Reference no: EM133044407

"All Boeing airplanes are certified and delivered to the highest levels of safety consistent with industry standards. Airplanes are delivered with baseline configuration, which includes a standard set of flight deck displays and alerts, crew procedures and training materials that meet industry safety norms and most customer requirements. Customers may choose additional options, such as alerts and indications, to customize their airplanes to support their individual operations or requirements."¹

These were the words of a Boeing spokesman on March 22, 2019, a week after U.S. President Donald Trump grounded all Boeing 737 MAX planes. The reason for the grounding was the recent crash of two of these planes killing 346 people.

Following the grounding of the planes, Boeing management had to decide how to respond to this action on the part of the government, and the growing outcry that Boeing had known of certain problems with the MAX and did nothing. The MAX was scheduled to be returned to service by June or July of 2020, so the company needed to find a way to repair their faltering image by then.

History of Boeing

Commercial flight began in the early 20^th Century when several engineering entrepreneurs began to build airplanes. Among those entrepreneurs were William E. Boeing, Donald Douglas, Sr., James H. "Dutch" Kindelberger, and James S. McDonnell. The history of Boeing began in July 1916 when William Boeing incorporated the aircraft manufacturer as the Pacific Aero Products Company, which became renamed as Boeing Airplane Company in the same year. Boeing began producing aircraft for the United States military in 1917 when it produced modified Model Cs for the U.S. Navy. This began a relationship that the company would have with the military that continued through 2020.²

After the war ended, the first commercial craft, the B-1, began carrying mail from Seattle to Canada. In 1927, the Boeing Model 40A was designed specifically for carrying mail, and it delivered mail from San Francisco to Chicago. About this time, engineers and pilots were testing the physical limits and the durability of airplanes. The Army Air Services' "World Flyers" completed the first airplane trip around the globe in 1924. Then in 1927, Charles Lindburgh made the first solo nonstop crossing of the Atlantic. Five years later, Amelia Earhart became the first woman to fly solo across the Atlantic.

Boeing continued to develop aircraft for the U.S. military after World War I and launched the B-17 "The Flying Fortress" in 1935. The plane became a key asset in World War II, as did additional aircraft introduced by Boeing. General Carl Spaatz, who was the U.S. Air Commander in Europe, said, "Without the B-17, we may have lost the war."³

Commercial passenger service. Civilian air travel grew rapidly during the 1950s and Post-War Era. The President of American Airlines, C.R. Smith, commissioned Douglas Aircraft to come up with an airplane that would carry passengers overnight. The plane the company designed was the DC-3. This plane, which was rolled out in 1936, was the first airplane that turned a profit based on commercial passenger demand. By 1939, the DC-3 and its earlier version, the DC-2, were carrying more than 90 percent of all U.S. passengers. Other versions of the DC-3 were later produced for military use during World War II. Even 70 years after its first delivery, this plane was still in use by smaller and emerging markets.⁴ Boeing Commercial Airplanes, which is a unit of the Boeing Company, is headquartered in Seattle, Washington, and employed more than 60,000 people worldwide by 2020.

The Cold War and Development of Military Jet Aircraft. During the Berlin Blockade, many countries sent the B-47 Stratojet bomber in to bring food and supplies to the divided city. Then as Cold War tensions began to escalate, the United States and the USSR raced to test new advanced jet aircraft. The U.S. F-86 Sabre Jet helped speed the end of the Korean Conflict as it dominated the skies over Korea. The F-86 destroyed so many Russian-built planes that the final air-to-air victory was 10 to 1.

The A-4 Skyhawk Light Attack Bomber gave America's allies the flexibility they needed in a light aircraft. In 1964, the first A-4s took flight in raids on North Vietnam. In addition, the F-4 Phantom II fighter was deployed in the Vietnam War and in Operation Desert Storm.⁵

Boeing's introduction of commercial jet airliners. The delivery of the four-engine Boeing 707 to Pan Am in August 1958 marked a significant advancement in commercial aviation. Pan Am made industry news later that year with its flight from New York to Paris which the 707 completed in 8 hours 41 minutes. The 707 introduced the modern era of passenger jet travel with longer flights, larger seating capacity, and faster travel times. Boeing's industry-leading commercial jet airliners dominated the 1960s through the early 21^st Century with new model introductions such as the 727, 737, 747, 757, 767, 777, and 787.

