lehpron
Posts: 6846
Joined: Tue Jul 10, 2001 3:42 am

Questions About Orders And Options

Mon Jan 24, 2005 3:21 pm

Tell me the difference, it has got to be obvious, but I will follow-up questions.

The meaning of life is curiosity; we were put on this planet to explore opportunities.
 
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scbriml
Posts: 13233
Joined: Wed Jul 02, 2003 10:37 pm

RE: Questions About Orders And Options

Mon Jan 24, 2005 5:03 pm

Quite often, when an airlines orders planes, they will also purchase additional "options". The exact terms of the options vary, but at a basic level, they give the airline the chance to purchase additional planes at a later date, but usually at the same price they paid for the original order. Some options might also reserve production line slots for the airline.

For example, BrimAir orders 15 A320s and at the same time takes 10 options. These options are valid for 5 years, and allow BrimAir to purchase 10 more A320s at the same price as the original 15 (regardless of any price increase Airbus might have imposed before the options are taken up). If BrimAir decides not to purchase the additional 10 planes, the options will lapse, and any money paid for the options will be lost.

Depending on how big a customer the airline is, the exact T&Cs associated with the options will vary - how much they cost, how long they're valid, can they be switched to other models, etc. etc. The bigger customer you are, the better terms you're likely to get.
Time flies like an arrow. Fruit flies like a banana!
 
jonathan-l
Posts: 394
Joined: Thu Mar 28, 2002 4:20 am

RE: Questions About Orders And Options

Mon Jan 24, 2005 5:10 pm

Order is firm and delivery slots have been agreed to. The airline will take the aircraft.
An option is agreed to by the airline and the manufacturer whereby the airline has a choice of confirming the option into an order or not taking advantage of it (depending on how the industry or its operations evolve). The airline has to make a decision by a certain date agreed to by both parties.
 
Planesmart
Posts: 1716
Joined: Sun Dec 05, 2004 3:18 am

RE: Questions About Orders And Options

Mon Jan 24, 2005 8:04 pm

Well summarised by Scbriml & Jonathon-I

The line between orders and options has reached new levels of blurring with the A38 & 7e7.

In the good old days orders were orders, supported by a sizeable deposit (the exact size determined by the period between the date of the order and construction commencing), which was not refundable, transferrable or deferrable, other than in exceptional cases.

Progress payments (tranches) are payable before construction starts, and then on completion of various milestones.

An option usually reserves production line positions, for a small payment. Manufacturers usually limit the number of options an airline can acquire at one time, as a % of the number of firm orders they place.

At a pre-arranged time before manufacturing starts, the airline must either convert the option/s into order/s, or cancel them. Manufacturers usually permit cancelled option $'s to be deferred, or transferred to other models, or even used as payment for orders.

How to tell between an order and an option? Check the airline's financials before and after the order has been placed. For orders, expect to see notes in the accounts in respect to contingent and term liabilities, and publicity from the lead financier and/or leasing company.
 
lehpron
Posts: 6846
Joined: Tue Jul 10, 2001 3:42 am

RE: Questions About Orders And Options

Tue Jan 25, 2005 8:43 am

Wow, thanks folks, most of my follow-ups were answered in one shot.

What about how many the airlines chooses to order/option to begin with, they can't have all the money needed for potential growth, can they? Unless it is borrowed, shouldn't technically all aircraft order be done at once with no options? How does an airline know how many options are needed? Granted they look at how their numbers are -- I guess if they get to have the option then they will use it when necessary.

Bt then they would not have had the option to order unless the plane existed. Big grin

For the most part, ya'll answered my questions, thanks again.  Smile
The meaning of life is curiosity; we were put on this planet to explore opportunities.