Most air travelers think of airplanes made by either Boeing (USA) or Airbus (Europe). With just two competitors, it’s called a duopoly.
The smaller “regional” jet planes are made by either Embraer (Brazil) or Bombardier (Canada). Another duopoly.
Competitors in a duopoly, if they’re smart enough to avoid a price war, can be very profitable. And so, Boeing and Airbus, as well as Embraer and Bombardier, have been quite profitable.
But, if Mitsubishi (Japan) has its way, that’s about to change. It recently rolled out its new Mitsubishi Regional Jet, MRJ70/90, in direct competition with Embraer and Bombardier. That will change everything.
Mitsubishi has invested $1.8 billion in the design costs of the plane that has not yet flown. Test-flights are scheduled to start in mid-2015, with deliveries during 2017. It is inevitable that following test-flights, design modifications will increase these costs.
Mitsubishi’s plane will seat between 76 and 88 passengers, roughly equivalent to its competitors. It claims to be more fuel-efficient with the new PW1217G “E-jet” Pratt and Whitney engines (both competitors plan to also use the new E-Jet engine).
So far, Mitsubishi has booked only 223 firm orders, mostly from Asian airlines. Japan Airlines has placed an order for 32 of the planes, but it also has many more on order from Embraer.
Mitsubishi’s list-price is reported to be somewhere between $40 million and $50 million. These “introductory orders” are usually at a high discount from “list prices,” and they will probably generate no profit. In order to pay off the capitalized design costs, they will need at least 750 orders at a list price of roughly $45 million each. Even with 750 sales, each plane would need to amortize $2.4 million of the design costs.
Embraer has years of experience in achieving cost reductions via-a-vis its learning curve. Its closely comparable E-175, seating 88, has a list price of $41.7 million. That makes profitability for Mitsubishi’s plane an entrepreneurial risk.
Mitsubishi says it plans to capture a 50 percent share of the regional jet market. But, Rob Morris, head of consultancy at Ascent Flight Global Consultancy, estimates Mitsubishi will capture a 22 percent market share of 4,000 regional jets he believes will be purchased by 2033.
That would amount to 880 planes during the 16 years following initial deliveries in 2017 — about one a week. At that production rate, it will take Mitsubishi years to replicate Embraer’s learning curve. Morris expects Embraer will capture a 61 percent share during that period.
And then there’s Russia and China. Russian K-on-A Aircraft Production Association builds a comparable Sukhoi Super Jet 100 which suffered a terrible crash during a demonstration flight in Indonesia in 2012. It reports a “firm” order backlog of 318 aircraft — mostly from Russian and allied airlines — but it has yet to start production. The engines — SaM-146 — are of local manufacture.
China’s ARJ21 is nearly a decade behind schedule. Although it had a maiden flight in 2008, its airworthiness has yet to be certified by any authority.
It seems obvious that Mitsubishi’s success will depend upon achieving Morris’ forecast of 22 percent market share. With Embraer’s forecast of 66 percent share, that leaves only 12 percent remaining to Bombardier, China and Russia.
Bombardier has intentionally failed to upgrade its existing models and instead plans to launch a 100-plus-seat plane to compete with the small Airbus A319 and the small version of Boeing’s 737. Good luck with that.
In the long term, the duopoly will be re-established, between Embraer and Mitsubishi as the junior member. That outcome might be profitable for both companies if they very carefully squeeze Bombardier out of the regional jet market. Russia and China must fight to share the remaining 12 percent. Either one has the potential to trigger a price war. So far, no American airline has sealed a firm order for either Russian or Chinese regional jets.
The new duopoly can again be profitable, but getting from here to there entails many risks and all the unintended consequences.