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Boeing 737 MAX and the FAA: A Clash of Culture and Convexity

  • (0:45) - Boeing 737 MAX: Did Profit Motive Override Sound Design?
  • (8:15) - Remember the DC-10? How Consumers Handle Shocking Tragedies
  • (14:00) - MCAS Software Enhancement: The Right Solution, Wrongly Delivered?
  • (22:45) - Does The FAA Give Boeing Too Much Control?
  • (28:30) - What To Expect From Boeing Moving Forward
  • (31:05) - Episode Roundup:


Welcome back to Mind Over Money. I'm Kevin Cook, your field guide and story teller for the fascinating arena of behavioral economics.

On March 10 of this year, an airliner with 157 people on board crashed 6 minutes after takeoff from Ethiopia's International airport. There were no survivors as the aircraft plummeted nose first into the desert after erratic climbs and descents under 5,000 feet.

This wasn't just any airliner. It was the workhorse of domestic skies around the globe, the Boeing BA 737, a narrow-body, twin engine plane with a range of about 3,500 miles.

But it was the newest version, the 737 MAX, which had been certified by the FAA just 2 years ago and less than 400 delivered since. More importantly, one exactly like it crashed in Indonesia only months before, killing all 189 passengers and crew.

On October 29, 2018, Lion Air Flight 610 plunged into the Java Sea 12 minutes after takeoff from Jakarta.

And so the March crash in Ethiopia is really when the story broke for most of us. It could have been random coincidence. But as facts started to bubble to the surface quickly in that first 24 hours -- and no place is faster for spreading both truth and speculation than Twitter -- it became apparent that the two accidents shared many similarities that called into question both the aircraft control systems and pilot training.

That Monday morning, I was already scheduled to profile a company in our weekly Top Stock Picks video segment and I quickly chose Boeing which was a Zacks #1 Rank Strong Buy stock because of its earnings momentum as quantified by Wall Street analysts.

Much of that projected profit growth was based squarely on the wings of the 737 MAX and its backlog of nearly 5,000 orders over the next 10 years. That backlog represented over $550 billion in potential sales for Boeing at $120 million per aircraft. And it was now possible that at least some of those orders were in jeopardy.

After reviewing the details of both the Lion Air and Ethiopian Air crashes, it was clear that the aircraft's new automated control system call MCAS, for Maneuvering Characteristics Augmentation System, was probably involved in the accidents. This was a new system designed and implemented to adjust for new and unique flight characteristics of the aircraft after bigger engines with a new configuration were installed.

In the first 24 hours following the second crash, I was an early defender of the aircraft and Boeing, suggesting that more than likely this was an issue of inadequate pilot training. In a moment, I'm going to bring in my colleague Tracey Ryniec who was a bit more skeptical at the time, offering comparisons to the DC-10 crashes of our youth.

In the wide battlefield between our views, we have since discovered many surprising events along the trail of economic behavior from Boeing's design of the 737 MAX to the FAA's frequent stamps of approval. That is the landscape we will survey today. And there are many layers.

First, here's how I explained the situation on that first business day , March 11th -- after the Ethiopian tragedy...

When Boeing designed this new 737, it added more powerful and fuel-efficient engines and had to adjust their placement on the wings. This in turn, created changes in flight characteristics.

One of the changes was a tendency for the aircraft to pitch its nose upward more than required during climbing procedures. In aviation dynamics, the relative orientation to level flight is known as the "angle of attack" (AOA) and is extremely important to monitor because too steep an angle, without enough power (speed), will result in a "stall," or loss of lift (the force of air passing under and over wings that keeps birds, planes, and BASE jumpers traveling to their destinations).

In a stall, a plane can fall rapidly, requiring emergency procedures from pilots to regain controlled flight.

So Boeing invented a new automated control system to deal with that tendency of the 737 MAX 8, and not merely reduce the constant workload of pilots but also reduce the risk of the plane approaching an AOA that could lead into a stall.

That system is called MCAS (Maneuvering Characteristics Augmentation System) and is implemented on the 737 MAX to enhance pitch characteristics at elevated angles of attack. The MCAS function commands stabilizer air surfaces, such as the tail elevator and associated trim tabs, to pitch the aircraft nose down and thereby enhance flight characteristics during steep turns with elevated load factors and at airspeeds approaching stall, which are common on takeoff.

