A malfunctioning 737 Max warning light could cost Boeing millions in new FAA fines

Boeing Co. engineers discovered in 2017 that a software glitch had rendered a warning light on the newly introduced 737 Max inoperable on 80% of the planes. But the company chose not to fix it or to inform U.S. regulators.

The next year, a Lion Air jet suffered the malfunction the alert was designed to detect and crashed in the Java Sea. The lack of an alert was cited as a factor in the crash by Indonesian investigators and Boeing’s failure to fix it drew stiff condemnation from lawmakers and families of the victims.

Now the inoperable warning light is threatening to become a costly new headache for the planemaker: its absence on the jet violated U.S. Federal Aviation Administration regulations. The FAA is considering imposing civil penalties, according to documents and officials, which can amount to millions of dollars.

“A manufacturer cannot alter the airplane’s features after it has been certified,” the then-acting head of the FAA, Daniel Elwell, said in a letter to lawmakers last July, referring to the malfunctioning alert.

The fines could accrue quickly. The agency’s enforcement guidelines say large businesses such as Boeing can be assessed $3,000 to more than $34,000 per violation. That could be applied to each of the more than 300 planes on which the alert didn’t work.

Moreover, a 2015 agreement to settle 13 separate investigations against Boeing — some of them involving similar issues of aircraft certification — gives the FAA a way to take swift action against the company. Boeing paid $12 million in that case, but could be assessed an additional $24 million if FAA finds the violations continued.

At the very least, the failure to disclose the inoperative warning light combined with other recent disclosures by the company — such as messages between employees mocking the FAA — have significantly soured the relationship between the Chicago-based manufacturer and its regulator.

J.E. Murdock, who served as FAA’s chief counsel and acting deputy administrator in the 1980s, said he’d never seen anything like what he called Boeing’s recent “disregard” for norms during his four decades of working in the aviation sector.

“I don’t know how this came about, but it’s worrisome to me,” Murdock said.

Boeing’s decision to withhold two troves of caustic and sarcastic text messages and emails between its employees from the FAA runs contrary to agency policy encouraging self-disclosure. Boeing had compiled at least some of the messages early last year, but didn’t disclose them to FAA until last fall and in January.

The FAA said in an emailed statement it doesn’t comment on potential enforcement actions.

Boeing spokesman Gordon Johndroe said the company wouldn’t comment on any possible open investigations. The company said it may be subject to unspecified penalties in a filing with the Securities and Exchange Commission last month, but said it didn’t anticipate a significant impact on its bottom line.

Andrew Harrer—Bloomberg via Getty Images

Crashes involving the 737 Max — there was a second one in Ethiopia last March, in which the alert also didn’t work — killed 346, grounded the plane worldwide and will cost the company an estimated $18.6 billion.

The U.S. Justice Department’s Criminal Division has gathered information about the plane through a grand jury. The SEC is also investigating whether Boeing properly disclosed issues with the plane to investors.

Congress is also looking into the disasters, including a provision of the law that permitted Boeing to designate employees to perform much of the Max certification functions on behalf of the agency. One such “designee” signed off on the decision not to immediately fix the warning light issue.

Elwell’s July letter provided a rare window into how the FAA views a high-profile matter that could become an enforcement case. It explicitly said the failure to fix the alert is a violation of agency regulations.

The FAA agrees with Boeing that the failure to install a working warning system — which illuminates when sensors that measure whether the nose is pointed above or below oncoming air disagree with each other — wasn’t a safety violation, Elwell said.

However, “once it was made part of the approved type design, it was required to be installed and functional on all 737 Max airplanes Boeing produced,” he said.

In comments during a Dec. 11 House Transportation and Infrastructure Committee hearing, Steve Dickson, who became FAA administrator in August, said he is considering action against Boeing for that and other issues.

“I have expressed my disappointment to the Boeing leadership about that,” Dickson said at the hearing. “And so, I reserve the right to — to take further action and we very well may do that.”

