Answering questions nobody is asking

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Mitsubishi Aircraft Corp (MAC) – subsidiary of Mitsubishi Heavy Industries (MHI) – has announced its 5th delay of the Mitsubishi Regional Jet (MRJ) to market. It has spent $3bn so far on development of a regional jet that is the wrong size competing with two incumbents (Bombardier and Embraer) which have 90% market share and forecasts from Boeing and Airbus showing the regional jet market will shrink from 5,000 to 3,000 over the next 20 years. China is also entering with the COMAC regional jet in a few years.

At its inception almost a decade ago I told MHI that the MRJ would flop  not on technological grounds but they didn’t understand airline economics. I told them regional airlines were notoriously fickle. The companies tended to run super lean budgets. Moreover regional airlines tended to favour one type of aircraft common in the market because expansion meant leasing same type aircraft was simpler, service technicians were trained and sourcing pilots a doddle. Also in a contraction, the residual values of regional jets that could be placed in the market relatively easier held their value.

MAC proposed the MRJ as a luxury regional jet something at odds with regional travel. In most cases regional airlines would seat people on stools if it would pass FAA regs. For an airline to consider buying the MRJ they’d need to factor

1) the risk of a downturn and the impact to residual values although MAC is likely to put in place Tesla like residual values. Leasing companies will have fewer options to place such planes with other airlines meaning residuals could be near zero meaning other airlines who buy MRJs risk marked to market valuations impacting their balance sheets negatively.

2) sourcing pilots – pilots ultimately having to choose to fly it. In most cases pilots can only get certification to fly one type of aircraft so if the odds of flying the MRJ long term are low the cost to procure pilots will be higher ruining economics. Then again if the outlook is poor in general why would pilots risk a career on a low demand plane. Sure they can retrain on another type but it is opportunity cost.

3) Airlines will need to train ground staff technicians to service planes going forward adding to costs.

MHI had a dreadful experience with the YS-11 in the 1970s. Technically capable plane but lost a bundle. The same issue afflicts the MRJ. Technically capable but alas a case of poor marketing power. It’s rivals have global networks in place and long standing relationships. China’s offering will be laced with domestic incentives to buy the home brand.  Which leaves the MRJ the piggy in the middle of a shrinking market with delays that will see it launch at the same time the global economy keels over. The worst of all worlds . Making wings for the 787 maybe all that is left that offers profitable hope.

Perhaps the MRJ may end up standing for Massively Risky Journey.

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