Does regulation work? Just ask Boeing

Photo by Gary Lopater on Unsplash

The world has been shocked with the seemingly related crashes of two 737 Max aircraft. Some of the most widely flown aircraft in the world, the idea that they might not be completely safe is paradigm-shifting for most of us. But there is a story to be told about this airplane in contrast to another that reveals why the recent attacks on regulation might be misguided.

To tell this story, I want to take you back to the 1980s. Back then, aircraft range was limited by a rule called ETOPS, an acronym for Extended Twin Engine Operations. The basis of this rule is the concern that if an airplane has only two engines and one goes out, the plane must be relatively close to an airport to land. Arbitrarily, the rule had been set at 60 minutes. In short, for a twin-engine airplane to fly a route over an ocean, for example, its entire route must be within 60 minutes of somewhere it could land if it lost one engine.

The result was that most trans-Atlantic and trans-Pacific routes had to be flown by airplanes with more than two engines, to theoretically reduce the danger to passengers if one engine became inoperable. It is for that reason that when American Airlines in 1966 put together a request for proposals for a new widebody aircraft, one that called for an efficient two-engined configuration, aircraft-makers Lockheed and McDonnell-Douglas responded with three-engine designs, which ultimately became the L-1011 and the DC-10.

Ironically, it was the effort of these two American aircraft manufacturers to address the ETOPS requirement that created an opening for the creation of the European Airbus consortium, the aircraft manufacturer, the company that would ultimately become the biggest competitor to U.S. aircraft giant Boeing. Noticing that Lockheed and McDonnell-Douglas had not precisely responded to American Airlines’s request, they proposed a new airplane, the twin-engine A-300 that met American’s requirements exactly.

At the time, Airbus was an unknown quantity. As a result, American ordered DC-10s rather than the Airbus version, and Airbus required massive investments from European governments to avoid going out of business at the time. Ultimately, Airbus would find customers for its A-300, including eventually American Airlines, but, as Lockheed and McDonnell-Douglas pointed out, its utility on longer-range routes was limited by the ETOPS rule.

Boeing, still recovering from the massive investment required to launch its ground-breaking 747 jumbo jet, took a pass on the competition for the second generation widebody that became a financial quagmire for Lockheed and McDonnell-Douglas. But they could not allow the Airbus challenge to go unanswered. As a result, they proposed two new jets aimed at responding to American’s specifications, two planes that would compete directly against the A-300: the 757 and 767.

One of the biggest differences between the A-300 and the Boeing 767 was their wings. The A-300 had a small wing that allowed the plane to fly fast. This was typical of the era when the Concorde and other Supersonic Transports (SSTs) were still considered viable. Boeing, in its usual fashion of precisely understanding the marketplace, designed a larger wing for the 767. The result was lower speed, but higher efficiency. And as a side benefit, higher fuel capacity for longer range. (For more on this, see Sutter, J. & Spenser, J. 2010. 747: Creating the World’s First Jumbo Jet and Other Adventures from a Life in Aviation: HarperCollins.)

Seeing an opportunity, TransWorld Airlines (TWA), which was one of the biggest carriers of transatlantic traffic at the time, worked with Boeing and the FAA to get the ETOPS range for the 767 increased up to 90 minutes. The difference between 60 and 90 minutes was critical, in that it allowed the 767 to serve transatlantic routes and to fly to Hawaii.

To accomplish this goal, the FAA and other countries’ regulatory agencies required both the airliner and the airline to undergo a series of tests, including operating the aircraft on commercial routes for a year or more, before they would certify the airplane as safe enough to fly such longer distances. Boeing and TWA were ecstatic, as they easily jumped through the requisite hoops, and the Boeing 767 went on to dominate transatlantic service in the 1990s and early 2000s.

Airbus, of course, had to respond. So they came up with the A-330 and A-340. The two aircraft were identical except for the fact that the A-340 had four engines and much longer range. The idea was that the A-330 would compete directly with the 767, and that the A-340 would allow airlines to open up much longer routes, such as trans-Pacific ones.

