UPDATE 2-JAL gives Japan's flagging home-grown regional jet boost with orders

Thu Aug 28, 2014 7:54am EDT

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(Adds value of Embraer order)

By Tim Kelly

TOKYO Aug 28 (Reuters) - Japan Airlines Co said on Thursday it has agreed to buy 32 Mitsubishi Regional Jets worth around $1.5 billion, giving Japan's first domestically manufactured commercial passenger plane in half a century a needed sales boost.

The carrier also signed a firm order for 15 regional E-Jets from Brazil's Embraer for delivery from 2015. The value of the firm order is estimated at $677 million, Embraer said on Thursday, adding that the airline had agreed to options on an additional twelve E-Jets.

Japan Airlines said it will start deploying the MRJs on domestic routes in 2021.

The MRJ venture - 64 percent owned by Mitsubishi Heavy Industries and one-tenth owned by Toyota Motor Corp - has struggled to win orders amid production delays and withering competition from the world's two leading regional aircraft makers, Embraer and Bombardier Inc.

The venture, which has a $1.9 billion development budget, risks repeating the commercial flop of its made-in-Japan predecessor, the YS-11 in the 1960s, unless it can garner more demand. With fewer than 200 confirmed orders, the 70- to 90-seat jet is likely still far away from breaking even, analysts said.

Japan Airline's rival home carrier ANA Holdings Inc has ordered 15 of the Mitsubishi aircraft with options for 10 more, and plans to fly the aircraft from 2017.

The aircraft maker says the jet will burn 20 percent less fuel than comparable jets. That however is mostly the result of fuel-efficient Pratt & Whitney PurePower engines rather than innovations in the air frame design.

Dulling the fuel-saving sales pitch for the MRJ, both Embraer and Bombardier have said they use the same engines for their next generation of aircraft.

Delays in development also mean MRJ is losing its edge in getting to market before the new versions from Embraer and Bombardier take to the skies.

STILL BULLISH

The MRJ's manufacturer remains bullish about potential demand for regional jets, predicting sales of as many as 5,000 in the 70- to 90-seat class over the next two decades.

That forecast, however, is almost double the demand predicted by Embraer and Bombardier. It also far exceeds the market size estimated by the Japan Aircraft Development Corp, an industry association which includes Mitsubishi Heavy.

The Japanese government is not however measuring the projects success by commercial orders alone.

Like the YS-11, the MRJ is meant to help the aerospace industry retain engineers and learn new skills that could help it win new business from the likes of Boeing Co, which already builds large portions of its planes in Japan, accounting for about 22,000 jobs.

The orders for the MRJs, which have financial backing from the Japanese government, comes in an increasingly politicised atmosphere for Japan Airlines and rival ANA Holdings.

Since Japan Airlines' bankruptcy and bailout by a rival administration, the former state-owned flag carrier has fallen out of favour with Prime Minister Shinzo Abe's Liberal Democratic Party, which returned to power at the end of 2012. (Additional reporting by Asher Levine in Sao Paulo; Editing by Ryan Woo and Jeffrey Benkoe)

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