Boeing Co. is one step closer to relegating the 737 Max crisis to the history books. On Thursday, the aerospace giant entered into a deferred prosecution agreement with the Justice Department under which the company will pay $2.5 billion to resolve a criminal charge that it conspired to defraud the U.S. by deceiving the Federal Aviation Administration about certain characteristics of its 737 Max jet. The plane officially returned to the skies late last year after a pair of fatal crashes forced a 20-month grounding and shattered Boeing’s reputation for safety and quality control.
Roughly two-thirds of the penalty — $1.77 billion — reflects compensation to Max airline customers that has already been budgeted in Boeing’s financial statements. The company will take a charge in its fourth-quarter earnings to reflect the remaining obligations — a $243.6 million criminal penalty and $500 million contribution to the heirs and beneficiaries of the 346 people who died in the two Max crashes.
“Boeing’s employees chose the path of profit over candor by concealing material information from the FAA concerning the operation of its 737 Max airplane and engaging in an effort to cover up their deception,” Acting Assistant Attorney General David Burns of the DOJ’s criminal division said in a statement. Employees is a notable word there. It’s striking the degree to which the DOJ paints the Max crisis as the result of actions by two rogue employees. While Boeing had to agree to enhance reporting on its internal controls and meet routinely with regulators to prove it’s doing all it can to discourage future violations of U.S. fraud laws at the company, the DOJ will not require an independent compliance monitor, in part because “the misconduct was neither pervasive across the organization, nor undertaken by a large number of employees, nor facilitated by senior management.”
I find it hard to believe that the two Boeing Max technical pilots singled out in the DOJ findings for their “misleading statements, half-truths, and omissions” about the Max’s Maneuvering Characteristics Augmentation flight-control system were acting entirely on their own unique selfish motivations. MCAS was ultimately blamed for triggering the nosedives in the two crashes and was one of the more notable differences between the Max and the older 737 NG. Boeing as an organization had made a clear commitment to minimizing the differences between the two, so much so that the company was willing to offer Southwest Airlines Co. a $1 million rebate per plane if additional pilot training was required for the Max. I don’t have the same insights the DOJ does into the specific actions of the employees in question, but the degree to which Boeing as a company financially benefited from minimizing the differences — compared with what those two employees stood to gain — is decidedly lopsided. Not to mention it took many months and the ouster of CEO Dennis Muilenburg for Boeing to take full accountability for the two crashes, provide full transparency on what its employees knew and when, and back off from overly optimistic assumptions about the timing of the Max’s return. If that’s not reflective of a deeper cultural problem, I don’t know what is.
“I firmly believe that entering into this resolution is the right thing for us to do—a step that appropriately acknowledges how we fell short of our values and expectations,” Boeing CEO Dave Calhoun said in a statement. “This resolution is a serious reminder to all of us of how critical our obligation of transparency to regulators is, and the consequences that our company can face if any one of us falls short of those expectations.” The agreement with the DOJ is indeed an important step forward in Boeing’s efforts to put the Max crisis behind it. Boeing has made internal changes in the wake of the crashes, including creating a designated reporting structure for engineers separate from the business units. And it means something that the Max missteps are memorialized in these DOJ findings.But if the company is really serious about learning its lesson, the settlement with the DOJ should be the beginning and not the end of this period of introspection.- Bloomberg