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[In]Securities Guest Blog: Drunk on a Plane by Aegis Frumento Esq
January 16, 2020
[In]Securities
a Guest Blog by
Aegis J. Frumento, Partner, Stern Tannenbaum & Bell
Aegis J. Frumento, Partner, Stern Tannenbaum & Bell
Drunk on a
Plane
A long time ago I crossed a big item off my bucket list
by learning to fly. Even before I got my license, I had logged hours on
Microsoft's early Flight Simulator for the Mac, and let me
tell you, flying a desk-top simulator and flying for real are not the same. A
few years after that, I found myself on a bar association boondoggle to an Air
Force base where the they liked to show off a real full-motion, full cockpit,
flight simulator of the C5 Galaxy, the huge cargo plane that the Air Force uses
to drop-ship military hardware. Because I had a baby pilot's license, they let
me try it, and I actually managed not to crash the thing in executing a virtual
nighttime landing. I don't know how close that simulator was to the real thing,
but no desktop simulator could possibly compete with it. Remember that for
today's story.
Boeing's 737 series is its hottest selling plane. A few
years back, Boeing unveiled the 737-800, also known as the 737 Next Generation,
or 737 NextGen for short (or 737NG if you've, like, got the runs). Boeing sold
thousands of them. So, of course, Boeing released its sequel, a next generation
Next Gen, which they called the 737MAX.
Boeing likes to say the only real difference between the
NG and MAX is that the MAX's engines are more powerful and sit a little higher
on the fuselage. However, that's all airplanes are: a fuselage, wings and
engines. When you change the size and location of one of the three components --
say, the engines -- you've created an aerodynamically different machine. That's
an inconvenient truth, because Boeing wanted to market the MAX as essentially
the same as the NG, so that pilots already trained and certified in the NG
wouldn't have to spend time (and money) retraining in a simulator to fly the
MAX. Boeing's alternative reality that the NG and the MAX were essentially the
same plane is the backstory of the Lion Air and Ethiopia Air crashes that
killed 346 souls on 737MAXs in the past 15 months.
To
make the MAX fly more like the NG, Boeing programmed the MAX's computerized
attitude adjustment system (called MCAS) to automatically adjust the MAX's
flight controls to maintain a constant nose-up or -down position when it sensed
the plane was about to lose airspeed. "Airspeed" is how fast air passes
over an airplane's wing. Air passing over a wing causes a partial vacuum over
the wing that literally sucks the wing up into it. Yes, just like your vacuum
cleaner. The higher the airspeed, the greater the vacuum and the stronger the
lift. Airspeed is what keeps a plane in the air, and if you lose airspeed, your
plane will drop like the rock that it really is. In flying a plane, you
decrease airspeed by pulling the nose up, and you increase it by pushing the
nose down. This is counterintuitive, especially if you've watched too many
movies where the pilot pulls back on the stick to make the plane zoom up. No,
it doesn't work that way in real life.
From all
indication, the 737MAX is a well-designed and nice flying plane. Boeing has a
video of it doing some neat maneuvers, including a takeoff that looks almost
vertical, albeit with that familiar warning label: "Flown by Boeing test
pilots. Do not attempt." https://www.youtube.com/watch?v=1XEsSRqnOwc.
Nor is there anything wrong with the 737MAX's MCAS system. It will
automatically nose the plane down when it senses that the plane is so nose-up
so that it might lose airspeed.
Investigators
think that in those two crashes the MCAS system reacted to faulty information
by pushing the nose down. In one instance, the MCAS reacted to a faulty sensor
reading a too low airspeed, and in the other to a false report that the plane
was in a "nose up" attitude because of a jammed elevator (which controls the
nose-up-down position of the plane in flight). In both cases, the MCAS did what
it was designed to do, pushing the noses of the planes down -- unfortunately to
the earth below. In its preliminary findings, the NTSB didn't fault the plane
or the MCAS. Rather, it found that the pilots were confused by what the MCAS
was doing and couldn't effect proper countermeasures. https://www.popularmechanics.com/flight/airlines/a29256058/737-max-lessons/.
Which is another way of saying the pilots weren't properly trained, and that
takes us back to Boeing.
Last week,
Boeing produced 117 pages of internal emails and text messages concerning the
737MAX. See https://www.washingtonpost.com/context/boeing-documents-reveal-internal-communication-among-employees-about-737-concerns-f-a-a/ad2f371a-8f0c-4615-9c08-2bd2c5e536b2/.
The news focused on some juicy phrases about the plane being "designed by
clowns who in turn are supervised by monkeys," but that's just employees
trashtalking their bosses. https://www.cnbc.com/2020/01/09/boeing-releases-communications-on-737-max-simulators-it-calls-completely-unacceptable.html.
You have to dig deeper into the archive to see what's really going
on.
In order to make the 737MAX
affordable to beleaguered airlines, Boeing needed to ensure that pilots already
certified in the 737NG could transition to the MAX with only a couple of hours
of computer-based training -- the mere modern equivalent of my old MS Flight
Simulator. It is striking how vehemently Boeing wanted to avoid real simulator
training. "I want to stress the importance of holding firm that there will
not be any type of simulator training required to transition from the NG to the
MAX," wrote one senior guy. "Boeing will not allow that to happen.
