Frontiercpt
Posts: 955
Joined: Tue Jun 08, 2004 9:47 am

What Is The Point Of Placing Options On Aircraft?

Sun Jun 13, 2004 4:44 am

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!
 
JAL777
Posts: 2453
Joined: Wed Jun 04, 2003 10:13 pm

RE: What Is The Point Of Placing Options On Aircraft?

Sun Jun 13, 2004 4:46 am

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

RE: What Is The Point Of Placing Options On Aircraft?

Sun Jun 13, 2004 4:47 am

Options recieve the same discount the previous ordered planes got. A whole new order may not get the same benefits.
 
Frontiercpt
Posts: 955
Joined: Tue Jun 08, 2004 9:47 am

RE: What Is The Point Of Placing Options On Aircraft?

Sun Jun 13, 2004 4:48 am

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?
 
JAL777
Posts: 2453
Joined: Wed Jun 04, 2003 10:13 pm

RE: What Is The Point Of Placing Options On Aircraft?

Sun Jun 13, 2004 4:57 am

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.
 
mandala499
Posts: 6461
Joined: Wed Aug 29, 2001 8:47 pm

RE: What Is The Point Of Placing Options On Aircraft?

Sun Jun 13, 2004 5:02 am

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 !
 
Frontiercpt
Posts: 955
Joined: Tue Jun 08, 2004 9:47 am

RE: What Is The Point Of Placing Options On Aircraft?

Sun Jun 13, 2004 5:07 am

Thanks guys! It really helped!
 
leelaw
Posts: 4520
Joined: Sat May 29, 2004 4:13 pm

RE: What Is The Point Of Placing Options On Aircra

Sun Jun 13, 2004 5:13 am

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.
Lex Ancilla Justitiae
 
ACAfan
Posts: 690
Joined: Fri Apr 30, 2004 11:25 pm

RE: What Is The Point Of Placing Options On Aircra

Sun Jun 13, 2004 7:28 am

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
 
EMBQA
Posts: 7798
Joined: Sat Oct 25, 2003 3:52 am

RE: What Is The Point Of Placing Options On Aircraft?

Sun Jun 13, 2004 7:59 am

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"
 
Guest

RE: What Is The Point Of Placing Options On Aircraft?

Sun Jun 13, 2004 8:01 am

That'll explain why NZ had so many 7e7 options then, but only 2 planes.
 
jwenting
Posts: 9973
Joined: Mon Apr 23, 2001 10:12 pm

RE: What Is The Point Of Placing Options On Aircraft?

Sun Jun 13, 2004 4:29 pm

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
 
SEAPete
Posts: 63
Joined: Tue Mar 09, 2004 6:38 pm

RE: What Is The Point Of Placing Options On Aircraft?

Sun Jun 13, 2004 4:47 pm

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
 
777ER
Crew
Posts: 9896
Joined: Fri Dec 19, 2003 5:04 pm

RE: What Is The Point Of Placing Options On Aircraft?

Sun Jun 13, 2004 6:58 pm

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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