Mitsubishi, Bombardier reach agreement to acquire CRJ program

  • MHI to acquire CRJ program.
  • MHI will acquire the maintenance, support, refurbishment, marketing, and sales activities.
  • Deal worth $550m in cash, $200m in assumed liabilities, $180m in a securitization program.
  • Transaction to close first half 2020 subject to regulatory approval.

June 25, 2019, © Leeham News: Mitsubishi Heavy Industries and Bombardier today announced an agreement in which MHI will acquire the CRJ program, subject to customary shareholder and regulatory approvals. Closing is expected in the second half of next year.

The CRJ program includes the airplane, the global product support and sales force, manufacturing facilities and other assets. A CRJ installed customer base of 1,300 airplanes and more than 130 operators worldwide.

“Bombardier will continue to supply components and spare parts and will assemble the current CRJ backlog on behalf of MHI. CRJ production is expected to conclude in the first half of 2020, following the delivery of the current backlog of aircraft,” the companies said in a statement.

No Aerostructures

It does not include the Aerostructures facilities in Belfast, Northern Ireland, or in Morocco. The Belfast plant builds wings for the A220 and the Moroccan facilities builds parts. Neither is associated with the CRJ program, but after Bombardier announced these were for sale, there was some market speculation MHI might seek to purchase these in connection with the CRJ transaction.

MHI is the parent of Mitsubishi Aircraft Corp (MITAC), which is developing the M-Series regional jet. This was launched as the MRJ and was rebranded before the Paris Air Show as the M-Series and SpaceJet.

The key benefits to MITAC are the global product support system, the global sales force and the installed customer base.

Terms and conditions

MHI will acquire Bombardier’s regional jet program for a cash consideration of $550m, payable to Bombardier upon closing, and the assumption by MHI of liabilities amounting to approximately $200m,” MHI said. “Under the agreement, Bombardier’s net beneficial interest in the Regional Aircraft Securitization Program (RASPRO), which is valued at approximately $180m, will be transferred to MHI.”

The $200m in liabilities represents a portion of the Residual Value Guarantees Bombardier is liable for with the CRJ program. Bombardier retains about $400m in these liabilities.

“MHI has a decades-long history in Canada, and I hope this transaction will result in the expansion of our presence in the country, and will represent a significant step in our growth strategy,” said Seiji Izumisawa, President & CEO of MHI.

CRJ benefit to MITAC

The installed customer base and global support system, backed by the existing sales and product support personnel, are the top benefits to MITAC.

Bombardier’s global owned and licensed service centers, c. 2017. The number has since been reduced slightly. Source: Bombardier.

Establishing its own global product support system, including personnel, would take MITAC the better part of a decade at an unknown cost. With the acquisition, MITAC gets physical facilities and personnel who have the experience and contacts to support the new M-Series as it comes on-line.

The installed customer base, supported by the CRJ sales force, gives MITAC instant access to more than 130 operators with 1,300 CRJs.

Bombardier’s global CRJ customer base. Source: Bombardier, 2018.

This access, and the availability of a new generation airplane from MITAC which Bombardier could not offer, will be of immense value to MITAC.

Future of CRJ

The CRJ itself is of limited value to MITAC, but it may serve a useful purpose.

While the CRJ itself doesn’t seem to fit with the SpaceJet business model, there is a logic to a synergy between the two airplanes. While CRJ “is expected” to end next year, a case can be made for MITAC continuing to sell the airplane.

The MRJ90, now renamed the M90 SpaceJet, is not compliant with the US Scope Clauses in pilot labor contracts; it’s too heavy. The M90 may be used anywhere else in the world. Entry-into-service is 2H2020.

The revised design of the Scope-compliant MRJ70, now called the M100 SpaceJet, won’t be available until beginning in 2023.

There is a production ramp up for each that, like any new aircraft program, will be slow and deliberate.

The CRJ900 is Scope-compliant and the CRJ-1000 has found some traction—though not much—in Europe. (The CRJ700, while still offered, is for all practical purposes a “dead” airplane.)

MITAC can offer the CRJ900 to US (and other) carriers as a “bridge” airplane, available as early as 2020/21 and the CRJ1000 to any airline outside the US.

There is a surge of ERJ/CRJ and even EJet potential retirements beginning from about 2023/24.

The mechanism of producing new airplanes to bridge until the M90, M100 or the prospective new M200 (the redesigned M90, incorporating the M100 features) will take creative thinking and deal-making, but it can be done.

Benefits to Bombardier

Bombardier gets cash, of course, and out from under some RVG liabilities. It gets out of the commercial aviation business (except for retaining a ~33% share of the Airbus A220 program and, until sold, the Aerostructures facilities). It off-loads a dying CRJ program.

