How Do Airlines Buy Planes?

‍As an aviation enthusiast and experienced pilot, I've always been fascinated by the process of how airlines acquire new planes in their fleets.

Airlines purchase their planes through leasing and financing options. There are many elements that airlines need to consider when buying planes, such as market demand and growth, examining case studies, the influence of suppliers and livery, and the importance of cost control and efficiency.

After extensively researching the airline industry, I have gathered enough information to determine the process by which airlines purchase planes. In this article, we’re going to take a closer look at the aircraft acquisition process among major airlines to help you better understand the ins and outs of the aviation industry.

‍Understanding the Basics of the Aircraft Purchase Process

As an aviation enthusiast, I have always been fascinated by the process of how airlines purchase planes. Buying an aircraft is a significant investment for any airline, and it involves a lot of factors to consider.

In this section, I will discuss the basics of aircraft purchase to give you a better understanding of how airlines buy planes.

Step 1: Working with Major Aircraft Manufacturers

First, let's talk about the aircraft manufacturers. The two biggest players in the commercial aircraft manufacturing industry are Boeing and Airbus.

These companies have a significant backlog of orders, which means that airlines must place an order well in advance to get their planes on time. The list prices of aircraft are often high, but airlines can negotiate hefty discounts on these published prices, especially if they're ordering a lot at once.

Step 2: Quality & Safety Assurance

When an airline decides to purchase a plane, they must consider several factors. Quality and safety are of utmost importance, and airlines often have specific requirements for their planes.

These requirements may include the size of the aircraft, the range, and the number of seats. The airline must also consider the cost of operating the aircraft, fuel efficiency, and maintenance costs.

Step 3: Placing an Aircraft Order

Once an airline has decided on the type of aircraft they want to purchase, they must place an order with the manufacturer.

The order includes the number of planes the airline wants to buy, the delivery schedule, and the price. The manufacturer will then add the order to their backlog and begin the production process.

Step 4: Production Process

The production process can take several years, and the airline must make payments at various stages of the production process. The final payment is usually made when the aircraft is delivered to the airline. The airline can then begin operating the plane and generating revenue.

In conclusion, purchasing an aircraft is a significant investment for an airline, and it involves a lot of factors to consider. The airline must choose the right aircraft type, negotiate the price, and make payments throughout the production process.

However, with careful planning and consideration, airlines can purchase planes that meet their specific requirements and generate revenue for years to come.

The Role of Leasing in Aircraft Acquisition

Leasing plays a significant role in aircraft acquisition for airlines. Many airlines choose to lease aircraft instead of buying them outright due to various reasons. As an airline, I have considered leasing aircraft for the following reasons:

Flexibility

Leasing aircraft allows me to adjust my fleet size and composition based on my current needs. I can lease additional aircraft during peak seasons or when expanding to new destinations without committing to a long-term purchase.

Lower Costs

Leasing aircraft can be less expensive than buying them outright. Finance leasing allows me to avoid the upfront costs associated with purchasing an aircraft, such as a down payment and collateral requirements.

Quicker Acquisition

Leasing also allows for quicker acquisition of aircraft for airlines. Both Boeing aircraft and Airbus apparently have thousands of planes that are backlogged and need to be cleared.

Maintenance and Repair

When leasing an aircraft, the lessor is usually responsible for maintenance and repair costs. This can save me money and time as I do not have to worry about maintaining and repairing the aircraft myself.

Access to Newer Aircraft

Leasing also allows me to access newer aircraft without having to commit to a long-term purchase. This can help me stay competitive and offer a better experience to my passengers.

Aircraft Financing Options

When it comes to purchasing aircraft, airlines have several financing options available to them. These options include loans, debt financing, and fleet financing.

Loans

Loans are a popular financing option for airlines. They can be used to purchase new aircraft or to refinance existing debt. Loans typically have fixed interest rates and terms ranging from five to 15 years. Airlines with good credit ratings are more likely to be approved for loans and may receive more favorable terms.

Debt Financing

Another financing option for airlines is debt financing. This involves issuing bonds or other securities to investors to raise capital. Debt financing can be more expensive than loans, but it can also provide access to larger amounts of capital.

The cost of debt financing is typically determined by the airline's credit rating. Airlines with higher credit ratings can issue debt at lower interest rates.

