Principled Negotiation and Value Creation in Aircraft Deals:
Airbus – Icarus Airways
Part II – Briefing for ICARUS AIRWAYS
This case was prepared by Adrian Borbély (IESEG School of Management), Javier Marcos (Cambridge
Judge Business School) and Ian Speakman (Cranfield School of Management). We are indebted to Paul
nd
Clark, author of Buying the Big Jets (2007 - 2 Edition, Ashgate publishing), who provided expert insights
into the case.
The case is intended as a basis for class discussion rather than to illustrate effective or ineffective handling
of an administrative situation.
The case is inspired by real negotiations and uses industry knowledge and expertise. However, it remains
fictitious and simply aims to provide an appropriate vehicle for the negotiation simulation. In particular, at
no point was Airbus consulted and validated the format of the negotiation, nor the numbers presented in
the case. Icarus name is fictitious, thus there is no relationship with the corporate jet organisation Icarus
Aviation Group.
14 January 2016
YOU MUST NOT UNDER ANY CIRCUMSTANCE REVEAL OR SHARE THIS
BRIEFING WITH THE OTHER PARTY (AIRBUS TEAM).
Contents
1
NUMBER AND TYPE OF AIRCRAFT ................................................................................. 3
2
PRICE ................................................................................................................................... 4
3
DELIVERY SLOTS ............................................................................................................... 5
4
FINANCING SCHEMES: LEASING VS PURCHASING ..................................................... 5
5
MAINTENANCE CONTRACT .............................................................................................. 6
6
CREW TRAINING CONTRACT ........................................................................................... 6
7
PAYMENT TERMS............................................................................................................... 7
8
INTERIOR DESIGN .............................................................................................................. 7
9
OTHER ELEMENTS............................................................................................................. 7
10
DESCRIPTION OF THE NEGOTIATION STRATEGY ........................................................ 9
11
MODEL AGREEMENT ....................................................................................................... 11
ICARUS
2
DATE: For the case and simulation to work effectively, please consider that the
day when the simulation commences is Thursday, July 10, 2014
You are part of a team acting on behalf of Icarus including Head of Operations,
CFO and Purchasing Manager(s). All of you have been on-board Icarus from
the start. The Head of Operations, a long-time friend from the Balados family,
studied engineering together with Stavros’s father, before entering flight school
and becoming a commercial pilot at Olympic Airlines, with type rating for flying
the Airbus A320 and later A340. After the company’s demise, he took some
time off, before Balados came and presented him/her the Icarus Airways
project. (S)he then brought his/her colleagues, that all met while at Olympic, into
the project. The CFO has expertise in both flag carriers and budget airlines. The
purchasing officer(s) have experience in procuring both aerospace equipment
and aircraft-related services. Once the company is formally launched, the Head
of Operations will serve as the chief A320 family pilot and will also operate
flights until his retirement (as a pilot based in Greece, mandatory retirement is
60 years old, i.e. in 7 years’ time).
The Head of Operations’ background as a former Airbus pilot means the choice
between Airbus and Boeing weighted on the Airbus side. (S)he trusts how
reliable the A320 family is and thinks it will correspond perfectly to Icarus
Airways’ business operations. Officially, no decision has been made and should
negotiations go sour with the European manufacturer, you all plan on flying to
the USA to negotiate with Boeing. After a series of prior discussions with
representatives from Airbus over the last few months, you believe that both
parties are in a position to move towards an agreement. You have a meeting to
negotiate and agree the purchase of new aircraft.
Your main interest in this negotiation is to start flying in the summer of 2016 and
operate new aircraft in financial conditions that fit with your operational
constraints as described below. Following, a description of the areas to be
negotiated is presented. The limits or the acceptable range for the different
components of the agreement, where they exist, are clearly specified.
1
Number and type of aircraft
The board of Icarus Airways has formally authorized you to discuss the
acquisition of the following aircraft models: the A319, the A320 and the A321,
both the current engine option (CEO) and the new engine option (NEO).
More precisely, Icarus’s business plan suggests that for initiating the planned
operations, 12 aircraft of the A320 size will be required, i.e. which can seat
around 150 passengers in a comfortable 2 class seating configuration.
Considering the demographics of people flying between Europe’s capitals and
the Middle-East, Icarus does not aim to be positioned as a low-cost carrier, nor
ICARUS
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a no-frills airline; it has to offer a Business class and full service in Economy.
