Boeing finally takes right call on 737 Max

(Bloomberg): The good news is, Boeing Co. is starting to do the right things. The bad news is, it’s going to be expensive.

The airplane maker said it would recommend pilots undergo flight-simulator training on its 737 Max before the embattled plane returns to service, reversing its previous stance that computer-based education would be sufficient. The Max has been grounded since March following the second of two fatal crashes that were triggered by a flight-control software system added to counter the aerodynamic impact of larger, more fuel-efficient engines than those on previous models.

The about-face on training amounts to a concession that the Max was in fact fundamentally different than earlier 737s and that pilots weren’t properly informed of or prepared to deal with its features - despite Boeing’s repeated efforts to argue otherwise in the initial certification process and throughout the Max crisis.

The “New York Times” reported that Boeing’s decision to recommend simulator training stemmed from an analysis of tests conducted last month with airline pilots, many of whom failed to follow correct procedures to handle emergencies. The argument for simulator training has gained traction within the Federal Aviation Administration, in part because Boeing and regulators have been rethinking emergency checklists.

Inevitable course of action

Given the uproar over the crisis and the extent of the changes to the plane as the grounding drags on, simulator training may have been inevitable. In that regard, it’s hard to give Boeing too much credit for this recommendation more than a year after the first Max crash. It’s a poor replacement for doing the right thing in the first place.

It seems like more than a coincidence that this change comes closely on the heels of the ouster of Dennis Muilenburg as Boeing’s CEO. Muilenburg initially blamed the Max crashes on a “chain of events” of which Boeing’s flight-control software system was just one, and more recently was publicly admonished by the FAA for pushing an overly optimistic narrative on the plane’s return that regulators worried was meant to pressure them into acting more quickly.

Tacit acknowledgement

If the decision to recommend simulator training is a sign of the new Boeing, it’s a positive that the company has finally come to terms with the gravity of its mistakes with the Max and is willing to accept the full financial penalty.

And make no mistake, this decision will cost Boeing. The company reportedly made a deal with Southwest Airlines Co. to reduce the cost of each Max plane by $1 million if simulator training was required. Southwest ordered 280 Max jets, so that alone may be a hit of nearly $300 million.

Some of that discounting may already have been captured in an unspecified agreement reached late last year to compensate Southwest for the hit to its profit from the grounding. American Airlines Group Inc. this week said it, too, had reached a settlement with Boeing.

But in both cases, the compensation only covers the damage done in 2019 and continued delays into 2020 are going to give airlines fresh ammunition to push for bigger concessions. Should regulators take Boeing’s recommendation and require simulator training - which they almost certainly will - that won’t necessarily delay the ungrounding of the plane but it will complicate its actual return to service.

There are only 34 Max simulators currently certified, although Boeing is reportedly looking into modifying simulators for older 737 models. That may force airlines to pace out deliveries of Max models that have been idling in parking lots all this time which, in turn, could potentially hinder Boeing’s efforts to clear the inventory and resume production.

For shareholders, Boeing’s willingness to take the costly, if correct path, should be a wake-up call that the good old days of soaring cashflow and billions in share buybacks are coming to an end. The acknowledgement that the Max is different enough from prior models to require simulator training could point to the company making another move it should have made in the first place: designing an entirely new successor to the 737.