Credit Memos – What are they?
The Boeing 737Max 9 grounding for safety checks after a cabin panel blowout on an Alaska Airlines-operated MAX 9 jet was a industry wide event affecting a number of airlines around the world....
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The Boeing 737Max 9 grounding for safety checks after a cabin panel blowout on an Alaska Airlines-operated MAX 9 jet was a industry wide event affecting a number of airlines around the world. The largest affected were two US carrier Alaska and United Airline with United having to suspend services on 79 aircraft from its fleet.
The airline recently reported it has influenced its bottom line for Q1 of 2024 with its loosing $200 Million dollars. The operator clearly feels that the manufacturer is negligent in this incident and as such it is reported that United Airlines is making a claim against Boeing for the grounding and the rescheduling of deliveries.
It has also been further reported that the manufacturer will provide the airline a confidential agreement with Boeing will provide it with "credit memos" against future purchases. But what is a credit memo… well let’s explore that.
A credit memo for aircraft typically refers to a document issued by an aviation company or aircraft manufacturer to provide a credit or refund to a customer for various reasons. These reasons could include:
Defects or Damage: If an aircraft is delivered with defects or damage that were not disclosed or were not apparent during the purchase process, the manufacturer or seller may issue a credit memo to compensate the buyer for the necessary repairs or adjustments.
Overpayment: Sometimes, a customer might overpay for an aircraft due to errors in invoicing or billing. In such cases, a credit memo is issued to rectify the overpayment and provide the customer with a credit or refund for the excess amount paid.
Contractual Agreements: In certain contractual agreements, such as aircraft leasing or financing contracts, there may be provisions for adjustments or credits based on specific performance metrics or conditions outlined in the agreement
Cancellation or Return: If a purchase agreement for an aircraft is canceled or if the aircraft is returned for any reason (e.g., dissatisfaction with the product), a credit memo may be issued to refund the customer's payment.
Warranty Claims: If an aircraft experiences issues covered under warranty, the manufacturer may issue a credit memo to cover the costs of repairs or replacements.
In essence, a credit memo for aircraft serves as a formal acknowledgment of the credit owed to a customer and details the reasons for the credit, the amount, and any terms or conditions associated with its use or redemption.
Typically, on an aircraft delivery such as reported for United Airlines the credit memo can take several forms:
A credit that’s delivers a discount on the purchase price of the aircraft.
A credit against the purchase that provides a using against good and service, think of this like a big gift voucher received with the aircraft.
A credit on additional services such as training or aftermarket support elements.
A credit to extend a warranty of specific items, providing more operational protection.
Given the agreement is confidential to United we are not aware which one of these they are receiving but it could be one or more of such agreements.
This sort of settlement is often preferred to money changing hands. It saves changing the wider terms of the aircraft purchase agreement by delivering a benefit that is easier to keep private. It also means that the money stays with the seller, without impacting their bottom line and retaining the customers loyalty. Additionally, it is a useful tool for the organization who is providing the credit memo as it becomes an internal organization cost, so it is typically cheaper for the business as the benefit is provided at cost, rather than at a marked-up rate. So, if the airline received $100 million dollars of benefit it would be significantly less exposure within Boeing as they provide these services at an internal cost.
Credit memos are a standard offering as part of any new aircraft, and they take detailed analysis to ensure you are receiving maximum benefit from them as well as finding the opportunities to receive them. Understanding where these can be found is something we at Aviation Mover have a great deal of experience in and something we will cover in future insights. For more information visit https://www.aviationmover.com/articles