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The New Mitsubishi Regional Jet Will Come a Decade Too Late


Mitsubishi Aircraft didn't wait for this week's Paris Air Show to launch its refreshed regional jet concept. Instead, it announced last week that it had given its MRJ program a new name: SpaceJet. The former MRJ90 model will become the SpaceJet M90, while the smaller MRJ70 model will be scrapped in favor of a new design called the SpaceJet M100, tailored specifically to the U.S. market.

The new SpaceJet M100 design is Mitsubishi's attempt to overthrow Embraer (NYSE: ERJ) as the dominant supplier to U.S. regional airlines such as SkyWest (NASDAQ: SKYW) . Unfortunately, development delays mean this new regional jet won't be available until 2023. That's 10 years too late to capture the U.S. regional airline market.

A new iteration of an old design

Mitsubishi Heavy Industries decided more than a decade ago to try to move up the value chain by building its own jets, rather than just being a supplier to the likes of Boeing . It created the Mitsubishi Aircraft Corporation and launched sales of the MRJ in 2008 with an order from top Japanese airline ANA. At the time, the MRJ was set to enter service in 2013.

In the following years, Mitsubishi mostly struggled to win orders outside its home market, where Japan Airlines also ordered the MRJ. However, Mitsubishi did win two significant orders -- representing the vast majority of its backlog -- in the U.S.: a firm order for 50 MRJ90s from Trans States Holdings and a firm order for 100 MRJ90s from SkyWest.

There was a problem, though. Mainline pilot contracts limit the weight, seat count, and number of regional jets that the three big U.S. network carriers may use. The MRJ90 exceeded the weight limit in the legacy carriers' scope clauses.

A rendering of a Mitsubishi SpaceJet flying over clouds

Mitsubishi began designing its regional jet more than a decade ago. Image source: Mitsubishi Aircraft.

Both Mitsubishi and Embraer -- which also designed a next-generation regional jet that exceeded the weight limit and also scored big orders from SkyWest and Trans States -- assumed that the legacy carriers would renegotiate their pilot contracts to raise the weight limits for regional jets. That turned out to be a bad assumption. As a result, neither SkyWest nor Trans States have a use for the MRJ90 or Embraer's E175-E2 as originally designed.

Mitsubishi's solution was to slightly expand the former MRJ70 concept to create enough room for 76 seats, while artificially limiting its maximum fuel load. This will reduce the range of the new SpaceJet M100, as it is now called, but keep the aircraft scope-complaint for U.S. airlines.

The case for the SpaceJet M100

According to Mitsubishi, the SpaceJet M100 will have "the lowest operating costs in its class." Its state-of-the-art engines will use less fuel and be cheaper to maintain than those used by today's regional jets, delivering a double-digit reduction in unit costs compared to the popular Embraer E175. The SpaceJet M100 will also have slightly wider seats and a higher ceiling than the E175 and will feature large overhead bins that can fit one roll-aboard bag for each passenger.

While the SpaceJet M100 will be range-limited because of the need to reduce its maximum takeoff weight, it will still be able to fly more than 1,000 miles, even facing headwinds. That's enough to cover the vast majority of U.S. regional airline routes.

Mitsubishi missed the replacement cycle

Mitsubishi's regional jet program has been beset by a multitude of delays, due to the company's lack of experience. The MRJ90 (now the SpaceJet M90) was initially supposed to enter service in 2013 but is now set for a 2020 debut. And the SpaceJet M100 won't be ready until 2023, a full decade after Mitsubishi originally planned to have a regional jet available for the U.S. market.

That caused Mitsubishi to miss a major fleet replacement cycle in the U.S. regional airline sector. Embraer and Bombardier have delivered about 500 large regional jets -- mostly 76-seat models -- to U.S. regional airlines since 2013. Together, they also have nearly 200 remaining firm orders from U.S. regional airlines.

Because of the limits placed on the major airlines' regional jet operations, there's only room for about 1,000 large regional jets in the U.S. right now. Perhaps that figure could grow to 1,100 in the years ahead, but that still means the total market opportunity in the U.S. is perhaps 400 76-seat jets in the decade after the SpaceJet M100 is ready in 2023. In addition, a large proportion of the older 70- to 76-seat regional jets in the U.S. today are operated by Republic Airline, which has an all-Embraer fleet  and no interest in changing that strategy.

The development of the SpaceJet M100 should enable Mitsubishi to consummate the existing SkyWest and Trans States orders, but the outlook for significant additional orders is quite bleak. If the total opportunity in the U.S. is at most 400 jets between 2023 and 2033 and Embraer is bound to get some of the orders, Mitsubishi might sell a total of only 250 SpaceJet M100s.

An Embraer E175 in the United Express livery

Embraer has captured most of the regional jet market opportunity in the U.S. Image source: United Airlines.

Outside the U.S., scope clauses are far more lax, if they exist at all. That means the SpaceJet M90 and Embraer E175-E2 -- and in some cases, even the larger Embraer E190-E2 -- are fair game. Mitsubishi's products might offer slightly better performance than Embraer's E2-series jets, but Embraer probably has lower production costs and airlines are already familiar with its jets. Thus, Mitsubishi may struggle to gain a high share of this market.

Will the SpaceJet program ever turn a profit?

Mitsubishi has spent billions of dollars to develop its new line of regional jets. It's unlikely that the company will ever fully recover that cash outlay. Embraer has been selling its E175 jets for $25 million or less in recent years. It could probably reduce prices further to keep customers from switching to the SpaceJet, especially with the additional purchasing power that will come from teaming up with Boeing .

There's only so much of a premium that airlines will pay for next-generation technology. Low prices for the reliable, proven E175 will force Mitsubishi to offer big discounts to sell SpaceJets. Meanwhile, its production costs could be significantly higher, both because the SpaceJet is a new product and because labor costs are relatively low in Brazil, where Embraer builds the E175.

The SpaceJet program ultimately may succeed in its long-term goal of building up the Japanese aerospace industry. However, viewed on its own, it seems destined to become an expensive white elephant.

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Adam Levine-Weinberg owns shares of Embraer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.





This article appears in: Personal Finance , Stocks
Referenced Symbols: ERJ , SKYW



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