The Post-Sanction Iranian Revolution; Its Aviation Industry Perspective

The conversation will be held to outline the context, business opportunities and arms of the aviation industry set for needed development in Iran post-sanction. These include airlines, airports and regulatory bodies.

CONTEXT

Iran is the second largest economy in the Middle East and North Africa (MENA) region after Saudi Arabia, having an estimated gross domestic product (GDP) of USD404 billion in 2014, according to the World Bank. With a population of almost 79 million, Iran is similar in size to Turkey but with an economy characterised by a large energy sector. Iran ranks second in the world in natural gas reserves and fourth in proven crude oil reserves. Aggregate GDP and government revenues still depend to a large extent on oil revenues and are therefore intrinsically volatile – especially given recent falls in oil prices. Iran is a market with enormous potential – the lifting of sanctions will surely produce a flurry of international expansion.AAEAAQAAAAAAAAbYAAAAJGQxY2Y2NzM5LTI1ZTMtNDM1Yi1iYzM1LTIxZWI2MzkzOWZjYQ.png

Mahan Air, now larger than flag carrier Iran Air, has been growing in China while waiting for European opportunities. Mahan and Iran Air currently account for about 35% of seat capacity in Iran’s international market. Turkish Airlines serves seven cities and has more favourable geography for connections to Europe and North America. It is the largest foreign carrier in Iran with about a 12% share of international seat capacity, followed by Emirates with 9%. Flydubai has a 6% share but serves nine cities in Iran – more than any foreign carrier. Iranian airlines will be competing primarily with Gulf network carriers – Emirates, Flydubai, Etihad and Qatar Airways – as well as Turkish Airlines. These airlines have geographically convenient hubs, strong local traffic, and are amongst the largest foreign carriers serving Iran. Turkish Airlines operates four-fifths (80%) of the number of international seats to/from Iran as Iran Air does. These three Gulf carriers and Turkish have an average fleet age of under seven years.

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After extensive negotiations and discussions between leaders of some of the most powerful countries, a deal was finally struck earlier this year that could signal the end of tough sanctions for Iran. Provided Iran complies with the peaceful terms of the nuclear agreement and satisfies the International Atomic Energy Agency of its future intentions to meet the terms of the deal, wide-ranging EU and US sanctions currently in place across various sectors could start to be lifted.

Whilst this is certainly progress for business in Iran, there will undoubtedly follow a long period of transition before many Western organisations will be free (and confident) to conduct business there without the need to consider the restrictions. However, the aviation industry appears to have been granted a slightly easier, and quicker, route to open trade as a result of a prioritised carve-out in the deal. This has generally been perceived as a positive step by those in the sector with many highlighting the acute need for investment in Iran’s aviation stock and infrastructure as long overdue.

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The prospect of the lifting of US aviation sanctions has sparked a flurry of interest among investors in the industry who have previously avoided conducting business in Iran. The difficulty of trading amongst the sanctions has broadly been two-fold.  Firstly, the bars on bringing aircraft parts into Iran has led to an increasingly out-of-date fleet (the average age being more than 20 years) and operational safety problems arising from the absence of investment. This also puts the Iran’s aviation industry to being unable to have an MRO industry for post-Revolution aircraft types. Dealings of aircraft trade were also under spotlight pre-lift of sanctions, with Mahan Air acquiring ex-VS A340-600 aircraft.

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An earlier interim nuclear agreement gave Boeing Co. and engine-maker General Electric Co. the green light to provide some spare parts for U.S.-made planes in service in Iran since the 1970s. Boeing says it has only sold one spare part along with some service bulletins and other materials since that deal came into force last year. The pending agreement upon sanctions being lifted allows for licenses on the sale of commercial aircraft, and Transportation Minister Abbas Akhoundi has said his country is prepared to spend about $20 billion to purchase some 400 aircraft over the coming decade. Boeing’s Mideast communications head, Fakher Daghestani, said the company is reviewing the deal “but until the U.S. government gives us further direction, it would be premature to comment.” GE, which also has U.S. licenses to sell some medical equipment in Iran, said it looks forward “to reviewing the details of the agreement and will watch the regulatory landscape that may unfold.” Airlines across the Persian Gulf from Iran are ramping up operations as interest grows.

 

Below; Iran Air Fleet Profile (January 2016)

Aircraft Type Current Future Historic Avg. Age Total
Airbus A300 13 5 30.3 Years 18
Airbus A310 2 6 25.9 Years 8
Airbus A320 6 3 20.3 Years 9
Airbus A340 1 1
Boeing 727 5 5
Boeing 737 6 6
Boeing 747 6 16 36.0 Years 22
Douglas DC-8 1 1
Fokker F70 / F100 16 4 23.3 Years 20
McDonnell Douglas DC-9 1 1
McDonnell Douglas MD-80 2 25.3 Years 2
Total 45 48 26.8 Years 93

 

Below; Mahan Air Fleet Profile (January 2016)

