When Losses Don’t Matter: How Japanese Conglomerate Mitsubishi Blows Billions on a Jet Nobody Really Wants

On paper, this looked like a no-brainer.

By MC01, a frequent commenter on WOLF STREET:

At the 2007 Paris Air Show, Mitsubishi Heavy Industries announced to much fanfare a brand-new regional airliner. The fantastically named Mitsubishi Regional Jet (MRJ) was to be certified for commercial operations by 2012 and to set a number of firsts for the technologies employed in its construction, including an airframe made with over 80% in composites.

The MRJ was the culmination of a ¥50 billion ($440 million in 2003 money) study program funded by the Japanese Government to build a regional airliner in the 50-90-seat category with as much domestic content as possible.

On paper, this looked like a no-brainer: Japanese firms such as Subaru (formerly Fuji Heavy Industries), IHI, and Mitsubishi are major vendors for the commercial aviation industry, supplying everything from toilets to critical large structural assemblies.

However, industry veterans remembered that Japan’s previous attempt at building a commercial airliner ended in farce: the NAMC Y-11 was produced up to 1974 in small numbers, losing a lot of money and being generally dismissed by airlines despite its excellent performance. Its problem was an inefficient cabin layout, the result of having been designed “by committee” instead of in close cooperation with the airlines that would have to operate it.

In terms of the MRJ, Mitsubishi grandiosely and confidently announced that it aimed at nothing less than a 20% share of the regional airliner market over the following 20 years, estimated at a total of 5,000 units, and that their MRJ would break even after just 350 units had been sold. The total cost of the program was put at $1.9 billion in 2007 dollars.

However already in 2009 it was evident this was nothing more than corporate hype reported uncritically by the media that should have known better.

In September 2009, Mitsubishi announced an extensive redesign of the MRJ, chief among which was abandoning the previous extensive use of composites in favor of traditional aircraft-grade aluminum alloys. As Mitsubishi is both one of the world largest producers of composites and a major manufacturer of critical composite assemblies, this decision is still puzzling and highly controversial.

This immediately caused the Maximum Take Off Weight (MTOW) to balloon from 38,000 kg to 42,000 kg, effectively jeopardizing all-important US sales due to the all-important “scope clause.”

The scope clause is part of the collective bargaining contracts the big three US airlines – United Airlines, Delta Air Lines, and American Airlines – have with the respective pilots unions.

The scope clause limits the size and numbers of airliners that may be flown by a company’s regional affiliates, the so-called feeder airlines that shuttle passengers between smaller airports under contracts and agreements with the Big Three. The stated goal of this clause is to avoid outsourcing the main company’s flights to the regional airlines and/or using pilots sourced from these airlines to replace regular ones during a strike.

Since 2008, all three airlines have a scope clause limiting their regional affiliates to aircraft with 39,000 kg MTOW and 76 seats. The smaller version of the MRJ (MRJ90) was designed from scratch to meet these limits, carrying 76 passengers in a single class configuration and with a MTOW under 38,000 kg. The inexplicable and inauspicious redesign caused Mitsubishi to instantly lose a big order of 50 firm orders plus 50 options from Trans States Holdings.

Trans States, which operates feeder services for the Big Three, made use of a contract clause allowing them to cancel their orders at no penalty if any redesign made the MRJ non-compliant with the scope clause. The financial loss for Mitsubishi on this contract was $2.3 billion in firm orders alone.

To counter this serious issue Mitsubishi launched another thorough redesign of the smaller MRJ90 aimed at drastically slashing weight which, however, will push its entry into service back at 2023 if not later. No cost estimate for this redesign has been given so far.

These near-continuous redesigns had the effect of pushing the whole MRJ program back 8 years for the larger MRJ70 and at least 11 years for the smaller MRJ90.

To add insult to injury, in October 2018 Bombardier of Canada suedMitsubishi, alleging an ex-employee had sold the Japanese firm trade secrets to help with the FAA certification process of the MRJ. The lawsuit was thrown out by a Federal judge in April 2019.

While such allegations are very common in most industries, it opened the door for a weird chapter of the return of Mitsubishi as an aircraft manufacturer: just two months after the judicial case closed, Mitsubishi and Bombardier executives stood on the same stage in Montréal and shook hands to sign the sale of the Canadair Regional Jet (CRJ) program to Mitsubishi.

Under the deal, Mitsubishi will pay $550 million in cash and assume $200 million in liabilities to acquire the maintenance, support, refurbishment and sales activities for the CRJ series, including two sites in Canada and two in the US. Bombardier will continue assembling CRJ aircraft well into 2020, when the last CRJ is scheduled to be delivered, on behalf of Mitsubishi.

By the time Mitsubishi and Bombardier were closing their deal, the MRJ program was in truly bad financial shape. Mitsubishi Aircraft, a joint venture between Mitsubishi Heavy Industry (with financial and technical backing from sister companies) and minority partner Toyota, had accumulated debts for  ¥110 billion by March 2018 and went on to accumulate a further ¥48 billion in the following six months, forcing its parent companies to inject ¥220 billion into Mitsubishi Aircraft and raising its capital from ¥100 to ¥270 billion.

This total doesn’t include liabilities incurred by other members of the Mitsubishi and Toyota keiretsu, such as the ¥65-billion purchase of government-owned land to build a new factory, on the site of one of the wartime Mitsubishi aircraft factories.

At last count Mitsubishi Heavy Industries alone had sunk ¥350 billion in the MRJ, and this doesn’t include expenses by other companies belonging to the Mitsubishi keiretsu, such as MUFG Bank, Mitsubishi Chemical Holdings, Mitsubishi Aluminum, and minority partner Toyota.

At the present, it’s estimated Mitsubishi will have to sell 800 MRJ to break even, more than twice the 350 originally envisioned.

As it often happens in these cases, Mitsubishi decided to apply a fresh coat of paint to the whole project, and in June 2019 rebranded the MRJ “SpaceJet”; and confusingly, the larger version will be named SpaceJet M90 while the smaller clause-compliant version will be called SpaceJet M100.

At the present, the SpaceJet order book is very thin, with just 167 M90 and 50 M100 firm orders, plus 180 options in total. Orders have been “padded” by 47 firm orders from All Nippon Airway and Japan Airlines – aircraft neither company wants or needs but which are crucial to get the program off the ground.

As things stand right now it’s likely the MRJ will end up like its predecessor, the NAMC Y-11: a costly commercial and economic failure. The project has been much delayed and is grossly over budget and Mitsubishi is likely to have priced the aircraft far too aggressively, meaning they’ll lose money on every aircraft delivered for years.

But with the Russian Sukhoi SuperJet and the Ukrainian Antonov An-148 both mired in safety scandals that make the Boeing 737 MAX look good by comparison, and China’s COMAC ARJ21 basically an obsolete 1980s design, it’s possible by the use of aggressive marketing, Mitsubishi will win orders from regional airlines across Asia, Africa and South America, and that would soothe the pain even if the program never makes money in the end. By MC01, a frequent commenter on WOLF STREET