University of Houston Boeing Case Study Questions

Dominance to Near Demise: Can Boeing Return to Its
Position as the World’s Largest Aircraft Manufacturer?
Case
Author: Rimi Zakaria & Dale DeJong
Online Pub Date: January 04, 2021 | Original Pub. Date: 2021
Subject: Strategic Management & Business Policy, Business, Government, & Society, Crisis
Management
Level: | Type: Indirect case | Length: 6116
Copyright: © Rimi Zakaria and Dale DeJong 2021
Organization: Boeing | Organization size: Large
Region: Eastern Africa, Northern America, South-Eastern Asia | State:
Industry: Air transport| Transportation and storage
Originally Published in:
Publisher: SAGE Publications: SAGE Business Cases Originals
DOI: http://dx.doi.org/10.4135/9781529761320 | Online ISBN: 9781529761320
SAGE
© Rimi Zakaria and Dale DeJong 2021
SAGE Business Cases
© Rimi Zakaria and Dale DeJong 2021
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Dominance to Near Demise: Can Boeing Return to Its Position as the
World’s Largest Aircraft Manufacturer?
SAGE
© Rimi Zakaria and Dale DeJong 2021
SAGE Business Cases
Abstract
Many companies, from local to large multinational firms, face fierce competition around the
world. In response, managers often take aggressive and hasty actions. Many of these actions
have major financial and reputational implications. Underscoring two deadly crashes that made
global news headlines, this case details a series of spiraling events that brought the world’s
largest aircraft manufacturer to its knees. The case analyzes the technical, managerial, market,
and regulatory issues that eventually contributed to the grounding and halt of production of
Boeing’s best-selling model. Managerial and ethical questions are raised on the topics of product
design, safety, and negligence. The case challenges students to consider the dilemmas around
managing the interests of various stakeholders as well as the dual pressures of balancing
financial profit vis-à-vis …
Case
Learning Outcomes
By the end of this case study, students should be able to:
• describe the unique nature and structure of the global aircraft manufacturing industry;
• identify the inter-dependency of manufacturers, supply-chain partners, regulators, buyers, and the
end customers in a highly technical and complex industry;
• discuss the issues of product design and safety that affect organizational reputation, financial
performance, and survival;
• underscore the importance of managerial response, corporate communication, and public relations
during organizational crisis;
• identify various stakeholder interests and their roles in promoting managerial transparency and
accountability.
Introduction
On a spring morning in 2019, Boeing chief executive officer Dennis Muilenburg woke up to the worst
nightmare of his career. An Ethiopian Airlines flight involving the Boeing 737 Max (commonly referred to as the
Max) aircraft reportedly crashed in Addis Ababa, the capital of Ethiopia. This was the second global headline
involving his company within a five-month span. The first crash in October 2018 involved a Lion Air flight
that plunged into the Java Sea 12 minutes after taking off from Jakarta, Indonesia. Both of the crashes cost
the lives of 346 people who had flown on the Max. Preliminary facts revealed eerily similar final minutes for
both of the crashes. Experts suggested that the cause may have been due to the malfunction of the anti-stall
system in the Max, which was designed to force the plane to nosedive to avoid a stall.
Airline regulatory authorities around the world, as well as the Federal Aviation Administration (FAA) in the
United States, gradually ordered the grounding of 387 of the Max aircrafts (Bogaisky, 2019). Quickly after its
introduction to the market, the Max became the highest-selling liner for Boeing (Russell and Seshagiri, 2019).
These aircrafts were used by 376 airlines around the world. These events were occurring when Boeing was
working on 4,547 outstanding orders of the Max, the future of which became suddenly and unquestionably
uncertain.
The Aftermath of the Crashes
As the world’s leading aircraft manufacturer and the largest American industrial exporter (Irigoyen, 2019),
Boeing scrambled to get the Max reapproved. These tragic crashes and design missteps, combined with
the grounding of planes, cost Boeing in several ways. First, aggrieved families filed lawsuits against Boeing
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Dominance to Near Demise: Can Boeing Return to Its Position as the
World’s Largest Aircraft Manufacturer?
SAGE
© Rimi Zakaria and Dale DeJong 2021
SAGE Business Cases
and the company had to provide monetary compensation to the families affected by the crashes. Second,
by July, Boeing anticipated reporting an after-tax charge of USD 4.9 billion (Reed, 2019) “in connection with
an estimate of potential concessions and other considerations to customers for disruptions related to the 737
MAX grounding and associated delivery delays.” Third, Boeing’s share prices became volatile as its relations
with airline clients and its reputation suffered. Fourth, the underutilized supply-chain, staffing, storage,
logistical, and maintenance headaches related to the Max line further compounded Boeings operational
predicament. Finally, as an important economic engine for the country, the problems at Boeing presented
broader ramifications; this led some economists to predict that the U.S. GDP would suffer noticeably.
The longer the Max remained grounded, the more difficult it was for Boeing to maintain its relationships. Client
airlines had mixed reactions to the problems at Boeing, variously affecting relationships. Amid the chaos,
Boeing signed deals for 200 Max jets and 787-Dreamliner airplanes with aviation giant International Airlines
Group (IAG) at the Paris Air Show, 2019 (Zarroli, 2019). The larger airlines had not promptly canceled orders.
Rather, they appeared to be taking a wait-and-see approach. Although most of the major carriers had not
canceled orders for the Max, some had reconfigured their orders. Orders for other Boeing products continued
to sell at a normal pace (Josephs, 2020). However, smaller carriers Avia and Flyadeal had canceled deals for
65 planes (Slotnick, 2019; White, 2019). In addition, the plane-leasing firm Avolon canceled their order for 75
planes (Bogaisky, 2020). These cancelations did not occur immediately after the crashes but over a span of
months. Although no order cancelation could be taken lightly, the modest number of cancelations could be
viewed acceptable given the magnitude of the situation. With orders of more than 4,500 planes on the books,
the cancelation of a few smaller orders was not disastrous (Slotnick, 2019).
One of the more noteworthy aspects of the Max crashes was the effect on public reactions. Grieving family
members found Boeing’s response insensitive and arrogant rather than signaling concern and empathy.
Boeing’s delayed response to the crashes followed by denial, avoidance, and fix-the-blame approach created
noticeable skepticism among many passengers, airlines, and the media. The studies conducted with regards
to the opinions by the public showed a general distrust with the Max (White, 2019). Passengers expressed
their preferences to fly another plane. Experts believed that Boeing had “caused a global aviation crisis of
trust.” (Gelles, 2019b)
The financial situation for the company depicted a concerning story. Yearend financial statements for 2019
were reported as the worst in Boeing’s history. The revenues for 2019 were (in millions) USD 76,559 and USD
101,127 for 2018. This represents a 24% loss in revenues in one year. The net (loss)/earnings comparison is
also very bleak. In 2019, Boeing reported a loss of USD 636 million, while showing USD 10.46 billion profit
in 2018 (Boeing, 2020). Operating margins for 2019 were at a 2.6% loss while in 2018 they were a positive
11.9%. With losses in revenues down USD 25 billion, net earnings down almost USD 11 billion, operating
margins negative, and the Max grounded, Boeing faced very serious financial difficulties, possibly indicating
an existential crisis for the company.
Data 1. Boeing Revenues
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Data 2. Boeing Gross Profit
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Data 3. Boeing Profit Margin
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The Max, Its Design Issues, and What Caused the Crashes
The new 737 Max aircraft was built on decades-old systems that date back to the original model debuted
in 1967. The predecessor of the Max—the 737–800—had been a relatively reliable model with few issues.
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Dominance to Near Demise: Can Boeing Return to Its Position as the
World’s Largest Aircraft Manufacturer?
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SAGE Business Cases
To ensure efficiency and competitive advantage in the market, Boeing’s strategy was to update the existing
model rather than to build anew from scratch. Because the plane was a modified design, Boeing was able to
develop and roll it out faster.
The Max featured larger engines than the former 737s. The engines were mounted on the wings, which
were positioned higher than where they were located in the previous models. A makeshift anti-stall system
was installed to create aerodynamics that would push the nose up or down in certain configurations. If
the angle of attack (AOA) of a plane—the angle between oncoming air or wind and a reference line of an
aircraft—becomes too steep (i.e., more than 10 degrees), the plane engines may stall, leading to a crash
(Gröndahl et al., 2019). To automatically control the stability of the plane, Boeing introduced the Maneuvering
Characteristics Augmentation System (MCAS). The MCAS was designed to receive data from the AOA
sensor. The AOA sensor is a small vane on the nose of the plane that measures the pitch of the aircraft as
it moved into the headwind. The design of the new flight control system relied on the information from only a
single AOA sensor (of the two sensors) for the MCAS to activate. If the AOA sensed the plane pitching up too
high, MCAS was designed to take over the control from both of the pilots. It was designed to automatically
and repeatedly force the nose of the plane down (FAA Report, 2020).
In both crashes, the MCAS of the Max received erroneous data from one sensor (see Figure 1). In previous
models of the 737, the MCAS would activate upon receiving data from two independent sensors. Reacting
to the erroneous data, the MCAS sent the planes into about a 40-degree angle of irrecoverable nosedives
(Gelles, 2019b; Gröndahl et al., 2019). Furthermore, the absence of an electric alert system in case of
hazardous malfunctions blindsided the pilots to the sudden disruption as they failed to gain manual control.
The 737-liner continued to essentially follow the controls of the original Boeing 737 introduced more than half
century ago (Nicas & Creswell, 2019).
Although Boeing completed a major change in 2016 to the parameters under which the MCAS would activate,
it did not submit the revised documents for FAA approval. Boeing subsequently removed the references to
the MCAS from the Flight Crew Operations Manual and training differences tables available to the aircraft
operators (FAA Report, 2020). As a result, pilots were not carefully and extensively trained regarding the
implications of the MCAS activation. Considering that the updates were reportedly only incremental, the
newer models of the aircraft assumed that only marginal pilot training was necessary. To cut training costs
for airlines, pilots assigned to the Max jets were offered only a short course on the MCAS modifications
using handheld devices (i.e., using the iPad as opposed to a flight simulator; Nicas et al., 2019). FAA officials
responsible for determining pilot training needs were unaware of the actual training requirements (Nicas &
Creswell, 2019).
Countries around the world have national aviation authorities overseeing airline safety standards and
regulations (e.g., the Directorate General of Civil Aviation in Indonesia and the Ethiopian Civil Aviation
Authority in Ethiopia). Given the global nature of the industry, these authorities may collaborate. For instance,
France’s government agency, the Bureau d’Enquêtes & d’Analyses, was responsible for decoding the black
box recordings in the Ethiopian crash.