Fleet Finacing

Fleet financing is another option for airlines. This involves financing the purchase of an entire fleet of aircraft. Fleet financing can provide access to larger amounts of capital and may offer more favorable terms than individual aircraft financing.

Capital Expenditures

Capital expenditures are another consideration when financing aircraft. Airlines must consider the cost of maintaining and operating their aircraft over their lifespan. This includes costs such as fuel, maintenance, and repairs.

Investors

Investors may also play a role in aircraft financing. Airlines may seek out investors to provide capital for aircraft purchases or to finance other aspects of their business. Investors may include private equity firms, venture capitalists, or other institutional investors.

When an international airline is having difficulty making payments, investors will often assist. Whether its Japanese operating leases, Spanish operating leases, or any international lease that needs to be covered, investors can be a key asset.

The Influence of Suppliers and Livery

Suppliers

As I research the process of how airlines buy planes, it's clear that suppliers play a significant role in the procurement process. In fact, according to McKinsey, more than 60% of an airline's cost base goes to suppliers.

This makes sense given that many suppliers are oligopolies, with only a few options for airlines to choose from. For example, there are only two aircraft manufacturers, which means airlines have limited options when it comes to buying new planes.

Livery

When it comes to livery, the designs painted on planes can make a big impact on an airline's brand recognition. As CNN notes, the colors and designs used on an airbus aircraft help distinguish one airline from another. This is especially important given the frequent mergers and acquisitions in the industry.

However, livery is not just about branding. It also plays a role in the procurement process. Airlines need to consider the cost of painting and maintaining their planes' designs. This is especially true for low-cost carriers, where every penny counts.

The Importance of Cost Control and Efficiency

Cost Control

As an airline, one of the most important factors to consider when purchasing new aircraft is cost control. It's no secret that buying planes can be a significant expense.

For instance, in 2022, a narrowbody Boeing 737-700 cost US $90 million at listing price, while the cost of a single widebody Boeing 777-9 jet fell just $58 million shy of half a billion US dollars.

Therefore, airlines must be strategic in their approach to purchasing new aircraft to ensure they are getting the best possible deal.

Efficiency

Efficiency is also crucial when it comes to buying and operating aircraft. Airlines have consistently become more efficient.

The superior efficiency over time reduces the cost per unit, which in turn increases profitability. Understanding cost differences is critical for airlines, as ticket prices have been falling throughout the entire history of the business, declining on average by 2 percent annually over the past 20 years.

Negotiations

To ensure cost control and efficiency, airlines can use various strategies when buying planes. For example, they can negotiate with manufacturers to get the best possible deal, taking advantage of bulk discounts or other incentives.

Airlines can also consider leasing planes instead of buying them outright, which can help spread out the cost over time and reduce upfront expenses. Additionally, airlines can focus on purchasing planes that are more fuel-efficient, which can help reduce operating costs over the long term.

Understanding the Role of Major Airlines and Suppliers

You can’t answer the question “How do airlines buy planes?” without taking into account the role of major airlines and suppliers in the process.

Major Airlines

Major airlines like Delta, United, and American Airlines have a significant role in the procurement process.

They place large orders for planes and negotiate directly with suppliers like Boeing and Airbus. These airlines have the power to influence the design, features, and even the pricing of planes.

Aircraft Suppliers

Suppliers like Boeing and Airbus are responsible for designing, manufacturing, and delivering the planes.

They work closely with airlines to ensure that their planes meet the airlines' needs and requirements. These suppliers also offer financing options to airlines, making it easier for them to purchase planes.

Leasing vs Buying

When airlines purchase planes, they typically have two options: lease or buy. Working with leasing companies allows airlines to use the planes without having to pay the full price upfront. Buying, on the other hand, gives airlines full ownership of the planes.Deciding between a finance or operating lease is a crucial decision that airlines need to address. Aircraft leasing firms let airlines pay down the line, but there are cost factors and operating lessor leases to consider.

Profitable airlines with a solid reputation generally do not fall behind on their lease payments. Operating lessors expect airlines to track records for all their finances when buying and leasing aircraft.

Aircraft Procurement Process

For most airlines, the procurement process is a complex one that involves multiple stakeholders, including airlines, suppliers, and financing institutions.

It is crucial for all parties to work together to ensure that the planes and cargo aircraft meet the airlines' needs in regard to performance, safety, and enhanced equipment trust certificates while also being cost-effective.