RE:RE:RE:RE:RE:RE:Another tough day?On those booked orders, we do not know the specifics of the contracts and what clauses are in it with regards to inflation and raw material clauses.
We have been told that BBD was paid 500 million in advance that benefitted just that meaning the inventory coat as you mentioned.
Look at this piece By Forbes and it specifically mentions price escalation clauses.as referred. The bomber has been selling aircraft for decades, I would think they would follow these practices if the customer absolutely wants delivery. They likely have cancellation clauses also and costs that may ve associated with them
https://www.forbes.com/sites/davidyu/2022/04/26/inflation-hits-new-aircraft-deliveries-escalating-the-problem-or-inflating-a-solution/?sh=2a990a473114
I have reviewed many aircraft purchase agreements between manufacturers and airlines/lessors, as an aircraft investor and a former lawyer. They all contain price escalation terms. In simple terms, the price of the aircraft goes up if the manufacturer's costs go up. I am sure there may be a contract in the market that has no escalations, but that would be a rare case and even the most revered airlines have escalation provisions in their agreements. People in the industry will tell you that they negotiate escalation caps in their agreements, and I will concur that those placing large orders or who are established clients, usually cap their exposure. The cap sets a limit on the escalation rate of the price, i.e. the percentage by which the agreed purchase price of the aircraft can rise is limited to the amount of the cap—3%, 5%, 6% or more, depending on who you are. The formula may have a sharing element above the cap and in times of “super-inflation,” the burden over a certain hurdle may fall back onto the customer. It often depends on the strength of the market; the inflationary environment and the relative strength and influence of the buyer. There are, however, customers with unlimited escalations, and escalations are usually a compound formula. Housefish wrote: The problem with inflation for BBD is not on the demand side (although with higher jet fuel prices, lower equity markets, and a slower economy – demand could get hit) but the big problem is that BBD has pre-sold the next 2+ years of planes in one cost environment, but will be building the planes in a vastly different cost environment.
Unless they have already purchased all the raw materials and commodities required to build those planes, they are going to get hit pretty hard as their inputs costs are up 15% to 40% or more (depending on the commodity).
So by pre-selliing the planes, they have locked in their future revenues, but their costs are floating (and floating higher), so they may have sold all the 2023 planes at significantly lower profit margin, or even at a loss, as input costs continue to skyrocket. Thus forcing investors to re-evaluate the profitability potential of BBD.
Additionally, their future debt will be re-financed at significantly higher rates (read: higher interest costs) so that will also hit profitability.
So inflation is hitting them multiple ways on the cost side.