HOTR: Mitsubishi, Bombardier set June 1 to close CRJ deal

By the Leeham News staff

May 6, 2020, © Leeham News: Mitsubishi Heavy Industries announced May 7 (Tokyo time) that it will close the acquisition of the Bombardier CRJ program June 1.

Production of the CRJ was to end this summer. The COVID crisis effectively terminates the program now. But the CRJ itself wasn’t the reason MHI bought the program, for US$500m. The attraction was the built-in global product support system for the CRJ that will transition to the M100 SpaceJet. It also provides a new revenue/profit stream as MHI enters the global RJ market.

Along with it, as icing on the cake, is acquisition of Bombardier’s sales team, infrastructure and other assets.

It would take years for MHI and Mitsubishi Aircraft Corp. (MITAC) to establish its own product support system.

This is a major step in development of the SpaceJet as a new global competitor.

With the collapse of the Boeing-Embraer joint venture, MITAC can reinvigorate and strengthen its relationship with Boeing.

Embraer, which said it needed the Boeing JV to compete in the future with Airbus against the A220, increasingly faces higher risks as MITAC and MHI evolve the CRJ product support system and potentially strengthens the Boeing relationship.

MHI also announced that it will immediately write down the $500m acquisition by ¥50bn- ¥ 70bn ($470m-$656m).

 

Embraer reverberations

Reverberations of Boeing jilting Embraer at the alter continue.

Despite Embraer’s brave face, few outside the company seem convinced it has a bright future in the years ahead.

Comments forthcoming demonstrate the problem.

“The passenger industry is dying and will be on life support with the real carnage starting in September/October.”—From a US industry official, speaking of the US market.

Embraer’s lifeblood in the US is the regional airline industry.

“The E2 was such a grave miscalculation on the part of Embraer, particularly in the U.S. market.”—from a US aviation journalist.

“Grave” is a strong adjective. At the time, given the information and competition, it was the correct decision. But Embraer, like Mitsubishi, guessed wrong that US Scope Clauses would be liberalized. The E175-E2 and MRJ90 turned out to be the wrong airplanes at the wrong time—neither meets Scope restrictions. Embraer is struck with selling the E175-E1, an aging platform. Mitsubishi redesigned the MRJ90 into the M100 SpaceJet.

The E190-E2 is too small to be attractive outside the US. The E195-E2 is the preferred choice.

The aircraft mile cost for the E195-E2 is 9% higher and seat mile 16% lower than the E190-E2, according to LNA’s analysis. The revenue potential of 20 or more seats is huge.

Blocking Middle Seats is cosmetic

More airlines are blocking middle seats as part of social distancing to win back passengers.

The trouble is: this is cosmetic.

Social distancing requires six feet apart. The width of center seats, including arm rests, is about 20 inches. Ryanair CEO Michael O’Leary is right on this one.

Frontier Airlines offers passengers the option of paying $39 to be sure the center seat is vacant. It’s a clever way to gain revenue, but it has nothing to do with safe distancing.

And with load factors at 10%, what’s it matter whether the center seats are blocked or not?

Beginning Friday, LNA’s Bjorn Fehrm—an aerospace engineer by training—will begin a series based on science about flying safely in today’s COVID environment.

31 Comments on “HOTR: Mitsubishi, Bombardier set June 1 to close CRJ deal

  1. “The COVID crisis effectively terminates the program now.” That sentence is not accurate. MHI would face serious legal penalties for not delivering the remaining CRJ aircraft as contracted to do. There are still 15 unfinished CRJ-900 airframes currently in various stages of assembly, including Air Canada (9), Delta (4), and Dow Chemicals (2) (likely to be delivered as Challenger 890’s.) Suppliers were just asked to restart production of parts ASAP, and workers plan to return in June, to finish the remaining orders. Mirabel had been temporarily shut down for two months, due to the outbreak.

    Local source is in French Canadian-only:
    https://www.lesailesduquebec.com/la-transaction-bombardier-mitsubishi-serait-imminente/

    • The CRJ’s were to be delivered by BBD–they weren’t part of MHI’s commitment.

      • Indeed.
        And BBD has to vacate this Mirabel space ASAP to allow for the A220.

        • Not sure Airbus would be in any hurry under the present circumstances….

          • Well yes, old plan timings have now been delayed for at least a few months.

            Then Airbus wants to stabilise production at 4 per month. But even at 3 per months, there isn’t enough space now for the A220. We waste time (and momentum) as we got to move around those A220s all the time.

  2. This all seems a bit overly optimistic on the MHI Spacejet project and negative on the E-jets. The first E-jet’s entered service 16 years ago and Embraer sold 1700 E1’s.

