In the world of aircraft and the airline industry, we often hear certain terms bandied around that are somewhat impenetrable, and nowhere is this more apparent than with regard to aircraft orders. And two that come up on a particularly regular basis are ‘letter of intent’ and ‘firm order’.

Letter of intent
Letters of intent are a way for airlines to get the ball rolling on aircraft purchases. Photo: United Airlines.

Letter of intent is also often linked to ‘memorandum of understanding’, but we’ll come to that one shortly. A letter of intent is a legal term that is used in several fields outside of the airline industry as well, and, as the name suggests, signals something of an intention for the purchase of an aircraft to take place.

A letter of intent will address the most important terms of the transaction, such as price, the scope of inspection, location, deposit, aircraft delivery conditions, aircraft movement costs, choice of law and jurisdiction, and so on.

Ongoing debate

This all sounds perfectly straightforward, but here is where the confusing part starts. There is some debate over precisely what a letter of intent constitutes, and what the legal implications are. In principle, it is generally believed that a letter of intent is no more than a statement of intent and that it has no legally binding implications.

For example, a while back we reported on Air Astana signing a letter of intent for 30 Boeing 737 MAX aircraft. Once this process has taken place, Air Astana can then count on those aircraft to ultimately be delivered by Boeing, while the airline manufacturer knows that it will likely have to fulfill 30 orders in the foreseeable future.

Air Astana jet on taxiway
Air Astana has been taking delivery of brand new Airbus A321LR aircraft. Photo: Air Astana

But here’s where it gets tricky. Most observers of the airline industry would understand that Air Astana can now back out of this deal at any point and that nothing they have proffered commits them to purchase the aircraft in question.

This indeed happens quite regularly. But in some quarters, it is instead suggested that a letter of intent is tantamount to a memorandum of understanding, and has clear legal implications for the company submitting the letter.

There have definitely been situations where letter of intent and memorandum of understanding have been used interchangeably. But, in principle, they are different. A memorandum of understanding certainly implies a greater commitment to completing a purchase, and would certainly attract legal implications if it were to be broken.

Firm orders

Both of these legal terms, though, differ from a firm order, which represents the point that a purchaser completely commits to buying aircraft. The firm order is established when the buyer puts down a deposit, and then the onus is on the supplier to complete the delivery.

Memorandum of understanding
There is some legal debate regarding letters of intent and memorandums of understanding, and clearly there is some overlap between the two. Photo: Frontier Airlines.

However, nothing is ever simple in the world of aircraft purchasing! The buyer can still back out at this stage. There are certain terms and conditions that allow airlines to renege on a deal should they feel that this is necessary.

Ultimately, buying aircraft isn’t like purchasing a sandwich! It’s a massive commitment for everyone involved, which is why the process associated with it can be a bit complex and confusing.