Aircraft acquisition by airlines takes a new tack

Airlines are getting smarter at buying aircraft.

Eager to boost returns on investment, airline executives are looking for ways to lower their biggest capital cost. One strategy gaining traction: working together to buy jets in bulk.

Last month, four airlines linked to a US private-equity firm struck the largest-ever group deal. The parent of British Airways and aviation companies tied to Chinese conglomerate HNA Group have tried similar tactics to secure bigger discounts from plane makers.

The strategy is adding to pressure on Airbus SE and Boeing Co. to trim their own costs so they can afford to cut customers a better deal. Airlines "are doing a better job at negotiating," John Leahy, Airbus's longtime chief salesman, said in an interview. "That is frustrating to any supplier."

Aircraft sale prices vary considerably, much like tickets sold for the same flight. Carriers buying large numbers of single-aisle planes can secure discounts of more than 60% off Boeing's and Airbus's advertised list prices, Moody's Investors Service estimates.

Indigo Partners LLC, a US privateequity group and longtime airline investor, leveraged the needs of the four carriers in its portfolio to secure better terms from Airbus. Chief Executive Bill Franke said in November at the Dubai Airshow that Indigo would buy 435 Airbus jets for Denver-based Frontier Airlines, Hungary's Wizz Air, Mexico City-based Volaris and Chile's Jetstart. The planned purchase is worth $60 billion before discounts.

. Franke gathered executives from the four airlines over the summer to explore a joint purchase at a time when Airbus and Boeing had backlogs stretching out six or seven years. Placing a big order would move them up the queue and secure a better price, as long as the carriers could agree to order nearly identical planes.

Wizz Air Chief Executive Jozsef Varadi said the airlines – all Airbus operators – were prepared to buy from Boeing if Airbus didn't give them the price they wanted. "At the end of the day it is a commodity in a commodity business. You have to be driven by cost," he said.

The deal's price tag wasn't disclosed, standard practice in the industry. In exchange for the discounts, Airbus gets increased production certainty to 2026. That, Mr. Leahy said, helps lower production costs. "Those airlines got a good deal but so did Airbus," he said.

The Indigo-led deal is by far the largest group transaction, eclipsing a 90-plane order that three Latin American carriers placed with Airbus in 1998. Other efforts have foundered as airline executives squabbled about features such as engines, seats or inflight entertainment systems.

Agreement on common specifications is critical to pursuing bulk deals. International Consolidated Airlines Group SA has standardized the cabins of its single-aisle planes, allowing it to transfer them between units including British Airways, Ireland's Aer Lingus and its two Spanish affiliates, Iberia and Vueling. As a result, IAG is able to secure better terms from Airbus by buying a single version of the A320 jetliner.

"That's a huge advantage because it gives us a lot of bargaining power," IAG Chief Financial Officer Enrique Dupuy said at an investor event last month.