BOEING

The Nuclear Deal between Iran and the six super powers is seen as a boon for the aging Iran aviation industry. Iran now plans to add 300 new aircraft in the next five years and 500 in the next 10 years by growing the national fleet as well as additional airports and facilities to the country’s existing infrastructure. Although many view this as a tremendous opportunity, there are many hurdles along the way – how does the country plan to tackle them?

On July 14, 2015, Iran and the six super powers (the USA, UK, France, Russia, China, and Germany — collectively known as the P5+1) finalized a Joint Comprehensive Plan of Action (JCPOA). This agreement is meant to ensure that Iran’s nuclear program can only be used for peaceful purposes in return for lifting the sanctions from P5+1 countries. On January 16, 2016, International Atomic Energy Agency (IAEA) announced that Iran met the requirements of the JCPOA and the sanctions were immediately lifted. One of the reliefs for Iran was the ability to conduct business with the EU and US companies across a range of sectors, including aviation-related industries.

The lifting of the sanctions was a relief for the aviation industry of Iran, as the entire in-service fleet of 225 airplanes is in a dire need for repairs and maintenance. Due to import sanctions, much needed machinery and parts have not been available for the airlines to repair and maintain their fleet, while the access to new airplanes was very limited. The average age of Iran’s fleet is 25 years, which is among the oldest in the world. This is also one of the reasons why Iran’s civil aviation has had one of the world’s worst safety records – more than 500 people dead in the past few years in air crashes of various Iranian airlines.

The lack of access to new machinery and aircraft has affected the growth of the domestic airlines – this includes the flagship carrier, Iran Airways, as well as other top airlines such as Aseman Airlines and Mahan Air. These three airlines hold the maximum in-service fleet and they are likely to also be the first to benefit from any deals made in the aviation sector in the country. And the deals are expected to start pouring in soon. The lifting of sanctions has enabled Iran to seek the possibility of doing businesses with companies such as General Electric (GE), a US-based equipment manufacturer, which has shown interest in investing in Iran to provide commercial aircraft engines, parts, and services, which is likely to be a boon for the local airlines in working towards improving their safety record over time.

Iran has already initiated talks with two leading aerospace equipment manufacturers, US-based Boeing and France-based Airbus, to buy equal amount of airplanes from both companies. As of January 2016, a deal was signed between Airbus and Iran to deliver (although the delivery timeline is still unclear) 118 jetliners worth US$27 billion. Boeing is working out the details with the US Treasury and a contract will go under negotiation once these details are clear. Both companies are motivated to convert the talks into a deal – even though both companies are giants, selling to most airlines around the world, the number of airplanes ordered by a Iran is still going to be a large contract for them.

Iran plans to re-vamp the entire aviation industry, including the purchase of new airplanes and construction of new airports along with refurbishing the existing infrastructure. The new planes are planned to slowly replace the older ones with the ambitious objective for the airlines to have brand new in-service fleet, which would reduce the repairs and maintenance costs over time. Apart from investment in airplanes, Iran also plans to develop five new airports with a total investment of US$8 billion. Iran’s Civil Aviation Organization (CAO) has already outlined two airport projects to be developed with an investment of US$1 billion expected to be completed by 2022, while the rest of the projects are yet to be announced.

The idea is to develop these airports as international corridor and transit hubs by reviving the historical trade route advantage, which Iran had through the Silk Route in ancient times. Iran, back then known as Persia, connected the Western countries to the Eastern ones – it was one of the transit hubs for trade. In current attempts to revive that route, Iran considers two airports, Dubai, UAE and Doha, Qatar, as competitors, due to these airports’ advantage of the same central geographical location connecting the West and the East. Dubai and Qatar have already leveraged their location and facilities by offering transit hubs to many international carriers, which brought good volumes of international traffic into these two countries. This has also led to the development of hospitality and tourism industry in the areas along with business and job opportunities to the local and expat population of UAE and Qatar. These countries have also worked on establishing their flagship airlines – Emirates and Qatar Airways, and both of these airlines are among the top airlines in the world now.

According to Iran officials, both these airports (Dubai and Doha) and their flagship airlines (Emirates and Qatar Airways, respectively) are direct competitors to Iran’s airports and its key airline – Iran Air. Iran can also learn from these two airports’ history in its quest to restore growth in aviation and several associated industries. The development of Dubai airport has been attributed as one of the major turning points to the development of the city, Dubai – the airport was earlier used for transit flights, repairs and/or refueling of the airplanes, gradually increasing the international flights and footfall in the city. This spurred interest of international players in hospitality industry to expand their existing infrastructure in the city, which in turn lead to the development of hospitality and tourism industry in UAE, which was a relevant step UAE took in diversifying its oil-based economy. Currently, Dubai handles passenger traffic of more than 75 million on a yearly basis. Recently it was announced that Dubai will be expanding its airport to accommodate the increasing traffic on its terminals.

Iran would like to draw a similar story for itself and follow Dubai’s footsteps by putting its flagship airline in the global picture and using its airports as transit hubs. The major challenge in Iran’s case is that it has missed out on this opportunity by at least a decade, if not more. Dubai and Doha already have the infrastructure, policies and rules in place to accommodate growing traffic, along with businesses looking to invest or expand in the city or the country. Iran still needs to develop or update the basic infrastructure it has so it can start to match its competitors. For this development, it needs heavy investment and planning to execute the vision it has for the aviation industry and developing other industries such as tourism and hospitality.