Boeing 737. The Boeing 737 became the workhorse of the airline industry soon after its introduction in 1967. Lufthansa first took delivery of the 737-100, which had six-abreast seating, on December 28, 1967. The following day, United Airlines was the first U.S. carrier to take delivery of the plane, a 737-200 model with an increased seating capacity and range. By 1987, the 737 had become the most ordered plane in history. Boeing introduced upgraded and lengthened 737-300, -400, and -500 versions of the plane, with total orders reaching 3,100 by 1993. Boeing continued to launch advanced versions of the 737 with Next Generation -600, -700, -800, -900, and -900ER models launched between 1993 and 2005.

The Fourth Generation 737 MAX was launched in 2017 in multiple model configurations with the MAX 7 having a length of 116 feet and seating capacity of 172 passengers and the Max 10 having a length of 143 feet and seating capacity of 230. The MAX 8 and MAX 9 models fell between the two other versions of the aircraft. Key advances of the 737 MAX included improved fuel efficiency that expanded range to up to 3,850 nautical miles, innovative carbon fiber/titanium engine turbine blades, stylish cabin, improved cockpit displays and updated flight deck. The 737 MAX was Boeing's fastest-selling passenger plane in history with about 5,000 orders from carriers in more than 100 countries.

Divisions of Boeing

The Boeing Company became the world's largest producer of commercial jetliners after its merger with McDonnell Douglas in 1997 and its acquisition of the defense and space units of Rockwell International in 1996. Boeing was able to provide a selection of 23 different airplane models to serve markets that required 100 to 600 seats. They also manufactured a complete line of cargo freighters.

Boeing's divisions in 2020 were Commercial, Defense, Space, Innovation, and Services. The Commercial Division had produced such airplanes as the Next Generation 737, the 737 MAX, the 747-8, the 767, the 777, the 777X, the 787, Freighters, Boeing Business Jets, and Boeing Support and Services. By 2020, there were 10,000 Boeing commercial jetliners in service. These planes were purported to fly farther on less fuel and significantly reduce emissions.

The Defense Division produced a large number of aircraft for the government including Air Force 1, the AH-6 Light Attack Helicopter, the AH-64 Apache, and various weapons systems. Their produce line also included fighter jets, rotorcraft, cybersecurity products, surveillance suites, missile defense, and commercial aircraft derivatives.

In terms of the Space Division products in 2020, Boeing was attempting to enable critical research on the International Space Station, deep-space exploration and life on earth, and the CST-100 Starliner commercial spacecraft. The company was working on a joint venture with Lockheed Martin on a United Launch Alliance. They were also building a heavy-lift, human-rated propulsion to deep space with the Space Launch System rocket that would launch missions on a path to the Gateway Cislunar Outpost.⁶

The Services Division had two parts: The Commercial Service Division and the Government Services Division. Boeing's experience in bringing innovative service solutions to commercial, defense, and space customers had prepared them to offer customer service to those particular groups.

Finally, Boeing's organizational divisions in 2020 included an Innovation Division. This group had more than $3 billion invested annually in research and development. Some examples of Boeing's innovations were the first flights if the 737 MAX 9, the 787-10 and the T-X.

Boeing's Purpose and Mission

Connect, protect, Explore and Inspire the World through Aerospace Innovation.

At Boeing, we are committed to a set of core values that not only define who we are, but also serve as guideposts to help us become the company we would like to be. And we aspire to live these values every day.

Boeing Behaviors

Lead with courage and passion

Make customer priorities our own

Invest in our team and empower each other

Win with speed, agility and scale

Collaborate with candor and honesty

Reach higher, embrace change and learn from failure

Deliver results with excellence-Live the Enduring Values

Boeing's Aspiration

Best in Aerospace and Enduring Global Industrial Champion.

Boeing's Enterprise Strategy

Operate as One Boeing

Build Strength on Strength

Sharpen and Accelerate to Win

Boeing's 2025 Goals

Market Leadership

Top-quartile Performance and Returns

Growth Fueled by Productivity

Design, Manufacturing, Services Excellence

Accelerated Innovation

Global Scale and Depth

Best Team, Talent and Leaders

Top Corporate Citizen

The Global Aircraft Manufacturing Industry

The Boeing Company was the world's largest aerospace company in 2020. The company was also the second-largest defense contractor for the United States Government behind Lockheed Martin Corporation. Also, in 2020, Boeing was the largest exporter in the United States.

Boeing and the French company Airbus were the two largest manufacturers of commercial airplanes in the world. Boeing had developed a competitive advantage based upon its size and market diversification. The company had the ability to take on multiple projects and clients at the same time, and it leveraged its economies of scale to buy inputs in bulk.⁷ Because Boeing operated in both the commercial and defense sectors, it was able to offset any decline in one division with an emphasis upon the other sector.

