Monday, October 6, 2008
MRJ Residual Values Gain Further Credibility with Boeing Support
The emergence of new manufacturers always has the potential for upset the status quo and impact existing residual value forecasts but usually the entrance of new players takes many years to have any discernible impact. Airbus for example took some 15 years to become a viable force in aerospace manufacturing and only after 20 years was the company able to force McDonnell Douglas into third place. For the first ten years of production Airbus relied heavily of domestic orders and politico-economic influence for overseas customers.
The aspirations of the Russian, Chinese and Japanese industrial bases to participate in the high technology sector of aerospace manufacturers have been well known for decades. To date Airbus and Boeing have enjoyed a duopoly in the larger segment of the market and Embraer and Bombardier in the smaller.
The launch of the Mitsubishi Regional Jets (MRJ) earlier this year offered a realistic alternative to the current generation regional jets. Even so, the incursion of the MRJ into the traditional markets of Embraer and Bombardier was expected to be modest in the early years, being essentially limited to the domestic and regional markets such that long term residual values for the ERJ and CRJ series regional jets were likely to be unaffected. The MRJ is scheduled for service entry in 2013 and while powered by the fuel efficient Pratt & Whitney PW1000G, the need to develop a viable support structure was expected to hold back wider appeal.
Prospective customers beyond domestic borders can be reassured that the new aircraft can be supported once in service. With so much focus by operators on reliability, customers will need to be confident that, in the event of a problem the aircraft can be placed back into the service with the minimum amount of delay. Such support comes in the form of the ability to provide engineering expertise in the event of minor damage to an aircraft while on the ramp or through the delivery of spare parts to alleviate an Aircraft on Ground (AOG) predicament.
In the early years, engineers will need to be placed with operators to eliminate teething difficulties. Failure to ensure high reliability will reduce relative attraction and impinge on the ability to sell further units and also make the disposal of used aircraft more difficult. The combination of a limited order book and restricted remarketing would have considerable adverse consequences for residual values. The converse, whereby reliability facilitates maximum utilization and improves remarketing opportunities, would not only allow residual values to improve but also for the new type to encroach on the traditional markets of Embraer and Bombardier. The ability of the MRJ to meet the high standards necessary to be global player would be further enhanced with the participation of Fuji Heavy Industries, a key supplier of B787 sub-assemblies and therefore an experienced player.
Despite service entry of the MRJ still being five years away, the potential impact on residual values of the ERJ and CRJ series is very real and needs to be increasingly included in any long term residual forecast. The fall in the price of fuel, if sustained, could prove to be a negative in the early years of the program, not least because the imperative to reduce fuel burn is less evident. However, the combination of a properly produced aircraft as well as excellent support, should still offer the possibility of considerable competition to current incumbent.