The Realistic View

Iran used its natural resources to attain economic development, a similar scenario as in other oil-based countries such as Saudi Arabia. Iran and Saudi Arabia are two countries, which can leverage on the onshore oil reserves available at a low cost. According to the Organization of Petroleum Exporting Countries (OPEC) data, Saudi Arabia accounted for 22.1% (266.56 billion barrels) while Iran accounted for 13.1% (157.53 billion barrels) of world’s total crude oil reserves in 2014. Over the years, Saudi Arabia has built its financial strength from oil revenues, but Iran was not able to achieve the same due to the economic sanctions imposed on it by USA, originally in 1979, strengthened in 1995 and then again in 2012.

Recent developments finally gave hope for Iran to catch up, though the process is expected to be slow. While the agreement with P5+1 has allowed Iran to stabilize its oil exports at about 1 million barrels per day, it is still 50% less than what Iran used to export before 2012. Another challenge are the declining oil prices, which have reached a level below US$30 per barrel in January 2016 from US$105 per barrel in 2012. Iran’s oil revenue accounted for about 12.5% of its GDP in 2012, a share that declined to 6.25% in 2014. The infrastructure spending share in GDP also declined by 3% points since 2012, as Iran has limited access to financing and the Oil Stabilization Fund (OSF), a fund to stabilize the economy against fluctuating oil revenues, was no longer operational.

In a scenario where majority of the economic development of the country is dependent on the natural resources such as oil and gas, once the oil and gas market slows down, the economic growth slowdown soon follows. Market fluctuations for oil and gas industry have led oil-based economies to diversify into other industries or build up financial reserves to sustain economic fluctuations. For Iran, aviation might be a tool to achieve that – the country plans to re-build aviation industry to make way for the tourism industry, which the country hopes to develop as part of the shift from being an oil-based economy.

The first step in this shift for Iran is to gather investment to develop and support the growth of aviation industry. However, Iran is in dire need of investments from external sources since it has no funds, assets, or resources to re-build or stabilize the economy. Iran was able to gain access to some funds worth US$32 billion from unfrozen assets abroad, which were available to the country once the sanctions were lifted – however, these frozen assets are not unlimited, and the Airbus deal worth US$27 billion was made from those unfrozen assets. At the same time, the investments cannot come from the growth of other industries such as manufacturing or agriculture, as any growth achieved from these industries will have to attribute to fiscal spending on developing human resources such as education and health of the population. Iran also needs trained staff personnel to support the development of non-oil based industries such as aviation and transportation. To do this, the country has to invest in training institutes and infrastructure to sustain the economic development Iran is hoping to achieve in the next few years.

The country is trading its natural resources to lure international companies to start or increase their businesses with Iran. For example, Total, a France-based oil and gas company, has signed a Memorandum of Understanding (MoU) to buy crude oil from Iran and promised research to look for other opportunities so it can invest in Iran. Such a deal brings in investment, which will help Iran to stabilize the economy or build financial reserve to later on invest in other industries such as aviation.

Currently, Iran needs close to US$220 billion in investment to uplift its aviation industry. The country cannot afford to sponsor this investment from its own reserves or funds from any other industry growth. These funds will need to be used to help maintain the economic stability as Iran is struggling with high unemployment and inflation. One of the best options for Iran is to leverage the natural resources such as oil and gas to other countries; in the pre-sanction period Iran could only do that with Asian countries such as China, India, or South Korea. Since the sanctions are lifted, Iran is open to expand its business options to European regions and USA as well.

EOS Perspective

The World Bank has forecast an optimistic growth of 5.8% for Iranian GDP in 2016, owing to the fact that Iran’s economy will benefit from the lifting of the sanctions from six super powers. In spite of the promise of industry growth, Iran has a lot on its plate to deal with before it can be considered a stable economy.

For starters, Iran has to gain the market share it once had in the pre-sanction period in the global oil industry, which means that it is going to adopt an aggressive strategy to gain back its lost clients especially European clients such as France, Italy, and Greece (in the pre-sanction period, these European countries were its major clients for oil trade). These countries used to do business with Iran but shifted to Saudi Arabia, Russia, and Iraq once the sanctions were imposed. Iran’s oil minister, Mr. Bijan Namdar Zanganeh, in an interview on November 5, 2015 was clear on Iran’s next steps when he said “Our only responsibility here is attaining our lost share of the market, not protecting prices”. Iran plans to sell oil at rates cheaper than its counterparts to gain the European clients back, which may result into an oil surplus in the market pushing the oil prices lower than US$30 per barrel. This also means that Iran would have short and medium term issues building up investments it needs to develop the aviation industry or even stabilize the economy to reduce unemployment and inflation. Apart from investments, Iran has to make changes to its existing policies to incorporate the growth of aviation industry. The country also has to gain access to trained and skilled staff who can handle the organizational and operational change the aviation industry will undergo in the next few years.

One major challenge for the aviation industry is that Iran still has not finalized a contractor for the repairs and maintenance of its already aging fleet. Lufthansa, the German-based aviation company, is in talks with Iran to set up a maintenance unit in Iran but nothing has been set it stone yet. With new airplanes in the pipeline and no immediate maintenance support for Iranian airlines, the industry growth might continue to be hampered more than before.

Iran needs to give priority to keep the in-service fleet in service. It might take years for aviation companies such as Airbus to complete the orders and during that time it is imperative that the older planes have access to machinery and repairs to stay in business.