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Business

Continued delays dimming chances of MRJ sales taking off

40-jet order from US airline likely to be canceled as Mitsubishi Aircraft continues to face headwinds

Repeated delivery delays have kept sales of the Mitsubishi Regional Jet from taking off. (Photo provided by Mitsubishi Heavy Industries)

TOKYO -- After repeated delays in rolling out Japan's first passenger jet in nearly five decades, Mitsubishi Aircraft now finds itself in danger of losing a 40-unit order of its Mitsubishi Regional Jet from the roughly 450 aircraft already on order.

This may be just one of the many problems plaguing the troubled project, which seems beset by a serious structural crisis.

Order crashes

Mitsubishi Aircraft's problems started when U.S. regional airlines underwent major shifts. Following the 2009 reappearance of Eastern Airlines, formerly one the top four carriers in the U.S. before ceasing operations in 1991, Mitsubishi took orders for 40 MRJs, including options, in September 2014.

After a financial crisis at Eastern, the airline was acquired in June 2017 by Swift Air, which announced its intent to increase its fleet of Boeing 737 aircraft from 13 to about 18, but failed to mention the previously ordered MRJs.

This caused a major stir at Mitsubishi. "Maintaining the orders would be difficult," admits an insider familiar with the deal.

Although a Mitsubishi Aircraft representative said the company "can't talk about individual contracts," it is likely that the large order, worth nearly 200 billion yen, will be canceled. If so, Mitsubishi would mostly have to shoulder the blame, as it has yet again reneged on delivery, this time pushing the promised 2019 delivery date back. 

Orders for the aircraft, including basic agreements, have grown to 477, of which 25 are from All Nippon Airways, 100 from Trans States Holdings of the U.S. and 10 from Myanmar's Air Mandalay. Mitsubishi's worst nightmare would be if U.S. airlines like SkyWest, which ordered 200 of the aircraft, also canceled.

Changing prioriites

Development of the MRJ began in 2008 as the first made-in-Japan passenger aircraft since the YS-11 about forty years ago. ANA was originally scheduled to receive its planes in 2013, but the delivery date has been pushed back five times to 2020.

MRJs at Mitsubishi Heavy Industries' Komaki South Plant in Japan (Photo provided by Mitsubishi Aircraft)

And since 2008, the global airline industry has undergone seismic changes.

According to the company, the main reason for the delays is obtaining certification from the U.S. Federal Aviation Administration and similar authorities in other nations. But there is a more fundamental issue at play: Airlines are having second thoughts about the MRJ.

Formerly, fuel-efficiency was a top concern of airlines. But priorities have changed. "Right now, fuel consumption doesn't matter too much as long as [the craft] is not as big as a Boeing 747," says a former maintenance manager at a major airline.

The main attraction of the MRJ in 2008 was its 30% better fuel-efficiency over the competition -- a strong advantage when benchmark West Texas Intermediate crude was going for around $100 per barrel. But with crude now hovering at about $50, airlines are more interested in rollout costs than fuel efficiency.

Competitors wait

Brazilian aerospace conglomerate Embraer, which ranks with Bombardier of Canada in market share for regional jets containing 100 or fewer seats, is skillfully adapting to market changes. To compete with the MRJ, which has 70-90 seats, Embraer will introduce a more fuel-efficient E175-E2 in 2021 that uses the same Pratt & Whitney engine as the MRJ.

But for now, the company is pushing sales of its last-generation E-Jet, or E1. "At the moment, there should be no interest at Embraer about rushing launch of the E2," says an industry source.

At the end of 2016, when Mitsubishi announced its fifth delay, Embraer took advantage of the setback, pushing back debut of its E2 to 2021. Embraer Civil Aviation Commercial Director Aryen Mayer confirms orders for nearly 300 jets and that development is on-schedule. He explained that the delay is designed to sync with U.S. deregulation.

He seems relaxed, carefully surveying the market surrounding the MRJ.