In the months leading to the 2019 crash, several pilots flying for the US airlines reported experiencing glitches
during critical moments while flying their Max jets (Wolfe, 2019). There were at least five such complaints
reported prior to the crashes. Unfortunately, neither Boeing nor the FAA resolved the issues.
Figure 1: Sketches of Scenarios in Which the MCAS Receives Erroneous Data From
the Sensor (Top) Shortly Before and (Bottom) After Taking Control and Activating the
System
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Dominance to Near Demise: Can Boeing Return to Its Position as the
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The U.S. Senate Hearings
Seven months after the Ethiopian Airlines crash and on the first anniversary of the first crash in Indonesia,
CEO Muilenburg and other Boeing executives appeared before the U.S. lawmakers. The Commerce
Committee of the U.S. Senate arranged the hearings. Family members of victims of both crashes were in
attendance. They held up large photographs of their loved ones. The hearing lasted for two days. The Senate
members of the committee denounced the executives for safety problems in the Max jet. The CEO finally took
public questions about whether Boeing downplayed safety concerns, withheld design flaws from regulators,
and tried to cover up its mistakes and missteps.
The media reported (Josephs, 2019) that Muilenburg was remorseful and acknowledged the technical issues:
“On behalf of myself and the Boeing company, we are sorry, we are deeply and truly sorry,” further adding,
“We’ve made mistakes and we got some things wrong.” When asked whether there were any concerns about
the system that could have saved the people on the Ethiopian Airlines flight, Muilenburg replied: “I think about
that decision over and over again. If we knew everything back then that we know now we would have made
a different decision.”
It became apparent that Boeing was aware that the MCAS had a problematic single point control system two
years before Max was cleared to fly. The House Transportation Committee released a redacted email during
the hearing that showed a Boeing engineer raising concerns about relying on just one sensor to trigger the
system. It further became evident that Boeing also knew its assumptions about pilot reactions to MCAS could
be wrong. Boeing developed MCAS around the startling assumption that if the system activated erroneously,
pilots would recognize and respond in four seconds. Even though the company never told pilots about the
system, it convinced the FAA that the system ran only in the background, and therefore did not need to be
included in training and flight deck manuals (FAA Report, 2020). Finally, in one of the most heated exchanges
during the hearings, Muilenburg acknowledged that after the first crash and before the second, he knew about
internal messages between technical pilots that discussed “egregious” problems with the MCAS system. He
told lawmakers he did not fully read the messages. He turned them over to company lawyers and only recently
became fully aware of their content.
Table 1 presents a timeline of the major events for the Max, from certification to discontinuation, and their
implications for the major stakeholders.
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Dominance to Near Demise: Can Boeing Return to Its Position as the
World’s Largest Aircraft Manufacturer?
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Table 1. Timeline of Major Events From Certification to Discontinuation of the Max
Month
Major event
and year
Stakeholder implications
March
2017
Max Certified
by
FAA,
allowing
Airlines received economical plane with long distance capabilities and seating
Boeing
to
for 32 more passengers and could pool pilots from 737NG. Pilots could fly two
deliver the Max
airplanes, 737NG and the Max, without having to be certified for each one. No
to customers.
additional simulator training needed to fly Max. Suppliers did not have to create
Later in the
new parts, since the fuselage and wings were the same, saving money to accrue
year, another
economies of scale.
agency
also
certifies
the
Max
March
2019
Passengers and Surviving Families: Some 157 lives lost in the crash. Lawsuits
Second crash
filed by grieving family members. Stockholders: Boeing stocks became volatile.
of Max and
Airlines had to rearrange schedules, cancel flights, layoff personnel, reconsider
subsequent
expansion plans and rearrange financing of Max putting a strain on finances.
grounding of
Southwest Airlines, the largest user of the Max, saw 4.5% of its fleet grounded and
the
plane
their stock plummeted 4%. Pilots found themselves grounded also without planes
worldwide
to fly. Suppliers expressed concerns over future orders for parts.
1. Release of
the Lion Air
Flight
610
investigation
report
October
2019
Boeing Chief Engineer testified the safety assumptions of the Max was wrong.
2. Boeing CEO
Grieving Family Members of the Passengers observed Boeing CEO takes
Dennis
apologetic stance in front of the lawmakers. Regulator: FAA’s roles scrutinized by
Muilenburg’s
the lawmakers. Airlines given timelines for the return of the Max and to make plans
testimony
at
for putting the aircraft back into service. Suppliers were to ready production lines
Congress
to complete orders that had been delayed.
assuring
lawmakers that
similar
accidents
would
not
happen.
Former CEO walked away without any severance pay, but received USD 60
Boeing CEO million in stocks and pension benefit. New CEO to receive USD 1.4 million base
Dennis
salary. In addition, a USD 10 million in stocks and incentives as well as a USD
December Muilenburg
7.5 million in bonuses payable on the achievement of several key performance
2019
fired
and indicators, including the Max’s full safe return of service. Airlines given new
replaced
by timelines for the return of the Max and found themselves continually adapting to
David Calhoun Boeing’s forecasts. Pilots were hopeful to return to work but continually thwarted
by unreliable timelines. Suppliers had to change production line estimates and lay
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Dominance to Near Demise: Can Boeing Return to Its Position as the
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off personnel.
January
2020
Airlines to make new arrangements for planes to replace the orders for the Max,
rearrange expansion programs, reassign and lay off personnel. Pilots to find work
Boeing’s
and to obtain additional certification for new aircraft purchased to replace Max.
agreement to
Suppliers and subcontractors to face possible layoff of personnel due to loss of
temporarily
orders, financials and logistics to be revised in light of lost income and possible
discontinue
downsizing with lack of orders. Communities where the airlines, suppliers, and
production of
subcontractors were located were to be affected by layoffs. U.S. Economy:
Max
Numerous estimates suggest that the shutdown could take a half-percentage point
off of the US GDP in the first quarter.
Whose Responsibility?
To modernize and improve functionality of their airplanes, plane manufacturers periodically update their
aircrafts. For instance, Boeing and Airbus installed a variety of new AOA sensors in their new models, the
737 Max and Airbus A320neo, respectively. While Boeing designed the Max to rely on only one AOA sensor
to activate the MCAS (i.e., downsizing from two sensors previously), its European counterpart Airbus added
three more sensors for safety. Boeing downplayed the risk of relying on only one sensor; it never submitted
an updated safety assessment of the MCAS modification to the agency (Kitroeff et al., 2019). The Max’s chief
technical pilot reportedly requested FAA approval to omit mentioning the MCAS in the Flight Crew Manual
(Nicas et al., 2019). For the MCAS overhaul, Boeing never submitted a formal review. This lapse led to the
MCAS approval without any independent assessment.
Many Boeing employees involved in building, testing, and approving the MCAS reported that they had not
fully understood the changes. Based on misguided assumptions, engineers made critical decisions, affecting
design, certification, and training for the Max. In an investigation, current and former employees at Boeing
and the FAA expressed that they had assumed the system relied on more sensors and would rarely, if ever,
activate (Nicas et al., 2019). Boeing employees expressed their lack of confidence in the company and the
FAA (Kitroeff & Gelles, 2020): “This airplane is designed by clowns [Boeing’s top management], who are in
turn supervised by monkeys [FAA].”
Pilots were found to be unaware of the MCAS taking over the controls on flight. Investigation reports from
the crashes revealed harrowing details of the final minutes of the crashes as experienced in the cockpit. The
pilots of the Lion Air Flight 610 initially disengaged the MCAS and recovered from the drop. But air traffic
control noted they continued to experience a flight control problem. Approximately 8 minutes prior to plunging
into the Java Sea, Max’s computer system activated 20 times and had finally forced the plane’s nose down.
The Ethiopian Airlines Flight 302’s cockpit voice data recorder showed that shortly after takeoff, the reading of
the left AOA sensor erroneously deviated from the right one. The left sensor reached 74.5 degrees while the
right AOA sensor value showed 15.3 degrees. The MCAS activated autopilot mode multiple times per design,
which caused the plane to nosedive. The pilots managed to disengage the MCAS along with the trim system,
which stopped the nose from dropping momentarily. Owing to the Max’s faulty recovery technique, disabling
the electronic trim system had also deactivated the motor that could help to turn the trim wheel. The tragedy
was compounded by a pilot error. Distracted by the runaway trim stabilizer and the fact that the plane was
pointing down, the pilots failed to reduce the engine power after takeoff. This made the aerodynamic forces
even stronger causing the plane to blast forward at full thrust.
Allied Pilots Association (APA) of American Airlines, representing 15,000 pilots, for instance, initially and
publicly remained confident in the Max and their pilots’ ability to fly it safely. A few months following the
second crash, the APA President Captain Daniel Carey stated in an APA Release (2019a), “The huge error of
omission is that Boeing failed to disclose the existence of MCAS to the pilot community. The final fatal mistake
was, therefore, the absence of robust pilot training in the event that the MCAS failed.” He further added on the
role of FAA, stating, “With regard to the public policy issues generated by the fatal MAX crashes, the foremost
and most urgent, in my view, is assessment of the adequacy of the FAA aircraft certification process.”
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Dominance to Near Demise: Can Boeing Return to Its Position as the
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Analysts perceived these accidents to bear a pattern of deep-seated cultural and managerial failures at
Boeing. The top-level executives and engineers were made aware of the MCAS issues in the form of
complaints and enquiries about the glitches. The executives chose to remain passive, or even actively ignore
these early signs of a fatal problem. After the crash in 2018, Boeing was quick to question the ability of
the foreign pilots. Discounting all possible managerial responses following the 2019 crash, CEO Muilenburg
promptly negotiated with FAA for its support not to ground the 737 Max. His underestimation of the crisis
eventually eroded Boeing’s relationship not only with the FAA, but also with the US Congress, its airline
customers, pilots, suppliers, and other important stakeholders. After the emergence of various media reports
and multiagency investigations identifying his reckless inaction combined with his failure to return the planes
to flight, Boeing eventually replaced Muilenburg with David Calhoun. In an interview with the press (Kitroeff
& Gelles, 2020), new CEO Calhoun finally expressed, “If anybody ran over the rainbow for the pot of gold on
stock, it would have been him [Muilenburg]” suggesting that his predecessor had taken many risks to drive
Boeing’s stock price higher.
