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Business

No easy flight for new Japanese airliner

Mitsubishi Aircraft President Hiromichi Morimoto, far left, smiles after the MRJ's maiden flight at Nagoya Airport on Nov. 11.

TOKYO -- On a crisp autumn day in New York in late October, Minoru Kawahara, head of Mitsubishi Aircraft's finance department, touted the company's first-ever regional passenger jet to a group of some 60 people from 37 financial institutions. The residual value of the Mitsubishi Regional Jet is estimated to be higher than rival Embraer's regional jet according to specialists, he explained.   

     Mitsubishi Aircraft has received more than 400 orders for the MRJ, including those that can be cancelled, since it began taking orders seven years ago. Mitsubishi Heavy Industries, its parent company, hopes to make the regional jet business "one of the company's major operations in 10 years," President Shunichi Miyanaga said. The list of buyers includes not only major airlines but also small and midsize carriers and low-cost carriers with less financing. "Teaming up with financial institutions for loan arrangements is an important sales tool," Kawahara said.

     Mitsubishi Aircraft also plans to tap the operating lease market with the MRJ. Operating leases allow airlines to procure aircraft without incurring a heavy burden on their balance sheets, because such leases are not recognized as assets. They also allow carriers to adjust their aircraft fleets in response to changes in passenger demand.

     After the term expires, leasing companies can sell the plane, at a profit if sold for more than its residual value, or re-lease it. According to evaluation by several appraisers, the pace of decline of the residual value of the MRJ over 20 years is up to 10 points less than that of rival Embraer's E175, Kawahara said. Touting the MRJ's lasting value, Kawahara and his team hope to press airline companies and financial institutions into loan agreements for the jetliner.

     Globally, 40% of commercial aircraft are leased. "By 2020, half will be leased aircraft," SMBC Aviation Capital reckons. But the market is hard to get into because fewer than 20% of regional jets with 100 or fewer seats are currently on lease. 

Not so attractive

The number of regional jets on the market is limited compared to small aircraft carrying 100-250 passengers such as the Airbus A320. This makes used regional jets harder to trade, an official at Mitsubishi UFJ Lease & Finance said. BBAM, a leading U.S. leasing company, said it has little interest in the MRJ given the illiquidity in the market.     

     Demand for regional jets is expected to grow over the next 20 years, with 5,000 new jets seen taking off. Whether those light-weight airplanes could thrive as a leasing business, however, remains to be seen. Mitsubishi Aircraft's Kawahara thinks that "the success of the MRJ will depend on whether we can mass produce aircraft that match the assessment, and meet demand," hinting at the importance of smooth production.

     The sales team for the MRJ includes many outsiders with different backgrounds. Kawahara used to work for Mitsubishi Corp., a major Japanese trader. Masao Yamagami, chairman of Mitsubishi Aircraft's U.S. branch since April, came from Mitsui & Co., another major Japanese trader. There, Yamagami was responsible for exporting parts for the YS-11, the first Japanese-made airliner, developed by Mitsubishi Heavy Industries and other manufacturers half a century ago. In 1995, he became the head of a U.S. aircraft leasing company, in which Mitsui had a stake.

     Despite his rich experience in both Japan and the U.S., Yamagami now faces a major challenge. In the aviation industry, providing a network of repair and maintenance services as well as replacement parts quickly is vital. "Operations efficiency is determined not only by the aircraft itself but a combination of the aircraft and the support network," explained Mitsubishi Aircraft President Hiromichi Morimoto.

Partner wanted

Small and midsize airlines tend to contract out maintenance work, but Mitsubishi Aircraft has yet to find a local partner in the U.S., even though the MRJ is set to start commercial flights in less than two years. The company also needs to respond to demand in Asia. "There have to be five or six maintenance facilities globally," said Yoichi Kujirai, senior executive vice president of Mitsubishi Heavy Industries.

     Mitsubishi Aircraft also received support from its parent company. Yukinori Horiguchi, who now oversees Mitsubishi Aircraft's sales and marketing division and serves as one of its senior executive vice presidents has a background in train systems and infrastructure building. Before Morimoto and Horiguchi arrived, Mitsubishi Aircraft focused mostly on winning orders at heavy discounts.

     Just before the Paris Air Show in June, the two shifted gears to profitability. As a result, the company received no orders for the MRJ at the event, while Embraer secured 50. The management, however, told employees not to lose heart. The strong attitude is a reflection of the company's resolve to turn an operating profit in fiscal 2020, an official at the parent company said.    

     Morimoto also comes from outside the aviation industry. He traveled around the world selling gas turbines and other parts for power plants. In the four years from 2009, as president of Mitsubishi Heavy Industries' U.S. unit, Morimoto implemented a bold restructuring plan, including introducing a performance-based pay scheme and hiring local people -- something none of his predecessors had ever dared to do. The restructuring boosted morale and individual performances, and led to higher revenues.

     Even a sharp-minded Morimoto had a difficult start at Mitsubishi Aircraft. The company had to repeatedly delay its maiden test flight, which was originally scheduled for May, to September or October. After announcing the delay at a press conference, Morimoto looked regretful. "Unlike gas turbines, assembling a million parts into a huge system like an aircraft has its own difficulties," he said.

     The MRJ finally made its test flight on Nov. 11 but the "difficulties" will likely continue to dog the company. Though successful, the flight is only a transit point for the company hoping to make a profit in fiscal 2020. The MRJ may be off the ground now, but the challenge to aim higher is only beginning.

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