Imagine the price tag: hundreds of millions of dollars for a single airplane. Airlines navigate a complex financial landscape to acquire these essential assets for their operations. This article delves into the world of airlines finance, exploring the options airlines utilize, the role of leasing companies, and the magic behind those seemingly astronomical list prices.

A Look at Aircraft Prices

Airbus and Boeing, the dominant players in the commercial aircraft manufacturing space, publish list prices that serve as a starting point for negotiations. The Boeing 737 family, a mainstay in airline fleets, ranges from the 737-700 with a list price of $89.1 million to the 737 MAX 7 at $99.7 million. Airbus’ offerings, including the popular A320 and A321, fall within a similar price bracket.

Moving to widebody aircraft, the numbers climb significantly. The Airbus A350 family, known for its fuel efficiency, starts at $308 million for the A350-900 and stretches to a hefty $356 million for the A350-1000. Similarly, Boeing’s 787 Dreamliner series ranges from $248 million to $338 million, with the iconic 747-8 passenger variant reaching a staggering $418 million.

However, industry insiders know these list prices are more of a guideline than a fixed cost. Both Airbus and Boeing acknowledge the significant negotiation process airlines undertake before finalizing an order. Airlines often place bulk orders, leveraging economies of scale to secure substantial discounts.

Leasing vs. Buying: A Strategic Choice

While headlines often announce multi-billion dollar aircraft purchases, for many airlines, these aren’t outright purchases at all. Leasing, a prevalent strategy in the aviation industry, allows carriers to acquire aircraft without the immediate upfront cost. Statistics reveal that a staggering 40% of commercial aircraft operate under lease agreements, according to The Points Guy.

Dominant leasing companies, such as Aercap, Avolon, and GECAS, often base their operations in Ireland due to favorable tax conditions. These lessors, with their strong financial standing, enjoy better credit ratings than individual airlines. This translates to lower borrowing costs, which they can then pass on to airlines through competitive lease deals.

“Leasing companies benefit from economies of scale thanks to bulk orders,” explains Thomas Conlon, Associate Professor and Director of the Masters Program in Aviation Finance at University College Dublin. “These bulk orders allow them to negotiate significant discounts from manufacturers, savings then passed on to airlines.”

Beyond cost benefits, leasing offers airlines flexibility. Aircraft purchases often involve long lead times, ranging from two to ten years. Leasing allows for faster fleet expansion and avoids the substantial capital outlay associated with outright ownership.

What About Airlines Seeking Assets?

While leasing offers advantages, airlines also value owning aircraft. Owning an aircraft strengthens a company’s financial position by increasing its asset base. This can be crucial when seeking additional capital or navigating financial difficulties.

For airlines opting to purchase, direct lending from a consortium of banks is a common financing method. Secured or unsecured loans are utilized, similar to how individuals borrow money, but on a much larger scale.

Another option is finance leasing, also known as capital leasing. This is a long-term arrangement that allows airlines to come close to owning the aircraft. Similar to a hire-purchase agreement, airlines have the option to acquire the aircraft outright at the lease’s conclusion.

Do Airlines Get Discounts?

Airbus and Boeing have acknowledged that list prices don’t reflect the final transaction value. Industry estimates suggest actual aircraft sales occur at significant discounts, ranging from 40% to 60% off list price. The type of customer, the number of aircraft ordered, and the payment terms all play a crucial role in determining the final price tag.

Airlines leverage their negotiation power and play manufacturers against each other to secure the most favorable deal. Additionally, repeat customers and airlines placing large orders often receive more attractive offers.

The Bottom Line

Financing the acquisition of multi-million dollar aircraft is a complex dance for airlines. By understanding the options available, from leasing with its flexibility to ownership with its strategic benefits, airlines can navigate this intricate financial landscape. The final price tag reflects not just the list price, but a strategic negotiation process that ensures airlines take flight with the most cost-effective and financially sound solution for their fleet needs.

Sources:

• Simple Flying
• Axon Aviation Group
• The Points Guy blog
• Featured image by Karol Ciesluk | iStock