Japan Flying Ahead with Mitsubishi Jet

Japan is close to a go-ahead on an ambitious commercial regional jet project. Sure, it's risky and costly, but China is hot on its heels

China isn't the only country in Asia with hopes of getting its commercial jet industry off the ground. While Beijing has made headlines this week with plans to build a jet by 2020, Japan's entry into the fray could come far sooner than that.

In the coming months, Japan's bureaucrats will decide whether to green-light their own national project for a 72- to 92-seat passenger jet. Mitsubishi Heavy Industries' executives say they have been signing preliminary deals with suppliers and showing blueprints of the MJ—short for Mitsubishi Jet—to carriers at air shows and during office visits. Built from lightweight carbon fiber, the MJ would be 20% more fuel-efficient than rival planes from China, Canada's Bombardier, and Brazil's Embraer, and it could be flying as early as 2012.

But the risks are huge, even for a country that produced the formidable World War II-era "Zero" fighter planes and has decades of experience supplying parts to the world's biggest aircraft and engine makers. That's because building a passenger plane involves more than design and assembly. Aircraft manufacturers rely on a worldwide sales staff to keep finicky airline operators happy, and must have an army of mechanics to keep the planes flying for decades. Says Wade Cornelius, vice-president of Boeing's (BA) commercial airplanes division: "For a company to be truly successful in the business they have to find a way to address all aspects of the customer's requirements."

Footing the Bill

Japan Inc. knows that better than most. Though engineering companies Mitsubishi Heavy, Kawasaki Heavy Industries, and Fuji Heavy Industries have landed a growing chunk of Boeing's business since the late 1970s, they have been wary of going it alone. Japan's first commercial plane venture—the 60-seat twin turboprop YS-11 in the 1960s—was a financial fiasco. That project lasted for less than a decade and resulted in mounting losses for the companies involved.

There's an even bigger obstacle: cost. Industry executives and analysts estimate that research and development alone will cost $1 billion. Getting a toehold in the fast-growing market for jets flying regional routes would probably run another $2 billion to $3 billion, they say. "It's still not clear how the costs will be split up," says Mitsubishi Heavy spokesman Kenichi Nakamura.

Translation: Unless the government foots part of the bill, the project is unlikely to move forward. Though some media reports have suggested that the government will pay for nearly a third of the costs, "It's still not certain whether there's enough political support for the project," says Credit Suisse (CS) analyst Teruhiko Nishimura.

Smaller Is Better

The planes wouldn't be 100% made-in-Japan. Mitsubishi Heavy, Kawasaki Heavy, and Fuji Heavy are expected to forge the MJ's carbon-fiber wings and fuselage in special kilns—the same now being used to make Boeing's new fuel-efficient 787 Dreamliner. Dozens of other Japanese suppliers would pitch in on everything from tires to toilets. But the MJ's fuel-sipping engines are expected to come from Rolls-Royce (RYCEY) and its avionics from Rockwell Collins (COL) or Honeywell International (HON).

From a business standpoint, building smaller planes makes sense. Single-aisle planes account for more than 70% of the market, according to consulting and research firm Frost & Sullivan. That's likely to remain the fastest-growing sector of the commercial jet market, analysts say.

The Japanese government estimates that carriers worldwide will add at least 2,000 small jets to their fleets from 2015 through 2035. Big orders could come from Japanese carriers ANA and JAL, which are likely to add regional jets to their fleets after an expansion at Tokyo's Haneda International Airport is finished around 2009.

Watching Beijing

To break even, Mitsubishi Heavy and its partners would have to sell at least 400 aircraft, company Chairman Takashi Nishioka recently told the Japanese financial daily Nikkei. The good news for them is that they wouldn't be jeopardizing their Boeing contracts. Airlines wouldn't be choosing between the MJ and Boeing's smallest plane, the 737, which has 110 to 215 seats. "They have chosen a size in the regional jet family. We don't view that as a direct competitor to our product line," says Boeing's Cornelius.

Of course, business considerations for the MJ could take a back seat, now that China has clarified its aerospace ambitions. Tokyo worries that Beijing's huge spending on a military and industrial buildup will soon close the economic and technological gap between the two. China may unwittingly have given the MJ's backers a huge boost.

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