• The U.S. government yesterday (Thursday) sued UBS AG (UBS) to force Switzerland’s largest bank to release the identities of 52,000 Americans who allegedly hid their secret Swiss accounts from U.S. tax authorities, Bloomberg reported. U.S. customers failed to report income earned and pay U.S. taxes on accounts that held about $14.8 billion in assets during this decade, according to the court filing. The lawsuit came a day after UBS agreed to pay $780 million and disclose the names of about 250 account holders to avoid U.S. charges that it helped thousands of wealthy Americans evade taxes.

• The number of U.S. workers seeking unemployment aid jumped to a record high of nearly 5 million, the government said yesterday (Thursday), as the slumping economy made it increasingly difficult to find jobs. The number of unemployed still on the benefits rolls after drawing an initial week of aid surged 170,000 to 4.99 million in the week ended February 7, the Labor Department said.  It was the highest reading on records dating to 1967, Reuters reported.

• The benefits of the Obama administration’s housing plan will be limited by restrictions on which mortgages are eligible, according to Bank of America Corp. (BAC) analysts.  Only about 50% to 60% of securitized prime jumbo or Alt-A loans meet the loan-modification standards under terms of the $275 billion plan, which includes government payments to lenders, mortgage servicers and borrowers, Bloomberg reported.

• Oil prices jumped 14% to top $39 a barrel yesterday (Thursday) after U.S. government data showed an unexpected fall in crude inventories last week due to lower imports and higher demand. The data snapped a seven-week streak of crude buildups in the U.S., where the flagging economy has dragged down fuel use, Reuters reported. U.S. crude futures for March delivery, which expire on Friday, rose $4.86 to settle at $39.48 a barrel, marking the biggest settlement gain since December 31. April delivery contracts traded up $2.77 to settle at $40.18 a barrel.

• Hewlett-Packard Co. (HPQ) lowered its forecast for 2009 profit yesterday (Thursday), as revenue in the fiscal first quarter was only $28.8 billion, about $3 billion shy of analysts’ expectations. The computermaker showed it isn’t immune to the pullback in consumer and corporate spending as sales of personal computers rose at the slowest pace in six years over the holidays, according to research firms Gartner and IDC.  Sales of personal computers, which make up about one-third of HP’s total sales, fell 19% to $8.87 billion, and sales in HP’s revenue and imaging business fell 19% to $6 billion.  HP expects revenue of $27.4 billion to $27.7 billion in the current quarter, which would be a 2% to 3% decline from revenue in the second quarter of 2008, MSNBC reported.

• Brazilian aircraft maker Embraer (ADR: ERJ) said yesterday (Thursday) it will lay off about 20% of its workforce or about 4,200 employees around the world, citing a sharp downturn in the aviation market amid the global economic crisis, Reuters reported. The company, which also makes business jets and military aircraft, cut its delivery forecast for this year to 242 jets from a previous estimate of 270. With the new delivery forecast, Embraer estimates it will bring in $5.5 billion in revenue in 2009, much less than it had initially expected. It also cut its investment plan for this year to $350 million from $450 million.

Source: Global Investment News Briefs Friday, February 20th, 2009

But for investors with an interest in long-term profits, this is a story that’s well worth a detailed look. It will leave you with a very clear understanding of why China is a “must invest” kind of market. And it will demonstrate, yet again, how committed China is to becoming a world economic superpower, as well as the tenacity that’s likely to make that happen.

Let’s start with a look at the basics.

Two weekends ago in Shanghai, the Chinese government unveiled its first “jumbo” passenger aircraft company, a venture that’s labeled as the Commercial Aircraft Corp. of China Ltd. (CACC). By “jumbo” jet, China is referring to the so-called widebody airliners that carry 200 to 800 passengers and make globetrotting trips to almost any point on the globe.

Right now – and for many years – the world jumbo-jet market has belonged to just two companies:

• The Boeing Co. (BA), the U.S.-based airliner industry pioneer that’s America’s biggest exporter.
• And the pan-European venture, Airbus SAS, a subsidiary of European defense giant EADS NV.

With its 747 “Jumbo Jet,” Boeing both defined and dominated the jumbo market. The jetliner, with its distinctive humpbacked silhouette, made its first commercial flight in 1970, and held the passenger-capacity record for 37 years – a mark that was finally eclipsed by the Airbus 380.

Lockheed Corp. – now Lockheed Martin Corp. (LMT) – was the first to pull the ripcord on the jumbo-jet market. Its L-1011 TriStar jet had been the third widebody jet to enter operation, following the 747 and the McDonnell Douglas DC-10, which was built by McDonnell Douglas Aircraft Corp, a defense/commercial airliner firm. Lockheed launched the jet in 1968 and, thanks to hugely disappointing orders (it only built 250 of the jets), ceased production in 1984.

McDonnell Douglas stayed around a bit longer. But it finally merged with Boeing in 1997, joining a long list of aerospace firms swallowed up by bigger suitors.

