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Recall vs. Lawsuits – Boeing Tragedy Offers Lesson in Cost Analysis

Companies can decide to recall products or face litigation. Which is cheaper?

Did you hear about those half a million Whirlpool fire-risk tumble dryers that were recalled? We hope you avoided salads and sandwiches at Target and Fresh Market because they were recalled, too, because of possible listeria contamination. Before you hop into your Volvo diesel-powered vehicle, be sure to check if it is one of the 507,000 automobiles being recalled. And that’s just a tip of the iceberg – oh, Canada’s Iceberg ice cream sandwiches are being recalled over a presence of metal particles.

Consumers might find it a nuisance that, seemingly every day, businesses issue nationwide or even international recall notices for their defective or contaminated products. That can be annoying, but it is important if you take your health and safety seriously. There are not many companies that want to absorb the financial pain of a recall, since it can range anywhere from a manageable sum to an amount that busts open the budget.

But it is better than litigation, right? Right?

Boeing 737 Max

In March, Boeing grounded its best-selling 737 Max jet after two of the planes crashed, killing 346 people. The aerospace titan does not expect the airplane to return to operation until early 2020.

Despite the disasters and numerous investigations and hearings, Boeing has not ceased manufacturing these planes. It still produces about 40 Max jets per month, which means Boeing could have roughly 350 in its inventory by the end of the year. This is bad news for a scandal-plagued company because it is not generating a profit and it is losing money to store its fleet; reducing its inventories would also come at a price because it made investments and increased manpower based on higher output figures.

Since March, Boeing has lost $40 billion in market value, and executives warned that it would take a $5.6 billion hit in revenue and pre-tax earnings in the second fiscal quarter. What’s worse, these calculations do not include the $1 billion in wrongful-death-lawsuit settlements, $1.7 billion in additional costs for slowing down 737 Max output, and the $100 million fund for communities and families impacted by the tragedies in Indonesia and Ethiopia.

Considering these astronomical figures, it would make sense for Boeing to temporarily pause building the aircraft. But that is not happening because the company is betting on demand for the future.

Judging from the lawsuits, the main question right now is: Could these disasters have been avoided?

Cost Analysis

According to some of the allegations, Boeing failed to notify pilots and the public about problems related to the plane’s automated anti-stall system. Probes revealed that the maneuvering characteristics augmentation systems, or MCAS, malfunctioned in both crashes. All the plaintiffs have said that they would have not purchased tickets had they been warned ahead of time about the dangers.

If the charges are true, and Boeing was aware of the malfunctions upon delivery, then a few things could have happened. One is that the company would have had to issue a global recall. Another is that Boeing may have calculated a cost analysis between recall and litigation.

As of January 2019, there were more than 5,000 “firm orders” for the Max 737 from 78 identified customers, including Southwest Airlines (280), FlyDubai (251), and Lion Air (251). It costs as much as $1.8 billion to construct an airframe and $3 billion to develop an engine. If the seller (Boeing) violates the terms of the agreement, then the buyer (airline) can cancel a contract or demand some type of compensation.

In the 1999 cult classic film Fight Club, Edward Norton’s character, a recall coordinator, maintains a formula: take the number of products in the market (A), multiply it by the probable rate of failure (B), and multiply the result by the average out-of-court settlement (C), which would be A x B x C equals X. If X is lower than the costs associated with a recall, then it would not be standard practice.

This type of situation captured national attention in the 1970s when the budget-friendly Ford Pinto caught on fire. According to Popular Mechanics:

“In low-speed, rear-end crash testing, the fuel tank, positioned behind the rear axle and in front of the rear bumper, exhibited several flaws. Upon impact, the filler neck would tear away from the sheet-metal tank and spill fuel beneath the car. The tank was also easily punctured by bolts protruding from the differential and nearby brackets. One report later described the entire contents of a tank leaking out in less than a minute after an accident.”

The Ford engineers came up with solutions, such as installing a tank similar to the one used in its Capri or adding tank shields to avoid punctures. But because Ford wanted to get the cars to market to compete against the Japanese, the company performed a cost-benefit analysis instead. To remedy the issue would cost $11 per car, which would total $113 million. The company then weighed the $11 against the repair-costs rate, personal injury claims, and mortality, which tallied up to $49 million. The result? Ford went ahead with production, and as many 180 people died. With 2.2 million Pintos on the road, Ford concluded that the death rate was comparable to other automobiles sold by Ford’s rivals.

It wasn’t the number of motorists who perished because of the car’s flaws that forced Ford’s hand; it was the public relations nightmare. In 1977, Mother Jones reported on the Pinto’s fire risk and internal documents showing that Ford executives were aware of the danger. A year later, a victim who had been injured in a low-speed accident when his car burst into flames was awarded $125 million (later lowered to $3.5 million).

So in the wake of a viral expose and a monumental pecuniary punishment, Ford finally recalled and upgraded its 1971-1976 Pinto models.

Would Ford have been better off had it just fixed the problem in the first place? Yes and no.

Ford Pinto

On one hand, it did spend money on shielding and reinforcements after all. On the other, there was only a 0.00008% chance of someone dying, so should a business let the public know about this fraction-of-a- percent chance of being wounded or killed from a product? You have greater odds of choking on food, getting run over as you jaywalk a busy intersection, or falling down the stairs.

Perhaps Boeing crunched the same cost analysis. First, if millions of passengers are flying on these jets and a few hundred die because of a crash, that is still a fraction of a percent. Or if the settlements price out less than the recalls, then it might not be worth it to remedy the MCAS. However, as Ford eventually learned, the PR disaster and negative media coverage may inflict more pain on Boeing than anything else.

The positive takeaway from the Ford saga is that the company produces some of the safest cars on the road. Maybe that will be true of Boeing’s highflying products as well.

Risky Business

There is a risk to everything you do in life, including in the goods and services you buy. If you’re purchasing the cheapest version of a standard product over the more expensive one, you are making the conscious decision to prioritize cost over features, which might include everything from safety and privacy to quality. This is why not every car on the open road has a forward-collision warning system and not every laptop has a five-terabyte hard drive. There is a cost to everything – ethical or immoral, agree or disagree – that’s just a fact of life.


To read more from Andrew Moran, visit his author page. At Liberty Nation, we love to hear from our readers. Comment and join the conversation!

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