The decision by Bombardier to exit commercial aviation was the seismic shift that enabled other dominoes to fall. But they didn’t fall where expected.

Bombardier – This OEM was the inventor of the modern-day regional jet.  Others came before it with variations, like Fokker and Avro.  But it was the CRJ200 that really caught the industry’s attention. Bombardier had cleverly taken a business jet and tweaked the design to accomplish something airlines really wanted.

From the CRJ200 Bombardier went on to stretch that design from a 50-seater to the 64-seater CRJ700 and then the 76-seater CRJ900.  Its ultimate stretch was the 99 seat CRJ1000.  But the CRJ1000 turned to be the stretch too far, at least for the North American market.  The resources Bombardier might have used to develop an entirely new aircraft to compete with the Embraer E-170 and E-175 was eaten up by the C Series.

Even so, the CRJ design proved to be very successful and gave Embraer stiff competition for many years.

Embraer – Here is a company that emerged from building a world-class turboprop in the EMB-120 Brasilia that served the US and other regional airlines very well.  It was such a success that Embraer went on to develop a fine line of small regional jets that proved to be the only competition to Bombardier. 

Whereas Bombardier kept their line rather simple, Embraer tweaked theirs incessantly. For example, its ERJ-145 that competes with the CRJ200 came in four variants (11 when you add executive and military variants) compared to two for the CRJ200.  This tinkering to refine and extract more performance from the aircraft served to keep Embraer’s engineering team sharp.  And this team did the same with the E-170 and E-175 which came in several variants, such as the latest E-175 with new wingtips launched in 2013 which became a great success, especially in the North American market.

By staying at the edge of the performance curve, Embraer ensured it could continually offer regional airlines the best in economic performance in concert with rising fuel prices.  Once again, its engineering team had to stay sharp. While Bombardier’s best engineers were toiling on a program that put them up against Airbus and Boeing, Embraer was able to exploit this distraction and move into becoming the largest source of regional jets.  This is a role it relishes and will not give up.

Mitsubishi – This OEM emerged slowly and has not really accelerated much.  Its slow progress appears to be primarily due to decisions being made without enough industry development experience.  The first test aircraft did not meet the specifications that would enable them to be certified, so new models had to be built that are certifiable. 

The first model created was a design that took a dangerous bet that US mainline airline pilots would ease scope clause to allow a heavier aircraft into regional use.  That bet failed miserably.  So much so, Mitsubishi had to retool the aircraft into a smaller version that meets the weight specification but looks to be too heavy for the LOPA US regional airlines now need.   The confidence that they could sell the initial larger aircraft outside the US has proven rather hubristic.  Today ominous news from Japan underscores our view.  Anyone with positive expectations for this program has to undertake a major recalibration forthwith. 

The Market Post-Bombardier
Now that Bombardier has exited the commercial aviation market, a first reaction might be that this is great news for Embraer and opens to the market to Mitsubishi.  It isn’t that simple.

  • The commercial aviation world changed dramatically since March this year. Covid has run roughshod over the travel market and seen two US regional airlines close.  Moreover, travel demand has collapsed.  With near-zero demand, Embraer has a tough fight ahead.  Mitsubishi remains out in the cold with no product and a much-promised but delayed program now going back into the freezer.
  • There is the issue of Boeing – a factor only partly discussed so far. The issue of Boeing betraying its deal with Embraer is well discussed.  But what is often overlooked is where Mitsubishi fits in.  Boeing had a deal with Mitsubishi first and then, behind their back, went and made a deal with Embraer.  The outcome in our view is that neither of these firms now trust Boeing.  This may not presently hurt Boeing, but almost certainly will later.
  • Airlines and lessors like to do deals with OEMs that allow for families of models to be acquired. Boeing might dismiss the regional segment as irrelevant. But that does not mean they are right. Especially in light of the poor showing of their smallest model, the MAX7.  Embraer has been consistently pointing out that they have no interest in developing anything larger than the E195-E2 and that this aircraft in no way competes with the MAX7.  We don’t expect Embraer to be saying this anymore.
  • Embraer lost opportunities to deliver aircraft in January and February this year while waiting for the deal with Boeing to close. Those deliveries will occur later in 2020, they hope.  The broken deal hampers but does not hobble them.
  • The thinking that Mitsubishi is now clear to deal with Boeing again is naïve. Mitsubishi has seen how Boeing changes interests and loyalties.  In short, Boeing cannot be trusted to have interests other than its own. Moreover, Mitsubishi appears to be a major rethink now. Any Boeing/Mitsubishi tie-up looks highly unlikely.  
  • For Mitsubishi to make any headway among the regional airlines, especially in the US, requires that it makes decisions that suit target customers. To that end, the acquisition of the CRJ team from Bombardier is valuable to Mitsubishi in both the short term and long-term.  Boeing is of zero help here, and if anything could be a hindrance or distraction.

Embraer vs Mitsubishi

  • Embraer is smarting from the broken deal with Boeing. But it remains a formidable OEM.  The corporate culture at Embraer will overcome the challenges ahead.  Its engineering team will almost certainly dust-off ideas and plans that were shelved in anticipation of their deal with Boeing.  In short, Embraer is now more dangerous as a competitor than they have ever been. Back against the wall, they have nothing to lose and everything to gain by offering state of the art products at aggressive pricing.  We expect Brazil’s government to offer export credits to support such efforts.
  • This means that Embraer will face off against Airbus as they market their E2 against the A220. Airbus will find a much more agile and aggressive Embraer going forward.  The potential for a Chinese deal with Embraer is now talked about.  But India may be more interesting for Embraer.
  • Mitsubishi will probably see a change in the way its SpaceJet program is run as the Montreal team starts to impact the organization. The Montreal team has far more experience than the current team and we expect to see this play out.  The focus likely will be placed on meeting deadlines and targets with no public announcements.  Delay announcements have likely proven to be annoying to Mitsubishi Heavy (MHI) management.  The budget cut announced probably reflects that.  The Montreal team understands the regional airline business better. What about the current team? We believe the budget cut signals that several people may be leaving. 
  • As the Mitsubishi team evolves, it will be a more mature and deliberate process of program management that emerges. In their favor is the fact that regional airlines want a competitor to Embraer. Airlines always want an OEM choice.  But with the M-100 program stopped, Embraer gets more time.  But Embraer needs travel demand to come back and its regional airline customers to require deliveries.  What should be an ideal moment for Embraer, after its painful Boeing experience, may take a while to emerge.
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Co-Founder AirInsight. My previous life includes stints at Shell South Africa, CIC Research, and PA Consulting. Got bitten by the aviation bug and ended up an Avgeek. Then the data bug got me, making me a curious Avgeek seeking data-driven logic. Also, I appreciate conversations with smart people from whom I learn so much. Summary: I am very fortunate to work with and converse with great people.

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