Plane Crash Economics: How Unethical Cheap Credit May Have Contributed to Boeing Disasters

As the world enters possibly one of its worst financial crises, sparked — though not chiefly caused — by the coronavirus crisis, so years of money printing and cheap credit that inflated an enormous financial bubble could finally be coming unstuck.

The problem — or tragedy — is that governments and central banks are going to react as they did in crash of 2008: by further growing a fake economy through infinite rounds of quantitative easing (essentially money printing) and low interest rates.

The Federal Reserve has already reacted to the crisis in this way, last night adding a further $700 billion to its balance sheet out of thin air and cutting interest rates to zero in a bid to prevent complete economic collapse after the biggest drop in the Dow since the crash of 1987.

But despite the grave damage such policies can inflict on ordinary people and business owners, Catholic Social Teaching is largely silent about such governmental interference in the economy.

And yet its immorality is there for all to see, argues Catholic economist Juergen Siemer, who explains in the article below how cheap credit very possibly contributed to Boeing’s two recent air disasters.

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Plane Crash Economics

by Juergen Siemer

On Monday, October 29th, 2018, Lion Air Flight 610 took off from Jakarta, Indonesia, at 6:20am local time.

Twelve minutes later, the plane crashed into the Java Sea, killing all 189 passengers and crew.

Nearly five months later, on Sunday, March 10th, 2019, Ethiopian Airlines Flight 302 took off from the Ethiopian capital Addis Ababa. Six minutes after takeoff, the plane crashed, killing all 157 people aboard.

Both crashed jets were Boeing 737 MAX 8s, a new variant of the best-selling aircraft in history.

It’s been widely reported that the reasons for these crashes were software glitches and poor pilot training, but is this explanation complete?

The Boeing 737 MAX is not a newly designed airplane. It is a variant of the existing and reliable 737, as its name indicates. The MAX-variant, however, needed bigger engines.

But there was a problem: there was not enough room under the wings with the old structure and design, and so the new bigger engines would have almost touched the ground.

Changing the fundamental design of the plane is, however, very expensive. Furthermore, registering a new plane would probably have forced the airlines — Boeing’s clients — to send their pilots to extensive, and therefore expensive, training programs. Hence, Boeing chose another solution: the engines were moved up, integrated into the wings, and the undersides of the engines were flattened, as shown in the following graph.

Source: (Infographic SRF News; https://www.srf.ch/news/international/absturz-von-boeing-737-max-8-infografik-sicherheitssystem-als-sicherheitsrisiko )

Now, the engines had effectively become part of the wings, which changed the wings’ aerodynamics by increasing their lift.

And here is the problem: More uplift leads to a steeper angle of the plane’s ascent and above a certain angle, when the ascent becomes too steep, the result would be a stall. The airstream would no longer support the wings and the plane would crash.

Boeing was faced with two options:

1. Abandon the project with its original specifications and instead develop a new plane, or
2. Try to fix the problem with a technical band-aid, which would consist of new sensors on the wings measuring the uplift-angle and new software that would correct the steering of the airplane in case the uplift angle became too steep.

Boeing’s management chose option 2).

346 passengers and crew died. Nevertheless, this is not the place to judge responsibilities.

Sensors may have failed, software may not have been properly programmed to detect or deal with failing sensors, pilots should probably have been trained about how to react to such system failures, and it is finally also possible that gross neglect has been a factor. The relevant authorities will have to figure that out.

But it cannot be denied that risks were taken in order to save costs and increase profits.

This attitude of prioritizing short-term shareholder benefits over mitigating the long-term risks of the company was visible in Boeing’s financials long before the two Boeing 737 MAXs crashed. As the table below shows:

• Boeing had reduced its spending on research and development significantly since 2011 and,
• In every year since 2014, the payments to shareholders in the form of dividends and share-buybacks were higher than what the company had earned in net incomes.

Financial Year, all figures in Mio. USD	DEC ’19	DEC ’18	DEC ’17	DEC ’16	DEC ’15	DEC ’14	DEC ’13	DEC ’12	DEC ’11	DEC ’10
Sales	76’559	101’127	93’392	94’571	96’114	90’762	86’623	81’698	68’735	64’306
Research & Development	-3’219	-3’269	-3’179	-4’627	-3’331	-3’047	-3’071	-3’298	-3’918	-4’121
Net Income	-636	10’460	8’197	4’895	5’176	5’446	4’585	3’900	4’018	3’307
Cash to Shareholders	-7’223	-12’865	-12’342	-9’436	-8’842	-7’773	-3’171	-1’202	-1’130	-1’166
Cash from or to creditors	12’950	1’055	1’072	-184	894	-895	-1’107	-2’257	-572	-811
Debt	28’532	13’847	11’117	9’952	9’964	9’070	9’635	10’409	12’371	12’421

 

According to its audited financial statements, there is no positive equity anymore on the passive side of its balance sheet!

But thanks to the continuation of the share buybacks, the company’s share price in mid-February 2020 was back at the level seen in 2018, before the two planes crashed.

Boeing still employs more than 153,000 people. As is common in the US, the company’s liabilities towards its current and future pensioners are not fully covered.

Governments and central banks have often stated that lower interest rates would make the economy stronger.

Boeing seems to be an example showing exactly the opposite, as the availability of cheap credit may have contributed to management decisions which benefitted the short-term interests of shareholders and increased the risks to the company itself, its employees and their families.

At its core, this is not ethical.