I’ve been writing about aircraft and aerospace companies for a few years now on Seeking Alpha, and sometimes I get comments and messages about the way aircraft performance is measured (or not measured) or aircraft pricing.
Aircraft pricing is important, not only to the jet maker, as it determines the revenue of the company, but also to the customer. For the customer, the acquisition price is important since it is one of the elements that makes an aircraft fit or unfit to operate in a company’s network. On average, the acquisition costs account for 40% of the total costs incurred over the entire life of the aircraft. So, acquiring the aircraft at the right price is important. Airlines and lessors can make use of the duopoly that Boeing (NYSE:BA) and Airbus (OTCPK:EADSF) have.
For some investors, there still seem to be some things unclear about pricing and discounts as it becomes clear from a comment from one of my readers:
Still curious how you guys come up with this figure they pay half when those in the company I met say [that] they do not give discounts like that?
There are a few things to be said about the comment above. I do think that each investor should do his or her own research where possible, but where I can help clear things up, I will do so.
Company people I spoke to said…
One thing I often hear is that some people claim to be having knowledge directly from Boeing or Airbus. In the past, there even were members claiming to be sitting in at board meetings. I am not commenting on those claims, but investors should be aware that what they read in the comment section of my articles is not always the truth.
Being somewhat familiar with the procedures at Boeing as I contacted it several times and to a lesser extent Lockheed Martin (NYSE:LMT), people from the company have communication guidelines that dictate company representatives not to disclose contract values, aircraft pricing or orders that are not yet firm. As a matter of fact, Boeing does not even disclose how many purchase rights/options the company has agreed on with customers.
So, it is highly unlikely that company representatives will give a clue on aircraft pricing without violating communication guidelines. Reason that aircraft prices are considered proprietary is the fact that Boeing and Airbus can underbid each other if they know the standard pricing of their competitor.
List price versus market value
One thing you might ask yourself is where the market values come from if company employees are not allowed to disclose them. A good start is by looking at the list prices to get a sense of the order of magnitude:
Figure 1: Aircraft catalog prices (source: www.boeing.com)
What can be seen is that the pricing varies from $80 million to over $400 million depending on the aircraft. This table does not say anything about any discounts. These discounts, however, can often be found in investor day presentations and come from trustworthy aerospace consultancy firms who have made it their business to aid airlines and lessors in making the correct choices for their fleet expansion and network support.
An example is shown below. This slide was presented on United Airlines' (NYSE:UAL) Investor Presentation in March 2014. What can be seen is that the airline uses three firms to come up with an appraisal value. Since the aircraft’s value decreases over time, the appraisal values should not be identified as realizable value for the airline. For the Boeing 787-9, we see that the new base values in March 2014 ranged between $133.2 million and $157.7 million, which is nowhere close to the $257.1 million that Boeing had listed on its site for the -9 in 2014. This signal a 38.7-48.5% discount. These days, discounts for new aircraft are around 45%, around 50% for aircraft that have been in production for some years, and 60% for aircraft that are reaching their end of production life.
Additionally, the bigger the number of airframes ordered and the more the loyal the customer, the higher the discount.
Figure 2: Slide from United Airlines Investor Presentation (source: AeroAnalysis)
Other sources that give an idea on the purchase price of aircraft are filings of airlines or government papers. The Government Accountability Office, for example, estimated that the procurement of two Boeing 747-8I aircraft would cost a total of $282.2 million. This means $141.1 million per aircraft versus a list price of $386.6 million implying a 63.5% discount.
Another proof that airlines and lessors do not pay list price comes from a BOC Aviation filing for the purchase of two Boeing aircraft:
There is a significant difference between the list price of the Aircraft and the actual purchase price of the Aircraft under the Aircraft Purchase Agreement. The consideration for the Transaction was established in an arm’s length transaction, taking into account the terms and conditions of the Transaction as a whole and with reference to market conditions. The price for a nearly new aircraft such as the Aircraft is negotiated taking account of new aircraft pricing, including discounts. The actual purchase price for the Aircraft is commercially sensitive information, in the same way as new aircraft pricing is commercially sensitive, because it reflects a significant notional discount to the list price of such Aircraft and is being paid as consideration for the first sale outside the manufacturer group. Such notional discounts against list price were determined based on certain variables and after arm’s length negotiations with Boeing. From the Company’s experience, the extent of such discount is not materially different, in percentage terms, from the discount against list price that the Company has obtained in previous purchases of new aircraft from Boeing, adjusted to reflect the age of the Aircraft. As a result of such discount, the actual purchase price of the Aircraft is lower than the list price of such Aircraft. The Company is subject to a strict confidentiality obligation with regard to the purchase price of the Aircraft under the Aircraft Purchase Agreement. The Seller would not have entered into the Aircraft Purchase Agreement with the Company if the Company were required to disclose the purchase price of the Aircraft under the Aircraft Purchase Agreement. Disclosure of the purchase price of the Aircraft could result in the loss of the significant discount against list price that may be granted by Boeing to the Company for future purchases and could therefore adversely affect the business operation of the Company. It is normal business practice in the global aviation industry for the aircraft list price, instead of the actual purchase price, to be disclosed for the acquisition of aircraft.
It can clearly be seen how proprietary the purchase price of the aircraft is considered to, but that it definitely is lower than the list price.
So from company filings, presentation, and government papers, we can fairly safely conclude that no customer ever pays list price and, where possible, the jet maker urges companies not to disclose the contract value.
Price escalations: free money
Another myth is that annual price escalations directly lead to higher revenues for the jet maker. Most of the times, price escalations reflect the annual inflation, and this counts for costs as well as revenue. Only if demand exceeds slot availability, we might see price escalations higher than the inflation rate.
Price escalations, nowadays, are used to say something about how robust the market and market demand is.
Buying aircraft without engines
When the Iran order was about to come through, we saw Iran being happy that it got itself a 50% discount, which, in reality, is less than what it should have gotten for an order for 80 aircraft. At the same time, I saw readers mocking Iran that it bought planes without engines. This is another myth that comes forth out of not understanding what is included in the price and what several engineering terms embody. The aircraft at manufacturer’s empty weight does already include the propulsion group. The aircraft as delivered by the jet maker at delivery empty weight includes the manufacturer empty weight plus standard items. So it already does include the propulsion group in the weight and price.
Boeing says this about the list prices on its website:
The prices above reflect an average price reflecting a range of available options and configurations for each model. Configurations and options that may affect price include performance capability, interiors, avionics, fuel capacity, etc.
BOC aviation also mentioned what is included in the purchase price when it purchased two Boeing 747-8F aircraft earlier this year:
The aggregate current list price of the Aircraft is approximately US$758.2 million. The aircraft list price comprises the airframe price, optional features price, and engine price. This information is generally publicly available.
The intention of this article was to debunk some of the myths about the aircraft pricing and what it does and does not include.
What is clear is that Boeing is likely never going to open up about the contract value of aircraft sales agreements and urges its customers not to disclose any of the data either. A clue on the price, however, can come from aerospace consultancy firms, company filings from airlines and lessors, and government procurement reports.
For investors to have realistic expectations from jet makers, it is important that they are aware that there is no company in the world that pays list price for commercial aircraft.
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Disclosure: I am/we are long BA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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