The COVID-19 pandemic cast global markets into a period of uncertainty as it moved across the globe in early 2020. The impact of the virus is beginning to make its mark as delivery and order slowdowns ripple across the aerospace industry. The full effect of these declines will dominate the sector for several years, as air traffic is not expected to return to normal until around 2023.
For the past year, sales held steady for MHI despite some ongoing difficulties. For FY19, ended March 31, 2020, Mitsubishi Heavy Industries sales were down about 1 percent at JPY4,041 billion, compared to JPY4,078 billion in FY18. The company posted a gain of JPY87.1 billion in net income, compared to JPY110.3 billion in FY18. Sales declines in energy and defense, along with cost deterioration in MHI’s shipbuilding division and increased development costs for its commercial jet airliner – the SpaceJet (formerly known as the Mitsubishi Regional Jet, or MRJ) – have cut into the firm’s bottom line over the past few years.
In April, the company initiated a new restructuring aimed at flattening and better defining its corporate structure. Under this effort, the former Power Systems unit is now Energy Systems; the Industry & Infrastructure domain was split into two domains: 1) Plants & Infrastructure Systems and 2) Logistics, Thermal & Drive Systems; and the Aircraft, Defense & Space sector remained relatively unchanged and includes Integrated Defense & Space Systems and Commercial Aviation Systems.
Pre-COVID, the large backlogs at commercial aircraft OEMs had helped MHI’s aerospace markets to hold steady. MHI has been developing and manufacturing key components, such as wings and fuselages, for civil aircraft for many years. Now these markets are beginning to tumble as air traffic grinds to a near halt, and future projections show them not returning to anywhere near pre-pandemic levels until 2023 at the earliest.
This pressure has led MHI to dramatically truncate its flagship aerospace program, the SpaceJet. As a result, the company has put flight testing of its initial model, the M90, on hold and is winding down production to a stop. Initially, the company suspended development of just the M100 variant of its SpaceJet, which was targeted toward U.S. carriers. During the suspension, the company will review and reconsider its plans to develop the 76-seat model, which is looking increasingly unlikely in the current environment. Service entry of the M100, which has not yet flown, had been scheduled for 2023.
This was soon followed by a halt to all flight testing of the M90. In late May, the company decided to consolidate SpaceJet activities back to Japan, The Seattle Times reported. As a result, MHI is closing overseas locations, including Mitsubishi Aircraft U.S. headquarters in Renton, Washington. The four M90 test aircraft undergoing review in the U.S. will be placed in storage as the company initiates steep budget cuts to deal with the COVID-19 pandemic.
As the company seeks to control costs, production work on the M90 has also been halted. According to a report in Aviation Week, once the eighth aircraft is complete, manufacturing will cease. The M90 was to be the first model certified for service.
However, even before the COVID-19 crisis, the M90 had been beset by numerous delays. Earlier this year, Mitsubishi again postponed service entry of the M90, this time until 2021 – some eight years behind schedule. Service entry of the M90 had previously been scheduled for mid-2020. Now it is unclear when this will occur.
For the time being, development work on the M90 is proceeding, but for now, it will be limited to ground-based validation and analysis activities needed for certification of the aircraft. Mitsubishi has not specified when or where flight testing is to resume.
The SpaceJet program is seen as a crowning achievement that leveraged MHI’s accumulated aviation technologies into a new aircraft. This new aircraft marked MHI’s re-entry into the regional jet market. Begun in 2008, the MRJ will be Japan’s first domestically produced airplane since production of the YS-11 turboprop passenger plane ended in 1973. As such, it is a program that many in Japan want to see succeed and thrive.
The concern now is whether customers will hold fast, as these latest moves will no doubt result in further delays or, in the worst-case scenario, program termination. All Nippon Airways remains the program’s launch customer, with SkyWest Airlines of the U.S. accounting for a majority of the aircraft’s backlog. According to Forecast International’s Platinum Forecast System, as of May 2020, Mitsubishi had accumulated 163 firm orders and 124 options and purchase rights for the M90. The order book took a hit in late 2019 when Trans States Holdings canceled its order for 50 aircraft and 50 options due to scope clause limits. Simply put, the aircraft seats 88 passengers, which is too many for the scope clauses of some U.S. regional airlines.
That said, the company appears hopeful. As it looks to the SpaceJet’s future, the company completed its acquisition of Bombardier’s CRJ program, but not its production facilities, in June 2020. The services and support network will be operated under the newly created MHI RJ Aviation Group (MHIRJ). Coupled with MHI’s existing aviation business, the new entity will provide support for the CRJ series and the Mitsubishi SpaceJet family of regional jets, if and when it enters service.
One silver lining in the aviation slowdown stemming from COVID-19 is that it may give the company more time to finish the aircraft, as everyone is strapped for cash and cutting costs in the near term. The cancellation or deferral of orders by many carriers may ultimately help the program when the crisis ends and airlines look for new aircraft to (hopefully) meet resurgent demand.
Defense Steady for Now
In defense markets, not much has changed for MHI, despite the relaxation of government export policies earlier in the decade. Marking the first major shift in arms transfer policy in nearly 50 years, in April 2014, the Japanese government moved to ease the country’s self-imposed weapons export restrictions.
The alterations in arms export policy are intended to allow Japanese defense companies to participate in joint weapons development projects in order to bolster military technological advances while also helping these companies improve their revenue streams by expanding the marketability of their wares beyond state orders. However, not much fortune has been found on this front, no doubt due to the high cost of Japanese manufacturing.
Further, Japan has decided to halt in-country production of the F-35 following delivery of its first indigenously produced lot. Instead, the country will focus on providing MRO services for the fighter. Under this shift, MHI will provide MRO services on the F-35 airframe to customers in the Northern Pacific region.
As it seeks to maintain a strong aerospace industrial base, Japan has launched the initial phase of its next-generation fighter project, the F-X or Next Generation Fighter (NGF). This effort seeks to replace the fleet of F-2 multirole fighter aircraft; the F-2 is based on the F-16. The new F‑3 aircraft is expected to be a stealthy fifth-generation combat aircraft. In order to mitigate technical risk and possibly accelerate the production timeline, the effort will likely feature an international partner, as did the previous F-2 program.
Although Japanese media had been reporting that the government was leaning heavily toward working with the U.S. on the project, a partnership decision remains open-ended, with talks between the prospective countries ongoing. As Japan’s top defense contractor, Mitsubishi Heavy Industries will no doubt be playing a leading role in future production.