    The E190 and E195E2 seem to have a niche around 90-120 seats. With the CRJ’s gone, even an exclusive position. And they are not under development, test flying, but rolling off the line, gaining hours, implementating improvements based on that.

    Embraer are at least 3 years ahead of MHI and don’t have to worry about establishing a new global support infrastructure. It’s there.

    The US market (<150 seats) for Embraer is less than 25%. This is a Global topic. https://www.embraermarketoutlook2019.com/intro/forecast-summary/#page-4

    Boeing not investing in Embraer might a sensible choice given the circumstances or another strategic mistake. We will only know in a few years.

    • I am a bit confused.

      The E-175E2 let alone the 190/195 are outside of scope.

      The US is in fact the worlds biggest regional jet market.

      MHI now has a world wide operation, sales, support you name it, they bought a full fledged plug and play (or as plug and play as you could get)

      While the E175 scrapes the edge of Scope (I don’t know if they fudge this one) , the 190/195 are clearly over it.

      Works for a family for rest of the world due to lower cost with commonality.

      B

      • Best scenario for EMB is to continue the E175 on its separate FAL with its existing engines, after all the fuel savings at current prices on short haul routes using GTF must be tiny. They have the existing plane base , similarities with the larger models….. I think that business strategy is called making lemonade from lemons , not that their planes are really lemons.

  3. For Mitac finalising Bombardier acquisition is the fastest & cheapest way to gain world wide support for its products, and thanks to that gain sales. Not mentioning ending on and off going litigations between these two companies. No doubt is a smart move and win-win move with both parties.

    Embraer obviously miscalculated E2 and will be soon out of under-scope regional market. Mitac made adjustments with M100 and will be a lider by circumstances in this market.

  4. Blocking middle seats is stupid especially when you do not have middle seats.

    • Block out of middle seats is stupid PR.

      If you don’t have them you can;t block them out though.

  5. Everything changed. Scope clause regulated pilots at sitting at home burning their bank accounts. A scenario where the 175-E2 is suddenly allowed for the US regionals should not be ignored. It’s quickly could become a win-win for airlines and pilot unions.

    • It won’t be win – win, especially for pilots.

      Pilots working for regional airlines has worse conditions than ones in main airlines – that’s the idea of scope-clauses fiction – pay less for the same or rather more tiresome job.

      I don’t think unions from main lines will allow further depreciation of job conditions. Especially there is a solution.

      The Delta way with A220 in main line is a good example how it can and should be resolved – by buying a super economic aircraft, making so lots of routes profitable, and using it in a main line. It had been done with A220 and probably would be with E2-195 as well.

      • The issue is Delta has been setup for low pax numbers for a long time and has the routes figured out for their main ops.

        What you are missing is that the E195-E2 is not an A220. Its range limited.

        Equally stuffed to the gills is can carry 12 fewer.

        It simply is not as flexible nor as good as an A220

        • Yes E2-195 is not so capable as A220 but a heaven better then E1. So probably can be used by main line instead of regional subfictionary with similar economics.

    • Excellent point, the airline industry and commercial trends influencing its long term development have completely changed over the past 10 weeks. Who says carriers cannot renegotiate with pilot unions to expand scope clauses, allowing the E2 175 to operate at regional carriers under CPA with DL, AA, and UA?

      The power has completely shifted away from pilots and their union representatives to the airlines. Their future lies in negotiating what they can with carriers to ensure their careers remain relevant.

      Embraer is NOT in bad position and it does NOT need to sell itself to COMAC, or some other PRC group.

      • I wouldn’t count on easing scope-clauses, even I wouldn’t bet on that. But, will see.

      • Nope, you don’t understand labor law.

        They have a Collective Bargaining Agreement.

        They can ask to open issues, union does not have to respond.

        There may be areas they will talk (pay cuts) but they won’t budge on this one as the Airlines now have nothing to offer in return (higher pay or benefits)

        Unions have been clear they think its a core interest for scope That is not going to change.

  6. Dear Leeham

    Six feet social distancing is a very recently very quickly adopted rule of thumb, a social discipline, but not a ‘scientific’ or a ‘medical’ gauge or guarantee

    It may change to nine feet or shrink to five, it may vary with the particular ‘aggressivity’ of each viral strain or mutation

    In any case strictly enforcing such in any and every form of mass transit is categorically impossible

    Nobody is going to re design and re build such systems when tomorrow, guess what, a cast iron 100% vaccine makes the very concept of social distancing disappear

    Until then sure everyone will try this or that and pretend it may work a little or more, if of course health passports, unemployment, higher ticket prices, plus general disinclination do not put paid to most pax traffic

    • You miss the point. No matter what the so called final data is, 20 inches is no where close to 6 feet.