Over the five years leading up to 2019, Boeing's U.S. manufacturing sector revenue was expected to decline at an annual rate of 1.0 percent to $78.1 billion. A strong demand for commercial aircraft has helped soften the declining defense spending in the United States and the billions of dollars that have been committed to paying for damages caused by the recent crashes and the thousands of flight cancellations occasioned by the grounding of the 737 MAX. (See Exhibit 1 below entitled "The Boeing Company's Financial Performance 2014-19.")

EXHIBIT 1 The Boeing Company's Financial Performance 2014-2019 ($ amounts in billions)

Year	Revenue	Growth (% change)	Operating income	Growth (% change)
2014	$82.3	N/C	$4.9	N/C
2015	85.9	4.4%	4.4	-10.2%
2016	83.7	-2.6%	4.6	4.5%
2017	81.4	-2.7%	7.5	63.0%
2018	85.0	4.4%	8.4	12.0%
2019	78.1	-8.1%	8.6	2.4%

The 737 NG and 737 MAX Crashes

On February 25, 2009, a Boeing 737 NG (Next Generation), a predecessor of the 737 MAX, crashed near Amsterdam. The plane was Turkish Airlines Flight 1951, and it was carrying 128 passengers from Istanbul. The first officer guided the plane toward Runway 18R and called out changes to its speed and direction. This officer was new to the Boeing jet, so the crew included a third pilot in addition to the captain who had 13 years of experience flying this aircraft. As the plane dipped to 1,000 feet, the pilots had not completed their landing checklist. When the plane reached 450 feet, the pilots' control sticks began shaking which informed them that there was an impending stall. One of the pilots pushed the thrust lever forward to gain speed; but when he let go, the computer commanded it to idle. The captain intervened and disabled the auto-throttle. This maneuver set the thrust levers to the maximum. By this time, nine seconds had elapsed since the stall warning. Now it was too late to do,anything else. The jet plunged into a field close to the airport.⁸ It was later determined by an investigation of the crash that Boeing had not included information in the NG operations manual that could have helped the pilots respond when the sensor failed.

The second crash occurred on October 29, 2018, when a Lion Air Flight 610 fell into the Java Sea just 13 minutes after takeoff from Jakarta, Indonesia. In that crash, 187 people were killed. The flight crew made a distress call shortly before losing control. The aircraft had just been received by Lion Air three months earlier.⁹

The third crash, which involved a 737 MAX, occurred in March of 2019. This time Ethiopian Airlines Flight 302 crashed on takeoff from Addis Ababa killing all 157 people aboard. The plane was bound for Nairobi, Kenya. Just after takeoff, the pilot radioed a distress call and was given immediate clearance to return and land. However, before the crew could make it back to the airfield, the aircraft crashed. This aircraft was only four months old.¹⁰

Investigators determined that Boeing's design decisions on both the MAX and the plane involved in the 2009 crash (the 737NG) allowed a powerful computer command to be triggered by a single faulty sensor, even though each plane was equipped with two sensors. In the two MAX accidents, a sensor measuring the plane's angle to the wind prompted a flight control computer to push its nose down after takeoff. On the Turkish Airlines flight, an altitude sensor caused a different computer to cut the plane's speed just before landing.¹¹ (See Exhibit 2 below for a recounting of the times of the crashes entitled "Timeline of First MAX Flights and Accidents.")

EXHIBIT 2 Timeline of First MAX Flights and Accidents

Feb. 2009	2016
Boeing 737 NG crashes near Amsterdam	The first MAX 8 Flight
2016	2017
2 of Boeing's top pilots indicate problems with MCAS	The first MAX 9 Flight
2018	Oct. 29, 2018
The first MAX 7 Flight	Lion Air 737 MAX crashes
March 10, 2019	March 13, 2019
Ethiopian Airlines 737 MAX crashes	Pres. Trump grounds MAX planes
October 25, 2019	October 28, 2019
NTSB publishes report on Lion Air crash	Boeing's Pres. Muilenberg admits Boeing knew of pilots' concerns
December 23, 2019
Boeing's President Muilenberg is fired by the Board of Directors

What Caused the Crashes?