If the jumbo-jet market sounds like a tough one to crack, that’s because it truly is. But those difficulties don’t emanate from a lack of demand: The market is huge.

The $3 Trillion Shopping List

Indeed, over the next 20 years, Boeing has forecast that air carriers worldwide will require 28,600 commercial aircraft with a value of $2.8 trillion. The Boeing forecast is generally viewed as the world’s best analysis of the global market for commercial airliners and cargo aircraft. And this forecast isn’t limited to jumbo-sized passenger jets: It includes short-range connector planes, regional jets, cargo planes and the jumbos.

The huge revenue potential of the global airliner market – combined with the low number of viable competitors and the high barriers faced by new potential entrants – has been a big reason that Money Morning’s investment gurus all view Boeing as a promising profit play for years to come. Not even China’s plans will change that viewpoint.

But with such a large potential market, many observers find it surprising that there aren’t more potential players.

That’s changing – or at least it is at the lower end of the market. China and Russia are both well along on government-backed programs to develop a regional jetliner for sale to global customers. In the past month or so alone – as was reported here in Money Morning – Japan entered the regional jetliner shootout: Japan’s Mitsubishi Heavy Industries Ltd. (PINK: MHVYF) has unveiled a plan to develop a “regional” jetliner for use by airlines all around the world. The development work alone is expected to cost several billion dollars, but the program has the backing of both Toyota Motor Corp. (TM) – the world’s No. 1 automaker by sales – and the Japanese government.

Mitsubishi Heavy hopes to have the jet in the air by 2013 and is aiming to sell 1,000 of the airplanes over the next 20 to 30 years, grabbing one-fifth of expected new demand in a market that is projected to roughly quintuple to more than 5,000 planes by 2026.

However, it could be a bumpy flight: Incumbents Bombardier Inc., of Canada, and Embraer (Empresa Brasileira de Aeronautica SA) (ERJ) of Brazil, currently dominate the short-range jetliner market. Both the China and Russia ventures will take wing well before Japan’s new jet, and the eventual existence of all five combatants in this slice of the airline market could lead to some pretty congested airspace – especially since several players are expected to link up with market-savvy foreign heavyweights, including, potentially, Boeing.

As tough as that sounds, attacking the jumbo-jet market will be tougher still. Even with fewer contestants.

Jumbo Challenges for a Jumbo Jet

The tremendous appetite for capital, the engineering challenges that range from complex aerodynamics to new composite materials, and the need to be able to manage a string of suppliers scattered about the globe are just a few of the hefty demands that make this mountain too high for all but a few global companies to climb.

Right now, in fact, there are only two new jumbo jet programs under way, either in development or in testing, and both have been riddled with technical problems that have resulted in pushed-back delivery dates. There are:

• The Boeing 787 “Dreamliner,” a replacement for the company’s Boeing 767. It’s making heavy use of composite materials and depends heavily on a network of global suppliers, and delays have pushed the delivery date for the first jets well into next year.
• And the Airbus A350, a replacement for the Airbus A330/A340 line, and a program whose many delays have pushed its delivery date out to an estimated 2012 or 2013, according to several sources.

Given that huge companies such as McDonnell Douglas and Lockheed have gone up against Boeing and failed, many analysts are skeptical about the “commercial prospects” of a jumbo jet designed and built in China. China has virtually no experience in this market and the two other (known) attempts – ventures with Douglas and Airbus – ended in failure.

And even if China succeeds, it’ll be a good 20 years before U.S. or European airlines flying China-built jets will be ready to lose your bags on a regular basis.

More than 30 years after Japan’s only airliner program since World War II ended as a commercial failure, the country is making a multi-billion-dollar bet that it can succeed in the jetliner market.

Japan’s Mitsubishi Heavy Industries Ltd. (PINK: MHVYF) has unveiled a plan to develop a “regional” jetliner for use by airlines all around the world. The controversial project gained global credibility in recent weeks after analysts began to speculate that Toyota Motor Corp. (TM) – the world’s No. 1 automaker by sales – would join the development team. Toyota subsequently confirmed its involvement, announcing plans to take a 10% stake in the venture and injecting $67 million to help get the initiative off the ground. The Japanese government is backing the program.

It’s a big gamble for Mitsubishi and its partners: The regional airliner market is right now dominated by Bombardier Inc., of Canada, and Embraer (Empresa Brasileira de Aeronautica SA) (ERJ) of Brazil. And firms in both Russia and China – each with a major U.S. corporation as a partner and co-pilot – already have targeted this market, and have a solid head start on the Mitsubishi team.

Still, the potential payoff is hefty enough to warrant the risk. Such key global trends as rocketing fuel prices, soaring global travel, fast growth in Asia, Latin America and the Middle East, and ongoing problems with major air carriers across the world are stoking worldwide demand for efficient, economic regional jets. And that demand could persist until 2030, many experts predict.