According to a multiagency task force report by the Joint Authorities Technical Review, the FAA lacked
the technical ability to effectively inspect Boeing’s claims about the Max. The FAA reportedly relied heavily
on Boeing employees to vouch for its aircraft’s safety (Gelles and Kitroeff, 2020). An FAA group, the
Boeing Aviation Safety Oversight Office, was tasked with certifying Boeing aircrafts. Compared with Boeing’s
technical expertise and manpower, this FAA group was understaffed and inept, according to Gelles and
Kitroeff, (2019a). Consequently, the FAA assigned routine tasks to Boeing rather than handling them inhouse.
The FAA relied on Boeing engineers to examine their own aircrafts (Gelles & Kitroeff, 2019). By 2018, the
FAA entrusted Boeing to certify 96% of its own work (Kitroeff et al., 2019). Federal Aviation Administration
managers often delegated critical documents back to Boeing and encouraged other employees to do the
same (Kitroeff et al., 2019). The FAA reportedly only took care of the paperwork while Boeing self-inspected
its safety regulations to approve certifications. When two specialist engineers working on the MCAS quit,
leaving inexperienced engineers in place, FAA reportedly handed over the MCAS approval responsibility to
Boeing.
The Associated Administrator of the FAA, at the time, was said to be favorable to Boeing (Gelles, 2019a).
Following the 2018 crash, despite the reports questioning proper functioning of the the MCAS and despite
their fuzzy understanding of it, the FAA initially stood with Boeing. Independent investigations by national
aviation authorities found this design flaw not caught by FAA allowed the subsequent crash in Ethiopia.
It was several days after the second crash that the FAA ordered the temporary grounding of the Max operated
by the US airlines or in the US territory. The agency made this decision as a result of the data gathering
process and new evidence collected at the site of the Ethiopia crash. The grounding will remain in effect
pending further investigation, including examination of information from the aircraft’s flight data recorders
and cockpit voice recorders. The agency was to continue to investigate. Months following the crashes, with
increased scrutiny of the FAA’s credibility, its typical high degree of delegation was off the table. With demands
from European and other foreign regulators, the FAA agreed to perform a far-reaching new safety analysis of
the Max’s flight controls.
The Global Aircraft Manufacturing Industry
Owing to its highly complex and resource-intensive nature, the aircraft manufacturing industry is inherently
globally dispersed. The industry primarily depends on downstream supply-chain demand from airlines, which
make up the bulk of the major markets for the industry players. The market operates in a near duopoly.
The industry generated more than USD 700 billion annually, with the U.S. company Boeing and European
company Airbus dominating as the frontrunners (Irigoyen, 2019). Aircraft manufacturers work with other
supporting industries and supply-chain partners that make the software and technical components. The
supporting industries are also globalized, with many aircraft manufacturers outsourcing their parts and
segment production operations to other industry operators, some of which are in lower labor cost countries.
The manufacturers Boeing and Airbus ultimately sell their finished products to the nationally and privately
held airlines around the world.
The competition between Boeing and Airbus exemplifies one of the greatest rivalries in the business world.
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Dominance to Near Demise: Can Boeing Return to Its Position as the
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Forbes reported a highly competitive market for these two companies in terms of commercial aircraft
deliveries prior to the crisis. Figure 2 shows (Trefis Research Team, 2020), for instance, the number of aircraft
unit deliveries Boeing and Airbus made yearly to various airlines and other buyers around the world. These
figures further testify the extent of rivalry between Boeing and Airbus in vying for a greater market share. The
other competitors, such as, Brazil-based Embraer and Canada-based Bombardier, focus on smaller, regional
jets.
Figure 2. Aircraft Deliveries by Boeing and Airbus
Source: Prepared by authors based on Trefis Research Team Data, 2020
Between 2014 and 2019, the average industry growth rate had been 1.7% (Irigoyen, 2019). The 2016–2035
Market Forecast and Current Market Outlook showed that both Airbus and Boeing had a positive outlook and
intentions to increase production. Both of these rivals had similar worldwide demand forecasts for the next
few decades for various types of their aircrafts (single-aisle, twin-aisle, etc.; see Figure 3). The deliveries in a
recent year according to the European Commission (2017; see Figure 4) show a neck-and-neck rivalry. This
exemplifies the crisis the industry would face, if Boeing were to go bankrupt or be found unreliable. Airbus
would undoubtedly dominate the market. However, it would likely result in major aircraft delivery shortages
given the time-consuming and sophisticated production processes in view of the already existing delivery
backlog.
Figure 3. Boeing and Airbus Market Outlook for 2016–2035
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Dominance to Near Demise: Can Boeing Return to Its Position as the
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Source: Prepared by authors.
Figure 4. Boeing Versus Airbus Global Deliveries (Aircraft Units) by Region in 2015
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Dominance to Near Demise: Can Boeing Return to Its Position as the
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Source: Prepared by authors.
Considering consumer safety in this industry, aircraft manufacturers are not the only ones responsible.
Various national and international agencies, for instance the FAA in the United States, are accountable for
determining safety regulations, certification, training needs, and modifications in their respective regions. The
General Aviation Manufacturers Association (GAMA) is a trade association that promotes general welfare,
safety, interests, and activities of the global business and general aviation industry. The GAMA works
with companies, associations, and airline communities to create a better understanding of general aviation
manufacturing, maintenance, repair, and overhaul through certification systems and regulations.
Is a Turnaround Possible?
The year 2020 has barely proved to be better than previous years for Boeing, at least at the time of
writing (June 2020). Though scheduled to commercially return by the middle of 2020, the subsequent global
pandemic of the COVID-19 brought only further uncertainty for the Max. Boeing continued to suffer along with
the broader aviation industry as travel bans around the world slowed new bookings. Financial and aviation
industry analysts anticipated significant and prolonged decline in air traffic for the subsequent year. This could
prompt many airlines to defer purchases of new planes, causing a demand slump for Boeing.
As of March 2020, the Max remained grounded. The production halt affected hundreds of suppliers and
millions of passengers in the United States and abroad. The timing of the return of the Max jet to service
remained uncertain, while Boeing continued to work on fixing the software issues. Rather than making new
jets, Boeing focused on delivering the 400 Max planes to its clients (i.e., airliners around the world). The FAA
took the rare step of publicly admonishing Boeing for pushing an unrealistic timeline for the planes’ return to
service and for appearing to pressure the regulator.
Several months following the second crash, CEO Muilenburg stepped down in December 2019 and Boeing
Chairman David Calhoun became the CEO at the start of the new year. Boeing acknowledged that concerns
about trust led to the change. CFO Greg Smith in a note to employees expressed, “The [Boeing] Board
determined that a change in leadership was necessary to restore confidence in the company moving forward
and that we will proceed with a renewed commitment to full transparency, including effective and proactive
communications with the FAA, other global regulators and our customers.”
A year after the grounding, returning the Max to service remained Boeing’s top-priority. Industry observers
predicted possible bankruptcy and government bailout for Boeing. Airbus surpassed Boeing in 2019 as the
world’s largest plane maker (Slotnick, 2020). Aviation pundits and investors alike ponder the same question:
after a series of grave missteps, will Boeing be able to make a comeback?
Discussion Questions
• 1.
What factors contributed to the 737 Max crashes in Indonesia and Ethiopia?
• 2.
Following the crashes, what managerial and public relations missteps contributed to the business
fiasco for Boeing? How could Boeing have handled the crisis differently?
• 3.
In your opinion, are the aviation regulatory authorities complicit in the alleged negligence?
• 4.
Which stakeholders were affected by this crisis? Could Boeing better manage its priorities around its
stakeholders?
• 5.
What lessons did Boeing executives learn from this crisis?
• 6.
In your opinion, can Boeing be turned around? What subsequent steps could its managers and top
executives take to manage its reputation to regain public trust?
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Dominance to Near Demise: Can Boeing Return to Its Position as the
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Acknowledgment
We acknowledge Sutapa Bhattacharjee, associate professor of management at the Institute of Business
Administration, University of Dhaka. Thank you for your preliminary work on Boeing.
Further Reading
Boeing Company. (2020). 2019 annual report. https://s2.q4cdn.com/661678649/files/doc_financials/2019/ar/
2019_Boeing_Annual_Report.pdf
Federal Aviation Administration Report #AV2020037 (2020, June 29). Timeline of activities leading to the
certification of the Boeing 737 MAX 8 aircraft and actions taken after the October 2018 Lion Air accident.
https://www.oig.dot.gov/sites/default/files/
FAA%20Oversight%20of%20Boeing%20737%20MAX%20Certification%20Timeline%20Final%20Report.pdf
Gröndahl, M. , Collins, K. , & Glanz, J. (2019, March 29). The dangerous flaws in Boeing’s automated system.
New York Times. https://www.nytimes.com/interactive/2019/03/29/business/boeing-737-max-8-flaws.html
Rivers, M. (2019, June 29). Boeing loses another 737 MAX customer. Forbes. https://www.forbes.com/sites/
martinrivers/2019/06/29/boeing-loses-another-737-max-customer/#185b5841ad8a
References
Allied Pilots Association Release. (2019a, March 12). Allied pilots association remains confident in Boeing
737 Max. Alliedpilots.org. https://www.alliedpilots.org/News/ID/6769/Allied-Pilots-Association-RemainsConfident-in-Boeing-737-Max
Boeing Company. (2020). 2019 annual report. https://s2.q4cdn.com/661678649/files/doc_financials/2019/ar/
2019_Boeing_Annual_Report.pdf
Bogaisky, J. (2019, August 12). How airlines are defending dormant 737 max jets from the ravages of
corrosion,
insects
and
time.
Forbes.
https://www.forbes.com/sites/jeremybogaisky/2019/08/12/
boeing-737-max-desert-storage/#2c6c19151e61
Bogaisky, J. (2020, April 3). This big Boeing 737 MAX order cancellation could be start of a wave. Forbes.
https://www.forbes.com/sites/jeremybogaisky/2020/04/03/boeing-737-max-airbus-avoloncancel/#2111fc0dfa37
European Commission. (2017, March). Annual analyses of the EU air transport market 2016. Europa.
https://ec.europa.eu/transport/sites/transport/files/2016_eu_air_transport_industry_analyses_report.pdf
Federal Aviation Administration Report #AV2020037 (2020, June 29). Timeline of activities leading to the
certification of the Boeing 737 MAX 8 aircraft and actions taken after the October 2018 Lion Air accident.
https://www.oig.dot.gov/sites/default/files/
FAA%20Oversight%20of%20Boeing%20737%20MAX%20Certification%20Timeline%20Final%20Report.pdf
Gelles, D. (2019a, June 19). Boeing criticized for 737 Max crisis at house hearing. New York Times.