MCAS is activated without pilot input and only operates in manual, flaps up flight. The system is designed to allow the flight crew to use manual or switch-based trim controls to override MCAS input. The function is commanded by the Flight Control computer using input data from sensors and other airplane systems.

One of the sensors giving input to the system is an Angle of Attack measurement device which can determine, based on air flow across the wings, how steep the aircraft nose is pitched. Obviously, if those sensors don't work properly, they can give incorrect input to the MCAS and activate it.

For instance, if an AOA sensor incorrectly signals a X-degree upward pitch at an airspeed that is too low, the MCAS will activate and attempt to push the nose of the aircraft down to avoid a stall.

Based on investigation of available data from the October Lion Air Flight 610 crash, including maintenance records and cockpit conversations, a faulty AOA sensor may have been involved that put the plane into a steep dive. Data from the black box indicates that pilots were exerting over 100 lbs of force on the yoke to pull the nose up and physically counteract the MCAS commands.

Initial data about the post-takeoff flight and crash of Ethiopian Airlines Flight 302 on Sunday indicate some potential similarities. While that investigation to discover the causes, and prove or disprove a connection, could take months, government officials, airline personnel, flyers, and investors are all having their say in the public square.

Fortunately, the cockpit voice and flight data recorders were recovered quickly, unlike the Indonesian crash in the ocean. This should provide many answers quickly.

(end of article from March 12)

I don't regret defending Boeing and the aircraft. I was doing quick analysis based on the information I had. And of course, I kept digging.

One resource I went to was one of my pilot brothers. I'll tell you that story in a minute after I introduce Tracy Ryniec, manager of the Zacks Value Investor portfolio and host of the excellent Market Edge podcast.

Tracey, tell us about your first reaction in those early days after the second 737 MAX crash?

(end of podcast excerpt)

Be sure to listen to the entire 30 minute episode and hear Tracey's perspective as she recalls the last time a plane was branded a "death machine."

Also, we dive into the relationships and cultures of Boeing and the FAA that allowed the former to basically become its own regulator with the latter's frequent approval.

This became a problem, we now know, because Boeing was in heated and hurried competition with Airbus EADSY since 2011 to come up with a more fuel-efficient aircraft before US carriers started ordering more A320s, like American Airlines did at the time.

If several decision points along the 5-year path of development for the new 737 MAX were questionable, why weren't more red flags being waved before these two tragedies that took 346 lives in mere seconds?

I suggest that Boeing, as excellent as their engineers and project managers are and have been, was treated like NASA or Lockheed Martin (LMT), capable of nothing but superior engineering and commitments to safety.

As we await the results of grand jury investigations by the NTSB, many of these questions will become very important for the future of technology safety.

While it's demonstrably true that airline safety has never been better -- and it remains, on average, far safer than traveling in your car on any given day -- it's the "fat tails" of outlier events that shock us.

And this is especially true with airline crashes because they tend to be so complete in their devastation and instant loss of multiple lives when something goes wrong.

I learned about "convexity," or the risks in fat tail events that fall three standard deviations outside of normal probability distributions, from smart options traders in the pits at CME Group CME and CBOE Global Markets CBOE.

But before I learned that math, I experienced its dynamics physically and mentally as a young student pilot at the age of 15. I was trained by my father and learned that preparation, planning, and procedures -- both standard and emergency -- were my top priorities.

It was actually exhilarating to know that you practiced emergency procedures like stalls, spins, and cornfield landings because you wanted to be as familiar with preventing danger as you were with enjoying clear skies and smooth landings.

And while commercial pilots are very well-trained on some of the best-engineered machinery and software in the world, they are not prepared for emergencies when the engineering and software are working against them. Time, aircraft control and safety are so critical that procedures and systems should never be confusing or contradictory.

Note: Tracey and I recorded this podcast on Tuesday August 20 and since then we saw a news report that "Boeing is hiring as it expects resuming 737MAX deliveries in October" according to Stay tuned!

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