Simon Nixon is chief leader writer of Times
Boeing shows why regulators are not a hindrance but a strength
Too big to fail is a problem usually associated with the banking industry. But could it also be a factor in the growing scandal engulfing Boeing? It’s too early to say for sure what caused Ethiopian Airlines Flight 302 to crash six minutes after take-off from Addis Ababa on March 10 but the country’s transport minister has already stated that it had clear similarities with the fate of another Boeing 737 Max 8, a Lion Air flight that crashed shortly after take-off in Indonesia last year.
That crash was caused by a malfunction in an automated program designed to compensate for a tendency of the nose of the 737 Max to lift too much while climbing, the result of new powerful engines being positioned further forward on the wings of what is now a 50-year-old design of fuselage. It appears that in both instances, pilots were unable to override the system when it forced the nose down too far, causing them to crash. It has since emerged that this flaw was widely known among pilots.
The crash has clearly posed urgent questions for Boeing, whose shares have so far fallen 12 per cent. Why was this design flaw not picked up sooner? Why did it not recommend the grounding of all Boeing 737 Max jets while it worked on a software fix, which it claims it will have ready by the end of the month? Why did it not do more to warn pilots? Why did it not provide more training to pilots of the new aircraft, of which there are already 300 in operation, particularly after the Lion Air crash? But it has become increasingly clear that the disaster also poses serious questions for Boeing’s regulators, the Federal Aviation Administration and the US Department of Transportation. How did the manoeuvring characteristics augmentation system come to be certified in the first place? What steps did the authorities take after the Lion Air crash to satisfy themselves that the plane was safe? How did they respond to complaints from pilots? Why did the FAA only decide to ground all 737 Max aircraft days after most other countries had already done so?
In particular, the episode raises important questions about the relationship between Boeing, its regulator and the federal government.
Already it has emerged that the FAA did not have the expertise to certify the safety of some Boeing systems and was obliged to rely on the company’s own engineers to carry out tests. That points to a potential conflict of interest. At the same time, the importance of Boeing to the US economy, and the 737 Max to Boeing, cannot be overstated. The 737 Max accounts for 33 per cent of Boeing’s revenues and it has a backlog of 4,600 orders. Boeing is the top US exporter by sales, employs 153,000 people in the US and is the fifth biggest corporate spender on corporate lobbying in America. A former Boeing executive is the acting secretary of defence. Advancing Boeing’s interests is a major objective of US trade policy. Indeed, President Obama once joked that he should be entitled to a bonus from Boeing as he had been one of its top salesmen.
It’s hard to avoid the suspicion that as with all national champions, Boeing’s interests became synonymous with the national interest, which meant that it had to be shielded from foreign competition and the over-zealous attention of regulators. Perhaps Boeing did indeed become too big to fail.
We’ve seen this movie before during the financial crisis, when regulatory agencies failed to police a powerful industry.
That was partly because financial regulators struggled to recruit sufficiently well-qualified staff to keep pace with innovation in a highly complex industry that was deploying increasingly sophisticated technology. But it also reflected a degree of regulatory capture, not least in Britain, which developed a regulatory culture that was unwilling to challenge an industry that appeared to be delivering vast benefits. Indeed, successive governments used to boast about London’s famously light-touch regulation in their efforts to lure global financial services firms to set up operations in London.
In economic terms, the case against national champions is that shielding a company from competition leads to weaker innovation, less efficiency, poorer quality and higher prices. That in turn leads to weaker productivity and ultimately lower living standards. But the global financial crisis, and perhaps now the Boeing scandal, is a reminder that there can be a far higher price to be paid: regulatory capture can be a source of systemic risks which can materialise with catastrophic consequences. Yet this does not seem to have deterred a worrying new enthusiasm across developed economies for fostering national champions. The French and German governments lobbied the European Commission to allow Siemens and Alstom to merge their train divisions to create a European champion. The German government is encouraging a merger between Deutsche Bank and Commerzbank, the country’s two largest lenders.
Of course, these moves are being driven in part in response to the pressures of globalisation and the belief that more powerful companies are needed to compete with China. But politicians should not overlook the economic importance of trusted regulation. It is often painted as a burden.
But all international trade depends to some extent on countries agreeing to trust each other’s agencies. Historically, the FAA has been highly regarded as a de facto global regulator, its decisions accepted by agencies around the world. Yet the Boeing scandal has undermined that trust. It is striking that Ethiopian Airlines sent its black boxes to France to be analysed rather than the US. Confidence in the FAA was further undermined by its failure to ground the 737 Max until after most other regulators had already done so. High-quality regulation that is trusted by the rest of the world can be a source of competitive strength. That is a lesson that financial regulators at least learnt in the wake of the global financial crisis.
Simon Nixon is chief leader writer of Times