Aircraft Type Current Future Historic Avg. Age Total
Airbus A300 18 5 27.6 Years 23
Airbus A310 10 3 25.6 Years 13
Airbus A320 7 7
Airbus A321 1 1 2
Airbus A340 11 15.7 Years 11
Boeing 747 5 26.9 Years 5
British Aerospace BAe 146/Avro RJ 17 1 22.5 Years 18
McDonnell Douglas MD-80 3 3
Tupolev Tu-154 2 2
Tupolev Tu-204 2 2
Total 61 1 24 23.6 Years 86

 

Below; Iran Aseman Airlines fleet Profile (January 2016)

Aircraft Type Current Future Historic Avg. Age Total
ATR 42/72 6 3 20.2 Years 9
Airbus A320 3 22.7 Years 3
Airbus A340 1 24.0 Years 1
Boeing 727 3 1 35.7 Years 4
Boeing 737 2 23.7 Years 2
Fokker F70 / F100 18 3 23.2 Years 21
Total 33 7 23.8 Years 40

 

BUSINESS OPPORTUNITY

But all seems behind (for now) with new announcements for infrastructure renewal and rapid economic growth upon sanctions being lifted. The decreasing dependence on road-transit in favour of rail and air based transport gives an opportunity for modernisation technologies to flourish in the Iranian market. But with sanctions compliance notwithstanding, businesses and entities seeking to do trade in Iran must understand the commercial risk of doing business in Iran through political, financial, legal & security contexts. Areas where the Iranian economy predominantly lacks is development, design, engineering and joint investment for production and export. In this aspect Western businesses can help to bridge the gap by investing in the above sectors and assisting in transfer of technology through joint venture collaboration and partnership with the private sector. However, with the most complex sanctions regime still in place, companies seeking to do business in Iran must conduct crucial due diligence before entering the Iranian market. Companies and businesses that have failed to comply with sanctions have been penalised heavily for sanctions breeches meaning that due diligence and appropriate market-preparation is critical. There are also plenty of legal tests which must also be overcome, for foreign-investments to materialize in a law-abiding manner, as will be discussed as follows.

A Business Opportunity Appendix (inter-industrial) is placed at the end of the article for reference.

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AIRLINES

The big order came through late January, where Iran Air (IR, Tehran Mehrabad) has signed an agreement with Airbus Industrie (AIB, Toulouse Blagnac) for the acquisition of 118 aircraft critical to its fleet renewal plans. Announced during President Hassan Rouhani’s ongoing official visit to France, the order entails: twenty-one A320ceo family jets; twenty-four A320neo family jets; twenty-seven A330ceo family jets; eighteen A330neo (-900) jets; sixteen A350-1000s; and twelve A380-800s. The order also includes pilot, maintenance training, and support services critical to the new fleet’s entry into service. “Today’s announcement is the start of re-establishing our civil aviation sector into the envy of the region and along with partners like Airbus we’ll ensure the highest world standards,” Farhad Parvaresh, Iran Air Chairman and CEO, said. Parallel to that agreement, Iran’s Minister of Roads and Urban Development, Dr. Abbas Ahmad Akhoundi, signed a comprehensive co-operation agreement with the Europeans which will see Iran’s civil aviation infrastructure and regulatory oversight overhauled and modernized. Among the areas involved in the deal are Iran’s air navigation services (ATM), airport and aircraft operations, regulatory harmonization, technical and academic training, as well as MRO and industrial cooperation.

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There was also a signing an agreement 3 days later with Avions de Transport Régional (Toulouse Blagnac) for the acquisition of forty ATR72-600s. Of the aircraft, twenty are firm orders while the rest are options. The deal was signed in Tehran this week and follows commercial discussions held in Rome and Paris during Iranian president Hassan Rouhani and Minister of Transport Abbas Ahmad Akhoundi’s official visits to Italy and France late last month. During the negotiations, the Italian and French governments played an important role through the participation of their respective export credit agencies – Sace and Coface. As previously reported, Iran Air is considering setting up a domestic air-taxi service to increase connectivity among the country’s more remote and underserved regions. At present, Iran Aseman Airlines (EP, Tehran Mehrabad) is the only Iranian operator of ATR equipment with a fleet of four ATR72-200s and two ATR72-500s.

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The signing of 20+20 ATR76s come after Iran Air considered setting up a regional subsidiary which will focus on the Iranian domestic market. Outlining his airline’s ten-year growth plan, Iran Air chairman Farhad Parvaresh told the recently ended CAPA Iran Aviation Summit 2016 that the proposed unit would likely operate 50- to 100-seater aircraft. Iran Air currently serves Abadan, Ahwaz, Ardabil, Bandar Abbas, Birjand, Bushehr, Chah-Bahar, Gheshm, Gorgan, Isfahan Int’l, Kerman, Kermanshah, Kish, Lar, Mashad, Rasht, Shiraz, Tabriz, Urmieh, Yazd, and Zahedan locally. The flights operate in conjunction with Bukovyna Airlines (BQ, Chernovtsy) using MD-82 as well as Fokker 100 equipment.

