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"Option" to buy further aircraft.

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Hi all.Have a question regarding the term "option" for purchasing aircraft.For example...."the airline has firm orders for ten Q400s, plus options on ten more...."Do these "options" give an airline preferential treatment for future purchases? What obligations does the airline have if it enters an "option"?I'm really not sure what "option" means....I mean any airline has an option to buy more aircraft...so how is this term unique?Thanks all.AB

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>Hi all.>>Have a question regarding the term "option" for purchasing>aircraft.>>For example...."the airline has firm orders for ten Q400s,>plus options on ten more....">>Do these "options" give an airline preferential treatment for>future purchases? What obligations does the airline have if it>enters an "option"?>>I'm really not sure what "option" means....I mean any airline>has an option to buy more aircraft...so how is this term>unique?>>Thanks all.i think it is as simple as "preapproved financing". they simply have the option, with the stated terms in their purchase contract, of buying more aircraft. i am sure bulk discounts, etc. are included in their purchase contracts, etc.

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The meaning will depend on exactly what's in the agreement between the airline and the manufacturer and the banks - all of which will be totally confidential betwewen them. I doubt that there's a unique meaning of "option" in these cases.

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OK...thanks.I'm still convinced there's more to this word...and it's "real" meaning.Will keep hunting.

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>Hi all.>>Have a question regarding the term "option" for purchasing>aircraft.>>For example...."the airline has firm orders for ten Q400s,>plus options on ten more....">>Do these "options" give an airline preferential treatment for>future purchases? What obligations does the airline have if it>enters an "option"?>>I'm really not sure what "option" means....I mean any airline>has an option to buy more aircraft...so how is this term>unique?>>Thanks all.>>ABAn "option" to buy ten more units allows the buyer to purchase ten more units at a predermined price,if he so choses. The buyer is not obligated to purchase any additional units after the "firm ordered" units have been delivered.Let's say you were upgrading or expanding your fleet because of an increase in business. You know you need ten new aircraft now to meet demand. You also realize that, if (the key is "if") business continues to grow you may need as many as ten more aircraft in the near future. Knowing that the only thing that goes up and keeps going up is price, you lock in a deal with the manufacturer to have the option to buy up to ten more aircraft at a set price. There is usually a time limit or a margin for inflation built into the contract. Many times it's the sellers that offer the options as kind of a closing tool. If the buyer is not convinced that he's getting a great deal the seller will offer the buyer the option to buy more units at a later date for the same price in order to earn his business for the present orders.John

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Outstanding!That's more like it...and was along the lines of what I was thinking.Cheers for that.

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Aren't options also used to schedule places in the production line.These things are not sitting around on a new car lot ready for immediate delivery. It seems to me that options have been used in the past to hold a place in the production line. So that if you need those ten extra aircraft, they will get built and delivered when you need them.

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Indeed as I suggsted in an ealier post there can be as many variants of options as there are airlines and manufacturers. It doesn't have a single fixed meaning. Each option will be individually agreed/negotiated. I am aware of cases (not in the aircraft industry) where options with no meaning were announced simply for marketing purposes - "the seller's product is good because there are lots of orders/options for it, and buyer's business is going to grow so much in a few years that it will need more!"

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You're exactly right. A good example of this are US Gov't military contracts with the manufacturers. They can say that we have "x" amount of orders and "y" amount of options for more orders from the Pentagon. Only the "orders" matter since they are already allocated in the military budget. The options can be any number one desires, but don't mean anything since the government can simply back out of them by not approving them in the budget. It looks good to the manufacturer's stockholders though when they can show both orders and options from the goverment.John

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