“In terms of the macro picture, demand is there for this type of jet,” Mizuho Investors Securities Co. Ltd. senior analyst Yuichi Ishida told the Reuters news service. “Money-losing regional routes could turn profitable by using them. But the real question is whether there is room left in this market for Mitsubishi Heavy.”

To date, the so-called NAMC YS-11 – a turboprop airliner built by a Japanese consortium – is the only commercial aircraft made in Japan in the post-World War II era. The program was initiated by Japan’s Ministry of International Trade and Industry in 1954. The aircraft was rolled out in 1962 and production ended in 1974 – hardly qualifying it as a “success” from a financial standpoint.

Toyota’s Desire to Fly

Toyota said its motivation was primarily patriotic – the Mitsubishi jet is being backed by the Japanese government, which is searching for ways to for its smallish aerospace business to become more of a global player, especially after losing other industries to South Korea and China.

Toyota – which edged ahead of General Motors Corp. (GM) in the first quarter to become the world’s top-selling automaker – said it also would be looking for ways to adapt the technological know-how developed in its aerospace activities to its core automaking business. That’s not just an empty claim made to justify its diversification into the aerospace sector: The Mitsubishi MRJ70 (70 seat) and MRJ90 (90 seat) jetliners are to be the first regional jets to make extensive use of high-strength/lightweight “composite” materials, such as those found on the new 787 Dreamliner being developed by U.S. aerospace giant, The Boeing Co. (BA).

Although it hasn’t built a commerical aircraft in decades, it is an experienced subcontractor in that area, and is a veteran defense contracting firm. For example, Mitsubishi already is a key manuacturing partner on the long-range Boeing jet. And it has experience building such military aircraft as the F-1 fighter, T-2 trainer – both supersonic jets that the company built on its own – and the F-2 fighter, a Japanese-built version of the U.S. F-16 Fighting Falcon that was produced in partnership with Lockheed Martin Corp. (LMT)., the No. 1 U.S. defense contractor.

Toyota, too, has some experience, and already operates a small aerospace research team. Analysts say that venture could easily take flight and become a major business operation. That’s just what happened with Toyota’s robotics business, which started out as a fairly tiny research operation, but today is one of the company’s better-known businesses outside its core auto operation.

Honda Motor Co. (HMC), Toyota’s chief rival in Japan, already has expanded into the aircraft business; its futuristic seven-seater HondaJet light business jet has garnered heady praise for its advanced design and elegant lines. The company was supposed to start taking orders for the airplane sometime this month.
Toyota’s investment in the Mitsubishi jet is the largest of any company outside the Mitsubishi corporate network, or “keiretsu” of related companies. Other backers include domestic Japanese trading companies and the government-supported Development Bank of Japan. Foreign suppliers also will be involved.

To Market, To Market

Why is Mitsubishi – Japan’s largest producer of machinery – getting into the airliner business? In a word: Opportunity.

Over the next 20 years, Boeing itself is forecasting that air carriers worldwide will need to acquire 28,600 commercial aircraft of all types – with a potential value of $2.8 trillion. The Boeing forecast is generally viewed as the world’s best analysis of the future global market for commercial airliners and cargo aircraft.

The huge revenue potential in the global airliner market – combined with the low number of viable competitors and the high barriers faced by new potential entrants – is a big reason that Money Morning’s investment gurus have repeatedly mentioned Boeing as a promising global investment for years to come.
During that same 20-year stretch addressed by Boeing’s market forecast, China will have to buy 3,400 airliners, a requirement worth $340 billion. That will make China the fastest-growing airliner market in the world, and will also rank it as the biggest market outside the United States for new commercial airliners. In fact, if you average it out, from China alone you’re talking about sales of $17 billion a year for the next two decades.

This staggering shopping list will include the globetrotting tarmac queens being built by Boeing and European rival Airbus SAS.

But global forces also are revving up demand for regional jetliners, like those being dreamed up by Mitsubishi.

According to Mitsubishi, the world’s airlines will order 5,000 regional jets over the next two decades as global carriers seek out fuel-efficient airplanes for shorter routes and developing nations expand their airliner fleets to fuel economic growth.

That’s not an arbitrary figure, either: The company spent several years analyzing the market and projecting the potential demand for the jet, and designed the specifications specifically around its findings. The plane will be:

• Small, so it can fly out of regional airports.
• Made of lightweight composites to make it strong and fuel efficient.
• Fast (with cruisng and maximum speeds of between 0.78 and 0.82 times the speed of sound, according to published reports).
• Profitable to operate, carrying 70 to 90 passengers, depending upon the model.
• And with a good range – 920 nautical miles for the base model, although extended-range (1,400 nm) and long-range (1,960 nm) versions will be available.

“Mitsubishi Heavy has always been just a partner of Western aircraft makers,” Mitsubishi Heavy President Kazuo Tsukuda said at a news conference that talked up the company’s pet project. “Now we want to take advantage of changes in the marketplace such as high fuel costs and a greater need for environmentally friendly aircraft.”