Mitsubishi’s decision this month to shutter its U.S. offices and most of its flight-test operation in Washington state might have upset the future competitive balance of the regional jet market, as another at least year-long delay to the SpaceJet M90 further damages the program’s credibility. The move leaves all the program’s U.S-based test flight airplanes in limbo and adds to the uncertainty over any real competition in the regional jet market for Brazil’s Embraer.

The decision perhaps shouldn’t have come as a surprise given Mitsubishi Heavy Industries' recently announced plan to slash funding for the 88-seat SpaceJet M90 by more than half and completely suspend development of the 76-seat M100. Those decisions spelled a delay for the expected first delivery of the 88-seat M90 from mid-2020 to sometime in 2021 “or later,” said MHI, while Embraer—still stinging from the collapse of its planned deal to sell 80 percent of its commercial aircraft business to Boeing—considers whether or not to undo its “carveout” of Embraer Commercial Aircraft from the rest of the company.

Now, with Mitsubishi becoming less relevant at least in the near term, Embraer seems to have a chance to capitalize on its monopoly position in the sector once the industry recovers from the Covid-19 collapse.     

Of course, no aircraft manufacturer finds itself in a strong position, thanks to the ravages of Covid. Embraer appears unlikely to deliver many more than 30 commercial airplanes this year, compared with 89 in 2019, and next year’s cash flow prospects look not much better given Brazilian airline Azul’s decision to defer delivery of 59 E2s by as much as four years. Originally scheduled for delivery between 2020 and 2023, the airplanes will instead begin arriving in 2024 under the terms of the new deal.

Fortunately for Embraer, it looks now as if it will stand as the last manufacturer of new regional jets in the 76-seat segment and, while the M90 competes on paper with the E175-E2, the Japanese airplane does not offer an economic advantage against the established Brazilian jet, which itself has not sold well. Unfortunately for Embraer, the E175-E2 will not qualify for use by U.S. regional airlines due to pilot-union scope clause limitations on weight, which appear even more stubbornly unmovable given the inevitable furlough of thousands of mainline pilots due to the Covid-related traffic collapse. In reality, the now-suspended Mitsubishi M100 program existed solely as a means to qualify for use by U.S. regionals because its mtow would have met scope limitations by the time it reached the market in 2024. Now that the M100 appears indefinitely shelved, the E175-E1—powered by aging-technology GE CF34 engines—will remain the only scope-compliant new-build regional jet on the market.

Embraer’s E175 backlog can support three more years of production at a rate of 60 airplanes a year, even without new orders. The previous-generation E175 was the company’s biggest seller due to continuing demand in the U.S. for scope-clause compliant regional jets, but the company will need more than one significant revenue generator as time passes. Utah-based SkyWest Airlines placed a new order this past January for 20 more of the 76-seater to fly for American Airlines following a deal for seven for Delta last August. While the Brazilian company has suffered no order cancellations since the start of the Covid-19 crisis, the resulting demand environment has raised doubts over American’s need for the airplanes as expected this year, notwithstanding suggestions from some analysts that regional aircraft could actually benefit from less demand.

Speaking with AIN from his base in Bainbridge Island outside Seattle, Leeham News and Analysis editor Scott Hamilton suggested that once the Covid crisis subsides, Embraer will face another source of competition regardless of Mitsubishi’s problems—used airplanes.

“There are a slew of 170s in storage; not that that’s a particularly attractive airplane but they are there, and there are a bunch of older-model 175s that might be available, plus there are [Bombardier] CRJs on the used market,” he noted. “A brand new 175-E1 would be sold for $22 or $24 million. So, for United, you consider a lease rate of 0.7 [per month] for that [airplane]. You can get a used CRJ for a lease rate of something like 40 or 50 percent [less than] that. And in the Covid environment and the immediate post-Covid environment, low lease rates are going to be important, particularly as fuel continues to be cheap.”

Of course, the fuel price environment could look completely different by 2023, when, according to the International Air Transport Association, traffic should return to 2019 levels and theoretically support a return to popularity of the E195-E2.

So, it appears, Embraer’s most promising product in the long term lies with its biggest airplane.  

“The rest of the world has made it clear that they’re not really interested in the 175-E2 and they're really not that interested in the 190-E2. They’re more interested in the 195-E2,” said Hamilton. “All you need to do is look at the order book. The 195-E2 operating expense by our analysis is only 5 or 6 percent more than the 190-E2, but in a typical configuration you get 20 to 22 more seats of revenue potential.”

But, as Hamilton pointed out, Embraer needs to first decide how it will proceed as an organization, now that its Boeing partnership has fizzled, before even considering product strategy. In a sense, Covid gives Embraer a little breathing space as the industry as a whole awaits a return to some semblance of normalcy. While rebuilding will not come easy, the company has faced and overcome challenges in the past. It would seem to serve competitors best to assume Embraer will do so again.