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Leeham News and Analysis
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Pontifications: The pricing jigsaw puzzle
By Scott Hamilton
May 22, 2017, © Leeham Co.: The prices airlines and lessors pay for their airplane purchases have long been of intense interest to just about everybody associated with the airline industry.
The manufacturers want to know what their competitors are selling the planes for.
The airlines want to know what their competitors pay for their airplanes. The same is true for lessors and their competitors.
(Airlines are less interested in what the lessors pay; they are only interested in what they must pay the lessors to lease the airplanes, and aren’t really concerned about the lessors’ costs.)
Appraisers want to know the prices of new aircraft, and prices on the secondary market, to have a basis for predicting base and current market values today and 25 years in the future.
The credit rating agencies want to know that values of the airplanes to rate financing deals.
Keeping the prices confidential
Actual prices paid—not the list prices or some guesstimate—is constantly a topic at conferences and in other conversations. The Airfinance Journal conference last week in New York, the ISTAT conference in San Diego last March, and at other events, conversations typically turn to pricing.
Finding out the price paid for an airliner is a jigsaw puzzle. Source: Google images.
The industry goes to great lengths to keep pricing confidential, for all the obvious reasons.
Forty years ago, the US Department of Transportation required airlines to file aircraft purchase price information as part of their plethora of data demands from the industry. For many years, the carriers dutifully did so.
The appraiser community relied heavily on the DOT information. But the airlines began objecting, because anyone (most notably, their competitors) could view the data. Eventually, the airlines persuaded DOT to give this information confidential treatment.
Making a federal case
Thirty years ago, I co-founded Commercial Aviation Report. I discovered a gold mine of information in the registration papers filed with the Federal Aviation Administration.
The documents included lease rates, debt amounts, insurances tables and—very rarely—the actual purchase prices of the aircraft. One could calculate from the other data the purchase prices of the airplanes if the purchase price wasn’t listed.
For 18 months, CAR published this data. Over the course of time, more and more airlines and lessors began redacting it as confidential. It wasn’t until more than 50% of the filings did so that I filed a protest with the FAA and requested the redaction policy be reversed.
The matter became a federal case. The FAA published in the Federal Register a formal review process. The airlines and lessors had their lawyers and law firms object. My law firm made legal arguments for me.
I resided in Dallas at the time and used a Dallas firm. American Airlines-which spread business around to just about every local law firm—ultimately objected to the firm I used, citing a conflict of interest. I had to go to an Oklahoma firm (where the FAA registration filing office is located) to complete the case.
Lost cause
I knew it was a losing proposition from the start. The FAA was and is in bed with the airlines. The airlines and lessors said this commercial information was sensitive and proprietary. I argued there was a “greater good” for industry players to know the information.
US Air sniffed that I wanted the information for my own commercial benefit.
One lessor, whose president was a good friend, wrote a detailed letter to the editor basically saying the information was none of my business.
Of course, the FAA ruled the information was indeed commercially sensitive, proprietary and could be properly redacted.
Getting the numbers
So now we all rely on market information, telephone calls and conversations to get a sense of how much who pays for what.
It’s not that simple, of course. There are so many other commercial terms and conditions and other factors that go into a deal that saying XYZ Airlines paid $115m for a Boeing 787-8 hardly scratches the surface. A more reliable way to price an airplane is to find out the lease rate and, if possible, the lease rate factor of a new 787-8.
Today, some of the lease rate factors will blow your mind for how low they are. But this is indicative of the health of the airplane market or the supply and demand of airplane types.
It’s all a piece of the puzzle. It’s just sometimes as difficult as jigsaw puzzles.
I can recommend the following page:
http://www.myairlease.com/resources/fleetstatus
Surely not very accurate, but gives an idea if you have nothing to start with. Further, it cites orders and active aircraft.
For most fleet purchases, would not the price “rule of thumb” be in a band of 52% to 48% of “list”, Scott?
We’ve seen discounts of up to 60%, depending on the deal.
In that is the secret why Boeing is so confident in selling the remaining places on its production lines as it changes over to new models.
They would buy them through a related company and then lease them at whatever the market rate is to do so.
Happening now with the 747-8 freighters
http://www.seattletimes.com/business/boeing-aerospace/boeing-backs-747-by-leasing-the-planes-as-it-awaits-cargo-upturn/
From the crumbs that are published about airline pricing I am struck by a couple of things:
Typically the list price (there are exceptions) seem to suggest Airbus are more expensive than Boeing but that they discount by more. For example I have never understood the large difference between list prices of B789 and A359 for what are quite similar aircraft.
The more significant point to me is that an ‘in demand’ aircraft such as the B777-300ER For almost a 10 year period or A321NEO today command a relatively low premium over other aircraft given their segment leading position.
