Summary

• A Letter of Intent (LOI) shows a desire to do business and outlines a prospective deal but is non-binding.
• A Memorandum of Understanding (MOU) outlines the terms and details of an understanding and may or may not be legally binding.
• A Firm Order requires a deposit but has conditions that allow the buyer to back out. Penalties may be applied if either party withdraws.

When airlines and OEMs make new fleet announcements, they often use terms such as ‘Letter of Intent,’ ‘Memorandum of Understanding,’ ‘Firm order,’ and ‘Options.’ Each of these terms means something different in the world of aircraft orders. In this article, we will explain these most commonly used phrases, going from least committed to most. We'll also provide real-world news examples of each.

1. Letter of Intent

Firstly, an announcement of a Letter of Intent (LOI) means that discussions have already taken place between the manufacturer and the airline. The letter of intent indicates a desire to do business together and outlines the prospective deal. Below is part of the definition as written by Investopedia:

"LOIs are useful in preliminarily bringing two parties together to hammer out the broad strokes of a deal before the finer points of a transaction are resolved. LOIs often include provisions stating that a deal may only go through if financing has been secured by one or both parties or that a deal may be squashed if papers are not signed by a certain date."

No deposit is put down for an LOI. However, it is essential to remember that a letter of intent is non-binding. Example: Mexican carrier Aerus signed an LOI in January 2023 for 30 commuter all-electric Alice aircraft. Why an LOI? Eviation Aircraft’s Alice project is still in development, has not been certified, and could face any number of delays and problems in the next few years.

The Letters of Intent provide companies with protection against uncertainty. Therefore, airlines that are willing to invest in new technologies such as electric Vertical Take-Off and Landing Aircraft (eVTOL) announce LOIs instead of firm orders. For instance, in 2021, Brazil’s GOL announced the signing of a non-binding LOI with Avolon to purchase 250 eVTOLS.

2. Memorandum of Understanding

Investopedia reports that a Memorandum of Understanding (MOU) is defined as:

"...an agreement between two or more parties outlining the terms and details of an understanding, including each party's requirements and responsibilities. It is often the first stage in the formation of a formal contract and does not involve the exchange of money."

Here's where things get a little more complex, as there are subtle differences between an LOI vs an MOU.

Investopedia states that the primary difference between the two is that a Letter of Intent is not binding, while legal courts consider a Memorandum of Understanding legally binding.

However, another article suggests that an LOI and MOU are essentially the same and used interchangeably. Both are not legally binding. An Airliners.net discussion mentions that money is, in fact, involved in an MOU, while the definition above says there is no exchange of money. Clearly, there is yet to be a complete consensus on this, as far as we can tell. For instance, JetSMART announced and later canceled an MoU to acquire Ultra Air, a low-cost Colombian company, which ceased operations in February.

Example: In 2023, we have seen plenty of MoUs announced throughout the aviation industry. Viva Aerobus signed an MoU for 90 Airbus A321neo aircraft, Philippine Airlines did the same for nine Airbus A350-1000 aircraft, and Icelandair for 25 A321XLRs. In general, however, an MOU is a greater commitment than an LOI in the aviation world.

3. Firm order

According to Airliners.net, a deposit is put down in the deal in a firm order. However, conditions still exist that allow the buyer to back out. If the buyer or the manufacturer happens to back out, then there are usually penalties. An example of this was Qatar Airways and Airbus’ dispute in court over Airbus’ cancelation of an A321neo order. Conversely, if the planes are late, there can be a refund of deposits, as happened to Boeing with the 737 MAX and 787 Dreamliners delays in the last few years.

Example: During the Paris Air Show 2023, Volaris and Airbus announced the acquisition of 25 A321neo aircraft. This announcement allowed the Mexican ultra-low-cost carrier to increase its overall firm order with the European manufacturer. Nonetheless, firm orders often include options for additional planes. An example in the Caribbean is Arajet’s 2022 order for 20 Boeing 737 MAX with options for 15 additional units. But what are options?

4. Options

Airlines will commonly obtain options from the aircraft manufacturer, which allow the airline to delay the purchase of additional aircraft until market conditions justify the purchase.

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Options also save the airline a position in the manufacturing queue for a guaranteed delivery slot. If the airline finally exercises its option(s), it can place its order without going to the end of the queue, which would otherwise delay the delivery of the aircraft for years. However, if future conditions do not justify the expansion of the airline's fleet, the airline is not under obligation to purchase the aircraft. Example: Wizz Air agrees to exercise the purchase option for Airbus A321XLR aircraft.

Conclusion

We hope this gives you a slightly better understanding of news headlines when airlines announce aircraft orders. If you have anything to add, please feel free to leave us a comment!