of the moral universe does not bend towards justice – rather it bends to the will of the rich and powerful.

Correcting this problem requires an approach that makes clear that no one is above the law, which means holding executives responsible.

One way of doing so would be to institute financial clawbacks – in this case, designing contracts to recover CEO compensation in the event of crashes or near-misses resulting from criminal behaviour.

Those of us who fly literally put skin in the game every time we climb aboard a Boeing – or indeed any kind of – plane. Financial clawbacks inject much-needed executive skin in the game. While this does not put passengers and executives on parity, it might just restore some trust in the system.

References

  1. ^ 737 Max planes crashed (www.theguardian.com)
  2. ^ Boeing (theconversation.com)
  3. ^ probationary period (abcnews.go.com)
  4. ^ agreeing to plead guilty (www.bbc.co.uk)
  5. ^ felons (theconversation.com)
  6. ^ “compelling business interest” (globalnews.ca)
  7. ^ related to felony violations (thehill.com)
  8. ^ “responsible contractor” (www.nytimes.com)
  9. ^ Path dependencies (www.investopedia.com)
  10. ^ bilateral dependencies (onlinelibrary.wiley.com)
  11. ^ billions of dollars (www.airforce-technology.com)
  12. ^ confidence trap (doi.org)
  13. ^ safety exemptions (fortune.com)
  14. ^ Boeing’s executives (apnews.com)
  15. ^ paid handsomely (www.reuters.com)
  16. ^ public humiliation (www.hawley.senate.gov)
  17. ^ auditing (www.rnz.co.nz)
  18. ^ send its engineers (www.bbc.co.uk)
  19. ^ stop making (www.foxbusiness.com)
  20. ^ support (www.euronews.com)
  21. ^ “headless chickens” (www.marketwatch.com)
  22. ^ “number one byword” (edition.cnn.com)
  23. ^ NTSB/Alamy Stock Photo (www.alamy.com)
  24. ^ higher fares (www.telegraph.co.uk)
  25. ^ can (www.forbes.com)

Read more https://theconversation.com/boeings-fraud-case-shows-that-some-businesses-are-still-too-big-to-fail-234328

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