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Mitsubishi Heavy injects another $1.9bn into struggling jet

CEO says this is the 'last time,' while forgiving 50bn yen worth of debt

The MRJ's delivery has been delayed five times, from its initiative target year of 2013 to mid-2020.

TOKYO -- Japan's Mitsubishi Heavy Industries is injecting $1.9 billion of capital into its struggling Mitsubishi Regional Jet program, which has accumulated serious debts as a result of repeated delays in the aircraft's development.

Chief Executive Shunichi Miyanaga insisted this injection would be the "last time" for the development as the new jet would meet its delivery date in mid-2020 as scheduled. He also downplayed the impact of a recent lawsuit filed by the company's Canadian rival Bombardier. Still, concerns persist that the lawsuit could further push back its current delivery plan.

Mitsubishi Heavy announced Wednesday, at its earning conference for the second quarter of fiscal 2018, a plan to resolve the excess liabilities of its aircraft unit, Mitsubishi Aircraft, by the end of December. The subsidiary, which had debt 110 billion yen ($972 million) in excess of assets as of March 2018, will issue shares worth 170 billion yen as part of a debt-to-equity swap in which Mitsubishi Heavy will receive new Mitsubishi Aircraft shares. Moreover, Mitsubishi Heavy will forgive 50 billion yen worth of debt.

The move will increase Mitsubishi Aircraft's capital to 270 billion yen, including reserves.

"The aero-industry will be one of the cores of our long-term growth strategy," Miyanaga said. The capital will be deployed for "development of the MRJ as well as its delivery," and will increase the stake held by Mitsubishi Heavy from 64.0% to 86.7%. Other minor shareholders, including Toyota Motor and Mitsubishi Corp., will not participate in the capital increase. The new funds will contribute to cutting administrative expenses at Mitsubishi Aircraft, mostly human resources costs, which have soared due to the repeated delays.

Japan's first passenger plane since the 1960s made its first air show demonstration flight in July in the U.K. However its delivery has been delayed five times from its initiative target year of 2013 to mid-2020, amid a failure to obtain type certificates, which validate aircraft design to meet airworthiness standards in the issuing jurisdiction.

Development costs for the MRJ have already topped 600 billion yen, and are expected to rise another 200 billion yen by 2020. Mitsubishi Aircraft had logged more than 210 billion yen in accumulated losses as of the end of March.

This emphasizes Mitsubishi Heavy's lack of experience in the industry. "We need to arrange quickly the mass production system and the business platform for MRJ." During the conference, Miyanaga did not conceal his impatience, as the regional jet business was presented as one of the biggest issues for Mitsubishi Heavy's growth strategy. He suggested he might form a new body in fiscal 2019 to lead the commercialization of the MRJ.

Shunichi Miyanaga, Mitsubishi Heavy’s CEO, did not conceal his impatience as the regional jet business was presented as one of the biggest issues for company's growth strategy.   © Reuters

However, the regional jet program faces another issue -- Bombardier's lawsuit against Mitsubishi Aircraft filed in mid-October.

The Montreal-based airplane manufacturer claims the company stole its testing and aircraft manufacturing practices for the narrow-body C Series, which it acquired from former Bombardier employees. Bombardier alleges Mitsubishi and its Seattle-based partner Aerospace Testing Engineering & Certification targeted hiring former Bombardier employees who had access to information on the successful certification of the company's aircraft.

Bombardier claims Mitsubishi Aircraft violated the Defend Trade Secrets Act of 2016, in order to use the confidential data to accelerate the process of certifying its planes, which is usually time-consuming and costly.

If the lawsuit impacts the plane's type certificate, the company will face even more delays. However, Miyanaga was confident on its delivery date. "We have bright prospects to deliver the first jet in mid-2020 as scheduled," he said, adding, "We support Mitsubishi Aircraft as we have been assured by the unit that there was no unfairness." Mitsubishi Aircraft, in a statement released last week, said the allegations were "without merit" and that the company saw this lawsuit "primarily as an attempt by Bombardier to stifle global competition."

According to Jamie Koutsoukis, a senior analyst at the corporate finance group at Moody's, disputes between aerospace manufacturers are "common in the industry." There have been disputes between Boeing and Airbus for some time, including lengthy World Trade Organization litigation, and similarly between Embraer and Bombardier, with both sides claiming the other has received government subsidies.

Mitsubishi Heavy on Wednesday announced a 25.4 billion yen net profit for the April-September half, with sales increasing 2% on the year to 1.87 trillion yen.

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