We'll go face-to-face with any regulator who tries to make that a
requirement." "There is absolutely no reason," it told
its airline customers, "to require your pilots to require a MAX simulator
to begin flying the MAX."
And
it worked. The airlines bought it. "We're almost at the point we can say
zero dollars in crew salary costs for off-line time," crowed one
employee. And so did the regulators. "It was like dogs watching TV . . .
-- curves, slopes, graphs, blah blah blah stuff non-engineers and test pilots
can't really understand other than the lines all line-up between the MAX and the
NG, which is supposed to prove they fly the same." It was, as one
Boeing executive termed it, a Jedi mind trick. https://www.reuters.com/article/us-ethiopia-airplane-faa/faa-turns-over-emails-from-former-boeing-737-pilot-idUSKBN1WX2LE
And
yet, Boeing engineers knew better. One engineer working on the desktop training
simulator admitted as much when faced with a control issue that seems similar
to that affecting the Ethiopia Air flight. "I suck at flying jammed
elevator without DLC," he told a colleague. "I crashed big
time my first few times, that's what scares me about showing any of this to
[the regulators]." DLC apparently stands for "downloadable
content," and refers here to a software upgrade that Boeing
offered as a safety option but that neither Lion Air nor Ethiopia Air bought.
Another was quite eloquent in laying out the problem and predicting how it
would
end:
Everyone has it in their head meeting schedule is most important because that's what Leadership pressures and messages. All the messages are about meeting schedule, not delivering quality. . . .[Decisions are made] Solely based on bottom dollar. . . . It's systemic. It's culture. It's the fact that we have a senior leadership team that understand very little about the business and yet are driving us to certain objectives. . . . Sometimes you have to just let things fail big so that everyone can identify a problem . . . Maybe that's what needs to happen . . ..
"Fail big" exactly
describes what happened next. Without proper training in a simulator, the Lion
Air and Ethiopia pilots couldn't figure out fast enough what the MCAS was doing
or how to override it. Lion Air actually wanted more training and Boeing talked
them out of it. https://www.bloomberg.com/news/articles/2020-01-14/lion-air-idiots-sought-more-max-training-boeing-thwarted-it
It
was hardly surprising, then, that Boeing's CEO, Dennis Muilenburg, was shoved
out the door without a parachute. For his bungling of the 737MAX crisis, he
forfeited his 2019 bonus, severance pay and unvested stock option. But he still
kept $80 million in vested stock, now worth $60 million after Boeing's stock
price crashed along with its planes. https://www.bloomberg.com/news/articles/2020-01-10/boeing-says-ex-ceo-muilenburg-didn-t-receive-any-severance-pay.
But he wasn't fired for the right reason. Covering up the problems with the MAX was the least of it -- what any half-witted CEO would do. Muilenberg should have been fired -- at least fired -- for fostering the culture that his employees accurately identified as sacrificing quality (and safety) for profits. In issuing its Statement arguing that corporations must serve other stakeholders besides the shareholders, I'm sure the Business Roundtable would have included airline passengers. I can live with the cramped seats, the stale nuts, and the lost luggage only if I don't go down with the plane. Funny thing, though: Muilenburg is one of the Statement's signatories. https://opportunity.businessroundtable.org/ourcommitment/. Maybe he didn't read it all the way through.
I understand that in Japan, CEOs can be jailed for breaches of trust, unless they can manage to smuggle themselves out pretending to be a musical instrument. https://www.classicfm.com/music-news/yamaha-dont-hide-instrument-cases-ghosn-escape/. I'm not advocating we jail derelict corporate executives. At least I don't think I am. But I do think that CEOs generally are paid too much -- far more than they earn. Maybe they should shoulder some serious risks for making all that loot. You know, like regular gangsters do. Muilenberg gets to keep $60 million for being drunk on a plane that cost 346 lives. I don't get much of a lift out of that.
ABOUT THE AUTHOR
Aegis Frumento is a partner of Stern Tannenbaum &
Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento
represents persons and businesses in all aspects of commercial, corporate and
securities matters and dispute resolution (including trials and arbitrations);
SEC and FINRA regulated firms and persons on regulatory compliance issues and
in SEC and FINRA enforcement investigations and proceedings; and senior
executives of public corporations personal securities law and corporate
governance matters. Mr. Frumento also represents clients in
forming and registering broker-dealers and registered investment advisers, in
developing compliance policies, procedures and controls, and in adopting proper
disclosure documents. Those now include industry professionals looking to adapt
blockchain technologies to finance and financial market
enterprises.
Prior
to joining the firm, Mr. Frumento was a managing director of Citigroup and
Morgan Stanley, a partner and the head of the financial markets group of Duane
Morris LLP, and the managing partner of Singer Frumento
LLP.
He
graduated from Harvard College in 1976 and New York University School of Law in
1979. Mr. Frumento is a frequent author and speaker on securities law issues,
and is often quoted in the media on current securities law
developments.
NOTE: The views expressed in this Guest Blog are
those of the author and do not necessarily reflect those of BrokeAndBroker.com
Blog.