Glom
Topic Author
Posts: 2051
Joined: Sat Apr 23, 2005 2:38 am

What Does It Mean To Have Options?

Thu Jun 16, 2005 2:03 am

What exactly are options? How does it benefit either the manufacturer or the airline to have them?
 
SkyexRamper
Posts: 1952
Joined: Sun Mar 27, 2005 12:17 am

RE: What Does It Mean To Have Options?

Thu Jun 16, 2005 3:48 am

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.
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squared
Posts: 352
Joined: Sun May 29, 2005 1:48 am

RE: What Does It Mean To Have Options?

Thu Jun 16, 2005 3:55 am

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]
 
B727-200
Posts: 1008
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RE: What Does It Mean To Have Options?

Thu Jun 16, 2005 1:48 pm

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.
 
Joost
Posts: 1841
Joined: Wed Apr 20, 2005 8:27 pm

RE: What Does It Mean To Have Options?

Thu Jun 16, 2005 5:04 pm

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.
 
airforum
Posts: 170
Joined: Fri Jun 23, 2000 10:48 pm

RE: What Does It Mean To Have Options?

Thu Jun 16, 2005 5:39 pm

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.
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