Originally Posted by
BobbyK
Cheers WHBM, very clear answer! I was also wondering as I read that whats in it for the manufacturers (whether the airline has to put down a deposit or something) but I guess the interest is good enough for them!
Yes, some options have deposits paid against them (though a nominal amount, others don't. It all depends what you negotiate.
In my day job I do options on cement and steel. If I am building Terminal 5 at Heathrow I say to RMC Concrete "how much for 500,000 cubic metres of concrete delivered to the site by the end of 2007. And they will quote £50 a cubic metre, and I place an option (we call it a "bulk order"). I don't pay anything initially and I don't have to take anything, but I know now that if I call them up and say I want 100 cubic metres next Monday, delivered to site, that it will cost me £5,000. It's the same concept. If they didn't trust I was serious about taking any (they can see I am doing the job) they wouldn't quote.
If they have to build a whole production unit to handle the job they may say "£5 million up front, then just £40 a cubic metre". It gets much more complicated than that but you get the idea. Airlines do the same sort of negotiations with manufacturers.