UPDATE 3-Japan's $1 bln plane project gets off the ground

(Adds details, background)

TOKYO, March 28 (Reuters) - Mitsubishi Heavy Industries 7011.T said it would launch a $1 billion project to build Japan's first passenger jet, taking a big gamble on a market dominated by Canada's Bombardier Inc BBDb.TO and Brazil's Embraer EMBR3.SAERJ.N.

Japan’s largest heavy machinery maker has spent several assessing the likely demand for a small, lightweight, fuel-efficient jet carrying 70-90 passengers over shorter and mid-range routes.

The project won a vote of confidence on Thursday when All Nippon Airways Co 9202.T, Japan's second-largest airline, said it would buy up to 25, the first carrier to commit to the jet.

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 are 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 BA.N to build a jet for 75 to 95 passengers, while China's efforts got a boost on Friday from news that General Electric's GE.N leasing arm signed a preliminary agreement to buy five regional jets developed by a state-owned firm. [ID:nSHA23009]

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

A subsidiary will be set up on April 1 to oversee the project. It will start out with capital of 3 billion yen ($30 million) and aim to increase that over about a year to 100 billion yen, two-thirds of which will be shouldered by Mitsubishi Heavy itself.

It plans to tap automobile giant Toyota Motor Corp 7203.T, trading houses Mitsui & Co 8031.T, Mitsubishi Corp 8058.T and Sumitomo Corp 8053.T, and the state-owned Development Bank of Japan for the rest of the capital.

Mitsubishi Heavy said it hopes to have the jet in the air by 2013 and will aim to sell 1,000 over the next 20 to 30 years, grabbing one-fifth of expected new demand in a market forecast to roughly quintuple to more than 5,000 planes by 2026.


Mitsubishi Heavy has focused until now on developing and making parts such as the composite wing box for Boeing's BA.N new 787 Dreamliner and cargo doors for Airbus jets.

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

But the venture is also fraught with risk.

Development is expected to cost a total of 150-180 billion yen, some of which will be shouldered by the government. The sum is equal to about 3 years of Mitsubishi Heavy’s net profit.

Mitsubishi Heavy predicted that it would lose money on the business for the next 10 years, during which it plans to rely on money-spinning businesses such as nuclear reactors and turbochargers to pick up the slack.

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

Mitsubishi Heavy said it would buy 60-70 percent of the new jet's parts from overseas suppliers, including engines from United Technologies Corp UTX.N unit Pratt & Whitney and the hydraulic system from Parker Aerospace.

The jet will be Japan’s second domestically developed passenger aircraft in the post war era. The propeller-driven YS-11 made its debut in 1962 but production was ended in 1973.

The project is for some a source of national pride. Japan has watched a good chunk of its manufacturing sector lose its competitiveness over the past decade or so to rivals in China, South Korea and Taiwan.

Japan’s Minister Akira Amari issued a statement saying that he hoped the project, which has been called Japan’s “last chance” in the aircraft industry, would help invigorate the airline industry and the manufacturing sector overall.

Mitsubishi Heavy also tried to put the project in the context of larger national goals.

“This has been a long-standing wish of the government and the private sector. We felt that if we let this chance go Japan would lose the initiative,” Mitsubishi Heavy’s Tsukuda said. (Reporting by Yuko Inoue, Nathan Layne, Kiyoshi Takenaka, Nobuhiro Kubo and Elaine Lies; Editing by Hugh Lawson and David Cowell)