The A319 would be too small for you and the A321 is clearly too big. To make
your operations smoother, you are looking for a single size for all of the
airplanes on your fleet (so that all of them are truly interchangeable)
Regarding current vs. updated aircraft versions, as you do not think you will
push the airplanes to their maximum capabilities, you do not see the point in
paying 8-9% more for NEO versions, at least for the first batch of airframes.
2
Price
For Balados, the price of the aircraft is not necessarily the most important
criterion for purchase. Given the operational plan and the scheduled marketing
campaigns, delivery slots are critical (see below “delivery slots”). It remains that
Icarus Airways is a for-profit structure and the price of aircraft, together with
their yearly depreciation in the books, needs to be kept at the lowest possible
level.
Usually, newly established airlines lease aircraft or purchase them on loan from
a bank, which adds financial costs to the operation. In your case, Balados is
able to pay cash; therefore you would not have to pay for interests on borrowed
money. New aircraft will therefore cost you, each year, the price of purchase
divided in 15 equal shares (we will assume that depreciation is linear).
Therefore, an aircraft paid 80 million USD will be marked in the books as 5.33
million per year over 15 years.
To guarantee a positive return on investment, the aircraft you operate cannot
have a cost above 5.5 million USD per year, including related costs such as
maintenance and crew training. This maximum has to be respected on a yearly
basis, or at least on average over the financial lifespan of an aircraft, i.e. 15
years. This is something that the board has made clear to your team and
something that has to be adhered to.
As outlined in the introduction, Airbus 2014 list price quotes the A320 at 93.9
million USD for the Current Engine Option (CEO) and 102.8 million USD for the
New Engine Option (NEO). You are aware that significant discounts are
available. Despite the fact that negotiated final prices are highly confidential in
the industry, your sources reveal that, in a situation similar to yours, discounts
of about 30% could be obtained. Other sources suggest that a few recent deals
achieved 40% discount off the list price. In exceptional situations, you believe
that OEMs could go up to 50% if there were unique circumstances such as
significant benefits deriving from the introduction of a particular aircraft in a
particular market.
ICARUS
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3
Delivery slots
This is a crucial criterion for you. As a large part of your clientele will be made of
connecting passengers (you will function with Athens as a hub, taking
passengers in and out on your entire network as conveniently as possible), you
would like to launch your entire operations at once in the summer of 2016. You
therefore would like to take possession of all ordered aircraft in a short period of
time, ideally between January and April 2016.
Indeed, you have a window of opportunity that may soon be reduced:


After Olympic Airlines went belly up, Aegean picked up the European routes
but is not really flying Eastward (besides Istanbul, Izmir, Abu Dhabi and Tel
Aviv). Many destinations remain open for service (including Dubaï, Haïfa,
Jerusalem, Amman, etc.). You do not expect Aegean to be able to
substantively develop in the near future.
Turkish Airlines, the main local competitor, is waiting for the new Istanbul
airport to be built to launch its next development wave. For now, its
operations are constrained by the fact that Istanbul Atatürk airport is
saturated.
The sooner the deliveries, the earlier you can start making money and start
creating a promising future for Icarus Airways. If the aircraft were not received
within a reasonable time, it would be a serious setback for your company.
It is received wisdom in the industry that the sooner you want your aircraft, the
more expensive they will be. At the moment, you do not have all the details on
this, so you will have to estimate the possibilities with Airbus’s representatives
when the negotiation starts. From initial conversations, you believe your plans
are feasible.
4
Financing schemes: leasing vs purchasing
Financially, as the company can pay cash (no interest payment required), it
would be advantageous to buy the aircraft. Depreciation figures should
therefore be slightly lower than leasing payments, maybe a few percentage
points of difference.
From a more personal perspective, given a choice, you would favour leasing as
opposed to owning the aircraft. If Icarus fails, an aircraft on lease simply returns
to its lessor (for a fee), whereas by buying the aircraft, you are stuck with them
in a potentially tumultuous second-hand market. If your failure coincides with
one of another major Airbus A320 operator’s, then the market will be flooded
and your aircraft resell value may be very low. You are confident that Icarus
Airways will succeed in their plans but you are not entirely comfortable with
imposing such a risk on Balados and the company.
ICARUS
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Therefore, for you, this is a tie.
Remember that current lease rates for an A320 family aircraft would be around
0.5-0.6% of the aircraft price per month.
