586 Part Six Options
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The payoffs from “wait and decide later” can never be better than the payoffs from an air-
craft purchase option, since the airline can discard the option and negotiate afresh with Airbus
if it wishes. In most cases, however, the airline will be better off in the future with the option
than without it; the airline is at least guaranteed a place in the production line, and it may have
locked in a favorable purchase price. But how much are these advantages worth today, com-
pared to the wait-and-see strategy?
Figure 22.7 illustrates Airbus’s answers to this problem. It assumes a three-year purchase
option with an exercise price equal to an A320 price of $45 million. The present value of the
purchase option depends on both the NPV of purchasing an A320 at that price and on the fore-
casted wait for delivery if the airline does not have a purchase option but nevertheless decides
to place an order in year 3. The longer the wait in year 3, the more valuable it is to have the
purchase option today. (Remember that the purchase option holds a place in the A320 produc-
tion line and guarantees delivery in year 4.)
If the NPV of buying an A320 today is very high (the right-hand side of Figure 22.7),
future NPV will probably be high as well, and the airline will want to buy regardless of
whether it has a purchase option. In this case the value of the purchase option comes mostly
from the value of guaranteed delivery in year 4.^14 If the NPV is very low, then the option has
low value because the airline is unlikely to exercise it. (Low NPV today probably means low
NPV in year 3.) The purchase option is worth the most, compared to the wait-and-decide-later
strategy, when NPV is around zero. In this case the airline can exercise the option, getting a
good price and early delivery, if future NPV is higher than expected; alternatively, it can walk
away from the option if NPV disappoints. Of course, if it walks away, it may still wish to
negotiate with Airbus for delivery at a price lower than the option’s exercise price.
We have cruised by many of the technical details of Airbus’s valuation model for purchase
options. But the example does illustrate how real-options models are being built and used. By
the way, Airbus offers more than just plain-vanilla purchase options. Airlines can negotiate
“rolling options,” which lock in price but do not guarantee a place on the production line.(^14) The Airbus real-options model assumes that future A320 prices will be increased when demand is high, but only to an upper bound.
Thus the airline that waits and decides later may still have a positive-NPV investment opportunity if future demand and NPV are high.
Figure 22.7 plots the difference between the value of the purchase option and this wait-and-see opportunity. This difference can shrink
when NPV is high, especially if forecasted waiting times are short.
◗ FIGURE 22.7
Value of aircraft purchase option—the
extra value of the option versus waiting
and possibly negotiating a purchase later.
(See Figure 22.6.) The purchase option is
worth most when NPV of purchase now
is about zero and the forecasted wait for
delivery is long.
Source: Adapted from Fig. 17–20 in J. Stonier, “What Is
an Aircraft Purchase Option Worth? Quantifying Asset
Flexibility Created Through Manufacturer Lead-Time
Reductions and Product Commonality,” in Handbook of
Aviation Finance., ed. G. F. Butler and M. R. Keller.
–7 –2
(^02)
(^47)
(^1020)
2.0
1.5
1
0.5
0
–0.5
2.5
1.5
3
Wait for
delivery
(years)
Value of purchaseoption ($ millions)
NPV ($ millions) = current PV – purchase price