Originally Posted by
tubby linton
Boeing sells a plane to Monarch in 2014 for delivery in 2018. The list price is 100 but Boeing - maybe because it wants to clock up some orders for its new model 737 - offers it for say 60 (these are purely illustrative numbers).
At some point Monarch is going to have to start making payments on these orders, because Boeing isn't going to start building a plane & ask for the cheque afterwards.
Monarch is at some point always going to go to an aircraft lessor and S&L the planes. Its advantage is that because the price its been offered for the planes is low, its lease payments (which are linked to the capital cost) will be low too.
But Monarch has a problem. It's got no cash to start making any payments to get the orders rolling.
The new 737 meanwhile has done well and the market price is quite close to list - so lets say its 90. There is a lot of pent up demand. As things stand Boeing has to sell its planes to Monarch for 60. It would like to sell them for a higher price.
There is a rational reason for Boeing and Monarch to do a trade. The substance of the trade is this: -
Boeing gets to "take back" the order at 60 and retender it at market which is 90. It does so and sells the order to a leasing company which wants to get hold of the planes. So Boeing gets an extra 30 for building the planes which is more profit for them.
In return for Monarch facilitating this - Boeing splits some of its gains with Monarch. That's the £165m. Its presumably a discounted value of future payments B expects to receive as it builds the aircraft.
Monarch remains the potential user of the aircraft. It signs up with the lessor to lease the planes when they are built. So what it has done is take some cash up front from Boeing. But because the capital cost of the aircraft has now risen, its lease payments in future will be higher than they would otherwise have been.
It kinda looks like a futures contract - except for the profit sharing part.
That's the bit which legally speaking would worry me, if I were in their shoes.
Very interesting, thank you Tubby.