5
Maintenance contract
You do not have a wide range of maintenance capabilities. Athens airport will
provide small maintenance operations: tire change, engine change, minor paint
jobs and minor technical visits. But for more sophisticated maintenance
operations, you would rather have these dealt with by the manufacturer, thus
enabling you to focus on operations and on achieving total customer
satisfaction. You know that Airbus offers a wide range of maintenance
schemes, for a fee that should be negotiable.
A recent report states that the A320 and B737 families are the best performers
of the category and highlights that the average maintenance costs of narrowbody aircraft increased by 41%, going from 390,000 USD in 2007 to 550,000
USD in 2010. Thus, you estimate it should cost you around 600,000 USD per
aircraft per year for maintenance. This is an optimistic estimation and the total
costs are likely to be higher.
An alternative to the maintenance services provided by the OEM and widely
used by airlines is to contract with a Maintenance Repair Overhaul (MRO)
organisation. A potential good solution could be ADAT (Abu Dhabi Aircraft
Technologies), within Icarus’ planned route network. Alternatively SR Technic in
Zurich could also be suitable.
6
Crew training contract
Your analysis reveals that you can find on the market certified crews, either
currently unemployed or looking for a career change (both cabin and cockpit
crews). Although their initial training will be suitable and pilots’ type rating in
accordance to regulations, you need to care for their continued training: pilots
and stewards will need to attend regular training and spend time in simulators
(flight simulators for the pilots, and cabin and emergency evacuation settings for
cabin crews). You do not have the installations and capabilities to deliver this
required training.
Thus you have searched for options and you got an estimate from Emirates, in
Dubai. They opened a state-of-the-art training centre for their own use and, as
they have factored in the future growth of their operations, there is available
space for external clients. All included (including travel and accommodation),
this would cost you the equivalent of 300,000 USD per aircraft per year
ICARUS
6
(calculated on the basis of five full crews per aircraft to cover for personnel
rotation).
7
Payment terms
It is customary for aircraft purchases that the customer pays a 20% nonrefundable deposit upon order, then the remaining 80% upon delivery. You
have no objection with this.
8
Interior design
You are aiming for a classical layout to accommodate Business class
passengers as well as Economy passengers in as much comfort as possible. In
virtually every direct sale, there is a degree of customisation, especially for
airlines intending to market themselves on product (i.e. aircraft) quality. Of
course you would love a personalised interior design but this is far from being a
priority. A wide catalogue of options exists, provided either by the manufacturer
or interior design specialists, with very different pricing. Just remember that any
customization needs to be priced and budgeted.
If you went down the leasing route, customised cabins are difficult to arrange.
You may have to live with a pre-configured aircraft or else pay for some
conversion work. This is typically not cost-effective for a short-term lease.
9
Other elements
The agreement may also include elements such as performance guarantees.
This means that manufacturers generally guarantee operators that the original
specifications of the airplane (especially in terms of reliability and fuel
consumption) are met over a certain period of time. It is your understanding that
new Airbus aircraft normally come with such guarantees for a limited period of
time.
You also believe you could achieve a higher discount rate linked to future
purchase contracts but you are unsure on how this would work in practice.
ICARUS
7
ICARUS
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10 Description of the negotiation strategy
Please briefly describe your negotiation strategy (use model agreement on next
page as inspiration). You are invited to consider and specify: your objectives
(what are you trying to achieve?), your walk-away point (what would be
unacceptable to you?), the parties’ interests (including how they rank in terms of
priority), criteria (what are the standards and criteria that can be used to scope
a mutually satisfactory deal?). From all this, derive your initial approach (how
will you approach this negotiation?).
Continue on the back if necessary
ICARUS
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ICARUS
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11 Model agreement
Please specify the outcome of the negotiation in as many components as
possible. Every monetary aspect needs to be presented in the table below or on
the back of this sheet, in a manner that enables a reviewer to evaluate the
overall financial balance of the deal.
Component
Contractual outcome
CEO
NEO
$ M ______
$ M ______
A319
Number and type of aircraft purchased
A320
A321
Unit price(s)
Total cost
$ M _________________
Delivery schedule for aircraft
Buying
Financing scheme for aircraft
Leasing (terms):
Payment terms
Maintenance contract terms
________ $
Crew training contract terms
________ $
Standard
Interior design
Customized
(Additional cost: ________ $)
Duration:
Performance guarantees
Additional cost: ________ $
Comments (write on back side if necessary)
ICARUS
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ICARUS
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