Southwest Air Agrees to $7.5 Million Fine, FAA Says (Update2)

March 2 (Bloomberg) -- Southwest Airlines Co. agreed to pay a $7.5 million penalty for flying jets without fuselage inspections in 2006 and 2007, which would be the largest fine collected from an airline by the Federal Aviation Administration.

The amount could double if the Dallas-based carrier fails to take steps outlined to protect safety, the FAA said in a statement today in Washington. The agency had proposed a record $10.2 million fine a year ago, saying Southwest operated 46 Boeing Co. 737s on 59,791 flights without full checks for cracks.

The settlement ends a dispute dating back to March of last year, when the FAA announced the initial penalty, and comes after the airline continued negotiating past an Aug. 29 deadline for paying the fine. Southwest, the biggest low-fare carrier, has said safety wasn’t compromised by flying the planes.

“Southwest Airlines is pleased that we have been able to resolve all outstanding issues,” the carrier said in a statement. “This settlement with the FAA will allow us to focus on safety going forward rather than on issues that are behind us.”

The carrier must meet 13 new requirements related to personnel, manuals and procedures as a condition of the agreement, the statement said. Among those is a measure to increase the number of on-site personnel for large-scale maintenance vendors to 35 from 27 within 30 days.

“Some of those safety measures exceed FAA regulations,” Acting Administrator Lynne A. Osmus said in the statement.

Southwest shares fell 37 cents to $5.52 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have fallen 36 percent this year.

Record Fine

The largest fine imposed on a carrier was $9.5 million, on Eastern Airlines in 1987, FAA spokeswoman Laura Brown said. Eastern went out of business after paying only $1 million of that amount, and the remainder wasn’t collected, she said.

Southwest must pay the first $2.5 million of the penalty within 10 business days of signing the settlement and the rest in two equal installments, the last of which is due Jan. 15, 2011, the FAA said in its statement.

Other requirements Southwest must meet include reviewing inspection procedures and giving inspectors better access to information for tracking maintenance.

The carrier flew jets after discovering the inspection lapses, and later found cracks in six of the planes, the FAA said last year.

‘Cozy’ Relationship

Two FAA whistleblowers alleged in 2007 that an FAA inspector and Southwest manager who formerly worked for the inspector were aware of the missed inspections and still let the planes fly, according to documents from the U.S. House Transportation and Infrastructure Committee.

The committee conducted its own investigation on the incident and held a hearing last year. The panel’s chairman, Minnesota Democrat James Oberstar, said the FAA had a “cozy” relationship with the carrier.

The FAA reassigned three workers as a result of the incident, and Southwest placed three employees on leave stemming from its own review. The inspection lapses also prompted the FAA to change practice in maintenance oversight and led to legislation to create a whistle-blower office at the agency.

To contact the reporters on this story: John Hughes in Washington at jhughes5@bloomberg.net.

To contact the editors responsible for this story: Larry Liebert at lliebert@bloomberg.net