Last Thursday, the Japan Aerospace Exploration Agency’s latest unmanned H-II transfer vehicle was launched from the Tanegashima Space Center on board an H-IIB launch vehicle built by Mitsubishi Heavy Industries. On Monday, it arrived at the International Space Station, where its cargo of food, clothing and equipment was unloaded by the ISS crew.
After failures in 1998, 1999 and – six missions later – in 2003, there have been 44 successful H-IIA and H-IIB rocket launches in a row (one postponed for two weeks due to a fire on the launchpad).
So why can’t Mitsubishi Heavy seem to make an ordinary passenger jet?
On Friday, it was reported that MHI would suspend plans for mass production of its regional commercial jet and postpone the first delivery, which had already been pushed out to 2021. The number of employees at Mitsubishi Aircraft (MHI’s aircraft manufacturing arm, which also makes fighter jets) will be reduced by half. Two of the company’s three offices in North America will be closed. Test flights at Moses Lake, Washington, have been halted.
The proximate cause for this is Covid-19, which has brought air traffic nearly to a halt and wiped out demand for new aircraft. But MHI launched its Mitsubishi Regional Jet project in 2008 with an order for 25 aircraft from All Nippon Airways, planning to begin deliveries in 2013. Since then, serious structural issues, design changes and other problems have led to six postponements of the initial delivery date. Total costs are expected to reach 800 billion yen this year and seem likely to reach 1 trillion yen (nearly $10 billion) within the next two or three years.
In 2019, the MRJ was renamed the Mitsubishi SpaceJet – perhaps to reflect its spacious cabin, or perhaps to escape the curse of the original name. There are now two models, the M90 with 76 to 92 seats (depending on the configuration) and the M100 with 70 to 88 seats.
In 2019, the MRJ was renamed the Mitsubishi SpaceJet – perhaps to reflect its spacious cabin, or perhaps to escape the curse of the original name. There are now two models, the M90 with 76 to 92 seats (depending on the configuration) and the new M100 with 70 to 88 seats designed specifically for the American market.
The M90 is too heavy to meet American industry requirements known as scope clauses, while a previous smaller model, the MRJ70, could not carry enough passengers to meet those requirements unless all the seats were economy class. A relaxation of the scope clauses had been anticipated, but this did not happen, so the MRJ70 was replaced with the M100.
M100 deliveries were originally scheduled to begin in 2023, but that may not be possible due to the cash flow crisis in aviation caused by Covid-19.
The SpaceJet is the first commercial passenger aircraft designed and built in Japan since the YS-11 turboprop project was cancelled in 1973. It is a largely aluminum aircraft powered by the fuel-efficient Pratt & Whitney geared turbofan PW1200G engine. Total orders received (including options) peaked at 397. Of those, 155 orders have since been canceled.
In the fiscal year ending March 2020, MHI recorded an operating loss of 29.5 billion yen, down from a 200.6 billion yen profit the previous year. SpaceJet lost 263.3 billion including development expenses and writeoffs of goodwill. The rest of the company’s Aircraft, Defense and Space Division made a 64.6 billion yen profit, with increases in sales of military aircraft and missile systems.
This fiscal year management is guiding for zero operating profit, including a 120 billion yen loss on SpaceJet. This seems reasonable. But the forecast also assumes a 30 billion yen profit from other Aircraft, Defense and Space operations, which may be too optimistic.
Until recently, wing boxes and other components for Boeing accounted for roughly a quarter of the Aircraft, Defense and Space division’s sales. But the factories that make those components have been largely shut down since late April, raising the possibility of a substantial amount of red ink in the fiscal year as a whole.
Nevertheless, on June 1, MHI plans to complete the acquisition of Bombardier’s Canada Regional Jet (CRJ) division, which will then provide maintenance and repair services for SpaceJets in Canada and the US. According to Japanese press reports, the entire value of the acquisition ($550 million, or nearly 60 billion yen) is likely to be written off this fiscal year.
This makes one wonder how MHI was planning to service a fleet of SpaceJets in North America before CRJ became available.
But it also suggests that MHI is prepared to take whatever losses it must in order to avoid the kind of reputation-destroying design errors that led to fatal accidents with the Boeing 737 MAX, push its SpaceJet project through the Covid-19 downturn and, the company hopes, make it into a profitable business.
This can probably be done without bankrupting the company. At the end of March 2020, MHI’s balance sheet showed net debt of 1.1 trillion yen, shareholders’ equity of 1.2 trillion yen and total assets of 5.0 trillion yen. The level of debt is high, but the company pays an average interest rate of only 1.1%.
Japanese banks would probably not refuse to roll over the loans unless the situation became extreme. In that case – MHI being Japan’s largest defense contractor and an essential part of its space program – the government would be forced to step in and save the company.
Nevertheless, the opportunity cost of SpaceJet is enormous; the targeted market is highly competitive and not obviously profitable; and there are no leading-edge technologies involved. So we must ask: Why is this happening at a time when both the space race and the arms race are heating up? How did the priorities of a company that is key to national security become so skewed? And why is it tolerated by the government, the banks and the board of directors?
This is a company-specific problem. Those inclined to blame “Japan Inc.” should recall that HondaJet overtook Cessna to become the world’s top seller of small business jets in 2017.
Scott Foster is an analyst with Lightstream Research, Tokyo.