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FAA seeks $2.75 million quality control penalty for Boeing unit

By Alwyn Scott and Doug Palmer

WASHINGTON (Reuters) - The Federal Aviation Administration on Friday said it proposed penalizing Boeing's commercial airplane unit $2.75 million for taking nearly two years to fix a problem with fasteners on its 777 widebody airplanes.

The penalty was unusual in its size and for the fact that it comes nearly three years after Boeing said it addressed the FAA's concerns, which stem from 2008. The FAA regularly imposes smaller penalties for rule violations, but multimillion-dollar amounts are far less frequent.

The action came as Boeing's 787 Dreamliner aircraft has suffered a series of mishaps in recent weeks, including a spontaneous fire on an Ethiopian Airlines-owned 787 that was parked at a remote stand at London's Heathrow Airport.

"Safety is our top priority and a robust quality control system is a vital part of maintaining the world's safest air transportation system," U.S. Transportation Secretary Anthony Foxx said in a statement announcing the action.

"Airplane manufacturers must take prompt and thorough steps to correct safety and compliance problems once they become aware of them," Foxx said.

Boeing said it took corrective action and closed the matter in November 2010 and is working with the FAA to "understand and address any remaining concerns."

Boeing said its actions included greater management oversight, a database for tracking issues and regular meetings with the FAA to ensure any open cases were closed on time.

STEMS FROM 2008

The FAA said Boeing discovered in September 2008 it had been installing non-conforming fasteners on its 777 airplanes, but then took more than two years to implement a plan to correct the problem, which violated regulations by failing to maintain its quality control system.

Boeing stopped using the bad fasteners after the problem was discovered, but some manufacturing issues continued until after the corrective action plan was in place, the FAA said.

"Manufacturers must make it a priority to identify and correct quality problems in a timely manner," FAA Administrator Michael Huerta said in the statement.

The violation carries a penalty of $25,000 a day, but the FAA said it would be willing to settle for $2.75 million and gave Boeing 30 days to respond.

Industry experts said the proposed penalty appeared unusual, not least because it came years after Boeing came into compliance. Some suggested that the FAA may be toughening its stance after being criticized for lax oversight of the 787 by the National Transportation Safety Board earlier this year.

"The headline is so out of sync with the size of the penalty, I'm inclined to view this as muscle flexing by the FAA," said Carter Leake, an investment banker with BB&T Capital Markets/Windsor Group.

The NTSB raised concerns after lithium-ion batteries burned on two 787 jets within two weeks in January. The FAA and other regulators grounded the global fleet of 50 Dreamliners for 3-1/2 months while Boeing redesigned the battery system.

"That's a pretty big fine for the FAA," said Mary Schiavo, a former Department of Transportation Inspector General. She said fasteners were a concern when she was inspector general in the 1990s, and were difficult to police because the parts don't have serial numbers.

"In this case, Boeing was cited for quality control, which suggests bad fasteners were coming in and they didn't have a system in place to catch them," she said.

The FAA's most recent large proposed penalty was a $4 million civil penalty against United Parcel Service for alleged improper maintenance of four cargo aircraft. That case stemmed from 2008 and 2009. In 2012, it proposed a $1 million penalty against Horizon Air for allegedly operating planes that were not in compliance with regulations. The violations spanned 2007 to 2011.

(Reporting by Alwyn Scott and Doug Palmer; Editing by Bill Trott, Carol Bishopric and Bernard Orr)

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