I follow the aircraft manufacturing industry as an indicator of near-, mid-, and long-term economic conditions. Aircraft ordering is a forward-planning activity, and reflects many important measures of expected socio-economic circumstances, such as income, population (composition, distribution, and movement), energy, technology, infrastructure, and the like.
I across an article this week called The Importance of List Price Hikes in The Aircraft Industry written by independent industry analyst Dhierin Bechai. In it he discusses Boeing’s most recent pricing moves. It is traditional for aircraft manufacturers such as Boeing and Airbus to impose annual price increases, frequently citing increasing labor costs as the underlying reason. Many analysts see list price increases as bullish, signaling supply and demand forces favorable to the manufacturer.
From a pricing perspective, there’s a lot to like about this: a supplier recognizing and pricing on a strong value proposition, effective and active signaling, and conditioning customers on price expectations. The story turns sharply, however, with a quote from Goldman Sachs that reads: “…as aircraft transact at discounts to list.”
The author details list price discounts on the Boeing 737-800: the Boeing 737-800 cost $81 million in 2011 and costs $96 million today. This is an increase of 18.5% or 2.8% per year. However, in 2011 a Boeing 737-800 sold for about $50 million or a 40% discounted price. Expressed in 2016-dollars that is equivalent to $53 million. Today a Boeing 737-800 sells for roughly $47 million, which is equivalent to a 51% discount. In absolute values that is $6 million lower if we compare it to 2011 sales prices expressed in 2016-dollars.
Clearly there’s an unmistakable disconnect between list and sale price, whether using current or constant dollar figures. The effect is to neutralize the important pricing tactics I mentioned above (value proposition, signaling, conditioning), and to undermine the integrity of list prices. I am a strong advocate of the “If you can’t charge your list prices, then you need to change your price list” approach to pricing, for a variety of reasons, including the most basic one: maintaining control of your pricing.