(FORTUNE Magazine) – THEY CALL IT pencil-whipping: doctoring computer entries, logbooks, and work cards so that vital maintenance and safety repairs seem to have been performed. When the U.S. Attorney for the Eastern District of New York looked into charges that Eastern Air Lines managers pencil-whipped the books in New York and Atlanta, investigators found enough evidence to obtain a 60-count federal indictment against Eastern and nine employees for falsification of documents, obstruction of justice, and conspiracy to defraud the government. Eastern and eight of the nine defendants have pleaded not guilty; the case is expected to go to trial early next year. The alleged violations could have caused injuries and death: failure to grease wing-flap gears, failure to drain contaminants from aircraft fuel tanks, failure to examine turbine blades. ''There were occasions when a mechanic would say, 'Look, we don't have time to do this repair,' '' alleges Michael O'Connell, Machinists union president at New York's Kennedy Airport. ''The Eastern foreman would take the logbook out of his hands and sign it off.'' The indictments mark the first time an airline has faced criminal charges over maintenance. Just as important, they have thrown a bright spotlight on the workings of the Federal Aviation Administration. What it illuminates is troubling. The FAA's most important mission is to ensure air safety. FAA inspectors patrolled the Eastern terminals from 1985 through 1989, when the alleged violations took place. If safety measures were being compromised, where was the FAA -- and what is it overlooking at other airlines? While the pencil-whipping alleged at Eastern seems to be rare or singular, poor monitoring by the FAA of airline maintenance is widespread, if not epidemic. That is the conclusion of three separate federal investigative agencies, and FORTUNE has documented it with details provided by outsiders ranging from pilots and mechanics to independent safety experts and former FAA administrators. The evidence suggests that the agency is underfunded, undermanned, and badly managed. The airline system needs more policing than ever. More planes are flying, and a greater proportion of them are older. No rational airline executive is going to take chances with passengers' lives. But under competitive pressures, many airlines are forgoing the extra margins of safety that they maintained routinely when they could pass the extra costs on to customers. That means the FAA's role as auditor of maintenance practices is more critical than ever. The FAA argues that it has been doing its job -- that an FAA inspector discovered the alleged violations and built a case that the agency used to fine Eastern and eventually took to the U.S. Attorney. Says Anthony Broderick, the associate administrator for regulation and certification: ''We were keeping the U.S. Attorney in New York apprised of everything we were finding -- just in case it might have some criminal interest for him.'' That's not how they see it at the federal courthouse. An investigator there says that although the pencil-whipping was ''widespread and egregious,'' the FAA's probe was limited. Says U.S. Attorney Andrew J. Maloney: ''We looked at substantially more planes than they did and found problems in almost every one.'' When his investigation ended in criminal indictments, Maloney warned: ''Civil fines are not the issue. The message to the airline industry is that if maintenance gets as intolerable as it has at Eastern, they can expect criminal charges.'' SEVERAL EASTERN PILOTS and machinists claim the FAA was reluctant to respond even after employees produced evidence of violations. ''There was a policy decision at high levels in Washington to keep Eastern flying,'' says John Mazor, spokesman for the Air Line Pilots Association, which represents 42,000 commercial pilots. When the agency finally did investigate Eastern, say the pilots and machinists, it was only because a few individual inspectors at Kennedy took the initiative. The charges and indictments seem to have raised tensions within the FAA. ''There's an internal battle going on,'' says an FAA official who requests anonymity. He says the Eastern regional office -- which covers much of the seaboard and cooperated with the U.S. Attorney's investigation -- is feuding with the Southern regional office, which is responsible mainly for the Southeast and has authority over Eastern's right to fly. The northerners suspect the southerners of protecting Eastern; the southerners are angry that the northerners helped nail the airline. Says the official: ''They're calling it the blue vs. the gray.'' The FAA official says the two inspectors from Kennedy who helped the U.S. Attorney are in the doghouse because their findings embarrassed higher-ups in Washington who investigated Eastern in 1988 and declared it safe. According to the official, one of the inspectors is being shunned at work. ''He says he feels like Serpico,'' says the insider, alluding to the New York police officer who testified 20 years ago against fellow officers. The FAA denies the charges, saying that the indictments haven't caused tension and that the inspectors remain in good standing. What seems beyond dispute is that the FAA needs generally to patrol airlines better. Last year transportation investigators from the Government Accounting Office said: ''We are concerned about the FAA's ability to sustain inspection surveillance over an industry that is expanding to meet the demand for its services.'' In a major 1988 report on improving flight safety, the Office of Technology Assessment, the congressional analytic support agency, concluded that ''The FAA's effectiveness has been undercut by budget constraints affecting personnel and procurement, equipment obsolescence, inadequate long- range