Regional Jet Sector Faces Overcrowding

April 14, 2008

Lack Luster Residuals Will Face At Least One Model

The long awaited competition to Western aerospace technology finally appears to have moved from the realm of desirability to reality with an actual order for the Mitsubishi Regional Jet from All Nippon Airways (ANA).

The Western aerospace manufacturers, decimated over the last decade with the withdrawal, absorption or demise of BAe, Fokker, FairchildDornier, Beech, McDonnell Douglas, Saab, have long feared the arrival of new competitors able to offer lower manufacturing costs and products capable of meeting politico-economic demands. Airbus, Boeing, Bombardier and Embraer will now have to sit up and take notice now that the Mitsubishi Regional Jet has been launched and that GE Capital Aviation Services (GECAS) intend to order the competing Chinese ARJ21. The development of a number of new products at approximately the same time offers the likelihood of values of at least one model experiencing significant problems.

The Mitsubishi Regional Jet (MRJ) was officially launched on the 28th March 2008 by Mitsubishi Heavy Industries Limited (MHI) on the basis of an order for 15 MRJ90s by ANA and 10 options. The purchase price has inevitably not been revealed but will have as usual attracted considerable discounts. The list price of the MRJ90 is approximately $40 million and the cost of developing the new aircraft is $1.5 billion. From the 1st April a new company, Mitsubishi Aircraft Corporation, was formed and will accelerate the MRJ’s development and further strengthen sales activities to potential customers worldwide. As Japan’s first company to manufacture and market original passenger jetliners, Mitsubishi Aircraft will fulfill a long-cherished wish of the Japanese aircraft industry, leveraging technological expertise that MHI has built up through its aerospace business. The aircraft will be powered by the Pratt & Whitney Geared Turbofan (GTF) which promises to offer a significant reduction in fuel consumption. There has been some comment that the close proximity of moving parts may create its own reliability problems.

Mitsubishi Aircraft will be responsible for various key activities in the MRJ project, including the aircraft’s design, acquisition of type certification, procurement, sales and customer support. MHI’s Nagoya Aerospace Systems Works will manufacture both the prototype aircraft and production models; it will also be in charge of the MRJ’s flight testing. The MRJ is being offered in two models, the MRJ70 and MRJ90 featuring 70-80 and 86-96 seats respectively. Each variant is also offered as a standard version, an ER and an LR, much the same as the Embraer and Canadair products. The long range versions have a range of just under 2,000 nautical miles which compares favorably with the larger offering from China, the ARJ21-700 and -900. The maximum capacity of the ARJ21-900 is 105 seats. The MRJ is due to enter service in 2013 which would perhaps reflect better market conditions, particularly in the context of replacing the existing generation of regional jets. In view of the difficulties experienced by Airbus and Boeing over the A380 and B787 respectively the development of an all new aircraft by a new manufacturer will likely also face problems. Rapid and comprehensive support has long since been an important consideration for operators just as much as the original purchase price.

Both the MRJ and ARJ are therefore firmly competing with the Bombardier and Embraer models providing a four way competition. The MRJ and ARJ are naturally seeking to initial orders from domestic customers although there exists speculation that Vietnam may be interested in the MRJ not least because of existing manufacturing links. The ARJ has already secured orders from Chinese customers but with a potential order for five ARJ21-700s from GECAS, there exists potential to expand the customer base beyond the domestic market. Russia is also seeking to compete with the Sukhoi Superjet 100, some of which have already been ordered by European customers. The 70-100 seat segment now features at least five manufacturers and both Airbus and Boeing have expressed interest in also competing when launching their own new narrowbodies in the coming years.

Even if the new manufacturers are able to secure sizeable orders from domestic and regional orders, the lack of a wider market could pose problems for residual values. Fleet concentration both in terms of size and geography have long since been considered major negatives when considering residual values. The 50 seat regional jet market is heavily dependent on the fortunes of the U.S. market and some volatility has already been experienced.

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