Is this the sunset for the Mitsubishi SpaceJet?
The Mitsubishi SpaceJet, once known as the RegionalJet, promised to bring Japan’s aerospace industry into the spotlight as one of the major players in the commercial aircraft sector. While many aerospace suppliers are based in the land of the rising sun, there was only one Japanese-made aircraft that made it into serial production, the NAMC YS-11 turboprop in the 1960s. Mitsubishi’s own SpaceJet, which promised to replicate and overcome the NAMC YS-11’s unfortunate career, has had an unlucky story itself.
The aircraft program has seen the world change like no other, including the Global Financial Crisis of 2008 and now, the current COVID-19 pandemic. While both had and will have long-term changes to the industry, changes always bring opportunities. However, has the window of opportunity already closed for the SpaceJet, which has only struggled to finally fly passengers?
Customers turning their backs
A significantly downsized workforce and companies turning their backs have provided another set of challenges, not to mention the onset of difficulties brought by the pandemic.
On January 8, 2021, Mitsubishi Aircraft announced that Aerolease, a US-based aircraft leasing company, has terminated its contract with the Japanese manufacturer. Aerolease had 10 firm and 10 optional orders booked for the regional aircraft since August 2016. While the two sides have agreed to “revisit a re-contract again when development resumes,” the question now is when the development will resume.
In an announcement in June 2020, the company indicated that its focus shifted “from development to perseverance and determination.” The onset of the pandemic and the shifting winds “necessitated the development of a new operating plan for this fiscal year that included resizing its organization so that Mitsubishi Aircraft may endure and emerge from this crisis,” read the company’s message, as it cut half of its 2,000-strong workforce. The mood, which was already on a downwards spiral, turned worse.
After all, Aerolease was not the only company to cancel their order. Trans States Airlines also chose the same option in October 2019, citing the jet’s failure to comply with scope clause regulations set out in airline contracts with unions regarding the aircraft’s size. That day, Mitsubishi lost 100 orders, consisting of 50 firm and 50 options.
Little room for improvement
Across its development, the SpaceJet program suffered many low points. After all, the entry into service date was pushed back a whopping six times: the aircraft, which was supposed to fly commercially in 2013, was scheduled to do so in late-2021 or early-2022.
And that was before the latest set of stumbling blocks.
In October 2020, Mitsubishi Heavy Industries (MHI), the parent company of Mitsubishi Aircraft, announced that it will freeze the development of the SpaceJet program, as the company’s profits dwindled amidst the coronavirus outbreak. While work to obtain the aircraft’s Type Certificate (TC) would continue, it would be done following another round of cost reductions. First things first, Mitsubishi’s United States flight test site would be closed down for good, according to the company’s announcement in November 2020.
A month later, the Japanese conglomerate axed 95% of the Aircraft division’s workforce, leaving 150 people starting from April 2021 to complete certification work. All in all, MHI allocated ¥20 billion ($194 million) to the SpaceJet program for FY2021. That is a large deduction in reserves compared to FY2019 when MHI spent ¥140.9 billion ($1.3 billion) for the development of the SpaceJet.
The skies above Nagoya, Japan, where the SpaceJet program is based, were not always shrouded by dark clouds. Five aircraft frames have been flying since the program’s first flight in November 2015, and the certification process has progressed forward. Mitsubishi further bolstered SpaceJet’s position by acquiring the CRJ lineup from Bombardier, including all of its assets. Acquiring another regional jet program significantly upgraded the sales package that Mitsubishi could have offered to potential buyers, which now included a proper support network.
“The CRJ program has been supported by tremendously talented individuals. In combination with our existing infrastructure and resources in Japan, Canada and elsewhere, we are confident that this represents one effective strategy that will contribute to the future success of the Mitsubishi SpaceJet family,” commented the president and Chief Executive Officer (CEO) of MHI Seiji Izumisawa when the Japanese company announced the sale in June 2019.
In September 2019, the Japanese manufacturer signed a Memorandum of Understanding (MoU) with Mesa Airlines for 100 SpaceJet aircraft (50 firm and 50 options), providing a spark of hope for Mitsubishi. The US market is essential to regional aircraft manufacturers. However, the market is not a welcoming one and it will be quite a challenge to get into.
