Authorization To Offer: What Is It & When Do Manufacturers Exercise It?

The ATO is signed and released when the manufacturer is ready to market its product.

The Authority to Offer (ATO) is written approval by the aircraft manufacturer for its aircraft to be marketed and sold to customers. The ATO is typically released when manufacturers sign firm contracts with customers. ATOs differ from Letters of Intent (LOI) and Memorandums of Understanding (MOU).

An LOI is a preliminary commitment from one party to establish a business transaction with another party. Meanwhile, MOU is a type of agreement to express convergence on a course of action between two parties. These two are heard quite frequently in the news since they are early parts of a transaction. However, an ATO is a binding contract with specific guarantees between the two parties. The management board may release the ATO approximately 6-12 months before the formal program launch.

An important milestone

The ATO is an essential milestone in the post-design phase of the program. At this point, the technical teams have refined the conceptual design through Computation Fluid Dynamics (CFD) and wind tunnel experiments of the scaled model. The technical teams have enough confidence that the aircraft will achieve its mission requirements within the prescribed limits.

The performance at various phases of flight, cost of maintenance, and passenger experience are also considered. The development (non-recurring) cost and the production (recurring) costs are estimated along with net revenues and margins. It is noteworthy that since the aircraft design and development cycle may take up to ten years, future costs are calculated and marketed for the ATO.

In parallel, purchase and logistics teams have established contracts with suppliers. The two parties have preliminarily agreed on costs and delivery terms. It is worth mentioning that not all negotiations with suppliers are concluded at this point. However, a good understanding of production times and costs is agreed upon with the suppliers.

It also indicates to the market and suppliers that the manufacturer is ready to launch the program. While the program will not be formally launched, a good understanding of orders and costs is obtained. Irrespective of the status of the ATO, some suppliers may want to see actual orders from customers before committing to the program.

Suppliers needing to deploy substantial resources and make investments may require more customer assurance. Signing firm contracts with the customers typically brings hesitant suppliers onboard.

Very early orders

Today’s upstarts in electric, hybrid, or hydrogen-powered aircraft have given rise to very early customer orders. While these orders are rarely firm, they are LOls and MOUs prepared even before the conceptual phase of the design. Large customers and the public are attracted to the proof of concept significantly different from what could qualify as a final product.

With very low maturity in the development cycle, customer contracts come with various walkway clauses. Some upstarts ramp conceptual design work to exercise the ATO and establish agreements with suppliers. These practices are generally a red flag for suppliers where any unforeseen change to the mission requirements (due to design constraints) can make customers walk away from the order.

For example, if the Operational Empty Weight (OEW) creeps up during the conceptual design phase, the Maximum Takeoff Weight (MTOW) increases. As a result, the airframe takes on higher operational loads, higher thrust is required from the engines, and landing gears have to absorb more impact and braking energy. The payload-to-range ratio can also be off, which makes design trade-offs much more complex for the manufacturers.

Hence, the ATO is an important step in the program and signals to customers and suppliers that the planemaker is confident in its product.

What do you think about the ATO and its use? Tell us in the comments section.