The Hindu Business Line : Air Deccan, SpiceJet reach pact on escalation charges for aircraft purchase

An Air Deccan official told Business Line that the airline has been able to negotiate for a cap on the escalation charges while SpiceJet has been able to get a waiver.

"We have been able to do away with the escalation charges in our agreement," the SpiceJet Director, Mr Ajay Singh, said. The cap on escalation charges ranges from 2.5 per cent to 3 per cent.

Aircraft manufacturers build in the escalation charges to protect themselves against inflation and future costs as the delivery schedules are spread across more than five years. Those customers who do not negotiate on the escalation charges, are forced to pay a higher amount than the market value while taking delivery of the aircraft.

A Kingfisher Airline official admitted that in its agreement with Airbus, the escalation clause has been built in. However, the airline has been able to negotiate a competitive deal, he said.

Escalation charges can be a major revenue drain for airlines whose business model is built around volume. For example, Air Deccan and SpiceJet can ill-afford such clauses because an airline will have to pay, according to some estimates as high as 15 per cent of the cost of the aircraft when it is delivered a few years later.

"This could be depressing because the prices of new aircraft have not risen at all," an aviation analyst said. The Chief Executive Officer for India of a Sydney-based think-tank, the Centre for Asia-Pacific Aviation, Mr Kapil Kaul, said the airlines usually negotiate for prices which are much lower than the list price of an aircraft. "Hence even if there is an escalation cost in the agreement, it does not hurt the airlines much," Mr Kaul said. However, an airline official said list prices do not carry much significance, as there are hardly any customers who agree to such pricing.

Air Deccan and Kingfisher Airlines have each placed orders for 30 A320s worth $1.8 billion while SpiceJet has ordered for 20 Boeing B 737-800s worth $1.2 billion.

Air Deccan will start taking delivery of the aircraft from next year and will continue to do so till 2010. The airline has, however, asked for advancing the delivery schedule to meet the huge demand for its airline.

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