Gelles, D. (2019b, August 7). Boeing 737 Max needs full F.A.A. review, crash families say. New York Times.

Gelles, D. , & Kitroeff, N. (2020, January 7). Boeing and F.A.A. faulted in damning report on 737 Max
certification. New York Times. https://www.nytimes.com/2019/10/11/business/boeing-737-max.html
Gröndahl, M. , Collins, K. , & Glanz, J. (2019, March 29). The dangerous flaws in Boeing’s automated system.
New York Times. https://www.nytimes.com/interactive/2019/03/29/business/boeing-737-max-8-flaws.html
Irigoyen, S. (2019). Global commercial aircraft manufacturing. IBISWorld. https://my-ibisworldcom.libproxy.uww.edu:9443/download/gl/en/industry/1050/1/0/pdf
Josephs, L. (2020, March 11) Boeing 737 Max cancellations pile up in bleak start to the year. CNBC News.
https://www.cnbc.com/2020/03/11/boeing-737-max-cancellations-pile-up-in-bleak-start-to-the-year.html
Kitroeff, N. , & Gelles, D. (2020, March 6). “It’s more than I imagined”: Boeing’s new C.E.O. confronts
its
challenges.
New
York
Times.
https://www.nytimes.com/2020/03/05/business/boeing-davidcalhoun.html?te=1&nl=dealbook&emc=edit_dk_20200306&campaign_id=4∈stance_id=16537&segment_id=21938&user
Kitroeff, N. , Gelles, D. , & Nicas, J. (2019, July 27). The roots of Boeing 737 Max crisis: A regulator relaxes
its oversight. New York Times. https://www.nytimes.com/2019/07/27/business/boeing-737-max-faa.html
Nicas, J. , & Creswell, J. (2019, April 8). Boeing’s 737 Max: 1960s design, 1990s computing power and paper
manuals. New York Times. https://www.nytimes.com/2019/04/08/business/boeing-737-max-.html
Nicas, J. , Kitroeff, N. , Gelles, D. , & Glanz, J. (2019, June 1). Boeing built deadly assumptions into
737 Max, blind to a late design change. New York Times. https://www.nytimes.com/2019/06/01/business/
Page 13 of 14
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SAGE Business Cases
boeing-737-max-crash.html
Reed, T. (2019, August 10). New report puts impact of Boeing 737 MAX grounding at $4.1 billion. Forbes.
https://www.forbes.com/sites/tedreed/2019/08/10/new-report-puts-impact-of-boeing-737-max-groundingat-41-billion/#299d25161fdf
Russell, K. , & Seshagiri, A. (2019, March 15). Why the 737 that crashed is Boeing’s best-selling plane ever.
New York Times. https://www.nytimes.com/interactive/2019/03/15/business/boeing-737-max-popularity.html
Slotnick, D. (2019, August 27). A Russian company is suing Boeing for hundreds of millions of dollars over
its 737 Max order, and it could be the first of dozens of similar lawsuits against the plane maker. Business
Insider. https://www.businessinsider.com/boeing-sued-737-max-cancelled-orders-2019-8
Slotnick, D. (2020, March 18). How Airbus became Boeing’s greatest rival. Business Insider.
https://www.businessinsider.com/airbus-history-boeing-rivalry-2018-4
Trefis Research Team. (2020, January 6). How Airbus has grown over the years to dethrone Boeing
as the largest commercial aircraft maker. Forbes. https://www.forbes.com/sites/greatspeculations/2020/01/
06/how-airbus-has-grown-over-the-years-to-dethrone-boeing-as-the-largest-commercial-aircraftmaker/#31e704343a59
White, M. C. (2019, July 8). Saudi airline cancels $6B Boeing order in favor of Airbus. Who’s next? CNBC
News.
https://www.nbcnews.com/business/business-news/saudi-airline-cancels-6b-boeing-order-favorairbus-who-s-n1027441
Wolfe, K. A. (2019, March 12). Pilots complained at least 5 times about Boeing 737 MAX problems, records
show. Politico. https://www.politico.com/story/2019/03/12/pilots-boeing-737-1266090
Zarroli, J. (2019, July 24). As 737 Max grounding drags on, Boeing’s bottom line takes a hit. National Public
Radio.
https://www.npr.org/2019/07/24/744795154/as-737-max-grounding-drags-on-boeings-bottom-linetakes-a-hit
http://dx.doi.org/10.4135/9781529761320
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Dominance to Near Demise: Can Boeing Return to Its Position as the
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Dominance to Near Demise: Can Boeing Return to Its
Position as the World’s Largest Aircraft Manufacturer?
Case
Author: Rimi Zakaria & Dale DeJong
Online Pub Date: January 04, 2021 | Original Pub. Date: 2021
Subject: Strategic Management & Business Policy, Business, Government, & Society, Crisis
Management
Level: | Type: Indirect case | Length: 6116
Copyright: © Rimi Zakaria and Dale DeJong 2021
Organization: Boeing | Organization size: Large
Region: Eastern Africa, Northern America, South-Eastern Asia | State:
Industry: Air transport| Transportation and storage
Originally Published in:
Publisher: SAGE Publications: SAGE Business Cases Originals
DOI: http://dx.doi.org/10.4135/9781529761320 | Online ISBN: 9781529761320
SAGE
© Rimi Zakaria and Dale DeJong 2021
SAGE Business Cases
© Rimi Zakaria and Dale DeJong 2021
This case was prepared for inclusion in SAGE Business Cases primarily as a basis for classroom discussion
or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein
shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use
only within your university, and cannot be forwarded outside the university or used for other commercial
purposes. 2021 SAGE Publications Ltd. All Rights Reserved.
The case studies on SAGE Business Cases are designed and optimized for online learning. Please refer to
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http://dx.doi.org/10.4135/9781529761320
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Dominance to Near Demise: Can Boeing Return to Its Position as the
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Abstract
Many companies, from local to large multinational firms, face fierce competition around the
world. In response, managers often take aggressive and hasty actions. Many of these actions
have major financial and reputational implications. Underscoring two deadly crashes that made
global news headlines, this case details a series of spiraling events that brought the world’s
largest aircraft manufacturer to its knees. The case analyzes the technical, managerial, market,
and regulatory issues that eventually contributed to the grounding and halt of production of
Boeing’s best-selling model. Managerial and ethical questions are raised on the topics of product
design, safety, and negligence. The case challenges students to consider the dilemmas around
managing the interests of various stakeholders as well as the dual pressures of balancing
financial profit vis-à-vis …
Case
Learning Outcomes
By the end of this case study, students should be able to:
• describe the unique nature and structure of the global aircraft manufacturing industry;
• identify the inter-dependency of manufacturers, supply-chain partners, regulators, buyers, and the
end customers in a highly technical and complex industry;
• discuss the issues of product design and safety that affect organizational reputation, financial
performance, and survival;
• underscore the importance of managerial response, corporate communication, and public relations
during organizational crisis;
• identify various stakeholder interests and their roles in promoting managerial transparency and
accountability.
Introduction
On a spring morning in 2019, Boeing chief executive officer Dennis Muilenburg woke up to the worst
nightmare of his career. An Ethiopian Airlines flight involving the Boeing 737 Max (commonly referred to as the
Max) aircraft reportedly crashed in Addis Ababa, the capital of Ethiopia. This was the second global headline
involving his company within a five-month span. The first crash in October 2018 involved a Lion Air flight
that plunged into the Java Sea 12 minutes after taking off from Jakarta, Indonesia. Both of the crashes cost
the lives of 346 people who had flown on the Max. Preliminary facts revealed eerily similar final minutes for
both of the crashes. Experts suggested that the cause may have been due to the malfunction of the anti-stall
system in the Max, which was designed to force the plane to nosedive to avoid a stall.
Airline regulatory authorities around the world, as well as the Federal Aviation Administration (FAA) in the
United States, gradually ordered the grounding of 387 of the Max aircrafts (Bogaisky, 2019). Quickly after its
introduction to the market, the Max became the highest-selling liner for Boeing (Russell and Seshagiri, 2019).
These aircrafts were used by 376 airlines around the world. These events were occurring when Boeing was
working on 4,547 outstanding orders of the Max, the future of which became suddenly and unquestionably
uncertain.
The Aftermath of the Crashes
As the world’s leading aircraft manufacturer and the largest American industrial exporter (Irigoyen, 2019),
Boeing scrambled to get the Max reapproved. These tragic crashes and design missteps, combined with
the grounding of planes, cost Boeing in several ways. First, aggrieved families filed lawsuits against Boeing
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Dominance to Near Demise: Can Boeing Return to Its Position as the
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and the company had to provide monetary compensation to the families affected by the crashes. Second,
by July, Boeing anticipated reporting an after-tax charge of USD 4.9 billion (Reed, 2019) “in connection with
an estimate of potential concessions and other considerations to customers for disruptions related to the 737
MAX grounding and associated delivery delays.” Third, Boeing’s share prices became volatile as its relations
with airline clients and its reputation suffered. Fourth, the underutilized supply-chain, staffing, storage,
logistical, and maintenance headaches related to the Max line further compounded Boeings operational
predicament. Finally, as an important economic engine for the country, the problems at Boeing presented
broader ramifications; this led some economists to predict that the U.S. GDP would suffer noticeably.
The longer the Max remained grounded, the more difficult it was for Boeing to maintain its relationships. Client
airlines had mixed reactions to the problems at Boeing, variously affecting relationships. Amid the chaos,
Boeing signed deals for 200 Max jets and 787-Dreamliner airplanes with aviation giant International Airlines
Group (IAG) at the Paris Air Show, 2019 (Zarroli, 2019). The larger airlines had not promptly canceled orders.
Rather, they appeared to be taking a wait-and-see approach. Although most of the major carriers had not
canceled orders for the Max, some had reconfigured their orders. Orders for other Boeing products continued
to sell at a normal pace (Josephs, 2020). However, smaller carriers Avia and Flyadeal had canceled deals for
65 planes (Slotnick, 2019; White, 2019). In addition, the plane-leasing firm Avolon canceled their order for 75
planes (Bogaisky, 2020). These cancelations did not occur immediately after the crashes but over a span of
months. Although no order cancelation could be taken lightly, the modest number of cancelations could be
viewed acceptable given the magnitude of the situation. With orders of more than 4,500 planes on the books,
the cancelation of a few smaller orders was not disastrous (Slotnick, 2019).
One of the more noteworthy aspects of the Max crashes was the effect on public reactions. Grieving family
members found Boeing’s response insensitive and arrogant rather than signaling concern and empathy.