Benefits to Canada and Quebec

The governments of Canada and Quebec are concerned most about maintaining jobs and the supply chain.

MHI’s acquisition of the CRJ program opens the possibility that MITAC could choose Montreal Mirabel, where the CRJ production line is, for the potential SpaceJet line.

MITAC already has said a North American production line could be in the future for the SpaceJet. With the CRJ now in the family, Montreal becomes a contender.

Other possible locations:

The Dallas-Ft. Worth (TX) area: MITAC’s sales office is in the Dallas suburb of Plano. D/FW (as it is called) has an existing, robust aerospace cluster and on the fringes, lots of space. Alliance Airport in Ft. Worth was at one time a major maintenance base for American Airlines and it is a hub for FedEx. Texas likes to give corporations big tax breaks. Weather is generally good if you discount a propensity for tornados.

The US South: Discounting Texas, there are Alabama (home to the A220 and A320 final assembly lines and Boeing Defense Huntsville), Georgia (Lockheed Martin), Florida (the Space Coast and Embraer’s corporate and some military FALs) the Carolinas (Boeing 787 FAL 2, Honda Jet, Spirit Aerosystem’s A350 production center) and Tennessee (Triumph Group’s A330 supply center). The South is another area where corporate tax breaks and other incentives are popular and generous.

Washington State: Despite Renton being MITAC’s brand new US corporate headquarters location and Moses Lake being the flight test center, this could be a tough call. Western Washington is solid Boeing territory. Labor costs are high and so is the cost of doing business. Land is scarce. Boeing competes for labor, especially as it faces some 10,000 retirements in the next few years of its engineering and touch-labor workers. Housing costs are among the highest in the nation.

Moses Lake in central Washington is inexpensive for housing, labor, electricity and the cost of doing business. The biggest obstacle: it’s in central Washington, where nothing else is.

Moses Lake is a dinky city of 24,000. It has no air service to Seattle (it’s a 2 ½ hr drive over the Cascade Mountains, a hazard in winter), or to Spokane, a “spoke” city that only goes to other hubs and a 90 minute drive to the east. Amenities and cultural attractions are non-existent for city folk who might be offered a transfer there. The work force pool is also limited.

The press release is here.

Lawsuits likely will be dropped

Although the companies did not address the issue, this deal likely means the lawsuits filed by each of them against the other in Federal court in Seattle will be dropped.

Cowen & Co. issued this note in the wake of the announcement:

BBD’s proposed sale of its CRJ program to MHI results in about $170MM of net value for BBD. MHI will be getting (1) CRJ aftermarket facilities and profitable revenues of ~$400MM/year and (2) CRJ production, which currently is in the red. However, the deal neutralizes BBD’s CRJ RVG liability, which amounted to an est. $589MM at the end of Q1 and a worst case of $1.1B in total exposure. In addition to its $550MM payment to BBD, MHI will take $200MM in net RVG liabilities and BBD will retain $400MM of the RVG liability. However, BBD’s liability will be fixed at $400MM eliminating the downside risk of a worst case increase if CRJ values continue to decline. Because MHI also will receive BBD’s $180MM aircraft securitization asset, the total transaction should yield about $170MM for BBD. It’s expected to close in early 2020 and includes a reverse break-up fee to protect BBD in the unlikely event it fails to receive regulatory approval.

 

 

 

34 Comments on “Mitsubishi, Bombardier reach agreement to acquire CRJ program

  1. Deal makes commercial sense for both Mitsubishi and Bombardier.

    Too bad that it looks like the CRJ is coming to the end of the line by the end of 2020. I remember touring their facility at Dorval just as they were getting ready to introduce the CRJ700/900 into service. At the time i asked them how the expected to compete with the ERJ program and it’s “nicer” aircraft (from a passenger perspective) at a price higher than the ERJ. Their answer was that airlines would prefer the Bombardier solution due to better economics and higher speed. This has to be one of the rare instances where airlines ignored economics in favour of passenger comfort.

    A shame that after dominating the industry at the lower end Bombardier (and to a lesser extent) Embraer have made such a hash of things that resulted in them both effectively exiting the business they launched.

  2. Is this the end of the road for the CRJ or could it live on in CRJ550 format that won’t compete with the M100?

    Also, will BBD retain any share in the CRJ program, the did retain 31/33% of the CS/A220?

    • The CRJ550 is a reconfigure of in-service CRJ700s. It’s not a new-build.

      • Thanks Scott.

        That leaves the future 50-75 seat class to the ATR72-600? Sure there must be a market for an ~50 seat RJ but is it big enough to develop a new aircraft for it. The ATR’s speed and range just doesn’t cut it to replace ERJ145 and CRJ200’s in most instances.

