Lawyers advise Ethiopian Airlines against ‘financially disastrous’ settlement offer by Boeing over 737 MAX crash

Posted on January 22, 2021

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By Dominic Gates
Seattle Times aerospace reporter
Jan. 21, 2021 at 4:15 pm Updated Jan. 21, 2021 at 5:38 pm

American attorneys for Ethiopian Airlines, which lost 157 passengers and crew in the second fatal crash of a Boeing 737 MAX in early 2019, have advised the carrier not to accept a settlement Boeing has offered but instead to sue the manufacturer for punitive damages in the U.S.

In an urgently worded letter sent Sunday, the Chicago-based attorneys warned Ethiopian CEO Tewolde GebreMariam that the offer falls “grossly short” of what the airline could win before a U.S. jury — particularly since Boeing recently accepted responsibility for criminal fraud during the plane’s certification by regulators.

The settlement Boeing has offered is “a mere fraction” of the actual damage, the lawyers told Tewolde, and accepting it “will inevitably leave substantial money on the table and would be a tremendous political and financial mistake for Ethiopian Airlines.”

Yet like many airlines, Ethiopian is now desperate for cash.

Before the 2019 crash of Flight ET302, state-owned Ethiopian was the largest and most successful airline in Africa. It lost business after the tragedy and the subsequent grounding of the MAX fleet. Then last year its revenue plummeted further when the COVID-19 pandemic paralyzed air travel.

The letter conveys the attorneys’ concern that direct settlement negotiations between Boeing and the airline’s management are close to done and that a “financially disastrous” deal may be imminent.

A person familiar with developments in the private negotiations shared details from the letter with The Seattle Times.

It offers a rare look inside what are normally secret negotiations. And with the MAX back in the air and the second anniversary of the second crash approaching, it highlights a Boeing push to conclude customer compensation discussions and put the MAX crisis behind it.

The letter from law firm DiCello Levitt Gutzler, which Ethiopian hired to provide advice on its claims against Boeing, is signed by co-founding partner Adam Levitt.

Boeing declined to comment on discussions with its customer. Ethiopian Airlines did not respond to an emailed request for comment. Levitt did not return a call seeking an interview.

Levitt’s letter argues that Boeing’s Deferred Prosecution Agreement with the Department of Justice (DOJ) earlier this month provides Ethiopian new legal leverage because of “Boeing’s admission of its criminal conduct.”

The DOJ settlement staves off a criminal fraud charge against Boeing with a relatively light $244 million penalty.

It also explicitly exonerates senior management while pinning the fraud on two Boeing technical pilots who misrepresented to airlines the details of new flight control software on the MAX — the maneuvering characteristics augmentation system (MCAS) — that was a key contributing factor in both crashes.

However, Boeing admitted in the deferred prosecution agreement that the accusations of fraud involving the two pilots were “true and accurate” and acknowledged that the company is responsible for criminal acts by its employees.

Furthermore, the DOJ deal explicitly states that Boeing agrees to make no claims “in litigation or otherwise” that contradict its acceptance of responsibility.
Levitt wrote that Boeing’s “admissions would prove a case of fraud and would also support a punitive damages claim.”

And he said Boeing’s deception is exacerbated by how company executives initially sought to cast blame on Ethiopian’s pilots for the March 2019 crash.

“These facts will have a powerful effect in a court of law and Boeing knows it,” Levitt wrote.
He urged Tewolde to “reject Boeing’s current, desperate settlement entreaties” and “immediately file and prosecute its claims against Boeing, in the United States.”

Boeing’s offer

The airline’s claim against Boeing is separate from the claims of the families of those who died in the Flight ET302 crash. Other U.S. law firms are handling about 140 such lawsuits, of which only a handful have been settled.

Ethiopian is negotiating for economic compensation: for the loss of its plane; for the subsequent grounding of its MAX fleet and the halt of new deliveries that reduced its profits in the year that followed; for the payouts the airline itself made to the families of passengers immediately after the crash; and for the significant reputational and brand damage.

