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What Is The Point Of Placing Options On Aircraft?  
User currently offlineFrontierCPT From Australia, joined Jun 2004, 973 posts, RR: 8
Posted (9 years 10 months 2 weeks 2 days 16 hours ago) and read 4941 times:

Hi! I don't really understand the point of placing an option on aircraft? I mean, if an airline decides they want more of a particular kind of aircraft, they can just place orders, right? Can someone please help me understand this? Thanks!

13 replies: All unread, jump to last
 
User currently offlineJAL777 From , joined Dec 1969, posts, RR:
Reply 1, posted (9 years 10 months 2 weeks 2 days 16 hours ago) and read 4920 times:

You can usually secure a price without having to actually put down a deposit.

User currently offlineRoberta From , joined Dec 1969, posts, RR:
Reply 2, posted (9 years 10 months 2 weeks 2 days 16 hours ago) and read 4913 times:

Options recieve the same discount the previous ordered planes got. A whole new order may not get the same benefits.

User currently offlineFrontierCPT From Australia, joined Jun 2004, 973 posts, RR: 8
Reply 3, posted (9 years 10 months 2 weeks 2 days 16 hours ago) and read 4911 times:

Oh, okay, so, and airline can say they want an option for 5 aircraft, then the manufacturer will say it will cost X dollars, no matter when you decide to buy them?

User currently offlineJAL777 From , joined Dec 1969, posts, RR:
Reply 4, posted (9 years 10 months 2 weeks 2 days 16 hours ago) and read 4890 times:

Look at it like this:

An airline orders 20 A320's with no options. 5 years down the line this airline needs more aircraft. Airbus, fully knowing the cost associated with either (a) jointly operating the 737 or (b) fully switching over to the 737, will not seek to undercut the price of the 737 by any substantial margin. Airbus fully knows that the customer needs and wants more A320's. The airline is therefore going to have to pay more per aircraft. With options written into contracts, the airlines can secure themselves lower prices and the manufacturers can secure themselves further orders.


User currently offlineMandala499 From Indonesia, joined Aug 2001, 6590 posts, RR: 75
Reply 5, posted (9 years 10 months 2 weeks 2 days 16 hours ago) and read 4883 times:

Add to JAL777's post...
I want plane X now... price: 20M USD
in 5 years time, I believe price of X would be 25M USD
I order 10 X now, with an option of 10 X valid for 5 years.
Option price = 0.1M USD per year per aircraft.

If at the end of 5 years I don't need the extra planes, I'll let the manufacturers keep 5m USD from the options.

If at the end of 5 years and the price IS 25M USD each, I would have saved 45M USD thanks to the option for 10 planes.

Just a simplified example...

Mandala499




When losing situational awareness, pray Cumulus Granitus isn't nearby !
User currently offlineFrontierCPT From Australia, joined Jun 2004, 973 posts, RR: 8
Reply 6, posted (9 years 10 months 2 weeks 2 days 16 hours ago) and read 4874 times:

Thanks guys! It really helped!

User currently offlineLeelaw From , joined Dec 1969, posts, RR:
Reply 7, posted (9 years 10 months 2 weeks 2 days 15 hours ago) and read 4869 times:

The legal definition of an option is the right, but not necessarily the obligation to do or refrain from doing something in the future. As the previous posters have stated well, particularly Mandala499, it's a low cost way for both the carriers and manufacturers to hedge their bets and provide themselves with certainty about pricing and product availability in the future.

User currently offlineACAfan From United States of America, joined Apr 2004, 710 posts, RR: 6
Reply 8, posted (9 years 10 months 2 weeks 2 days 13 hours ago) and read 4775 times:

can options secure delivery places as well or only price?


Freddie Laker ... May be at peace with his maker ... But he is a persona non grata ... with IATA
User currently offlineEMBQA From United States of America, joined Oct 2003, 9364 posts, RR: 11
Reply 9, posted (9 years 10 months 2 weeks 2 days 13 hours ago) and read 4743 times:

Also, along with securing a price, you get moved to the 'front of the line' when you convert options to orders.


"It's not the size of the dog in the fight, but the size of the fight in the dog"
User currently offlineRoberta From , joined Dec 1969, posts, RR:
Reply 10, posted (9 years 10 months 2 weeks 2 days 13 hours ago) and read 4741 times:

That'll explain why NZ had so many 7e7 options then, but only 2 planes.

User currently offlineJwenting From Netherlands, joined exactly 13 years ago today! , 10213 posts, RR: 19
Reply 11, posted (9 years 10 months 2 weeks 2 days 4 hours ago) and read 4603 times:

yes, sometimes you can ensure delivery as well, but in that case there will be a clause about when the option will have to be executed to make those dates happen (they can hardly have you place an option for delivery on 01/01/2006 and expect to be able to deliver that if you convert the option into a firm order on christmas day 2005 unless they're doing really badly and have a lot of aircraft parked AND you ordered dirt-standard aircraft with no customer specific items installed).


I wish I were flying
User currently offlineSEAPete From United States of America, joined Mar 2004, 67 posts, RR: 0
Reply 12, posted (9 years 10 months 2 weeks 2 days 4 hours ago) and read 4587 times:

Options are a pretty widely used business practice in many industries including the airlines. Most people have mentioned the ability for an airline to secure a price for what might be a future order, however for companies like Boeing it is a great sales tool because it will ensure a higher rate of return business. So the airline has a hedge against inflation and the plane builder has a hedge against the airline choosing a competitor.

Ultimately options are a win-win situation for the airlines and the manufactures.

Cheers!

Pete



SEA No other place like it
User currently offline777ER From New Zealand, joined Dec 2003, 11857 posts, RR: 18
Reply 13, posted (9 years 10 months 2 weeks 2 days 2 hours ago) and read 4545 times:
AIRLINERS.NET CREW
FORUM MODERATOR

That'll explain why NZ had so many 7e7 options then, but only 2 planes.

The 42 options NZ has with Boeing when they announced the B763 replacement are for the B772, B772ER, B772LR, B773, B773ER and B7E7. About 8-10 of those options will be taken up in about 8-9 years for when the B773ER is ordered to replace the B744s. More B772s and/or B7E7s will be ordered for when NZ announces new long haul routes.


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