Jetmakers’ inflation shield no match for soaring costs

Inflation clauses that determine how much airlines pay for new jets have jumped into a “hyper-escalation” band, pushing up aircraft prices but still leaving manufacturers unable to fully pass on their soaring costs, industry executives said. The hike to the top inflationary band is a rare move in the industry, potentially triggering a rise in airfares by airlines while manufacturers will also be left out of pocket, experts warned during major gatherings over the past week in Dublin, the centre of the global aviation finance industry. Airlines buy jets at a basic price agreed in confidential negotiations but the final price includes adjustments for inflation during long production waiting times, based on US factory input and labour costs, wherever the planes are built. For years, these “escalation” clauses discreetly swelled the profits of planemakers as price revisions exceeded their long-term purchasing costs, people familiar with the contracts say. Now, with key US cost indices rising by the largest amount in over a decade, the price adjustments are steeper and the cushion between escalation and real costs has vanished. “It’s always been a windfall game for the (manufacturers) so long as they’re efficient enough to make sure their own costs don’t grow as fast as the escalation,” AerCap CE Aengus Kelly told the Airline Economics conference. The rapid spike means some manufacturers may be left out of pocket as the clauses were negotiated during an era when inflation fears were low. Yet leasing companies who secured limits to their exposure during that decades-long lull in inflation will be in a more comfortable position than some competitors, Kelly said. “It’s certainly something that we’re watching carefully... We’re seeing very strong inflation pressures in the United States,” said Steven C. Udvar-Hazy, senior vice-president at Tokyo Century leasing unit Aviation Capital Group.<br/>