Boeing’s delayed response to the crashes followed by denial, avoidance, and fix-the-blame approach created
noticeable skepticism among many passengers, airlines, and the media. The studies conducted with regards
to the opinions by the public showed a general distrust with the Max (White, 2019). Passengers expressed
their preferences to fly another plane. Experts believed that Boeing had “caused a global aviation crisis of
trust.” (Gelles, 2019b)
The financial situation for the company depicted a concerning story. Yearend financial statements for 2019
were reported as the worst in Boeing’s history. The revenues for 2019 were (in millions) USD 76,559 and USD
101,127 for 2018. This represents a 24% loss in revenues in one year. The net (loss)/earnings comparison is
also very bleak. In 2019, Boeing reported a loss of USD 636 million, while showing USD 10.46 billion profit
in 2018 (Boeing, 2020). Operating margins for 2019 were at a 2.6% loss while in 2018 they were a positive
11.9%. With losses in revenues down USD 25 billion, net earnings down almost USD 11 billion, operating
margins negative, and the Max grounded, Boeing faced very serious financial difficulties, possibly indicating
an existential crisis for the company.
Data 1. Boeing Revenues
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Data 2. Boeing Gross Profit
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Data 3. Boeing Profit Margin
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The Max, Its Design Issues, and What Caused the Crashes
The new 737 Max aircraft was built on decades-old systems that date back to the original model debuted
in 1967. The predecessor of the Max—the 737–800—had been a relatively reliable model with few issues.
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To ensure efficiency and competitive advantage in the market, Boeing’s strategy was to update the existing
model rather than to build anew from scratch. Because the plane was a modified design, Boeing was able to
develop and roll it out faster.
The Max featured larger engines than the former 737s. The engines were mounted on the wings, which
were positioned higher than where they were located in the previous models. A makeshift anti-stall system
was installed to create aerodynamics that would push the nose up or down in certain configurations. If
the angle of attack (AOA) of a plane—the angle between oncoming air or wind and a reference line of an
aircraft—becomes too steep (i.e., more than 10 degrees), the plane engines may stall, leading to a crash
(Gröndahl et al., 2019). To automatically control the stability of the plane, Boeing introduced the Maneuvering
Characteristics Augmentation System (MCAS). The MCAS was designed to receive data from the AOA
sensor. The AOA sensor is a small vane on the nose of the plane that measures the pitch of the aircraft as
it moved into the headwind. The design of the new flight control system relied on the information from only a
single AOA sensor (of the two sensors) for the MCAS to activate. If the AOA sensed the plane pitching up too
high, MCAS was designed to take over the control from both of the pilots. It was designed to automatically
and repeatedly force the nose of the plane down (FAA Report, 2020).
In both crashes, the MCAS of the Max received erroneous data from one sensor (see Figure 1). In previous
models of the 737, the MCAS would activate upon receiving data from two independent sensors. Reacting
to the erroneous data, the MCAS sent the planes into about a 40-degree angle of irrecoverable nosedives
(Gelles, 2019b; Gröndahl et al., 2019). Furthermore, the absence of an electric alert system in case of
hazardous malfunctions blindsided the pilots to the sudden disruption as they failed to gain manual control.
The 737-liner continued to essentially follow the controls of the original Boeing 737 introduced more than half
century ago (Nicas & Creswell, 2019).
Although Boeing completed a major change in 2016 to the parameters under which the MCAS would activate,
it did not submit the revised documents for FAA approval. Boeing subsequently removed the references to
the MCAS from the Flight Crew Operations Manual and training differences tables available to the aircraft
operators (FAA Report, 2020). As a result, pilots were not carefully and extensively trained regarding the
implications of the MCAS activation. Considering that the updates were reportedly only incremental, the
newer models of the aircraft assumed that only marginal pilot training was necessary. To cut training costs
for airlines, pilots assigned to the Max jets were offered only a short course on the MCAS modifications
using handheld devices (i.e., using the iPad as opposed to a flight simulator; Nicas et al., 2019). FAA officials
responsible for determining pilot training needs were unaware of the actual training requirements (Nicas &
Creswell, 2019).
Countries around the world have national aviation authorities overseeing airline safety standards and
regulations (e.g., the Directorate General of Civil Aviation in Indonesia and the Ethiopian Civil Aviation
Authority in Ethiopia). Given the global nature of the industry, these authorities may collaborate. For instance,
France’s government agency, the Bureau d’Enquêtes & d’Analyses, was responsible for decoding the black
box recordings in the Ethiopian crash.
In the months leading to the 2019 crash, several pilots flying for the US airlines reported experiencing glitches
during critical moments while flying their Max jets (Wolfe, 2019). There were at least five such complaints
reported prior to the crashes. Unfortunately, neither Boeing nor the FAA resolved the issues.
Figure 1: Sketches of Scenarios in Which the MCAS Receives Erroneous Data From
the Sensor (Top) Shortly Before and (Bottom) After Taking Control and Activating the
System
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The U.S. Senate Hearings
Seven months after the Ethiopian Airlines crash and on the first anniversary of the first crash in Indonesia,
CEO Muilenburg and other Boeing executives appeared before the U.S. lawmakers. The Commerce
Committee of the U.S. Senate arranged the hearings. Family members of victims of both crashes were in
attendance. They held up large photographs of their loved ones. The hearing lasted for two days. The Senate
members of the committee denounced the executives for safety problems in the Max jet. The CEO finally took
public questions about whether Boeing downplayed safety concerns, withheld design flaws from regulators,
and tried to cover up its mistakes and missteps.
The media reported (Josephs, 2019) that Muilenburg was remorseful and acknowledged the technical issues:
“On behalf of myself and the Boeing company, we are sorry, we are deeply and truly sorry,” further adding,
“We’ve made mistakes and we got some things wrong.” When asked whether there were any concerns about
the system that could have saved the people on the Ethiopian Airlines flight, Muilenburg replied: “I think about
that decision over and over again. If we knew everything back then that we know now we would have made
a different decision.”
It became apparent that Boeing was aware that the MCAS had a problematic single point control system two
years before Max was cleared to fly. The House Transportation Committee released a redacted email during
the hearing that showed a Boeing engineer raising concerns about relying on just one sensor to trigger the
system. It further became evident that Boeing also knew its assumptions about pilot reactions to MCAS could
be wrong. Boeing developed MCAS around the startling assumption that if the system activated erroneously,
pilots would recognize and respond in four seconds. Even though the company never told pilots about the
system, it convinced the FAA that the system ran only in the background, and therefore did not need to be
included in training and flight deck manuals (FAA Report, 2020). Finally, in one of the most heated exchanges
during the hearings, Muilenburg acknowledged that after the first crash and before the second, he knew about
internal messages between technical pilots that discussed “egregious” problems with the MCAS system. He
told lawmakers he did not fully read the messages. He turned them over to company lawyers and only recently
became fully aware of their content.
Table 1 presents a timeline of the major events for the Max, from certification to discontinuation, and their
implications for the major stakeholders.
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Table 1. Timeline of Major Events From Certification to Discontinuation of the Max
Month
Major event
and year
Stakeholder implications
March
2017
Max Certified
by
FAA,
allowing
Airlines received economical plane with long distance capabilities and seating
Boeing
to
for 32 more passengers and could pool pilots from 737NG. Pilots could fly two
deliver the Max
airplanes, 737NG and the Max, without having to be certified for each one. No
to customers.
additional simulator training needed to fly Max. Suppliers did not have to create
Later in the
new parts, since the fuselage and wings were the same, saving money to accrue
year, another
economies of scale.
agency
also
certifies
the
Max
March
2019
Passengers and Surviving Families: Some 157 lives lost in the crash. Lawsuits
Second crash
filed by grieving family members. Stockholders: Boeing stocks became volatile.
of Max and
Airlines had to rearrange schedules, cancel flights, layoff personnel, reconsider
subsequent
expansion plans and rearrange financing of Max putting a strain on finances.
grounding of
Southwest Airlines, the largest user of the Max, saw 4.5% of its fleet grounded and
the
plane
their stock plummeted 4%. Pilots found themselves grounded also without planes
worldwide
to fly. Suppliers expressed concerns over future orders for parts.
1. Release of
the Lion Air
Flight
610
investigation
report
October
2019
Boeing Chief Engineer testified the safety assumptions of the Max was wrong.
2. Boeing CEO
Grieving Family Members of the Passengers observed Boeing CEO takes
Dennis
apologetic stance in front of the lawmakers. Regulator: FAA’s roles scrutinized by
Muilenburg’s
the lawmakers. Airlines given timelines for the return of the Max and to make plans
testimony
at
for putting the aircraft back into service. Suppliers were to ready production lines
Congress
to complete orders that had been delayed.
assuring
lawmakers that
similar
accidents
would
not
happen.
Former CEO walked away without any severance pay, but received USD 60
Boeing CEO million in stocks and pension benefit. New CEO to receive USD 1.4 million base
Dennis
salary. In addition, a USD 10 million in stocks and incentives as well as a USD
December Muilenburg
7.5 million in bonuses payable on the achievement of several key performance
2019
fired
and indicators, including the Max’s full safe return of service. Airlines given new
replaced
by timelines for the return of the Max and found themselves continually adapting to
David Calhoun Boeing’s forecasts. Pilots were hopeful to return to work but continually thwarted
by unreliable timelines. Suppliers had to change production line estimates and lay
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off personnel.
January
2020
Airlines to make new arrangements for planes to replace the orders for the Max,
rearrange expansion programs, reassign and lay off personnel. Pilots to find work
Boeing’s
and to obtain additional certification for new aircraft purchased to replace Max.
agreement to
Suppliers and subcontractors to face possible layoff of personnel due to loss of
temporarily
orders, financials and logistics to be revised in light of lost income and possible
discontinue
downsizing with lack of orders. Communities where the airlines, suppliers, and
production of
subcontractors were located were to be affected by layoffs. U.S. Economy:
Max
Numerous estimates suggest that the shutdown could take a half-percentage point
off of the US GDP in the first quarter.
Whose Responsibility?
To modernize and improve functionality of their airplanes, plane manufacturers periodically update their
aircrafts. For instance, Boeing and Airbus installed a variety of new AOA sensors in their new models, the
737 Max and Airbus A320neo, respectively. While Boeing designed the Max to rely on only one AOA sensor
to activate the MCAS (i.e., downsizing from two sensors previously), its European counterpart Airbus added
three more sensors for safety. Boeing downplayed the risk of relying on only one sensor; it never submitted
an updated safety assessment of the MCAS modification to the agency (Kitroeff et al., 2019). The Max’s chief
technical pilot reportedly requested FAA approval to omit mentioning the MCAS in the Flight Crew Manual
(Nicas et al., 2019). For the MCAS overhaul, Boeing never submitted a formal review. This lapse led to the
MCAS approval without any independent assessment.
