March 27, 2019 / 2:37 PM / a month ago

Breakingviews - Hadas: Boeing undermined by too-positive thinking

LONDON (Reuters Breakingviews) - Here is something a senior Boeing executive almost certainly never said: “You know how important it is to keep up with Airbus. We’ll have to move fast, even if that means taking a few chances on safety.”

An aerial photo shows Boeing 737 MAX airplanes parked on the tarmac at the Boeing Factory in Renton, Washington, U.S. March 21, 2019. REUTERS/Lindsey Wasson

All products are supposed to be safe, but aircraft are in a league of their own. There is no acceptable level of accidents. All crucial systems are backed up and maintenance is never skimped. Everything new is tested thoroughly, and tested again. Boeing and its rivals have always cooperated with the ultra-strict demands of their regulators, including the U.S. Federal Aviation Administration (FAA).

The system has worked remarkably well. Since 1970, the number of passengers on commercial flights has increased twelvefold, according to the World Bank, yet the number of people dying on them has plunged. Between 1966 and 1970 the annual average number of fatalities was 1,469, according to the Aviation Safety Network. Between 2014 and 2018 the average was 351.

No airline executive would jeopardise that record by cutting corners on a new model’s safety. They realise that any gains would be miniscule compared with the potentially huge costs of grounding or fixing existing planes, compensating airlines, cancelled orders, and substantial civil and even criminal liabilities.

Boeing may now demonstrate just how expensive a safety failure can be. Investigators suspect that an avoidable design flaw was responsible for two fatal crashes of the new Boeing 737 MAX, killing a total of 346 people. Airlines have grounded planes while investigators try to work out what happened.

Though the probes continue, the Seattle Times reported last week that the FAA delegated safety assessments to Boeing, and that the manufacturer’s analysis understated the power of - and potential flaws in - its new automated flight control system. The FAA has said it followed the standard certification process on the 737 MAX, while Boeing said the processes were identical to those used on previous airplanes.

How could a successful company get so lost? Organisational theorists will talk of regulatory capture, or more precisely of a change in the regulatory equilibrium. In the past, Boeing’s managers could push to develop products as fast as was safely possible, knowing that the FAA would push back by setting a very high safety standard.

In other words, safety depends on maintaining a respectful but clear tension between manufacturer and regulator. If self-certification reduced that tension in the development of the 737 MAX, the leaders of Boeing were taking risks that they would have avoided if they fully recognised what they were doing. Something in the way they were thinking must have led them to ignore this reality.

The behaviour of the world’s largest banks before the 2008 financial crisis helps illuminate this fault. Senior bank executives are often accused of having been willing to take huge risks in the boom years because they knew that they would keep the gains while taxpayers would pick up the tab for any losses. That narrative is faulty.

Bosses and traders were probably blinded by huge potential rewards. But they always acted and talked, both in public and in private, as if their business was fundamentally sound. Financial regulators trusted bankers to set their own standards for risk-taking, because the banks assured them that they were the experts. The Basel II framework for measuring bank capital – which was being introduced as the crisis struck – was based explicitly on banks’ measurement of their own risks.

Though the bankers were mostly sincere, they were deceived by excessively positive thinking. The power of confidence was one theme of the Reverend Norman Vincent Peale’s 1952 bestseller, “The Power of Positive Thinking”. He told readers to “stand up to an obstacle. Just stand up to it, that’s all, and don’t give way under it, and it will finally break”.

Peale was not entirely wrong. A good attitude can often overcome huge obstacles. The irrational levels of confidence of Boeing’s army of modestly paid engineers helped them design the hugely successful 747 Jumbo Jet and created the 787 Dreamliner out of radically different new materials.

However, positive thinking is not always enough. Some obstacles never break. Firmly standing up to them can lead to crises and crashes.

There is a lesson here for regulation-haters. Bosses and boards of directors do not require bad intentions to behave badly or foolishly. They do not have to be incompetent or under pressure from ruinous competition. All they need is an excess of one of the key ingredients of outstanding business success. The capitalist system is much healthier when regulators exercise the power of negative thinking.

Breakingviews

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