But here’s the problem: Mitsubishi isn’t the only player to see that potential.

And the competition figures to be pretty intense.

Just look at Vietnam: With all the changes that country’s economy is enduring, and with all the aircraft that will need to be upgraded to keep pace with global competition, Vietnam could well serve as a case study for the swirling market dogfight that Mitsubishi is accelerating into.

The Impact of Global Change

The over-under action should be interesting. Vietnam’s domestic carriers – state-owned Vietnam Airlines and joint-stock Pacific Airlines – will soon be forced to make room on that nation’s runways for some privately operated rivals, according to a recent report by the VietNamNet Bridge news service. Vietjet Air will be the first wholly private firm when it launches its domestic service late this year or early next year. When that happens, it will actually be the fourth carrier in Vietnam, joining Vietnam Air, Pacific Air and cargo carrier Vasco (Vietnam Aviation Services Co).

And state-run Vietnam Air is soon to be privatized, meaning it will have to modernize its fleet of 45 aircraft, a mix of aging Airbus, Boeing, ATR and Fokker commercial planes if it’s to compete against the new domestic rivals – and the host of foreign competitors that count Vietnam as one of their stops.

“We want to be one of the leading regional carriers,” Bach Quoc Thang, Vietnam Airlines’ general manager for corporate affairs, said in an interview earlier this year. “Singapore Airlines and Cathay Pacific are the examples we want to follow.”

According to some industry sources, Vietnam’s main carrier also may look to transform subsidiary Vietnam Air Service Co. into a low-cost carrier, to take on Pacific Airlines, part-owned by Australia’s Qantas Airways Ltd., and Malaysia’s AirAsia Berhad, now in partnership with Vietnamese shipbuilder Vinashin.
To secure financing for any new planes, Vietnam now has a newly established leasing company – its first – which has been capitalized with $200 million from Vietnam Air, Vietindebank, Petrovietnam and telecom group VNPT.

Here’s where it gets interesting. Vietnam Prime Minister Nguyen Tan Dung must soon decide which long-range jets to buy for Vietnam Air; that’s why both Boeing and Airbus have intensified their lobbying efforts.

Canada’s Bombardier has zoomed into the fray, as well, boasting that its newly launched CRJ900 NextGen regional 90-seater jet could fly domestic Vietnamese air routes and even key Asian routes at the lowest fuel cost per passenger seat – a key industry metric. It even flew one of the jets to Vietnam recently, to put the aircraft through its paces for this possible buyer.

“This would be an ideal feeder aircraft for Vietnam’s domestic and regional air transport needs,” Trung Ngo, a vice president of Bombardier, told a Vietnam news service, adding that airlines such as Deutsche Lufthansa AG and Air France KLM have used its jets since the 1990s.

That would also be the ideal use for the Mitsubishi jet. But here’s the problem for Mitsubishi: Its airplane won’t be ready until 2013. That makes it too late for the initial sales push that will be taking place in this market, although experts say there will be many more opportunities in Asia and other parts of the world as markets abroad continue to open up to capitalism.

Big Returns Often Demand Big Risks

Demand for smaller jets is expected to increase rapidly as carriers bolster domestic routes and look to offset surging oil prices with aircraft that consume less fuel and are more likely to have their seats filled.

But Mitsubishi is not the only newcomer in the market.

Russia’s United Aviation Co. has teamed up with Boeing to build a jet for 75 to 95 passengers. China’s ongoing effort to build a midrange commercial jetliner got a boost recently when the leasing arm of U.S. giant General Electric Co. (GE) signed a preliminary agreement to buy five of the airplanes when they’re finished by the state-run venture in charge of the project.

China has broad ambitions in jet manufacturing, starting small with its 70-seat ARJ21-700, reports the trade journal Aviation Week & Space Technology. Flight testing has slipped a bit and now the certification of the aircraft isn’t expected until the middle of next year. Russia has a big aerospace sector, and wants into the regional market with its Sukhoi Super Jet 100, which will be in flight-testing soon.

Mitsubishi has set up a special subsidiary to oversee development of the jet. It capitalized the project with an initial outlay of $30 million, although it expects that total to climb to nearly $1 billion over the next year. Two-thirds of that money will come from Mitsubishi.
And that billion dollars is just the first installment.

Total development costs are projected to reach $1.5 billion to $1.8 billion – roughly equal to three years’ worth of the company’s profits. And that estimate is almost certainly short of what will really be needed, given the company’s newness to the sector and the new technologies involved.

Mitsubishi Heavy expects to lose money on the aircraft business for the next decade, and will underwrite the development costs with money from such cash-flow-positive business units as those that make and sell nuclear reactors and turbochargers. Many analysts question the wisdom of the strategy.

“It seems there are various sectors they’d be much better concentrating on, such as nuclear reactors,” Takeshi Osawa, senior fund manager at Norinchukin Zenkyoren Asset Management, told Reuters. “There is demand for the planes, but the competition is tough.”

Mitsubishi Heavy said it would buy 60% to 70% of the components for the new airliner from suppliers outside of Japan. For instance, it sees the Pratt & Whitney unit of United Technologies Corp. (UTX) as the engine provider.

Ironically, up until now, Mitsubishi’s aerospace business has filled that supplier/provider role, developing and making parts for Boeing and Airbus jets. It makes cargo doors for Airbus jets and the composite wing box for Boeing’s new Dreamliner.

Support and Opposition Abound

All Nippon Airways Co. Ltd., Japan’s No. 2 air carrier, gave the Mitsubishi jet project a vote of confidence recently when it committed to purchases of 25 of the jets. And Steven F. Udvar-Hazy, chief executive officer of aircraft leasing giant International Lease Finance Corp. (ILFC), told Aviation Week that his firm has met with Mitsubishi and has made a series of recommendations for improving the design of the MRJ jetliner. ILFC also has been in talks with Bombardier about buying that company’s proposed C-Series jet.

“What I have told [Mitsubishi] is … if you guys can pull it off and do what Toyota has done in cars, you can be a formidable player,” Udvar-Hazy told the influential aerospace-industry trade journal. “But it has to be done right.”

Needless to say, Udvar-Hazy’s major concern is the price of the airplane.

One potential rival says Mitsubishi can expect to face some real marketplace turbulence. Although it already has one airline backer in Japan-based All Nippon Air, the technology Mitsubishi is offering may not be unique enough to differentiate it from all the other marketplace offerings, Frederico Pinheiro Fleury Curado, the CEO of Brazil’s Embraer, alleged during a recent interview with Aviation Week.

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