  3. Nasty comment that Mosses Lake is a dinky little city.

    So put in in hugely high priced and crowded traffic packed Seattle?

    The Cascades also have an East side (for those skiers from Seattle that recreate) let alone access up Stevens Pass, 97 and highway 20.

    In short its a Paradise compared to a big city. Low cost and lots of places to go. Paradise to raise a family.

    And you don’t think that someone (hint Horizon) would not put flights into Mosses Lake if the demand was there?

    No, lets just keep stuffing stuff into Dallas, Seattle, SFO, New York.

    • My Brother-in-law lives in Moses Lake. I’m allowed.

      • Yes. Its just creating a picture for every one else who hasnt been there.

        • I have family that live there and I am allowed as well.

          Small town is fine, pejorative on a reporting of aviation facts no.

          You guys need to be reminded of “Field of Drams”

          Build It and They Will Come

          Seattle started from nothing as well.

          • @TW, you of all people tagging me about “pejoratives”? Really….

    • Just lure some German families there and you get good bread, good soccer teams, an opera and a symphonic orcherstra (Huntsville Alabama…). You can add some Swedes/Norwegians and Danish for good coffee, nice wooden houses and great cafes, the Japanese brings sushi and small Electro-mechanical workshops and the transformation is rolling… ( a bit like Peebles Ohio where GE more or less built a town in nowhere)

      • Germans…good bread!
        I don’t think so…hard black bread hasn’t taken the world by storm for good reason.

        • That‘s just one type of bread out of more than thousand you can choose of in Germany. Also what get as “black bread” is depending on the region. A baguette is hard after one day but a rye bread could last for a week.

          I would prefer Italian coffee.

        • says the man who’s never been to germany.

          I often dream of the morning Brotchen mit Kase und Schinken I used to get every day when I lived in Germany…

          those little rolls rival anything France has ever done.

    • Just pick you English:

      Oxford dictionary –
      uk approving: She’s got dinky little (= small and charming) feet.
      us disapproving: They live in a dinky one-room apartment.

      Either way no question that it is small.

    • With fresh fruit in season in eastern WA, such as Wenatchee, nectarines near Chief Joseph Dam (I’ll never buy in stores again), and the Yakima area.

      (And if needing more aerospace, there was a small missile collection beside a park in the old town across the river from Chief Joseph Dam.

      It included the infamous Boeing Bomarc. (A not great missile that is infamous in Canada because its government cancelled the Arrow interceptor project in favour of the missile, in reality both were needed. Having cancelled the Avro Jetliner to concentrate on the Arrow.)

      The Arrow being an M2++ all-weather interceptor to defend North American airspace in the far north. Attempts to sell the powerful Iroquois engine to other countries were not successful. (An engine overhauler in Fort St. John BC has one he found in the UK, intends to get it running. Only a few pieces of Arrows remain, there is a cockpit somewhere.)

      • The US( North American XF108 ) and UK( Fairey Delta III) both cancelled similar development of high altitude interceptors like Canada later did. The US may have flown its XB70 Valkyrie bomber but the USSR wasnt making anything similar, but to make sure they did put the Mig25 into production against the western threat. Canada didnt face attack by B70s !
        The Avro jetliner was cancelled to work on the earlier CF100, not the CF105. In the early 50s , Canada like similar western countries, was spending 6-8% of GDP on defence, ( Britain was more) but by ’58 it was down to 4% and falling.
        Lack of money killed the Arrow more than anything else, but dreams live on

  4. Goodbye Bombardier! Thank you for bringing a whole range of emotions to us over the past decades, we, these aviation enthusiasts. Now, unfortunately or fortunately, we will have only two behemoths to digest. Fewer varieties, more wrestling, more commercial war tinged with political influence, plane projects already known for the next 10 years, well …

  5. This marks a shameful chapter in aviation history for a nation which began building aircraft for UK in the Battle of Britain long before America entered World War 2.

    Canada built De Havilland aircraft, Avro Lancasters, Bristol Blenheims & God Knows what else. Not forgetting the Avro Arrow Jet fighter, still born by America’s intervention.

    Now with Trump’s intervention, 220% tariff plus an additional 80% in duties subsequently imposed on the C-series, USA has deliberately reduced Canada to a Third World country to destroy competition.

    What are we left with?

    Third rate product from Boeing. The Kamikaze 737MAX. The Burning Battery 787 with fire extinguishers that don’t work on 330 minute ETOPS. This is the total destruction of diversity and innovation in aviation.

