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Aircraft Purchasing And Options  
User currently offlinePlacekicker From United States of America, joined Apr 2008, 22 posts, RR: 0
Posted (5 years 4 months 1 week 2 days 15 hours ago) and read 3877 times:

What does it mean for an airline to agree to options for "15 additional planes"? If there is a firm order for 15 and nothing else, can't the purchasing airlines always come back to the aircraft manufacturer and place an order for an additional amount at any time (as long as the aircraft is still in production)?

I just don't understand the true meaning or purpose of "options". So I ask anyone who has a decent understanding of the term to explain it to me.


I copied this example from one of the links that was posted today just to give an example of what I was asking about:

FedEx announced in January it had renegotiated a deal to buy 777 Freighters from Boeing over the next decade. The escape clause wasn't mentioned at the time. At the time, the company increased its order from 15 planes to 30 and agreed on an option for another 15 planes.

4 replies: All unread, jump to last
 
User currently offlineAdam42185 From United States of America, joined Dec 2005, 413 posts, RR: 0
Reply 1, posted (5 years 4 months 1 week 2 days 15 hours ago) and read 3860 times:

I believe "options" are kind of like, say you buy 15 planes and 15 on option, you will get the same price on those 15 planes if you exercise the options for them, but if you don't exercise the options there is a penalty to pay, but its not as severe as canceling an order. I cant remember exactly how it works but i think it is something along those lines. Also having options, i think, allows you to "book" your spot in the production line in case you do choose to purchase the aircraft. I believe options are also more flexible in terms of aircraft type. If you have options for say 15 737-900s but times change and you would rather order -700s i believe with options you can change that without severe financial penalties.

**im not an expert, but that's how I understand that it works. if there is anybody else on here with a better explanation i would appreciate the enlightenment.**


User currently offlineWNTex From United States of America, joined Jun 2008, 72 posts, RR: 0
Reply 2, posted (5 years 4 months 1 week 2 days 12 hours ago) and read 3782 times:



Quoting Adam42185 (Reply 1):
I believe "options" are kind of like, say you buy 15 planes and 15 on option, you will get the same price on those 15 planes if you exercise the options for them

I'm no expert either, but that is my general understanding as well. I would also guess that these options expire after a certain point too. I'm not sure about the penalties.

...but I'm certainly sure someone on Anet can fill you (and me) in on aircraft options...



"The chief cause of failure and unhappiness is trading what you want most for what you want now." -Zig Ziglar
User currently offlineBMI727 From United States of America, joined Feb 2009, 15719 posts, RR: 26
Reply 3, posted (5 years 4 months 1 week 2 days 12 hours ago) and read 3761 times:

An airline will pay a certain amount for options, which I think can be put toward the purchase of aircraft, like a deposit of sorts.

Quoting Adam42185 (Reply 1):
you will get the same price on those 15 planes if you exercise the options for them,

I think that's part of it. More importantly, I believe that getting an option locks in a delivery slot for the plane, so an airline can basically defer a decision on further orders and not incur a time penalty.

Quoting Adam42185 (Reply 1):
If you have options for say 15 737-900s but times change and you would rather order -700s i believe with options you can change that without severe financial penalties.

This is also an important aspect of options. I think that one can also do that with firm orders up until construction begins.

I have given the best answers I can, but I have a question too. What percentage of options are picked up? It seems like quite a few end up being ordered, probably over 50%.



Why do Aerospace Engineering students have to turn things in on time?
User currently offlineTdscanuck From Canada, joined Jan 2006, 12709 posts, RR: 80
Reply 4, posted (5 years 4 months 1 week 2 days 8 hours ago) and read 3683 times:



Quoting Placekicker (Thread starter):
What does it mean for an airline to agree to options for "15 additional planes"?

Options are highly negotiable. A normal option is the right to purchase additional aircraft in the future at the price you've negotiated for the firm order. E.g. I agree to purchase 10 A320's from Airbus for $30 million each + 10 options at $1 million each. Those options allow me to buy up to ten more aircraft in the future at the agreed upon $30 million per aircraft. That's the most basic version.

Pretty much any conceivable part of the deal is open to negotiation though.

Quoting Adam42185 (Reply 1):
I believe "options" are kind of like, say you buy 15 planes and 15 on option, you will get the same price on those 15 planes if you exercise the options for them, but if you don't exercise the options there is a penalty to pay

Typically there isn't a penalty for failing to exercise options...you just forfeit whatever you paid for the options (if you paid anything).

Quoting Adam42185 (Reply 1):
Also having options, i think, allows you to "book" your spot in the production line in case you do choose to purchase the aircraft.

That's a negotiated thing, but the most you'd ever be able to "book" is a particular delivery timeframe. It's basically impossible to book a particular production slot without a firm order behind it. Even with firm orders, if the delivery is more than a year away the exact line position probably isn't known anyway.

Quoting Adam42185 (Reply 1):
I believe options are also more flexible in terms of aircraft type. If you have options for say 15 737-900s but times change and you would rather order -700s i believe with options you can change that without severe financial penalties.

That would be a negotiated point as well, although obviously the cost is going to change if you move types drastically.

Tom.


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