Many Boeing employees involved in building, testing, and approving the MCAS reported that they had not
fully understood the changes. Based on misguided assumptions, engineers made critical decisions, affecting
design, certification, and training for the Max. In an investigation, current and former employees at Boeing
and the FAA expressed that they had assumed the system relied on more sensors and would rarely, if ever,
activate (Nicas et al., 2019). Boeing employees expressed their lack of confidence in the company and the
FAA (Kitroeff & Gelles, 2020): “This airplane is designed by clowns [Boeing’s top management], who are in
turn supervised by monkeys [FAA].”
Pilots were found to be unaware of the MCAS taking over the controls on flight. Investigation reports from
the crashes revealed harrowing details of the final minutes of the crashes as experienced in the cockpit. The
pilots of the Lion Air Flight 610 initially disengaged the MCAS and recovered from the drop. But air traffic
control noted they continued to experience a flight control problem. Approximately 8 minutes prior to plunging
into the Java Sea, Max’s computer system activated 20 times and had finally forced the plane’s nose down.
The Ethiopian Airlines Flight 302’s cockpit voice data recorder showed that shortly after takeoff, the reading of
the left AOA sensor erroneously deviated from the right one. The left sensor reached 74.5 degrees while the
right AOA sensor value showed 15.3 degrees. The MCAS activated autopilot mode multiple times per design,
which caused the plane to nosedive. The pilots managed to disengage the MCAS along with the trim system,
which stopped the nose from dropping momentarily. Owing to the Max’s faulty recovery technique, disabling
the electronic trim system had also deactivated the motor that could help to turn the trim wheel. The tragedy
was compounded by a pilot error. Distracted by the runaway trim stabilizer and the fact that the plane was
pointing down, the pilots failed to reduce the engine power after takeoff. This made the aerodynamic forces
even stronger causing the plane to blast forward at full thrust.
Allied Pilots Association (APA) of American Airlines, representing 15,000 pilots, for instance, initially and
publicly remained confident in the Max and their pilots’ ability to fly it safely. A few months following the
second crash, the APA President Captain Daniel Carey stated in an APA Release (2019a), “The huge error of
omission is that Boeing failed to disclose the existence of MCAS to the pilot community. The final fatal mistake
was, therefore, the absence of robust pilot training in the event that the MCAS failed.” He further added on the
role of FAA, stating, “With regard to the public policy issues generated by the fatal MAX crashes, the foremost
and most urgent, in my view, is assessment of the adequacy of the FAA aircraft certification process.”
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Analysts perceived these accidents to bear a pattern of deep-seated cultural and managerial failures at
Boeing. The top-level executives and engineers were made aware of the MCAS issues in the form of
complaints and enquiries about the glitches. The executives chose to remain passive, or even actively ignore
these early signs of a fatal problem. After the crash in 2018, Boeing was quick to question the ability of
the foreign pilots. Discounting all possible managerial responses following the 2019 crash, CEO Muilenburg
promptly negotiated with FAA for its support not to ground the 737 Max. His underestimation of the crisis
eventually eroded Boeing’s relationship not only with the FAA, but also with the US Congress, its airline
customers, pilots, suppliers, and other important stakeholders. After the emergence of various media reports
and multiagency investigations identifying his reckless inaction combined with his failure to return the planes
to flight, Boeing eventually replaced Muilenburg with David Calhoun. In an interview with the press (Kitroeff
& Gelles, 2020), new CEO Calhoun finally expressed, “If anybody ran over the rainbow for the pot of gold on
stock, it would have been him [Muilenburg]” suggesting that his predecessor had taken many risks to drive
Boeing’s stock price higher.
According to a multiagency task force report by the Joint Authorities Technical Review, the FAA lacked
the technical ability to effectively inspect Boeing’s claims about the Max. The FAA reportedly relied heavily
on Boeing employees to vouch for its aircraft’s safety (Gelles and Kitroeff, 2020). An FAA group, the
Boeing Aviation Safety Oversight Office, was tasked with certifying Boeing aircrafts. Compared with Boeing’s
technical expertise and manpower, this FAA group was understaffed and inept, according to Gelles and
Kitroeff, (2019a). Consequently, the FAA assigned routine tasks to Boeing rather than handling them inhouse.
The FAA relied on Boeing engineers to examine their own aircrafts (Gelles & Kitroeff, 2019). By 2018, the
FAA entrusted Boeing to certify 96% of its own work (Kitroeff et al., 2019). Federal Aviation Administration
managers often delegated critical documents back to Boeing and encouraged other employees to do the
same (Kitroeff et al., 2019). The FAA reportedly only took care of the paperwork while Boeing self-inspected
its safety regulations to approve certifications. When two specialist engineers working on the MCAS quit,
leaving inexperienced engineers in place, FAA reportedly handed over the MCAS approval responsibility to
Boeing.
The Associated Administrator of the FAA, at the time, was said to be favorable to Boeing (Gelles, 2019a).
Following the 2018 crash, despite the reports questioning proper functioning of the the MCAS and despite
their fuzzy understanding of it, the FAA initially stood with Boeing. Independent investigations by national
aviation authorities found this design flaw not caught by FAA allowed the subsequent crash in Ethiopia.
It was several days after the second crash that the FAA ordered the temporary grounding of the Max operated
by the US airlines or in the US territory. The agency made this decision as a result of the data gathering
process and new evidence collected at the site of the Ethiopia crash. The grounding will remain in effect
pending further investigation, including examination of information from the aircraft’s flight data recorders
and cockpit voice recorders. The agency was to continue to investigate. Months following the crashes, with
increased scrutiny of the FAA’s credibility, its typical high degree of delegation was off the table. With demands
from European and other foreign regulators, the FAA agreed to perform a far-reaching new safety analysis of
the Max’s flight controls.
The Global Aircraft Manufacturing Industry
Owing to its highly complex and resource-intensive nature, the aircraft manufacturing industry is inherently
globally dispersed. The industry primarily depends on downstream supply-chain demand from airlines, which
make up the bulk of the major markets for the industry players. The market operates in a near duopoly.
The industry generated more than USD 700 billion annually, with the U.S. company Boeing and European
company Airbus dominating as the frontrunners (Irigoyen, 2019). Aircraft manufacturers work with other
supporting industries and supply-chain partners that make the software and technical components. The
supporting industries are also globalized, with many aircraft manufacturers outsourcing their parts and
segment production operations to other industry operators, some of which are in lower labor cost countries.
The manufacturers Boeing and Airbus ultimately sell their finished products to the nationally and privately
held airlines around the world.
The competition between Boeing and Airbus exemplifies one of the greatest rivalries in the business world.
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Forbes reported a highly competitive market for these two companies in terms of commercial aircraft
deliveries prior to the crisis. Figure 2 shows (Trefis Research Team, 2020), for instance, the number of aircraft
unit deliveries Boeing and Airbus made yearly to various airlines and other buyers around the world. These
figures further testify the extent of rivalry between Boeing and Airbus in vying for a greater market share. The
other competitors, such as, Brazil-based Embraer and Canada-based Bombardier, focus on smaller, regional
jets.
Figure 2. Aircraft Deliveries by Boeing and Airbus
Source: Prepared by authors based on Trefis Research Team Data, 2020
Between 2014 and 2019, the average industry growth rate had been 1.7% (Irigoyen, 2019). The 2016–2035
Market Forecast and Current Market Outlook showed that both Airbus and Boeing had a positive outlook and
intentions to increase production. Both of these rivals had similar worldwide demand forecasts for the next
few decades for various types of their aircrafts (single-aisle, twin-aisle, etc.; see Figure 3). The deliveries in a
recent year according to the European Commission (2017; see Figure 4) show a neck-and-neck rivalry. This
exemplifies the crisis the industry would face, if Boeing were to go bankrupt or be found unreliable. Airbus
would undoubtedly dominate the market. However, it would likely result in major aircraft delivery shortages
given the time-consuming and sophisticated production processes in view of the already existing delivery
backlog.
Figure 3. Boeing and Airbus Market Outlook for 2016–2035
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Source: Prepared by authors.
Figure 4. Boeing Versus Airbus Global Deliveries (Aircraft Units) by Region in 2015
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Source: Prepared by authors.
Considering consumer safety in this industry, aircraft manufacturers are not the only ones responsible.
Various national and international agencies, for instance the FAA in the United States, are accountable for
determining safety regulations, certification, training needs, and modifications in their respective regions. The
General Aviation Manufacturers Association (GAMA) is a trade association that promotes general welfare,
safety, interests, and activities of the global business and general aviation industry. The GAMA works
with companies, associations, and airline communities to create a better understanding of general aviation
manufacturing, maintenance, repair, and overhaul through certification systems and regulations.
Is a Turnaround Possible?
The year 2020 has barely proved to be better than previous years for Boeing, at least at the time of
writing (June 2020). Though scheduled to commercially return by the middle of 2020, the subsequent global
pandemic of the COVID-19 brought only further uncertainty for the Max. Boeing continued to suffer along with
the broader aviation industry as travel bans around the world slowed new bookings. Financial and aviation
industry analysts anticipated significant and prolonged decline in air traffic for the subsequent year. This could
prompt many airlines to defer purchases of new planes, causing a demand slump for Boeing.
As of March 2020, the Max remained grounded. The production halt affected hundreds of suppliers and
millions of passengers in the United States and abroad. The timing of the return of the Max jet to service
remained uncertain, while Boeing continued to work on fixing the software issues. Rather than making new
jets, Boeing focused on delivering the 400 Max planes to its clients (i.e., airliners around the world). The FAA
took the rare step of publicly admonishing Boeing for pushing an unrealistic timeline for the planes’ return to
service and for appearing to pressure the regulator.
Several months following the second crash, CEO Muilenburg stepped down in December 2019 and Boeing
Chairman David Calhoun became the CEO at the start of the new year. Boeing acknowledged that concerns
about trust led to the change. CFO Greg Smith in a note to employees expressed, “The [Boeing] Board
determined that a change in leadership was necessary to restore confidence in the company moving forward
and that we will proceed with a renewed commitment to full transparency, including effective and proactive
communications with the FAA, other global regulators and our customers.”