comprehensive planning, and problems with its inspection and rulemaking programs.'' The National Transportation Safety Board says FAA weaknesses contributed to a number of recent airplane accidents: -- Aloha Airlines Flight 243, April 28, 1988: One crew member flung into the sea, eight other people seriously injured when the roof peeled back at 24,000 ! feet. The NTSB placed the blame on structural fatigue, adding, ''Contributing to the accident were the failure of Aloha management to supervise properly its maintenance force; the failure of the FAA to properly evaluate the Aloha Airlines maintenance program and to assess the airline's inspection and quality control deficiencies . . .'' -- Delta Airlines Flight 1141, August 31, 1988: Fourteen persons killed and 26 seriously injured during takeoff at Dallas-Fort Worth. The NTSB said the Delta crew did not report defective equipment and failed to follow required takeoff procedures. But, it said, ''Contributing to the accident was the lack of sufficiently aggressive action by the FAA . . . and the lack of sufficient accountability within FAA's air carrier inspections process . . .'' -- United Airlines Flight 811, February 24, 1989: Nine lost at sea and five seriously injured when a cargo door blew open at 23,000 feet. The NTSB blamed a faulty door latch but also noted that the airline and the FAA shared in the blame. It cited United for ''lack of proper maintenance and inspection of the cargo door,'' and the FAA for ''lack of timely corrective actions'' after a similar 1987 accident on a Pan Am B-747. Of all the airplane accidents in the last decade, none shocked the industry as much as Aloha's. ''It showed that the system wasn't working as intended,'' says Allan McArtor, who was the FAA administrator at the time. Indeed, NTSB's report on the Aloha accident, which was released last year, was pointedly critical of weaknesses in the FAA's surveillance system. The problems start with the very definition of inspection. If you imagine FAA inspectors swarming aboard airplanes, flashlights and clipboards in hand, prepare yourself for a shock. They rarely look at airplanes. Rather, they spend their hours auditing the record books kept by the airline's mechanics. That process may reveal procedural errors, say critics, but it often doesn't accurately reflect the real condition of the planes. Take the Aloha incident. If FAA inspectors had eyeballed the fleet -- instead of relying on the paperwork provided by Aloha's mechanics -- they might have seen what NTSB investigators found after the crash: ''Swelling and bulging of the skin . . . dished fastener heads, pulled and popped rivets, and blistering, scaling, and flaking paint . . . at many sites along the lap joints of almost every airplane.'' EVEN IF INSPECTING paperwork were all it needed to do, the FAA hasn't got enough manpower. The agency has hired hundreds of new inspectors recently. But they receive civil service pay, which tops out around $60,000. Senior inspectors can leave to become airline executives; even junior ones can become pilots and make $80,000 or more. Not surprisingly, inspectors often move to industry jobs. Though the inspection staff is almost 75% bigger than five years ago, the workload has grown even faster. The FAA's principal inspector for Aloha told investigators he was ''zeroing in'' on Aloha's maintenance department and had a plan for improving it. But he also had to monitor nine other carriers and seven repair shops. His territory stretched from Hong Kong to Hawaii. (The FAA covers the foreign operations of U.S. carriers.) In other cases the agency's surveillance is spotty. When the Department of Transportation audited the FAA's Alaska region a few years ago, it found that more than one-third of the mandatory FAA inspections hadn't been done. The DOT investigators who checked into the FAA's Southwest region three years ago discovered that about 12% of the most basic inspections hadn't been completed -- and that 26 commuter airlines hadn't been inspected at all in the previous six months. Inspectors who are on the job often don't know what to look for. Many of the FAA's training courses are appallingly obsolete. The NTSB reported that the FAA Academy in Oklahoma City ''required students in FAA-approved maintenance schools ((to)) be knowledgeable in such topics as wood airframes, airframe fabric repair, and the application of paint and dope.'' The NTSB added that ''the words computer and composite do not appear in the list of required curriculum subjects.'' Last year, the GAO reported that the FAA still had no courses in composite materials used in parts of the skin -- and that most inspectors have never received any training in such new aircraft as the Airbus A-300-600. That doesn't keep the agency from sending the inspectors out into the field. When the GAO interviewed 17 FAA electronics inspectors last year, it discovered that none had received all the training they were supposed to. The GAO then examined the inspections the 17 had performed. Several were inadequate, says the agency. Had the FAA's Aloha inspector been properly trained, said the NTSB, the accident may not have occurred. As it was, the inspector was untrained in corrosion control, spotting problems with joints peculiar to 737s, and the management of older airplanes. * Inspectors would be better armed if they could draw on the agency's vast body of knowledge about safety problems. Unfortunately, they cannot. ''The FAA collects a lot of information, but it doesn't do enough with it,'' says Edith Page, director of the Office of Technology Assessment's 1988 report on air safety. It doesn't have a comprehensive national computer system to collect, analyze, and share that information. When OTA investigators arrived at the Los Angeles office two years ago, they found a few enterprising