Aircraft shopping for dummies

Data available with the Directorate General of Civil Aviation reveals that, with the sole exception of state-owned Air India, which owns all its planes, almost all the aircraft used by Indian airlines belong to leasing companies.
Welcome to the curious world of aircraft buying. Aircraft do not come cheap. The average list price for a brand new Airbus A320 in 2011 was $85 million. Boeing has the 737-800 listed for $84.4 million. These two 180-seater aircraft are the workhorses of airlines across the world. In India GoAir, Indigo, Kingfisher and the domestic flights of Air India all use the A320 extensively. Jet Airways and SpiceJet use the 737-800.
There are variants of these airplanes, the slightly smaller Airbus A319 being currently priced, on average, at $77.7 million, while the slightly larger Airbus A321 sells for $99.7 million. The same goes for comparable Boeing models.
However, almost no aircraft ever sells at its listed price. Airbus and Boeing negotiate hard for large orders and offer massive discounts to get them. Discounts range from 10 to 40 per cent depending on the type of aircraft ordered, delivery dates requested, the engines selected and the interior options specified. Thus, for example, while Indigo and Kingfisher have similar A320 aircraft running the same IAE V2500 engine, Kingfisher's planes would have cost more as they are outfitted with galleys and in some cases with seat-back personal TV screens.
Airlines pay, on average, only one per cent of the cost of the aircraft at the time when the deal to buy them is signed. At pre-determined timelines before the delivery date and during the lead-up to constructing a plane, they have to fork out small percentages of the cost to the manufacturer. A big tranche of up to 10 per cent usually has to be paid when the three-month long assembly process for a narrow-body jet commences.
Much of this financing is provided by banks, from which airlines usually take long-term loans at pre-negotiated rates.
Often, aircraft leasing companies buy aircraft directly from Airbus and Boeing - at times for particular customers to whom they lease them once the aircraft are delivered. Indian airline companies, however, follow a different path. They buy most of their aircraft directly from the manufacturer, but before the aircraft are delivered, they also often conclude deals with leasing companies to sell them those aircraft. In times of financial difficulty, airlines in India have even sold their positions on the production line to leasing companies.
Now comes the sleight of hand. An airline buys an aircraft for a certain pre-negotiated price, but often sells it to the leasing company at a higher price. Suppose an airline pays the manufacturer $50 million, it in turn may sell the plane to the leasing company for $60 million, netting the $10 million as profit. Not a single flight has been operated yet using the newly acquired aircraft, but it has already turned a profit for the airline. The airline then promptly leases the aircraft back from the leasing company, thus concluding a 'sale-leaseback' deal on the aircraft for a pre-determined period of time.
Again, airlines often do not buy aircraft engines from the aircraft manufacturer. They negotiate separate deals with engine manufacturers. (However, all aircraft prices quoted so far in the story include those of the engines in them.) Airlines can conclude 'per-hour' deals with engine companies, paying them for every hour an engine is used, rather than buy the engine outright. Engines are easily swapped around between aircraft, so the plane you fly next could well be using engines other than the ones it had when it was delivered.
07/12/11 Kushan Mitra/Business Today

To Read the News in full at Source, Click the Headline

Categories: Indian Aviation- In General Dec 2011