A year after the grounding, returning the Max to service remained Boeing’s top-priority. Industry observers
predicted possible bankruptcy and government bailout for Boeing. Airbus surpassed Boeing in 2019 as the
world’s largest plane maker (Slotnick, 2020). Aviation pundits and investors alike ponder the same question:
after a series of grave missteps, will Boeing be able to make a comeback?
Discussion Questions
• 1.
What factors contributed to the 737 Max crashes in Indonesia and Ethiopia?
• 2.
Following the crashes, what managerial and public relations missteps contributed to the business
fiasco for Boeing? How could Boeing have handled the crisis differently?
• 3.
In your opinion, are the aviation regulatory authorities complicit in the alleged negligence?
• 4.
Which stakeholders were affected by this crisis? Could Boeing better manage its priorities around its
stakeholders?
• 5.
What lessons did Boeing executives learn from this crisis?
• 6.
In your opinion, can Boeing be turned around? What subsequent steps could its managers and top
executives take to manage its reputation to regain public trust?
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Acknowledgment
We acknowledge Sutapa Bhattacharjee, associate professor of management at the Institute of Business
Administration, University of Dhaka. Thank you for your preliminary work on Boeing.
Further Reading
Boeing Company. (2020). 2019 annual report. https://s2.q4cdn.com/661678649/files/doc_financials/2019/ar/
2019_Boeing_Annual_Report.pdf
Federal Aviation Administration Report #AV2020037 (2020, June 29). Timeline of activities leading to the
certification of the Boeing 737 MAX 8 aircraft and actions taken after the October 2018 Lion Air accident.
https://www.oig.dot.gov/sites/default/files/
FAA%20Oversight%20of%20Boeing%20737%20MAX%20Certification%20Timeline%20Final%20Report.pdf
Gröndahl, M. , Collins, K. , & Glanz, J. (2019, March 29). The dangerous flaws in Boeing’s automated system.
New York Times. https://www.nytimes.com/interactive/2019/03/29/business/boeing-737-max-8-flaws.html
Rivers, M. (2019, June 29). Boeing loses another 737 MAX customer. Forbes. https://www.forbes.com/sites/
martinrivers/2019/06/29/boeing-loses-another-737-max-customer/#185b5841ad8a
References
Allied Pilots Association Release. (2019a, March 12). Allied pilots association remains confident in Boeing
737 Max. Alliedpilots.org. https://www.alliedpilots.org/News/ID/6769/Allied-Pilots-Association-RemainsConfident-in-Boeing-737-Max
Boeing Company. (2020). 2019 annual report. https://s2.q4cdn.com/661678649/files/doc_financials/2019/ar/
2019_Boeing_Annual_Report.pdf
Bogaisky, J. (2019, August 12). How airlines are defending dormant 737 max jets from the ravages of
corrosion,
insects
and
time.
Forbes.
https://www.forbes.com/sites/jeremybogaisky/2019/08/12/
boeing-737-max-desert-storage/#2c6c19151e61
Bogaisky, J. (2020, April 3). This big Boeing 737 MAX order cancellation could be start of a wave. Forbes.
https://www.forbes.com/sites/jeremybogaisky/2020/04/03/boeing-737-max-airbus-avoloncancel/#2111fc0dfa37
European Commission. (2017, March). Annual analyses of the EU air transport market 2016. Europa.
https://ec.europa.eu/transport/sites/transport/files/2016_eu_air_transport_industry_analyses_report.pdf
Federal Aviation Administration Report #AV2020037 (2020, June 29). Timeline of activities leading to the
certification of the Boeing 737 MAX 8 aircraft and actions taken after the October 2018 Lion Air accident.
https://www.oig.dot.gov/sites/default/files/
FAA%20Oversight%20of%20Boeing%20737%20MAX%20Certification%20Timeline%20Final%20Report.pdf
Gelles, D. (2019a, June 19). Boeing criticized for 737 Max crisis at house hearing. New York Times.

Gelles, D. (2019b, August 7). Boeing 737 Max needs full F.A.A. review, crash families say. New York Times.

Gelles, D. , & Kitroeff, N. (2020, January 7). Boeing and F.A.A. faulted in damning report on 737 Max
certification. New York Times. https://www.nytimes.com/2019/10/11/business/boeing-737-max.html
Gröndahl, M. , Collins, K. , & Glanz, J. (2019, March 29). The dangerous flaws in Boeing’s automated system.
New York Times. https://www.nytimes.com/interactive/2019/03/29/business/boeing-737-max-8-flaws.html
Irigoyen, S. (2019). Global commercial aircraft manufacturing. IBISWorld. https://my-ibisworldcom.libproxy.uww.edu:9443/download/gl/en/industry/1050/1/0/pdf
Josephs, L. (2020, March 11) Boeing 737 Max cancellations pile up in bleak start to the year. CNBC News.
https://www.cnbc.com/2020/03/11/boeing-737-max-cancellations-pile-up-in-bleak-start-to-the-year.html
Kitroeff, N. , & Gelles, D. (2020, March 6). “It’s more than I imagined”: Boeing’s new C.E.O. confronts
its
challenges.
New
York
Times.
https://www.nytimes.com/2020/03/05/business/boeing-davidcalhoun.html?te=1&nl=dealbook&emc=edit_dk_20200306&campaign_id=4∈stance_id=16537&segment_id=21938&user
Kitroeff, N. , Gelles, D. , & Nicas, J. (2019, July 27). The roots of Boeing 737 Max crisis: A regulator relaxes
its oversight. New York Times. https://www.nytimes.com/2019/07/27/business/boeing-737-max-faa.html
Nicas, J. , & Creswell, J. (2019, April 8). Boeing’s 737 Max: 1960s design, 1990s computing power and paper
manuals. New York Times. https://www.nytimes.com/2019/04/08/business/boeing-737-max-.html
Nicas, J. , Kitroeff, N. , Gelles, D. , & Glanz, J. (2019, June 1). Boeing built deadly assumptions into
737 Max, blind to a late design change. New York Times. https://www.nytimes.com/2019/06/01/business/
Page 13 of 14
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boeing-737-max-crash.html
Reed, T. (2019, August 10). New report puts impact of Boeing 737 MAX grounding at $4.1 billion. Forbes.
https://www.forbes.com/sites/tedreed/2019/08/10/new-report-puts-impact-of-boeing-737-max-groundingat-41-billion/#299d25161fdf
Russell, K. , & Seshagiri, A. (2019, March 15). Why the 737 that crashed is Boeing’s best-selling plane ever.
New York Times. https://www.nytimes.com/interactive/2019/03/15/business/boeing-737-max-popularity.html
Slotnick, D. (2019, August 27). A Russian company is suing Boeing for hundreds of millions of dollars over
its 737 Max order, and it could be the first of dozens of similar lawsuits against the plane maker. Business
Insider. https://www.businessinsider.com/boeing-sued-737-max-cancelled-orders-2019-8
Slotnick, D. (2020, March 18). How Airbus became Boeing’s greatest rival. Business Insider.
https://www.businessinsider.com/airbus-history-boeing-rivalry-2018-4
Trefis Research Team. (2020, January 6). How Airbus has grown over the years to dethrone Boeing
as the largest commercial aircraft maker. Forbes. https://www.forbes.com/sites/greatspeculations/2020/01/
06/how-airbus-has-grown-over-the-years-to-dethrone-boeing-as-the-largest-commercial-aircraftmaker/#31e704343a59
White, M. C. (2019, July 8). Saudi airline cancels $6B Boeing order in favor of Airbus. Who’s next? CNBC
News.
https://www.nbcnews.com/business/business-news/saudi-airline-cancels-6b-boeing-order-favorairbus-who-s-n1027441
Wolfe, K. A. (2019, March 12). Pilots complained at least 5 times about Boeing 737 MAX problems, records
show. Politico. https://www.politico.com/story/2019/03/12/pilots-boeing-737-1266090
Zarroli, J. (2019, July 24). As 737 Max grounding drags on, Boeing’s bottom line takes a hit. National Public
Radio.
https://www.npr.org/2019/07/24/744795154/as-737-max-grounding-drags-on-boeings-bottom-linetakes-a-hit
http://dx.doi.org/10.4135/9781529761320
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Instructor’s Guide
Negotiating Globally
IG Appendix 4.2.3
1
IG APPENDIX 4.2.3
NOKIA AND MOTOROLA VERSUS TELSIM (STUDENT VERSION)
Mikko and Satu Rieger
Note: The authors thank three Kellogg students from Turkey—
Ömer Cagirgan, Emre Sucu, and Ömer Özvardar—for their huge
contribution to the writing of the case and their insights
into Turkish culture. Additional information was received
from the Research & Information Department of McKinsey in
Istanbul. Date of original writing: December 2005.
To boost sales, major technology vendor companies have been
lending money to customer companies, especially in emerging
markets such as Turkey, China, and Latin America, where
growth prospects seem bright. This approach is called
vendor financing. In this case, the equipment vendors lent
money to wireless carriers who in turn bought product from
the lender and in principle were to use revenues generated
by selling the equipment and minutes to pay back the loan
over time.
Two of the world’s leading mobile phone companies, Motorola
(United States) and Nokia (Finland), have been active in
vendor financing in Turkey. Nokia first entered Turkey in
the 1960s, Motorola in the 1990s. Despite good experiences
there, recently Nokia and Motorola have had to learn the
art of negotiation and dispute resolution in a Turkish
cultural setting.
This case describes Motorola and Nokia’s vendor financing
experience with the Turkish cellular phone operator Telsim
Mobil Telekomunikasyon, from making the initial deal to
provide Telsim with telecommunications equipment to
fighting to limit the economic damage after Telsim used the
loan for other operations and refused to pay the money
back. In this case, the two rivals, Motorola and Nokia,
ultimately joined forces in order to achieve the best
results.
BACKGROUND
The Turkish economy is prone to rapid fluctuations and high
inflation. A handful of rich and powerful families control
a large share of assets in Turkey, illiteracy is still an
issue (13.5 percent of the seventy million people can’t
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IG Appendix 4.2.3
2
read1), and university students are a lucky minority.
Corruption is a problem. In the Corruption Perceptions
Index 2005 (in which Iceland ranks first, Finland second,
and the United States seventeenth), Turkey ties for sixtyfifth, together with Ghana, Mexico, Panama, and Peru.2 Doing
business in Turkey requires having connections to the right
people, from leading families and businessmen to
politicians and civil servants. Mediterranean culture is
predominant in Turkey, and of Western companies, Italian
businesses seem to be the most successful there.