The 737 MAX could fly further and carry more people than any previous generation of 737s. Because the engines were bigger and because the 737 sat so low to the ground, Boeing moved the engines slightly forward and raised them higher under the wing. However, the new position of the engines changed how the aircraft handled in the air. This created a potential for the nose to pitch up during flight, and a pitched nose is a problem in flight. If it is raised too high, the aircraft can stall. To keep the nose in trim, Boeing came up with a software called the Maneuvering Characteristics Augmentation System (MCAS). With this system, when a sensor on fuselage detected the nose was too high, MCAS automatically pushed the nose down.¹²

On October 25, 2019, the Indonesian Transportation Safety Committee published its final report on the Lion Air Crash. The report largely blamed the MCAS device. Before the crash, the Lion Air pilots were unable to determine the aircraft's true airspeed and altitude and struggled to take control of the plane as it oscillated for about 10 minutes. Whenever they pulled up from a dive, MCAS pushed the nose down again. The report stated further that the MCAS function was not a fail-safe design and flight crews had not been adequately trained to use it.¹³

Boeing's Knowledge of Problems

On November 12, 2018, The Seattle Times reported that MAX pilots from Southwest Airlines were "kept in the dark" about the MCAS and how to respond to warnings from it. Then the Dallas Morning News found similar complaints from American Airlines pilots just four months later.

In April 29, 2019, shareholders' meeting, Boeing CEO Muilenberg, in response to questions about the accidents, suggested that in some cases pilots didn't completely follow the procedures that Boeing had outlined to prevent a crash in case the MCAS should happen to malfunction. On that same date, the Wall Street Journal reported that, even for airlines that had ordered it, the warning light was not operating.¹⁴

On October 17, 2019, Boeing suggested that it had turned over text messages between two of the company's top pilots which were sent in 2016. The messages revealed that the company knew about the problems with the MCAS system quite early. In fact, a former chief technical pilot for the Boeing 737 described the MCAS' habit of engaging itself "egregious."¹⁵

Then on December 23, 2019, the CEO of Boeing Dennis Muilenberg was fired by the Board. He was replaced by David Calhoun on January 13, 2020. Calhoun was a Boeing Board member and a former General Electric executive. In an interview on January 29, 2020, Calhoun criticized the company's prior leadership for not immediately disclosing a large amount of damning internal communications that raised safety questions about the MAX. Calhoun promised that he would be more transparent.¹⁶

In February of 2020, Boeing fired a midlevel executive in charge of pilots who exchanged internal emails that have embarrassed the company as it continued to struggle to get the 737 MAX flying again. Those email msgs indicated that Boeing employees were mocking airline officials, aviation regulators and even their own colleagues. In one of the emails, an employee said the 7637 MAX had been "designed by clowns, who in turn are supervised by monkeys."¹⁷

Boeing's Dilemma

Boeing reported a loss of $1 billion in the fourth quarter of 2019 as revenue plunged 37 percent due to the grounding of the MAX (see Exhibit 3 entitled "Summary Financial Results for the Fourth Quarter of 2018 and 2019" and Exhibit 4 entitled "Commercial Airplane Deliveries in the Fourth Quarter of 2018 and 2019.") The company suspended deliveries of the plane in the early spring of 2019 and had speculated that deliveries would have been restarted by the end of the year. The company lost $636 million for all of 2019. This compared to a profit of nearly $10.5 billion in 2018. This was the first loss the company had experienced since 1997 when they were hit by parts shortages, production delays and expenses occasioned by their merger with McDonnell Douglas.¹⁸

EXHIBIT 3 Summary Financial Results for the Boeing, Fourth Quarter 2018 and Fourth Quarter 2019 (In millions except for share data)

	2019	2018
Revenues	$17,911	$28,341
GAAP
(Loss) Earnings from Operations	($2,204)	$4,175
Operating Margin	(12.3)%	14.7%
Net (Loss)/Earnings	$1,010)	$3,424
(Loss)/Earnings Per Share	($1.79)	$5.93
Operating Cash Flow	$2,220)	$2,947

EXHIBIT 4 Commercial Airplane Deliveries in the Fourth Quarter 2018 and 2019 (Dollars in Millions)

	2019	2018
Commercial Airplane Deliveries	238	79
Revenues	$16,531	$7,462
(Loss)/Earnings from Operations	$2,600	($2,844)
Operating Margin	15.7%	(38.1)%

The Board of Directors had to deal with the bad publicity that the company had received and the loss in revenue for the past year. Some observers speculated that it might take a rebranding of the MAX to recover the valued name of the company. Others suggested that an even more desperate act of dropping the MAX was in order. This was the dilemma the Boeing Board faced during the first quarter of 2020. There were even some observers who wondered if the coverup of the difficulties with the MCAS system might be tantamount to fraud.

QUESTION: How does Boeing link rewards and incentives to strategically-important employee behaviors and the company's targeted sustainability outcomes?