[In]Securities Guest Blog: Drunk on a Plane by Aegis Frumento Esq

January 16, 2020


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. 


Aegis J. Frumento

380 Lexington Avenue
New York, NY 10168

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.