Fuzzy Numbers – The Need for Context When Counting Airshow Orders

While hundreds of aircraft are announced during the week of the summer airshows, the reality is often a different picture.  Aircraft orders don’t happen overnight, even within a week.  They typically take months of preparation, analysis, and negotiations bringing into question exactly how so many deals get done during airshows.

The answer is fairly obvious in that airshows become a target for close-in deals to be timed for the wow factor.  A deal can be delayed by weeks to fall into the airshow, or accelerated to catch the buzz of the show.  Of course there are always exceptions where companies can move extraordinarily quickly, but by-in-large airshow orders are planned weeks and months in advance.  Announcing a firm order at an airshow adds value beyond the manufacturer as the airlines also enjoy the positive publicity around a new aircraft order.  However, beyond firm aircraft orders, there is another way manufacturers can take advantage of the attention already focused on the industry during airshow week, and that is with the LOI (Letter of Intent).

Announced LOIs may not even refer to incremental aircraft orders at all…

There are rules around what is considered a firm aircraft order, in that deposits must be paid, production slots allocated, and a firm agreement in place.  With the LOI, it is much fuzzier.  Based on definitions found at Investopedia, an LOI actually has no legal binding and does not carry the weight of the law.

This does not mean LOIs are useless.  They outline the structure of a potential future agreement, and often result in firm orders later.  But LOIs can also be used as a PR tool, particularly around airshows, where the PR frenzy is at its height and the pressure to announce something is high.  Further, announced LOIs may not even refer to incremental aircraft orders at all, rather intended placements by lessors who already have the aircraft on order.  The end result is an illusion of double-counting that makes a backlog look larger that it is in reality.

This week, we look at the Farnborough Airshow tallies, how many aircraft were ordered, and which manufacturers rely on the fuzzy LOI to produce buzz rather than the firm orders.

For Boeing and Airbus at the Farnborough Airshow, they both signed LOIs and option aircraft at a rate of about 2:1 versus firm orders.  Some OEMs seem unwilling to play the PR game such as Bombardier only announcing firm orders, while still producing orders outside the airshow for 35 CRJs in 2018 compared with Embraer’s 15.  What stands out, though, is Embraer’s stunning 7:1 LOI to firm order ratio.  Of the 300 of the total aircraft announcements, only 37 were firm orders for Embraer.  The largest chunk of which came from one announcement with Republic Airways for 200 aircraft.  A huge order… only not an order at all.

It takes detailed knowledge of the industry to understand just how problematic this announcement by Embraer and Republic is.  Limited by scope clauses at the U.S. mainline carriers, Republic has no room to actually operate these aircraft.  Of course there is no way Republic will take delivery of the aircraft without a place to fly them, hence the need for an LOI.  Consider, also, that the trend over the past 8 years has been for the mainline carrier to purchase the regional aircraft then assign them to a regional carrier.  In fact, United did just this at the airshow, legitimately ordering 25 E-175s to be operated at a regional carrier later to be named.

If LOIs can be signed for the benefit of PR value alone, it seems to have worked.

This isn’t the first time this type of LOI has been written for PR benefit as Embraer announced 100 E-175 E2s with Skywest during the 2013 Paris Airshow.  Yet, looking at Skywest’s annual report for that year shows just how these “firm” orders are constructed:

“Additionally, no significant financial obligations are created under this agreement until SkyWest successfully enters into an agreement with a major airline partner, at which time the aircraft are considered ‘‘firm orders’’.”

So, not firm until a major airline partner commits to the flying… which hasn’t happened because the major airlines have all purchased their own aircraft.  When a major airline does place orders for aircraft, those orders are counted again, providing the illusion of even more activity than there really is.

But if LOIs can be signed for the benefit of PR value alone, it seems to have worked.  Those outside the industry simply look at each LOI as a foregone conclusion, adding up total numbers as if there is a scoreboard of success that lasts only 4 days a year.  Even FlightGlobal initially reported the announcement as a firm order based on a comment by Embraer’s lead salesman while the official press release clearly outlined it as an unbinding LOI.  Yet, this article written by Brett Snyder at Cranky Flier shows how solid knowledge of the industry and a little common sense can separate the firm from the fluff.

This all illustrates the need for context in this industry. With as many news outlets referring to this 200 aircraft announcement as firm (or as good as firm), it shows just how willing we are to buy into the hype.

 

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Courtney Miller

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Scott Hamilton
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In fairness, BBD announced how many C Series LOIs, MOUs and Options before the CSALP-Airbus deal, very few of which were ever converted to firm orders. But your point is valid.