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ESCALATION: The great industry scam
01 April 2005
Escalation formulas mean that many aircraft being delivered are costing far more than their market value. How long, asks Alasdair Whyte, can manufacturers can keep taking money from their most loyal customers?
"Escalation is one of the great scams of the aviation industry," says one airline CFO. "Escalation is not a word our industry can afford. Period. It needs to go," says John Plueger, chief operating officer of ILFC, in Los Angeles, Airbus and Boeing's largest customer. "Escalation is a typical example of how airlines are forced to cut costs and increase productivity whilst suppliers don't need to try," says Wolfgang Kurth, former CEO of German charter Hapag-Lloyd, in Hannover.
If you ask anyone who has ordered aircraft in the past five years you will get a similar response. Customers are furious about a concept of which many people in aviation have never heard – and they have had enough.
The theory behind escalation clauses is simple. Manufacturers add them to protect themselves against inflation when customers order aircraft to be delivered in the future. Escalation clauses have been used for many...
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