#mrj

Mitsubishi Jet facing cancellations

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In 2009 CM argued (in a former life) that the Mitsubishi Regional Jet (MRJ) was doomed to failure. It was answering a question that no one was asking. It seems that one of its customers, Eastern Airlines, which originally placed 40 orders found itself in receivership and its new owners do not seem to have any intention honouring Eastern’s order book. With a total order book (including options) of 447 MRJ aircraft, this would be a big dent. The plane has been beset with delays, material changes (it was to have carbon composite wings but it was deemed too expensive so switched back to alloys, increasing weight hence hurting economics) and the realities of the industry.

1. Demand – Both Boeing & Airbus publish detailed long range fleet forecasts every year. They are both in agreement that regional jets (50-100 seats) have little future forecasting they’ll represent a total of 3,000 orders in the next two decades. Around 8 years ago that forecast was 5,000.

2. Incumbents – Embraer and Bombardier dominate the regional jet market with some 80% share. Mitsubishi is looking to beat the door down in an industry where risk is not wanted. The Chinese are entering the market with the C-919 and the Russians with the Sukhoi Superjet. Mitsubishi wanted a 20% share. Of 5,000 units that’s 1000 units they banked on. At 3,000 that’s only 600 units their share target would hit. Boeing and Airbus are offering slightly smaller versions of the 737 and A320 series to cater to the market that would normally buy an RJ.

3. Pilots – well most pilots are certified to fly only one type of commercial plane at any given time so Mitsubishi needs to make sure it’s planes can have a supply of pilots to fly them and airlines need to take a bet on expansion. Same goes for ground crew training.

4. Existing fleet – if a regional airline wanted to expand, if they used Embraer ERJ-145s it is better to get more of the same as the economics are well understood. Also the pool of pilots is likely more accessible. Route gaps need to be filed as soon as possible so waiting 12 months to get an MRJ may not work for an airline.

5. Residual values – when airlines get into financial turbulence, sometimes fleets need to be trimmed. Having a ‘liquid’ fleet which is easily placed at another airline helps balance sheet (relatively speaking). The best example was the GE engined 747 (60% of market) which sold at a premium to the Rolls-Royce engined 747 (15% of  market) in the used market because very few airlines used RR. A fleet of MRJs may have few homes to go if airlines need to part with them quickly. Airlines know this so it is likely that Mitsubishi is providing such residual value guarantees to bank in the orders.

However if Mitsubishi keep losing orders then the airlines that intend to use them may switch away on the basis that the risks down the line are too great. Regional airline budgets are thin. Risks are avoided at all costs.

The MRJ will likely fall foul of the Mitsubishi YS-11 of the 1970s. Great concept but poor execution on the basis of not having a big enough grasp of the industry dynamics. JAL and ANA will likely he asked to do national service on top of the initial tour of duty to support the plane.

The ground’s the limit.

Mitsubishi (Two) Zero

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The Mitsubishi Regional Jet (MRJ) will see first deliveries pushed from 2018 to 2020. Two Zero Two Zero. This is a classic case of a project built on dreams rather than the reality of the regional jet market. Mitsubishi was answering questions nobody was asking. Don’t get me wrong, Mitsubishi Heavy Industries is a wonderful supplier of aerospace parts (787 wings for example) but it should never have chosen to get involved in the retail of its own commercial jets. When the plane was introduced as a concept in 2007 at the Paris Airshow I believed it was destined to failure from the beginning. It had nothing to do with the technical abilities but it was playing in a market dominated by two makers (Embraer & Bombardier) who held 70% share. MRJ wanted 20% of the supposed 5,000 regional jet market. The problems are/were many:

1) Boeing & Airbus‘ 20-year commercial aircraft forecasts scaled back the exact market that MRJ was shooting for from 5,000 to 2,500. The market was no longer looking at 70-90 seats but 110-120 which is exactly where Embraer and Bombardier were aiming. Airbus notes its sales of the smaller A319 have fallen from 44% of the A320 family to 5% in 2015 while the larger A321 has gone from 10% to 38% over the same period. In essence larger planes are becoming much more efficient so the place for regional jets is shrinking. So MRJ was targeted at the wrong space and the market is expected to be 50% smaller. So even if   MRJ managed to hit 20%, 500 planes would unlikely be a breakeven point. MRJ has 243 orders so far and 200 options with fairly shaky customers outside JAL & ANA. It has had one customer cancel. On top of this China is entering with the COMAC C919 and the Russians with the Sukhoi Superjet 100.

2) Regional airlines tend to run on shoestring budgets and downturns can cause them to trim back routes and fleet numbers. Part of the reason of owning potentially slightly less efficient aircraft which have high market shares is the resale market. When times get tough, leasing companies have a much easier time placing more popular types in the market for other customers because with such high shares, potential demand is global. The residual values are important in downturns. I won’t be the least bit surprised if MAC is having to guarantee them to sell the planes they have. The biggest purchasers of MRJs are smaller US regional airlines. More delays risk order cancellations or penalty payments for MAC.

3) Pilots. In general most pilots are only certified to fly one type of aircraft. If an airline has a lot of Embraer, they are likely to grow with the same plane so their pilot pool is more flexible. Pilots also train to fly planes which offer them flexibility with careers. If planes like the MRJ are unlikely to sell well, then fewer pilots want to spend years learning to fly for an aircraft type with low prospects.

4) Service crews. The ground technicians have to be trained. If airlines have one type of plane, training costs are reduced and replacements, spares and service networks are more commonplace. If 3 MRJs are sold in Brazil, then the supply networks need to be on the ground but serving such a small fleet size just impacts cost and riding on the back of a 3rd party vendor only emphasizes they aren’t a serious player.

5) Airlines hate risk. Buying a brand new airframe is risky. Launch customers are making judgements based on computer models and without launch customers, aircraft manufacturers don’t commit. Buying a new airframe with a brand new engine makes the proposition even riskier. The 787 was a new airframe but the engine architecture from Rolls-Royce and GE was based on existing designs.

6) Materials. MRJ tried to go the state of the art composite route but had to scrap plans and go back to traditional alloys because the cost was too high, killing off one of the key selling points.

Sadly delays are part and parcel of modern aircraft design. MRJ can little afford more delays. Aircraft orders for Airbus and Boeing have slowed in recent years, some 20-30% off the peak of 1500 a piece. Regional jets are at the rump end. A sluggish global economy and airlines that have expanded too quickly are backing off the throttle. This two year delay could lead to cancellations. Any global downturn could see those orders and options get trimmed or cancelled sending earnings into a tailspin.

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.