      6 feet is established on the basis of other airborne spread Virus.

      What is being probed is can you maintain a functioning system while the Vaccine is in the works.

      Unfortunately part of the issue is that its the wild west on Vaccine and rather than focus on 10 approaches, there are a 100.

      The first Vaccine may not be fully effective, follow ups likely needed and refined (and concern on Virus mutation short term more lethal)

      Its going to be a couple years before we are fully out of the woods if all goes better than experts think.

      • @TW ‘established on the basis of previous…’

        so despite the deaths and general confusion, this and that lockdown, this and that, maybe, vaccine er… but maybe not maybe this year maybe next maybe never

        in one area alone – we are absolutely certain that this virus will behave like previous about which there was reliable distancing expertise, and there’s going to be no problem in convincing the public that although every authority has displayed ignorance and confusion about every other aspect of this virus, this aspect is absolutely under control

        I’m dubious that public will prove to be so gullible

        The 6 feet thing is doomed: while you are others are holding out false hopes of a vaccine, no real interim progress will ever be made, and the already large numbers of deaths will inexorably increase

        • I don’t see anything other than a muddled post that I can’t unravel.

          Distancing is effective. Its not a panacea but its a significant help.

          The only confusion sown by certain parties, the gist of what needs to be done short term and the direction to work at longer term (Vaccine) is clear.

          My state has stopped it cold. It has had a huge cost in peoples lives via out of work, but its been stopped, they are staying on top.

          The Governor followed his medical staff expertise.

          What are your interim measures if not the basics of distance, hygiene, masks?

          And yes I expect a Vaccine, not as a miracle but as a result of a lot of previous work that was allowed to die before completed

          We are not 1918, we have a lot more tools and there are a number of different approaches. Several are likely to result in a Vaccine.

          The first one may not be what we want but a start, followed by others.

  7. Buried in this is the key point of just who decided Scope was going away?

    All I see is pie in the sky, someone said it and both Embraer and MHI bet the ranch on it when there was no basis other than some pundits saying it was so.

    You believe pundits and you are in deep trouble (Fortune Tellers and Weejie Boards have a much better track record )

    For Embraer not to design the E170-E2/175 to scope was simply and plain stupid as was MHI decision (MHI can get away with it, they bulge with bucks and this is just a corporate toy)

    We are seeing all sorts of predictions being thrown out now on the airline industry when in fact they are nothign more than opinions.

    No one knows, there is no historical data and each entity involved in this has its own set of variables that push it one way or the other (let alone simply grossly incompetent management to throw in like Boeing)

    • A380 is over said Tim Clark after he ordered 123 of them.

      • TC is know to flip his position.

        Somehow the Trent 900 became miraculous 5% better than a GP7000 (which had 3% better prior to this amazing event) and he ordered the problematic RRs for the last group and kept at it to the end.

        I think he is past his due date

  8. Part of the Scope ‘problem’ is entirely of the airlines making.
    Im sure you can carry 75 passengers in both E175/E2 and the MRJ90

    But its the airlines who want 75 seats but only in first , economy plus and economy. Its mad. The detail rules are about the quantum of seats and weight , not that there has to be different seating classes.

    The rest of the world for these size planes they would have a single class . Its time US airlines woke up to what a regional plane is and now is the time to change.

    • It is more about the MTOW with max 75 passengers. The E175-E2 is perfect capacity wise, but too heavy for the max MTOW in the scope agreement.

      As said there is a large fleet of E175E1’s and CRJ’s now, and fuel is cheap, so that reduces desire to get E175 E2’s or Spacejets.

    • Duke:

      You miss the weight part of scope.

      Its not 76 passenger OR 86,000 MTOW.

      Its 76 passenger AND 86,000 MTOW

      If you are under 86,000 MTOW and carry 90 pax, you can change that to 76 and be fine.

      If you are over 86,000 MTWO you cannot, or you have to drop weight.

      Now if you certify it with 75% tanks maybe you can drop a E-170-E2 into the slot, call it a regional /regional. How viable that is I don’t know.

      But right now the E2 is over the weight limit as is the MRJ90.

      Regardless Embraer should have had the E170-E2 under the 86,000 and did not. Foolish, very very foolish.

      • @TW: We’ve run the analysis on how to make 175E2 compliant. You’d be limited to about 800 miles range. Destroys the flexibility of the airplane.

        • That’s why even with a lighter frame the M100 barely reaches 1500 nm range. Making a sub 86000 lb 76pax aircraft with these new engines, with lower CASM and better range than 175E1 (Wing Tip version) is very hard!

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