At the time of the events in this case Telsim was part of a
family-owned conglomerate, the Uzan Holding. The Uzan
family was one of the rich and powerful families in Turkey.
In addition to Telsim, the Uzan Holding comprised 219
companies, including TV stations, energy companies, various
manufacturing facilities, and banks such as the Uzan-owned
Imar bank.3
Also during the time of this case, the Uzan family was
engaged in politics. Cem Uzan, son of Kemal Uzan, the
family patriarch and head of the Uzan Holding, was the
leader of the Genc party in the 2002 parliamentary
elections. These elections were accelerated because of the
government’s then failing economic policies. Most parties’
election campaigns focused on the economy, European Union
membership, and the U.S.-Iraqi situation. Cem Uzan’s Genc
party conducted a populist and patriotic campaign and made
enormous economic promises to the Turkish people. In the
end the Genc party got 7.2 percent of the votes but failed
to reach the 10 percent threshold needed for a party to put
its candidate into the parliament. Had Cem Uzan become an
MP, it would have been nearly impossible to sue him, which
some speculate was his reason for going into politics in
the first place.
EVENTS OF THE CASE
Telsim’s Deals and Defaults
Motorola and Nokia each made separate deals with Telsim.
Motorola lent Telsim $2 billion in 1998. Nokia followed in
2000, lending Telsim about $700 million. The money was to
be used for the purchase of base stations, switching
equipment, telephones, and other equipment needed for the
development of a wireless network in Turkey. Backing the
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IG Appendix 4.2.3
3
loans were pledges by the Uzan family of a 66 percent stake
in Telsim for Motorola and a 7.5 percent stake for Nokia.
After receiving both loans, the Uzan family illegally
maneuvered to dilute Motorola’s and Nokia’s equity stakes
to 22 percent and 2.5 percent respectively by issuing new
shares. Normally, stockholders would have a meeting and
vote on the issuance of new shares. However, Cem Uzan
announced the mandatory extraordinary shareholder meeting
through small Turkish newspapers in order to prevent Nokia
and Motorola from learning about the meeting. In the
absence of Motorola and Nokia, the attending shareholders
decided to increase the company’s equity. Legally in such
an equity increase, shareholders have the option of
investing an additional amount of money proportional to
their initial stake. Cem Uzan did so, but not knowing about
the opportunity, Motorola and Nokia did not.
In June of 2000 Telsim defaulted on its debts to Motorola.
Motorola first discussed the default in public in July 2001
and stated that it was considering legal action against
Telsim.
The Imar Bank and Involvement of the Turkish Banking
Industry
When Telsim stopped paying Motorola and Nokia, it became
clear that the Uzan family had been having financial
difficulties in its other businesses as well. The Uzanowned Imar bank had played the central role in financing
the majority of the family’s companies. This bank attracted
the savings of many individuals with dubious offerings,
such as EUR and USD bank accounts with 15 percent interest
rates. The bank was using these private investment funds to
shore up Uzan-owned companies, among others Telsim. This
was possible because similar operating procedures had been
common in the Turkish banking industry over the previous
decade. In 1994, macroeconomic imbalances contributed to an
overreliance by Turkish banks on foreign currencies. As a
result of excessive risk taking, Turkish banks were unable
to meet their obligations to foreign banks. In January
2000, the interplay of a weak, risk-loving banking sector
and the overreliance on inflows of money with outrageously
high return expectations left the country extremely
vulnerable to a swing in confidence.4
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IG Appendix 4.2.3
4
Although the Imar Bank did not go bankrupt in the 2001
banking sector crash, the Turkish government started to
observe the bank’s operations through the Banking
Regulation and Supervision Authority (BRSA), which had been
founded in 2000. From June 2001 onward, the BRSA had a
representative on the Imar Bank board. However, the
representative was kept unaware of the true state of the
bank until the very end of 2003.
Motorola and Nokia Seek Compensation
Meanwhile, Motorola and Nokia had taken legal action. In
January 2002 Motorola and Nokia filed a joint lawsuit in
the U.S. District Court in New York. The companies claimed
that the owners of Telsim, the Uzan family, took out loans
they never intended to repay. Motorola and Nokia alleged
thirteen counts of wrongdoing under the U.S. Racketeer
Influenced and Corrupt Organizations Act (RICO). Motorola
sought more than $2 billion and Nokia more than $700
million in compensatory damages. The companies also wanted
to collect punitive damages and treble damages. The suit
was filed against Kemal Uzan, the head of the family, as
well as several other family members, three Uzan-controlled
firms, and an individual close to the family.5 Other
lawsuits followed in London (by Motorola) and Zürich,
Switzerland (by Nokia) in an attempt to ground further
assets and cash on bank accounts of the Uzans. By the end
of 2003 the U.S. District Court had ruled in favor of
Motorola and Nokia, followed by the British and Swiss
courts in early 2004.
The Uzan Family Refuses to Repay
The Uzans still refused to pay, questioned the courts’
legitimacy, and demanded that the dispute be heard by a
three-person arbitration panel in Switzerland (the agreed
formula for dispute resolution stipulated in the original
contract). The Uzan family also filed a series of
countersuits in Turkey, but those suits were dismissed.
According to the Uzan family, they were being persecuted by
the government because of the increasing popularity of Cem
Uzan’s political party. (After losing in the 2002
elections, Cem Uzan had repeatedly attacked Prime Minister
Erdogan politically and personally through the media,
predominantly the TV stations that were controlled by the
Uzan family.)
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IG Appendix 4.2.3
5
Although the courts had given Motorola and Nokia the legal
rights to go after the money, the Uzan family assets were
mostly in Turkey. The assets that were grounded outside
Turkey did not come even close to the value that was
claimed. Further, several members of the family, as well as
board members of the Imar Bank, had gone underground and
could not be reached from August 2003 onward. At this point
both companies gave up any hope of collecting, as
illustrated by the fact that both companies’ financial
statements of the year 2003 show an extraordinary expense
due to uncollectable receivables from this case.
At the end of 2003, the Turkish government, now under Prime
Minister Recep Tayyip Erdogan, discovered that $6.2 billion
was missing from the Imar Bank. With the world’s largest
bank fraud at hand, the Turkish Savings and Deposit
Insurance Fund (TMSF), responsible for government backing
of savings, stepped in.
The Turkish Government Steps In
In 2004 the TMSF seized the ownership of all companies
owned by the Uzan family, including Telsim, plus the
family’s private property, because of the fraud-related
collapse of the Imar Bank. The TMSF itself was unhappy with
the Uzans, claiming that the family owed it $6 billion.
Apparently, in addition to that owed TMSF, the Uzans owed
another $600 million to $700 million to various other
Turkish government agencies. The family’s total liabilities
amounted to more than $10 billion.
Motorola, Nokia, and TMSF sat down at the negotiating
table. In August 2005 the three parties agreed to share in
the proceeds of Telsim’s assets, according to the following
formula: Motorola, 20 percent; Nokia, 7.5 percent; TMSF,
72.5 percent. In addition, Motorola received a one-time
cash payment of $500 million. Vodafone bought Telsim in
December 2005 for $4.55 billion.6
DISCUSSION QUESTIONS
1.
Motorola apparently had conducted no business in
Turkey prior to the Telsim deal. Motorola’s interests
were clear: a Turkish market with a population of
seventy million and double-digit growth rates for many
years to come was certainly a temptation, and entering
the Turkish market successfully could open future
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IG Appendix 4.2.3
6
business opportunities in neighboring Georgia,
Armenia, Iran, Iraq, and Syria. Yet Ericsson, the
Swedish telecommunications manufacturer with the
largest market share in the network equipment business
worldwide, had a budget of $2 billion for all its
vendor financing deals together, and Motorola shelled
out this amount for one deal only. Motorola made a
fundamental negotiation mistake in addition to several
strategic mistakes in this investment. What were these
mistakes?
2.
Why did the Turkish government in the form of TMSF
agree to share the funds generated by the sale of
Telsim’s assets with Motorola and Nokia, knowing that
these companies had both already written off their
losses associated with Telsim?
CHRONOLOGY OF EVENTS
• 1923: The Republic of Turkey is formed under the lead
of Mustafa Kemal Atatürk. The newly formed republic
looks at western Europe as a model for its secular
democracy.
• 1959: Turkey applies for membership in the European
Economic Community (EEC).
• 1963: Turkey is granted associate membership in the
EEC.
• 1963: Nokia enters the Turkish market.
• 1987: Turkey applies for full membership in the EEC.
• 1994: Turkish cellular phone operator Telsim Mobil
Telekomunikasyon is formed. Nokia and Telsim enter
into their first business relationship.
• 1995: A customs union between Turkey and the European
Union is formed.
• 1995: Motorola enters the Turkish wireless market,
which is perceived to be on the verge of explosive
growth.
• 1998: Motorola lends $2 billion to Telsim to be used
for the purchase of base stations, switching
equipment, telephones, and other equipment needed for
the development of a GSM and 2.5G wireless network in
Turkey.
• 1999: Turkey becomes an official candidate for
European Union membership.
• June 2000: Nokia lends about $700 million to Telsim to
be used for the purchase of base stations, switching
Copyright © 2014 by Jimena Ramirez-Marin and Jeanne M. Brett
Instructor’s Guide
Negotiating Globally
IG Appendix 4.2.3
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equipment, telephones, and other equipment needed for
the development of a GSM and 2.5G wireless network in
Turkey.
June 2000: Telsim makes its last payment to Motorola
under the agreement.
December 2000: The Uzan family requests to reschedule
loan payments.
April 2001: The Uzan family illegally dilutes the
value of stock pledged as collateral for the loans and
reaffirms this action in a Telsim shareholders meeting
on January 4, 2002.
2001: A bank crisis occurs in Turkey, resulting in the
devaluation of the Turkish lira. The Turkish
government begins to observe Imar bank.
July 2001: Motorola voices concerns about the loan in
public and states that it is considering legal action
against Telsim.
January 2002: The Uzans stage a meeting of the Telsim
shareholders in which they eliminate the control
rights of the shares pledged as collateral for the
loans and take actions that would permit the transfer
of Telsim’s illegally obtained assets to a Turkish
foundation, seemingly beyond the reach of Motorola,
Nokia, and the other creditors of Telsim.
January 2002: Motorola and Nokia file a joint lawsuit
in the U.S. District Court in New York. The companies
claim that the owners of Telsim, the Uzan family, took
out loans they never intended to repay. Motorola and
Nokia allege thirteen counts of wrongdoing, including
four counts of criminal activity under the U.S.
Racketeer Influen…
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