DBEA55AED16C0C92252A6554BC1553B2 Clicky DBEA55AED16C0C92252A6554BC1553B2 Clicky
May 26, 2024
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This week both major aircraft OEMs announced price increases.  Airbus raised its list prices by 2%, and Boeing raised its list prices 4%.   With average discounts already above 50% for most airline and leasing company customers, list prices have become meaningless in the industry, except for the announcements of deals at “list prices.”  The reality, however, is quite different than press releases, and margins are not what the PR folks at OEMs would like us to believe they are.

We’ve examined and answered some questions that industry observers might have regarding list prices.

Q:Does Airbus smaller price increase provide it any competitive advantage?
A: No, as airline campaigns are based on projected total economics over the lifetime of the aircraft including operating costs, maintenance costs, and a number of factors.  The  OEMs clearly know how competing aircraft perform, and have mastered the process of  pricing to the point of economic indifference.

Q: Do we need to assume higher discounts from Boeing vis-à-vis Airbus?
A: Pricing of aircraft is on a campaign by campaign basis, often taking queues from competitive behavior. Since nobody pays list price, the competitive market will determine pricing.  But if Boeing is inflating its list prices faster than Airbus, one would, ceteris paribus, expect slightly higher discounts from that artificial number from Boeing.

Q: Do list prices impact residual values of aircraft?
A: Typically, an increase in the list price of an aircraft would be adjusted for discounts by appraisers in their assessment of a market, so the list price provides a replacement cost baseline for new models. But replacement cost is only one factor in estimating the future value of an aircraft, which also needs to consider market demand and relative economics vis-à-vis competing aircraft.  The impact of an increase in list prices on estimates of future aircraft value are minimal if appraisers correctly apply an appropriate discount in their estimation process.

Q: Do increases in list prices result in higher aircraft prices?
A: The relative pricing for aircraft depends on the supply-demand balance in the marketplace for each type. For example, while Airbus has raised the list price of the A380 in recent years, the lack of demand has probably not led to higher sale prices, which are deeply discounted.  By contrast, the A321neo is in high demand, and is typically not discounted to quite the level of its competition, as its suitability for middle of the market roles and economic advantages provide it a leg-up in “pricing to the point of economic equivalence” against less efficient competition.

Q: Why are list prices so high and unrealistic?
A: The trend in discounting of aircraft has changed over the years, with typical discount levels increasing from the 25% range to the 50% range over the last three decades.  Whether as a result of over-estimating inflation, or increasing competitiveness between the major OEMs trying to gain or defend market shares, the gap between actual and list prices has been growing.

Q: Is there a chance that one of the OEMs might break the tradition and utilize a more realistic price for aircraft?
A: We view this as unlikely, as consumer behavior has been shaped around obtaining higher and higher discounts. A large discount makes the customer feel that he’s obtained a great deal, even though everyone gets a similar discount.  While illogical, we see no immediate change in this industry practice.

Q: How much should we now assume for discounts from list price?
A: For most models, about 50%, which discounts of 60% for models that are poor sellers, and in the 40%-50% range for hot sellers in high demand. For most order announcements of $X billion dollars at list prices, we would cut the number in half to provide a more realistic estimate.

Q: What other factors should one consider when thinking about list prices?
A: Aircraft OEMs are likely to follow the model established by the engine makers and bundle services with aircraft to the degree possible.  Engine makers prefer to sell their engines with “power by the hour” to ensure they earn aftermarket revenues.  Their pricing is based on a longer-term revenue stream and typically results in deeper discounts to win the multi-year stream of spares and services.  As aircraft OEMs follow the lead of the engine makers, we will likely see discounts rise even further than today’s levels.  While this will never quite reach razor and blade levels, we’ve seen engine deals, in certain competitions, with discounts into the 90% plus levels to secure the services contracts.  Factors such as services complicate pricing transparency.

The Bottom Line

Aircraft list prices are meaningless numbers and should be ignored.  With services growing in importance, pricing transparency will likely be further obscured as discount levels rise in the future, rendering them even more meaningless in the future.

1 thought on “The Meaningless Game of List Prices

  1. This is interesting insight into the pricing game. I noticed an article today announcing that the state department had approved a possible sale of 34 F-35As to Belgium worth an estimated $6.53 Billion. I realize it may be more obscure in the defense industry, but do similar discounts (40-60%) exist for fighter aircraft?

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