    It is also destruction of integrity in aviation safety and engineering safety. All that is being done is being done to protect the monolithic edifice of Boeing Commercial Airplanes. USA can only shield Boeing from the commercial reality of building crappy airplanes for so long. The day is fast approaching when there will be a disaster so obviously caused by engineering malpractice that Boeing will go down the toilet.

    Just out of interest. The Boeing 787 fire suppression system is not merely limited to the engines is it?

    I suppose they don’t work in the cargo hold either?

    How long before we have another Boeing mysteriously disappear far out over the Ocean with some poor pilot being accused of pilot suicide to protect Boeing’s reputation?

    • Weird comments . Bombardiers misteps are the basis of their decision to exit commercial aviation. Just look at the production rampup….it hasnt gone to plan, any plan. Then there were plenty of previous issues from the business itself like the money spent on the composite Learjet that was later abandoned, leading to a cashflow crisis the banks wouldnt fill.
      Its not an easy business to be in, far better to be top of the heap in business aviation than a minnow in a pool with sharks for commercial planes.
      For my point of view , Bombardiers divisions , firstly DHC and now CRJ are going to ‘good homes’. Too many commercial plane makers of once great names ended up on the scrap heap , like Saab , Fokker, British Aerospace ( although non commercial areas survived)

      • Letting Airbus take on the C Series is beginning to look very good for that aircraft. If Bombardier (or more importantly, Bombarded staff) are retaining any work or profit share of that, it’s looking like a good business outcome.

        Presumably the Bombardier factories are presently working quite hard because Airbus’s new FAL at Mobile isn’t finished yet.

      • Yes Bombardier got a bit out of phase with all new aircraft designs at the same time and they did not improve quickly enough the products they had to make sure the cashflow was enough for even one new product at a time.
        Boeing might stumble but normally gets it pretty right and very profitable for the later members in the family. They are a bit like P&W that after 400 SB’s are issued produce a pretty competetiv product, maybe from their common life in United Aircraft corp.

        • They could only do one new aircraft, and they made the right decision to go for the size of the Cseries rather than that of the CRJ.
          The global financial crisis had effects on many businesses, banks, automobiles, aviation….
          Bombardier didn’t have the finance to carry the project against all the headwinds after they maxed the credit card from the bank of Canadian/Quebec taxpayers

    • Really thoughtful article, thanks TW. I had no idea how many band-aids had been applied.

      • You are welcome.

        Agreed on how many aspects have been added to keep up to date.

        Its more the oddity of merging it with a old style control system, they do the same thing with FBW software.

        The FBW was basically done right and its changes have been tweaks, these are significant changes. Ok to do them (done right of course) but to not have it all in the manuals? that is nuts.

        And at some point it is time (well past for the 737) you throw the cash cow out with the bathwater and start over.

        Boeing ignoring things has also gone way to far.

        And they can’t seem to settle in on a base concept for dealing with this as they now have 3 or 4 different aspects.

  6. Depends on whether or not the CRJ is of value as a stepping stone to Mitsu’s larger aircraft.

    Didn’t work for Boeing with deHavilland decades ago, but that was more of a mismatch, and other turboprops like used Convairs and F27s were about.

    • History tidbit:
      Boeing was in the turboprop business decades ago via deHavilland Canada.
      The notion was to sell 737s as traffic grew to where its size was appropriate.
      Somehow that didn’t work out, IIRC because:
      – Boeing didn’t sell may deHC turboprops
      – Sales value was modest compared to 737s so emphasis was on selling 737s
      – it wasn’t pleased with condition and efficiency of the factory

      • There were other reasons given at the time for Boeing buying DHC.

        “Boeing bought the company [1986]in an effort to better position itself to compete for a new Air Canada order for large intercontinental airliners. The contract was eventually won by Airbus, which received an order for 34 A330 and A340 aircraft. This highly controversial move came amid allegations of bribery. Following the failure in the competition, Boeing put de Havilland Canada up for sale.”
        https://www.globalsecurity.org/military/world/canada/de-havilland.htm

        Boeing exited DHC (1992)
        EIS for the A340-300 with Air Canada was 1995
        Air Canada went bankrupt in 2003.

  7. If the CRJ goes GE is out of the 50-120 seat RJ (small SA) market with PW taking over (E1XXE2/M100/A221). Could this be enough motivation for GE to make improvements to the CF34-8X and EMB to improve the E175E1 for US (and other) airlines to order more of these instead of the M100? The price and availability should win orders.

    • Still used on the China only ARJ21 ( a DC9 copy).
      Im sure GE are letting go of the CF34 knowing they can a have a derivative of the Leap/Passport on offer for short cycle airliners

  8. “ residual value liabilities “ more likely a net loss that future liabilities, we have to wonder how value those birds will retain when the program will be 💀,

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