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What Does It Mean To Have Options?  
User currently offlineGlom From United Kingdom, joined Apr 2005, 2815 posts, RR: 10
Posted (9 years 1 month 1 week 5 days 18 hours ago) and read 4485 times:

What exactly are options? How does it benefit either the manufacturer or the airline to have them?

5 replies: All unread, jump to last
 
User currently offlineSkyexRamper From , joined Dec 1969, posts, RR:
Reply 1, posted (9 years 1 month 1 week 5 days 16 hours ago) and read 4436 times:

That an airline has already signed for a certain number of airplanes to purchase and is also expressing very high interest in another amount of those same planes based on their plans for the future. Most airlines or leasing companies couldn't afford to put deposits down for 100 airplanes so they buy 50 and then "put off" the order of the other 50 for after the first 50 have arrived.

User currently offlineSQuared From Canada, joined May 2005, 387 posts, RR: 0
Reply 2, posted (9 years 1 month 1 week 5 days 16 hours ago) and read 4416 times:

Quoting Glom (Thread starter):
What exactly are options? How does it benefit either the manufacturer or the airline to have them?



Quoting SkyexRamper (Reply 1):
That an airline has already signed for a certain number of airplanes to purchase and is also expressing very high interest in another amount of those same planes based on their plans for the future. Most airlines or leasing companies couldn't afford to put deposits down for 100 airplanes so they buy 50 and then "put off" the order of the other 50 for after the first 50 have arrived.

Just a quick addition, options allow airlines to buy planes at the same terms as when the initial order was negotiated. So if plane Y when originally bought, cost X dollars, then a converted option for plane Y, 4 years down the road would also cost X dollars. Airlines generally pay to have this benefit, as options represent a form of security, and they usually expire within 5 years.

Therefore, airlines get a form of security, in the form of a predetermined price for the planes they intially ordered, if they need to order more. And Manufacturers get $$$, and maybe some converted options.

SQuared

[Edited 2005-06-15 20:57:16]

[Edited 2005-06-15 20:57:50]

User currently offlineB727-200 From Australia, joined Nov 1999, 1051 posts, RR: 3
Reply 3, posted (9 years 1 month 1 week 5 days 6 hours ago) and read 4300 times:

Another benefit of options is that an airline can convert to a different aircraft type with the manufacurer. This is often where the aircraft is of a similar type (eg. A319/20/21), but not limited to.

For example, an airline might make firm orders for 10 A320's with options for a further 10 A320's. During the delivery phase of the initial A320's the market dynamics may have changed, so the carrier might opt to convert the options into A319's or A321's.

Rgds,
B727-200.


User currently offlineJoost From Netherlands, joined Apr 2005, 3161 posts, RR: 4
Reply 4, posted (9 years 1 month 1 week 5 days 3 hours ago) and read 4226 times:

Well, that usually depends on the deal. But indeed, often it is stated that the airline can change options. And often after some discussions, more things are possible. Like NW, switching from 340's to 330's, and UPS, switching from 306F's to 380F's.

For the manufacteror, it's usually interesting to offer some flexibility to the customers. For Airbus and Boeing, it doesn't really matter producing a 319/320, 737-700/-800. And better selling a plane, than not selling a plane.

AFAIK, there are also options that secure certain production slots.


User currently offlineAirforum From Netherlands, joined Jun 2000, 176 posts, RR: 0
Reply 5, posted (9 years 1 month 1 week 5 days 2 hours ago) and read 4210 times:

Quoting Joost (Reply 4):
AFAIK, there are also options that secure certain production slots.

Yup, actually that's one of the priviledges when an airline takes options on a certain plane. Others are indeed the right to switch types and the right to buy at the same price level as the initial order. However airlines do have to pay for REAL options, which is more or less like a down payment for the planes ordered on option. As far as I know it's something in the range of 3 or 4 % of list prices.

Options are often confused with purchase rights. There's a major difference though, as purchase rights are free and the number of them usually makes no sense at all. With purchase rights you can't secure production slots, and you have to join the line and in some cases wait for years to get your aircraft delivered. The only advantage of purchase rights is the guaranteed price you get from the manufacturer.

So folks, always be alert when you read a release stating that one or another airline has 20 planes on order and purchase rights for 30 more. That doesn't really make sense. If the airline is seriously planning to add more frames later (and there's cash!), they'll prefer options over purchase rights.



What goes up, must come down. Let's hope the sky never went up.
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