United's Friendly Skies
United's Friendly Skies

United placed orders for 50 aircraft, 25 each from Boeing and Airbus this past week and industry “experts” immediately proclaimed the end of the recession.
This economic news is always of  great interest to me as it points not necessarily at an economic recovery persé, but it does indicate that business are starting to work together to find a landing point for the recession. And the real interesting part of this development is that supply and demand comes together under some sort of barter arrangement that benefits both parties. Here is the story:

Smart move number 1.

United disclosed details this week about deals the Chicago based airline reached with Boeing and Airbus to split a 50-aircraft buy between each airplane manufacturer.
Airline executives said the purchase plan was more about striking great deals during a recession to replace aging existing airplanes.
Of course idiot analysts immediately claim that the very fact that a carrier is willing to commit to such a major buy at this time provides another signal that the worst may be over for the industry. Why do I call this crap? Because of the financial arrangement between supply and demand.

Smart Move nr. 2

Under the deals, United will place 25 orders apiece for Airbus A350-900s and Boeing 787-8s. United said it still needs to work out the financing for the aircraft, but the airline said both Boeing and Airbus have agreed to provide loans if the carrier needs them. The fall back position is that the supplier is willing to provide the loan to manufacture and deliver the aircraft.
Here are the barter conditions:

‚Ä¢ At current list prices, the new planes would cost more than $10 billion — about $6 billion for the A350s and $4 billion for the 787s. United said it received a discount, although it won’t disclose how much.

• United has pushed off delivery of the planes until 2016 and the airline has negotiated rights to defer the orders.

Let’s assume United got a total 10% discount which means $1 billion off the listed price.
Let’s also assume that both Airbus and Boeing have access to current cheap money as major employers, so the loans offered to United are about 3% and both manufacturers have a profit margin on the list price of 30%, which they don’t have to finance to break even.

So here goes the calculation.

– The loan is $7 billion at 3% fixed or $210 million a year starting 2016

– This calculates to $4.2 million per plane or $350,000 per plane per month finance charge.

Now let’s look at the operational financials of these planes.

The A350 seats 314 passengers and the 787 can accommodate up to 250. Analysts said the carrier would likely use the twin-aisled jets for long-haul international service.¬† Since United executives identified plans this week to beef up the carrier’s trans-Pacific service, the assumption would be that each of these planes does a daily trans Pacific flight with one day a month of maintenance. 29 days times average 280 seats would be 8,120 r/t opportunities which would make the cost of the plane financing $350,000 divided by 8,120 seats or something like $43 per roundtrip ticket if fully booked. Off course there are a load of other cost factors to operate these planes, but it really makes the debt service over the long term quite acceptable.

And…. that is taking the long term approach to take advantage of the current term financial offerings, while creating employment at a level that takes out the Bubble effects.

This barter arrangement does not signal that the worst of the recession is over, it signifies that major players are using the tools available to secure the long term viability at a price level that will allow them to operate in line with the consumers ability to afford long haul travel into the world’s next major economic hot spot – the Far East.

And that is very smart indeed.

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