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Purchase Rights Vs. Options -- Difference?

Wed Apr 25, 2007 3:11 am

The MSNBC article re: Virgin's order for the 787 states that, in addition to the order, Virgin "took options for eight 787s and purchase rights for 20 more." What is the difference between an option and a purchase right? Are they listed on the books differently? Does one allow the airline greater flexibility than the other? Does one cost more than the other? Which is considered more firm -- if either?

I've seen these two terms used in relation to other orders as well. Any information on these two categories from our esteemed a.net experts??
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RE: Purchase Rights Vs. Options -- Difference?

Wed Apr 25, 2007 4:41 am

options secure you a slot, such that you have first right to it. I'm not sure just what Boeing contracts say about it, but its clear that many airlines had to take their options on 787's or lose the slots they had for the options. This is why you see many airlines that only had a few firm frames seemingly at random converting just a tiny number of 787 options to firm orders at a time. The slots came up, other airlines wanted them, but the airline with the option to the slot wanted the frame and the frame so they firm the order.

purchase rights are little more than an agreed framework for buying future frames w/o the requirement for new negotiation. I'm not too sure what Boeing gets out of it, but the airlines get some safety against large jumps in pricing, or other factors that would make getting the frames they need hard, expensive, or even impossible.

Both options and purchase rights will have terms for setting the price in accordance with "inflation" of some kind so you can't order a 787 today for $100 million then wait 10-20 years when the list price will climb to $250million or something with inflation and still get it for a bare $100 million. On the other hand you will get the plane for a "fair" price and be protected against huge swings in cost so that the $100 million plane suddenly isn't $150 million a couple years later when you take the option unless the economic situation for the whole world is that volatile.

BTW this is why the A380 is very very impossible to cancel for some airlines. They are getting frames for retarded cheap prices TODAY, that were just merely normally aggressive launch prices when signed. The protections for inflation don't cover the massive swing in exchange rate, the vast cost basis jump for list prices, the solidifying of pricing for mid and large airframes, etc. Which is of course what every airline dreams of, taking planes that are worth more than they paid, as if they need to its thus easy to sling and make a quick buck. Delta did this with their 737's on order.
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RE: Purchase Rights Vs. Options -- Difference?

Wed Apr 25, 2007 5:00 am

Quoting JAAlbert (Thread starter):
Which is of course what every airline dreams of, taking planes that are worth more than they paid, as if they need to its thus easy to sling and make a quick buck

Do contracts typically have terms that limit an airline's ability to reap this sort of windfall by immediately selling the plane (or perhaps negotiated as part of the delay compensation) -- or is the whole A380 delay situation so unusual that it probably isn't covered in the contract. Of course this all assumes there'll be a healthy secondary A380 market.
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RE: Purchase Rights Vs. Options -- Difference?

Wed Apr 25, 2007 10:10 am

This is something I've always wondered myself, and have some theories about them, but also would like someone who knows more about it to clarify this issue.

If they work like options and purchase rights in stocks, it would seem as if an option would be an indication of the airline's interest to buy (without having to come up with a full order deposit), whereas the purchase right being used as a deal sweetener, giving an indication of how many more planes Boeing would be willing to sell at the negotiated terms.
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