What I understand from this is that sales are highly sensitive to price even where there is relatively little competition.
789 and A359 are not same size.
789 would have matched the 358
7810 ~~ matches the A359 on capacity not on range.
Quite similar, not the same, the price differential more than reflects the increase in size, I chose my words carefully uwe
OK. ( but not really stated in your initial .. )
A: Product scope is different? ( stuff included on X but not on Y)
B: product capabilities are different? ( higher initial value due to less fuel, cheaper to maintain, … in the long run)
My understanding is that Boeing prices are for the “empty shell” and Airbus prices include some basics like toilets etc…
What is “lease rate factor”? Cheers!
The lease rate factor is the percentage of the purchase price for which the airplane is leased.
If a plane is purchased for $100m. and a lease rate factor is 1%, the lease rate is $1m per month. Lower credit quality airlines may have a lease rate factor higher than 1%. Better quality airlines will have a LRF lower than 1%, often substantially lower, such as 0.70%. We’ve seen them lower than this.
Cheers!
So when we’re talking about the new middle of market plane, I’ve seen $75m as an upper limit price. Is this list or a ballpark net price?
Thanks!
@Raflw: It’s what the customers want to pay. Boeing’s having a challenge getting the cost to a level to price it here.
John Ostrower once researched that the first 400 frames
were sold for an average of ~$85m (+engines afair?)
( List price at the time was fantastic too ( lower than A330 on the “assembly at near zero cost” planning).
cite from WP:EN:787 from dec. 2004:
The 7E7-8 variant was priced at a list price of $120 million per aircraft, surprising the industry, who were expecting a much higher price tag. Launch customer ANA is rumored to have received a 50% discount, though that may never be easily confirmed.
2007 list price: 787-8: $157–167 million
today list for 787-8 is $225m.
I love this article history feature 🙂
Interesting to read your formation history Scott. Did you suspect the FAA papers might hold the info you found or was it entirely a fortuitous surprise?
Also, if you know, what is the historical basis for such a high % ‘standard’ discount? It has always seemed far more than I would expect for a product of this type.
@Woody, when I started reading the FAA filings, I had an inkling but the depth of the data included was a surprise. It was tedious work: all the documents were on microfiche (this was 1989) and ran hundreds of pages long. I soon figured out shortcuts….
Discounts used to be more in the 25% range. These increased over the decades as competition intensified.
Well, I’m glad for your surprise and what it has led to ;-). Tedious indeed but definitely something to be said for the research skills and commitment needed pre-web.
Do you feel the discounts have now (in the main) plateaud? And any feling on whether Chinese entrants may try to play the pricing game differently?
There’s some great “why we don’t care what others receive on pricing” comments in the Delta testimony at last week’s ITC hearing which, as Scott flags, would negate half the chatter and bar tabs at every conference either of us has ever attended.
@Doug: I have the transcript of the Boeing-Bombardier proceeding and am wading through the 300 pages. There’s a whole host of great stuff in there, which LNC will be reporting in the coming days.
Isn’t the wealth of data available on airlines just an artifact of the government’s distant past role as regulator and micro manager of the industry? I find the data interesting too, but am inclined to agree that it may be none of our business. I would include the reams of operational cost reporting that is also done. I do think collection of fares paid is important, particularly in identifying monopolistic behaviors in certain markets.
Few industries have this level of government scrutiny; most convey their financial condition in filings to the SEC.
@Peter: DOT Form 41 data, which includes operational data you refer to, is entirely bogus. DOT doesn’t have a standard by which the airlines must comply to be sure there is consistent, apples-to-apples reporting. The airlines are free to set their own standards, and some have been known to skew it to confuse competitors. This is why we made such a stink over Boeing’s reliance of citing DOT Form 41 (and out-of-date IATA data) when arguing the 737 had 16% lower maintenance costs than the A320. GIGO, as they say.
The prices sports teams pay to secure the services of their players from the ordinary to the stars seems to be public information.
Its America, its always in the public interest.
Its often said the quintessential american question is ‘why’ ?
I would think ‘how much’ comes in close behind.
Being “intermediary products” applied in the process to produce seat-trips (final industrial products marketed by operators), aircraft are worth anywhere between 14 to 26 months of sales (chiffre d’affaires) pending the markets in which they are deployed and how they are used. That’s their “industrial value”. A thumb-rule calculation shows this corresponds to OEM’s List Prices. OEM’s are in dear need to earn these ‘fair prices’ to keep their product cycles running smoothly and profitably. The recent trend towards ‘open books’ unveiling OEM’s strategic pricing throughout displaces the controls of profitability over into the hands of operators. Isn’t this ‘killing the goose that lays the golden eggs’ ?