But the acquisition and the development has brought little success to show for Mitsubishi, despite the rather big Mesa Airlines order.
Unplugged cash drain
Ultimately, the goal of the SpaceJet was to bring in cash and profit for Mitsubishi. So far so, the cash has been only leaving the company.
The outflow number, as of October 2020, stood at more than $9 billion.
But Mitsubishi has a long way to go before the SpaceJet can bring at least some cash into the company. The question is whether that ship has already sailed, considering the impact of the current crisis. Airlines will look to save cash in the coming years due to the massive balloon of debt they have taken, especially in the United States – one of the key markets for the regional aircraft. Even then, for the SpaceJet to access that market properly would mean developing the SpaceJet M100, a variant of the aircraft catered to the regional market in the United States.
US airlines are bound to a deal with their unions, which not only restricts the amount of regional jets they can use but the size of them as well. Potential aircraft for the US market can seat up to a maximum of 76 passengers and have a Maximum Take-Off Weight (MTOW) of no more than 39 tons. Neither the M90 nor the standard version of the M100 meets these requirements, as both are too heavy for airlines to operate with their union’s consent. While Mitsubishi has highlighted in its sales brochure that a scope clause-compliant M100 will seat 76 passengers in a “North America triple class” layout, with an MTOW of 39 tons, the development of the SpaceJet M100 was suspended in May 2020.
Considering the cash drain that Mitsubishi experienced with the program and the current crisis, the decision was expected. With the M90 not acceptable to mainline regional affiliates due to its size, the M100 was the spearhead that could penetrate the market. Now, the spear is seemingly as blunt as an aircraft’s nose.
Yet Mitsubishi might have missed the opportunity to enter the US market at the perfect time.
The CRJ acquisition from Bombardier brought Mitsubishi something that would have taken years and millions of dollars to build – an extensive support network across the globe. At the same time, the Canadian-built aircraft program will begin to leave windows of opportunities as time goes on.
The CRJ program delivered its last commercial aircraft on December 17, 2020, when C-FJGZ left the plant located in Montreal, Canada in Air Canada Express colors. Bombardier produced the larger CRJ versions of the regional jet from 1999 till 2020, meaning the oldest CRJs in service are approaching their 20th birthday, as the first delivery occurred in January 2001 to a now-defunct French airline Brit Air, which now operates as Air France’s regional subsidiary Air France Hop. CRJ700 family aircraft are all similarly sized when compared to the SpaceJet and Embraer’s E and E2 jet families, and the Japanese-built could have perfectly slotted in to replace the aging CRJs.
After all, Embraer’s own scope clause-compliant aircraft are aging. The E175, which the Brazilian manufacturer still has a fairly sizeable backlog of, entered service in 2005. The aforementioned backlog, as of October 30, 2020, stands at 153 aircraft, not to mention the additional three E190 jets. However, the E2 jet family has an issue, much like the M90 – scope clause compliance. Even the smallest E175-E2 is five tons too heavy to appease the union contract.
“Historically, scope clauses only changed once there was a product that pushed it to change,” stated the now-current CEO and President of Embraer Commercial Arjen Meijer in October 2019. “There needs to be a scope clause change, in the end, to allow the E175-E2 to fly,” he added. As of October 30, 2020, the smallest E2 jet has no orders and since August 2020, the aircraft’s development was slowed down. Thus, its previous entry-into-service date of 2021 was pushed back into 2023. Embraer, which had to entangle itself from the failed commercial partnership with Boeing, looks not only to save cash but to also find a customer for the E175-E2, as the regional jet has zero outstanding orders.
Ultimately, Mitsubishi is now facing an opportunity-filled market in front of them. With the aging CRJ and a struggling E175-E2, the M100 could have swooped right in and started chipping away at Embraer’s market share. Undoubtedly, both the E175-E2 and the M100 are much better than either the CRJ or the E175 in terms of their efficiency and passenger experience, as they are simply newer aircraft.
The E175 is definitely an outdated design when compared to the two new yet-to-be entrants in the regional market. Nevertheless, the E175 still has a competitive edge against both. Yet at the same time, it also provides an advantage for its E2 brother and undermines M100’s edge against the Brazilian made regional jet.