inspectors entering data on laptop computers they had bought themselves. Especially disturbing is that inspectors often do not follow up on the most critical matters. The FAA issues airworthiness directives, which alert airlines to such serious structural problems as failing engine bolts. For these, the inspectors are supposed to look at the planes after corrective work is done. But last year GAO investigators making rounds with FAA employees found that in eight out of ten instances they didn't check for compliance with the directives. In the ninth instance, the inspector checked through paperwork. Only once did an inspector scrutinize the plane. Sometimes the fault lies higher up in the agency. In the case of Aloha, the FAA sent the airline a directive advising that structural weakness had been found on similar planes at other airlines. But the NTSB said that the FAA sent an incomplete directive -- Boeing had told it that 12 sections of the plane needed attention, but the agency singled out only two. What's more, said the GAO, the FAA did not follow up to see if even that work had been carried out. Finally, like other regulatory agencies, the FAA can be susceptible to influence by the industry it regulates. Inspectors are assigned to specific airlines and usually stay there for years. They have broad discretionary powers to set maintenance procedures. But they work closely with management -- sometimes too closely, critics say. And sometimes the airlines lean on inspectors for favors -- such as permitting extensions on certain repairs. Critics from pilots to safety experts say they know of cases where airlines have ''inspector shopped'' for the most friendly ones. (The FAA says it has taken steps that minimize the opportunities for this.) There is no evidence of improper coziness betwen the FAA and Aloha. Nonetheless, when its unfortunate aircraft was due for a major overhaul and inspection -- which could have grounded it for months -- the agency let Aloha ; divide the inspection into 52 stages so that the plane could stay airborne. The FAA later conceded that Aloha had been allowed to break the inspection into ''too many segments.'' Warned the NTSB: ''It appears that the current surveillance system can lead to rubber stamp approvals and endorsement of an air carrier's operations and maintenance programs . . . Without . . . improvements, the system of program approval can be driven by the momentum and interests of the air carrier.'' FACED WITH MOUNTING criticism, the FAA says it is taking steps to improve. In the last two years it has added 482 new inspectors and has ordered all to increase hands-on inspections of airlines. It is updating some training courses and trying to hire more instructors with high-tech backgrounds. It also promises that a new computer system will be running by next year. But critics say the improvements are too little, too late. ''The FAA is willing, but its hands are tied,'' says former FAA administrator McArtor, now a senior vice president at Federal Express. Past administrators (and there are quite a few, since the job turns over frequently) praise the commitment of many individuals at the FAA. But they are unsparingly critical of the red tape and bureaucratic routine -- and the FAA's subordinate position under the Department of Transportation. ''Frustrating,'' says McArtor. ''To try to advance a progressive agency with all that bureaucratic baggage is very difficult. You have a lot of bosses.'' These include Administration political appointees and Congressmen who meddle and micromanage, second-guessing the technical experts. Says Donald Engen, administrator from 1984 to 1987: ''You have a secretarial staff sitting on top of an operational agency that has to deal in real time with real issues. It's the toughest job in Washington.'' Meantime, the entrenched civil servants, who know they can outlast the appointed administrators, go on with their tasks as always. And the agency's hierarchical management culture discourages initiative at lower levels. Financing is no less of a nightmare. Says McArtor: ''You must suggest a budget that is within the OMB budget, and as a good soldier you must say you can do everything you want within that budget -- when of course you know you cannot.'' While Washingtonians chew over the problem, the airline system becomes bigger, more complex, and perhaps more dangerous. Deregulation has lowered many fares and has put far more people into the air. It has also produced fierce desires to cut costs, which in turn has produced labor-management strife, instances of low morale, and even outright sabotage. Experts worry most about the pressure on maintenance. Before deregulation many airlines kept a cushion above the FAA's minimum safety standards -- equipping planes, for instance, with four generators instead of the FAA's minimum of two. Now, says the NTSB, ''the margin between the minimum established by federal aviation regulations and the actual level at which some carriers are operating has diminished.'' The DOT concluded a few years ago that airlines had cut maintenance costs by 30% in the first six years of deregulation. That could just reflect better management -- but in the current climate it does raise doubts. The need to keep planes on schedule offers another incentive to skip or defer all but the most important maintenance. Under aviation's hub-and-spoke system, developed largely since deregulation, passengers from smaller airports are flown into larger hubs and transferred to planes headed for major destinations. But if one plane is late into a hub the system can break down, leaving hundreds of passengers waiting. So the pressure to get that small plane to the hub is intense. And that's where maintenance is sometimes sacrificed. ''Pilots sense the pressure to arrive on time and depart on