The catalog price for the MRJ is 4.7 billion yen, but in the aircraft business, official prices don't necessarily reflect actual selling prices. Based on past deals, the MRJ's price point seems to be around 3 billion yen.

"Embraer is selling its E-Jet at less than 2.5 billion yen," says a source at a Japanese manufacturer, apparently alluding to the fact that it makes sense for the Brazilian firm to continue selling low-priced E-Jets rather than more expensive E2s to airlines that aren't very interested in fuel economy.

Reality check

"You won't need to work to obtain new orders," read a notice sent to Mitsubishi Aircraft sales staff immediately preceding the Paris Air Show in June, where Boeing and Airbus competed fiercely for customers.

The confidence was hugely misplaced. Mitsubishi went to Paris with a working MRJ, but returned to Japan without having received any orders.

It often takes over a decade for new aircraft to become profitable. Mitsubishi Heavy Industries, which produces the MRJ, initially considered sales of 300-500 jets as the break-even point. Now, this will not be enough -- even at preferred prices -- to cover development costs, which observers estimate have ballooned to nearly 500 billion yen, roughly 300 billion yen more than MHI's initial estimate.

Debt at Mitsubishi Airline exceeded assets by 50 billion yen as of March 2017.

MHI President Shunichi Miyanaga, who considers the MRJ his pet project, and Yuichi Shinohara, senior vice president in charge of development, are both from the company's Hiroshima office. In January Miyanaga began campaigning to expedite the certification process by hiring a large number of foreign engineers.

Of Mitsubishi Aircraft's roughly 2,000 engineers, now over 600 are non-Japanese, among them one who reportedly earns 100,000 yen a day. "In Nagoya [at MHI's aerospace center], one can't succeed without speaking both English and the Hiroshima dialect," joked an employee.

Mitsubishi Heavy Industries President Shunichi Miyanaga, center, went to Paris to debut the MRJ but returned home without obtaining any orders for the new jet. (Photo by Tomohiro Ichihara)

Many of these foreign engineers are migrant professionals, who move around the world, lending their expertise to the highest bidders. Bringing in ideas from Bombardier and Embraer, these professionals are leading lights of aircraft development.

"Foreign engineers used to be considered just hired hands, outside the decision-making process. Now we actively have them decide," says an MHI insider, confirmation that the company now clearly depends on foreign talent, a surprise to local staff.

Missed opportunity

Development of the MRJ might have gone more smoothly if Mitsubishi Aircraft hadn't bungled a decision seven years ago. A former MHI employee on the development team testified that a Boeing executive had proposed that the company use the Boeing 737 cockpit for the MRJ. The employee couldn't believe it when Mitsubishi refused the offer.

There would have been tremendous upside in using the same cockpit. With over 9,000 737s operating worldwide by 2017, costs for training pilots and mechanics would have dropped and reluctance to fly the new aircraft would have been minimized.

But Mitsubishi Aircraft executives laughed the proposal off. "They insisted on developing everything themselves," says the former employee, still puzzled over the refusal.

Along with Bombardier and Embraer, China's state-run Comac is rapidly taking off with its ARJ21 jet. Although the aircraft was originally targeting only the domestic market, the firm is reportedly partnering with Russia to obtain certification from other countries.

Regardless of its quality, the jet will be a strong competitor if China can bundle sales of it with economic assistance to developing nations.

MHI still believes it has a great product that will sell, regardless of cost. The company's confidence -- or perhaps overconfidence -- can be seen in its attempt to charge higher prices to cover the increased development costs.

Mitsubishi has been faulted in the past with new product development. The firm withdrew from mass production of a linear-powered Shinkansen train after producing a prototype. It also wrote off a massive loss on a luxury cruise ship due to rushed development, not having considered sales prospects and insisting on doing everything in-house. 

Now, due to the many delays, the company is faced with redefining the MRJ in a market that has changed drastically since the jet's original conception. How Mitsubishi responds to this challenge in a business environment much changed over the past seven years will be crucial to the jet's commercial success.

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