While the Embraer E175 has passed its glory years, the old sport still has some fighting spirit left in it – and together with the E175-E2 can very much take on the M100.
For Embraer, the only question mark for the E175-E2 remains are the scope clause measurements for a regional aircraft’s size, as the aircraft was seemingly ready to enter into service in 2021. The E175, which Embraer still produces, allows the commercial aircraft division not only to raise cash continuously with the fairly sizeable backlog but to also keep its customers loyal. With many retirements across the globe, including that of the E175, aircraft are losing value like no other. For example, Alliance Airlines, a regional Australian carrier, has used the downturn in prices to purchase second-hand E190s, the second-largest aircraft in the E-Jet family. In August 2020, the company announced that it would purchase 14 E190 aircraft, including six spare engines and other items related to the jet for $79.4 million. While the spare engines and other assets are included in a deal, that would put one E190 at $5.6 million – a very cheap option for carriers to expand quickly.
“Historically, in any given year, between 30 and 50 E-Jets transition from one operator to the next, and we work hard to smooth those transitions to reduce cost, broaden our customer base and enhance residual value, which is important to our customers,” an Embraer Spokesperson indicated in a statement to AeroTime News in August 2020.
Even second-hand acquisitions help build loyalty with an airline, including the fact that the carrier begins to build up the background infrastructure to operate the fleet. Alliance Airlines, according to Embraer’s press release, “has an option to acquire five more E190s and a full-flight simulator,” which might indicate that it could operate these jets for years to come. Down the line, once the E190 aircraft program has finally run its course, the same background infrastructure might become a very heavy argument for Alliance Airlines to buy new Embraer jets.
The same argument could be repeated around the US, where the Embraer E-jet fleet is highly present. According to an Embraer investor presentation dated September 2020, the E175 holds 83% of the market share in North America for orders since 2013 compared to the CRJ900. In total, 53% of the Brazilian manufacturer’s order backlog is based in North America, outlining just how important that market is for it.
Not done with investment
For Mitsubishi, despite its CRJ program acquisition, that will not be a given. The SpaceJet is as familiar with the CRJ as the CSeries aircraft was with the Airbus family of aircraft, and the Japanese company will still have to build up spare parts resources, Maintenance, Repair and Overhaul (MRO), and pilot training facilities. While some of that could be covered under the former-CRJ flag, a lot of work resources-and-personnel-wise will have to be done – a process that will require a major investment in order to properly provide aftermarket support for future SpaceJet customers.
For airlines, coming off a devastating crisis such as the current one, cash becomes a very important factor. Especially in the US, where the Coronavirus Aid, Relief, and Economic Security (CARES) Act has come in the form of loans, which airlines will eventually have to repay. Furthermore, introducing a new aircraft into a fleet is a costly venture – a venture that Mitsubishi could fund in the form of reductions in order prices.
At the same time, sinking in $9 billion without nothing to show for it is not a good argument to drive down your aircraft prices in order to offset costs for carriers, when Mitsubishi’s equity reserves have only gone down since FY2017. The situation is further complicated due to the fact that the M100 development, which was supposed to release the smaller variant of the SpaceJet into the market in 2024, is not completed nor is nowhere near so. The freeze of development in May 2020 has put further questions on the final entry-into-service date for the M100.
The Mitsubishi aircraft family is yet to be certified, while the E190-E2 and E195-E2 are already flying across the globe, with E175-E2 the only remaining aircraft from the family not to be certified. The only question for Embraer’s yet-to-be-certified regional jet remains whether unions are willing to relax the scope clause limits. From Mitsubishi’s point-of-view, there is a myriad of questions. All of them are covered by an umbrella called Cash – how much more the Japanese company is willing to spend in order to release an aircraft into the market when airlines will not willingly throw their own cash around and the demand for the SpaceJet is already questionable? If not for SkyWest Airlines’ firm order of 100 aircraft, the M90 only managed to attract 67 orders, while the scope clause-compliant M100 has 50 firm orders so far.
At the end of the day, a company is always at a disadvantage when it plans to introduce a clean-sheet design into the market. If your product is now at least a decade late than initially promised, well, good luck with that boulder, which rolls over one’s cash reserves, up the mountain.
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