Levitt’s letter states that independent expert assessments put the airline’s financial hit at “not less than $1.8 billion in cash.”

The person familiar with the discussions said Boeing is offering an amount on the order of $500 million to $600 million, a large portion of which is not cash but concessions on future Boeing airplane sales, including waivers on maintenance costs and discounts on future airplane deliveries.

“It’s nowhere near the value of the loss,” the person said. “It’s astonishing that Ethiopian management could accept this.”

With the deep downturn in air travel during the coronavirus pandemic, the person added, “What use is a $5 million discount on planes you don’t want?” Ethiopian still has unfilled orders for 25 MAXs.

According to disclosures in financial filings, Boeing has set aside a total of about $9 billion to cover present and future compensation to all of its MAX customers, about 58 airlines and airplane lessors. So the $1.8 billion figure cited by the lawyers advising Ethiopian would be a massive claim for a single customer.

Though Ethiopian’s status as a victim of a crash clearly adds substantial financial damage, its fleet at the time of the crash had only six 737 MAXs, each worth perhaps $55 million.
A footnote in the letter concedes that the amount of a jury award is uncertain.

“While a U.S.-based judicial proceeding may ultimately yield an award of less than $1.8 billion, with the greatly-strengthened punitive damages threat that we presently have against Boeing, and which we would strongly press in a litigation context, we would not start with a number less than that amount,” the footnote reads.

Ethiopian’s U.S. legal team may have some financial incentive to seek a trial rather than a private settlement.

While lawyers representing families of those killed, many of whom have meager means, typically work on a contingency basis and take about 20% of any eventual settlement, the norm for lawyers representing companies in commercial cases is payment by the hour. Typically, such legal advice as Levitt’s firm is providing starts at about $550 per hour, according to a person familiar with the rates.

Why settle for less?

A foreign company ignoring the expensive legal advice from the U.S. counsel it has hired is not unheard of.

Steven Marks, of the Miami aviation law firm Podhurst Orseck, and one of three lead lawyers litigating on behalf of the families of the victims of Flight ET302, said he has personal experience: Boeing bypassed him to close a direct deal with one of his clients, a foreign aircraft-leasing company which sued Boeing for damages over the MAX.

He said Boeing leverages its long-term relationships with foreign governments and customers, who need the manufacturer to supply spare parts and provide logistical support.

“They are joined at the hip,” Marks said. “They get sweetheart deals.”

A critical factor is Ethiopian’s need for cash to survive the year ahead. Because of the pandemic, Ethiopian now makes more money from carrying cargo than passengers and, like airlines around the globe, has suffered a precipitous drop in revenue.

The Ethiopian economy is currently crushed by the impact of the pandemic. And the government — which owns the airline — is also engulfed by a bloody ethnic conflict in the northern Tigray region. It’s likely not in a position to bail out the carrier.

Facing this crisis, the airline’s management will be aware that U.S. lawsuits can be years long affairs and that Boeing will defend itself with top legal talent that could draw the process out. In addition, the pandemic has halted jury trials in most large cities in the U.S., creating a huge backlog of cases that would likely delay an outcome further.

The two-year anniversary of the crash coming up in March, after which Boeing could potentially limit the scope of the suit with statute-of-limitations arguments, is probably a hard deadline for a decision on filing suit.

Bob Clifford, a Chicago lawyer who is another of the lead attorneys representing the families of ET302 victims but is not involved with Ethiopian’s case against Boeing, said it seems grossly unfair that the airline’s distress might force acceptance of a lowball settlement.

Told of the reported Boeing offer, he asked “Why on heaven’s earth would the leadership of Ethiopian Airlines even contemplate that kind of resolution?”

“I get that companies like to skip the litigation process and the lawyers if they can,” Clifford added. “But it’s a deal that smells to high heaven.”