The agency filed two unrelated enforcement cases against Boeing since December, seeking a total of $9.3 million for claims it knowingly installed substandard parts on wings, including on the 737 Max. In November, the FAA stopped granting Boeing employees authority to certify that individual aircraft were built to legal standards.

Boeing’s actions on the so-called angle-of-attack disagree light also raise questions about the FAA’s system of deputizing Boeing employees to conduct agency approvals and oversight.

A Boeing employee who was the FAA’s authorized representative signed off on the company’s decision not to immediately repair the warning light, Representative Peter DeFazio, the Oregon Democrat who is chairman of the House committee that held the hearing, said in an interview. The involvement of the authorized representative was discovered in recently obtained documents, DeFazio said.

“That points to the huge problem at Boeing and the problem with the system,” he said.

The disagree light was standard equipment on earlier models of the 737, known as Next-Generation, and supposed to be included on the 737 Max. But a software change caused it not to function if airlines didn’t order an optional display that showed what each angle-of-attack sensor was reading.

As a result, 80% of the 387 Maxes the company delivered to airlines didn’t have a working disagree light, according to Indonesia’s final report on the Lion Air crash off of Jakarta, which killed 189 on Oct. 29, 2018. A second crash, of an Ethiopian Airlines Group jetliner on March 10, killed 157 and resulted in the plane’s worldwide grounding.

Boeing recognized the error just months after the 737 Max entered service in 2017, the company said in a statement posted on its website last May. The company “followed its standard process” for resolving such issues by consulting in-house experts, it said in the statement.

A review found that the absence of a disagree light wasn’t a safety issue, according to the statement. There are no emergency procedures associated with the disagree light for pilots and the planes provide flight crews other indications that the sensors have failed.

As a result, the company decided to repair the alert in a later software update. Boeing’s “senior company leadership” wasn’t involved in the decision, it said in the statement.

Only after the Lion Air accident did the company inform the FAA. The company plans to ensure that the alert works on the planes before the grounding is lifted.

The alert was relevant to the Lion Air crash because it should have activated before the accident and on a previous flight, the investigation concluded. If it had done so, it might have helped mechanics diagnose and fix the issue before the crash, the report concluded. A malfunctioning angle-of-attack sensor is what prompted an automated system to repeatedly push down the plane’s nose.

It’s not clear whether the FAA will bring a case against Boeing related to the 737 Max, and it can take years from the time it starts an investigation it until the agency imposes a penalty. The FAA often waives or lowers penalties if companies promise to spend the money on fixing errors.

One potential complication to any such case is the criminal investigation. It’s not uncommon for the Justice Department to ask agencies such as the FAA to delay their enforcement cases if they interfere with a possible criminal case.

In its settlement agreement between FAA and Boeing in 2015, the company agreed to tighten up its internal audits and make regular reports to the agency about its compliance, including ensuring that aircraft conform to their designs, according to a press release at the time.

When asked during the December hearing whether Boeing had complied with the settlement, Dickson said he hadn’t decided yet.

“But it’s something that’s under consideration and it could be the subject of future litigation,” he said.

The largest fine ever paid in an FAA enforcement action was $24.9 million by American Airlines, now known as American Airlines Group Inc., in 2013.

If past FAA practice is a guide, the amount of any civil penalties will be relatively low compared to fines levied against automakers or financial institutions in recent years, which has rankled lawmakers such as DeFazio.

“I think that when companies become repeat offenders, there should be a dramatically escalating series of fines and actions,” DeFazio said.

More must-read stories from Fortune:

—20 maps charting the rise of the modern megacity around the globe
—Coronavirus misinformation is fueled by government mistrust in China
—In China, oil won’t be the only energy sector battered by the coronavirus
—Europe wants business to share its data and open up A.I. systems for scrutiny
—Fortune Explains: Tariffs and trade wars

Catch up with Data Sheet, Fortune’s daily digest on the business of tech.