Boeing, once again, out-strategized Airbus. They proposed the 777, a twin-engine plane with very long range that Boeing said should satisfy ETOPS requirements for 180 minutes. If so certified, the 777 could fly the transpacific routes Airbus was building the A-340 for, but with the higher efficiency of two engines rather than four.

But here’s the rub. United Airlines and several other carriers were interested in the 777, but only if it could be certified to fly the longer transpacific routes from the time of its introduction. They did not want to have to operate it on shorter routes for a period of time while waiting for the possibility of being able to fly longer routes. If that were the case, they might as well just order the A-340.

Boeing went to work. They set up a team to work directly with the FAA other regulators. The aim was to go so far beyond what the regulators were demanding that their design and testing efforts would surpass the equivalent of the years-long testing the airlines would have to put the aircraft through. Much to the consternation of Airbus, Boeing succeeded. And the 777 went on to become a best-seller, far out-selling the A-340. It has also been a historically safe and reliable aircraft right from its introduction. (For more on this, see Pandey, M. 2010. How Boeing Defied the Airbus Challenge: CreateSpace Independent Publishing Platform.)

The point of all this is that with the 777, Boeing strove to respond directly to the regulators, to avoid shortcuts, and to go above and beyond government expectations. The result was a superb, safe and reliable aircraft.

Contrast this with what we are finding out about the development of the troubled 737 Max. While Boeing and Airbus were competing in the widebody segment, as I described above, Airbus was enjoying much more success in their competition for the narrowbody market. These airplanes, designed to fly shorter, mainly domestic routes with 100 to 150 passengers, are a critical piece of the aircraft market. Airbus has its hugely successful A320 family competing against Boeing’s 737s.

Interestingly, here, Airbus has seemingly outpaced Boeing. Boeing was first to market with its 737–200. To address noise and pollution concerns, in 1984, Boeing introduced its 737–300. Then Airbus introduced its more efficient A-320 in 1988. Boeing responded almost ten years later with its next generation of the 737, the -600 version. In the meantime, Airbus captured a big chunk of the narrowbody market.

Airbus, of course, was not going to stand still. They updated their A-320 several times, most significantly in 2010 with their A-320 neo, which stands for new engine option. This introduction prompted Boeing to respond again, with its 737 Max version. This time, though, Boeing was not going to give Airbus time to gain an advantage, as they had before.

It is now coming to light that the cooperative relationship Boeing developed with the FAA and other regulators as it developed its 777 has become a bit of a farce. It turns out that Boeing basically has taken control of the process of certification of its own aircraft. The result has been the inept introduction of their 787, grounded for flawed batteries, and the now grounded 737 Max.

Obviously, there will be investigations into what happened with the 737 Max, and much will come to light. It appears, however, that its development represents an example of what scholars have called “regulatory capture,” in which industry develops such a close relationship with its government regulators that the regulators put industry concerns ahead of those of the general public. Regulatory capture has been blamed, for example, for the regulatory failures that led to the financial crisis of 2007–2008. (For more on this, see Admati, A., & Hellwig, M. 2013. The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It. Princeton: Princeton University Press.)

By now, we should see the pattern. When we allow industry to police itself, bad things can happen. The failure of the regulators in 2007 led to a worldwide recession, the worst we’ve seen since the Great Depression. Similarly, it appears that regulatory capture may have also led to the loss of hundreds of lives on 737 Max aircraft.

On the other hand, the remarkable success that the 777 represents is an example of effective regulation paired with an outstanding effort by industry at compliance.

We just need to ask ourselves which we would rather see: the kind of regulation that curries industry favor like we saw with the 737 Max, or aggressive regulation paired with thorough compliance like we saw with the 777. My guess is that the passengers in Ethiopia and Indonesia, and even now the American passengers and airlines inconvenienced by the grounding, wish the 737 Max had instead followed the path of the 777.

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Mike is an Assistant Professor of Management for Legal and Ethical Studies at Oakland U. Mike combines his scholarship with practical experience in politics.

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