time in spite of weather, maintenance, or traffic problems,'' Henry Duffy, president of the Air Line Pilots Association, testified to a Senate subcommittee two years ago. ''Maintenance often succumbs to deferring rather than fixing broken items.'' Airlines also have reduced the inventory of parts they keep at satellite airports. Repairing the plane, then, isn't an option. The decision boils down to stark and unhappy alternatives: Fly without the repair (if it is deemed noncritical) or don't fly at all. Modern airplanes are notoriously overbuilt machines -- ''forgiving,'' in the engineer's argot -- but at some point the quality of mercy is strained. That point may come with length of service. Over the past decade the average age of jetliners in the U.S. has risen by 21%, to about 13 years. One-quarter of the fleet is more than 20 years old. About a third of the airplanes flying in America today exceed the manufacturer's ''design goals'' -- the objectives for useful life of the aircraft as originally set by the manufacturer. As those aging planes see more and more intensive use, experiencing the cycles of expansion and contraction that come with pressurization, they wear out faster. Until a few years ago, airplane makers said their equipment could fly almost endlessly if given proper maintenance and repairs. In one test, an old DC-9 was put through 70 years of simulated flying. The plane held up. But the test missed one real-life peril of airplane service: the combination of corrosion and fatigue that caused the Aloha craft to rip apart. ''The industry was really frightened by Aloha,'' says Kenneth Mead, GAO's director of transportation issues. ''There was suddenly a lot of concern about what we didn't know about aging aircraft.'' Now the industry has lost some of its smugness. As Aviation Week and Space Technology noted in an article last year, ''Experience is proving that hard-used transports, no matter how well-built and maintained, are vulnerable to structural wear as they age.'' CORROSION THROWS yet another challenge at the FAA's inspection staff. Searching for it on an aging aircraft is a tedious and boring process. ''They have a little hand-held device that the guy runs across every rivet on the airplane,'' says Mead. ''He does that all day long.'' Yet for this mind- numbing work, Mead adds, ''you need someone of reasonably high intelligence.'' The planemakers and the FAA agreed last year to require owners of aging planes to replace entire sections of those that are vulnerable to corrosion and cracking. Boeing and McDonnell Douglas are recommending $1.4 billion in repairs, including the replacement of the ''belly skins'' of older 727s. There is just one complication: To comply strictly with the FAA order, U.S. airlines would have to ground some 2,000 planes over the next few years for extensive repairs and inspection -- about half the total commercial jet fleet. That would absorb the efforts of most of the FAA's inspectors and also far exceed the nation's repair capabilities. The FAA concedes that the process will have to go slower -- airplanes will be rebuilt one by one, and the rest will need constant surveillance. Retirement is not in the cards. Aircraft makers are backlogged with new orders, so that any airline wanting to retire and replace old planes will have to stand in line. Besides, economics argues for keeping an airplane flying as long as possible. A new 747 or equivalent might cost $60 million or more, while rebuilding and recertifying an older one will run $4 million to $20 million. Airline inspection clearly needs a new formula -- one that gets the FAA up to speed again in an era of deregulation. There's no end to the suggestions for improvement, but the essential recommendations boil down to three crucial needs: -- Well-trained inspectors paid at industry standards. The agency must update its classrooms and raise salaries to attract instructors knowledgeable about modern technologies. It should also farm out more training to community colleges, technical schools, or other institutions with better teaching skills. Boeing has begun to offer courses in spotting corrosion, but planemakers could do more in other areas where their specialized knowledge is critical. -- A comprehensive and modern computer system that gives the FAA a national database, with information from airlines, manufacturers, and other government agencies such as the NTSB. -- And the hardest to accomplish: a structural overhaul. The FAA needs to be a strong and independent body with a long-term administrator. It should get its financing directly from airport and ticket taxes, rather than filtered through the Department of Transportation. It should be able to make its own decisions about buying new technology, instead of struggling through a federal procurement process so lengthy that equipment is apt to be obsolete before it's delivered. And unlike the present FAA, which is supposed to promote air travel as well as safety, it should be responsible strictly for safety. WHEN A PRESIDENTIAL commission studied the agency a few years ago, it recommended ''a brand new FAA with an independent czar responsible for the public's air safety.'' Similarly, a pending Senate bill calls for an FAA separate from the DOT, with a seven-year administrator and a budget pulled directly from airport taxes. Several former administrators support the bill. But others, including Langhorne Bond, who served under President Carter, say that it doesn't make the FAA any less bureaucratic -- or any less vulnerable to the kind of federal lethargy that affects other independent agencies. Whatever the precise form of reorganization, the critics who say the FAA can no longer afford to be a paper tiger are right. It has teeth -- and it should use them.

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