On the leisure/LCC aspect of things, Iran’s aviation industry wishes to facilitate the full spectrum of service variety. This is displayed with intel provided that Meraj Air (JI, Tehran Mehrabad) vice president Iraj Ronaghi says the airline has drawn up plans to bolster its domestic operations through the opening of two new bases to supplement existing ones at Tehran Imam Khomeini and Tehran Mehrabad. Meraj Air intends to open up more routes to leisure destinations such as the islands of the Persian Gulf, he told the CAPA Iran Aviation Summit 2016. Though it operates an aged fleet of two A300-600s, three A320-200s, one A321-200, one A340-300 (VIP), two B707-300s, and one B737-200Adv, Ronaghi said the airline hoped to acquire an unspecified number of regional jets in order to add another 2000 seats in the next two to three years, then another 1000 seats over the next five-year period.

 

Also on the Airline side;

  • Discount carrier FlyDubai launched a major expansion to Iranian destinations from its base in the Mideast’s busiest airport of Dubai, announcing five new Iranian destinations on top of two it already serves
  • Dubai’s Emirates, the region’s biggest carrier, this month announced flights to Iran’s second-largest city of Mashhad, with 5-weekly A330-200 services. It already flies to Tehran.Etihad made no formal announcement as of yet.
  • Qatar Airways studies to expand operations of narrowbodies and freighters to Iran upon refinement of bilateral relationships.
  • Air France set to resume Tehran on April 18 2016
  • British Airways set to resume Tehran on 14th July 2016
  • Lufthansa and Austrian already operates Frankfurt/Vienna to Tehran, while adding Munich on 15th April 2016
  • Mahan Air set to start Boryspil and Copenhagen, with more announcements to come.
  • Iran’s AWA Airways adds maiden aircraft, and set to begin commercial operations.

 

AIRPORTS

Airports around Iran adopted its airport infrastructure around lower capacities and capabilities in regards to handling variety of aircraft types. Besides Tehran’s Imam Khomeini International Airport, most airports in Iran are in dire need for development. An agreement with the Iranian Ministry of Roads & Urban Development and the Iran Airports Company was signed by during the state visit to France of Iran’s president, Hassan Rouhani. Mashhad is the country’s second-largest airport and Isfahan is the fifth-largest. The agreement is the first step in a process that should result in work to renovate, extend and operate the two airports. The airport in Mashhad, which recorded 8.2 million passengers in 2014, is located in the northeast of the country and serves the country’s second-largest city, a holy city that attracts more than 20 million pilgrims every year. The Isfahan airport, with 2.6 million passengers in 2014, serves Iran’s third-largest city, which was the capital of the Persian empire in the 16th and 17th centuries and is known for its cultural and historic heritage. The deal follows the recent effective lifting of international sanctions. Vinci sees airport activity as holding major economic potential in Iran, given its large population and territory as well as increases in tourism, which grew more than 35% in 2014.

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Another deal was also struck, with Parsabad airport is set to reopen to all traffic following the upcoming completion of runway resurfacing and terminal expansion works. Located in Iran’s northwest near the border with Azerbaijan, the airfield is expected to reopen sometime during the second and third quarter of this year. Tehran has announced an ambitious aviation infrastructure modernization programme following the recent upliftment of sanctions. During the recently ended CAPA Iran Aviation Summit 2016, Iranian minister of roads and urban development Dr Abbas Akhoundi said plans to expand Tehran Imam Khomeini International Airport were at an advanced stage while noting that only ten of the more than sixty-five operational airports in Iran, at present, have adequate infrastructure. This, he said, created tremendous opportunity for foreign investment and partnerships. For his part, Iran Air (IR, Tehran Mehrabad) chairman Farhad Parvaresh expressed optimism that the airline would be readmitted to IATA’s billing and payment systems which would tremendously simplify its revenue collection and payments for overflights, airport fees and other services. Iran was suspended from IATA’s clearing house in 2010 due to financial sanctions.

Akhoundi also said that Iran would invest USD250 million to modernise its air traffic management infrastructure with the aim of creating the most secure and safe airspace in the region. This has been of greater investment due to growing traffic utilizing the Iran and the Persian Gulf geographies as ideal/safe overflight regions in contrast of Syria and much parts of Iraq. Intel suggests the management systems were around enroute control spacing and route optimization systems, while tender productions are being made for terminal approach systems and control tower refurbishments.

 

 

REGULATORY AUTHORITIES

As we know, things are a little raw at the moment, given;

  1. The U.S. government has, by and large, left in place its embargo generally forbidding U.S. companies, citizens and residents, and others in the United States to engage in Iran-related activity. European Union authorities, on the other hand, have rescinded most EU economic sanctions relating to Iran.
  2. The U.S. government has neutralized most so-called “secondary sanctions” measures that have provided for sanctions against third country companies that engage in specified types of activities relating to Iran.
  3. The U.S. government has also, for the most part, eliminated the embargo’s application to non-U.S. subsidiaries of U.S. companies acting abroad. Furthermore, the U.S. government has, in limited respects, authorized U.S. parent companies to permit and, to some limited extent, enable their non-U.S. subsidiaries to engage in Iran-related activity.  But U.S. parent companies will need to be careful to avoid support for their non-U.S. subsidiaries’ Iran-related activity that could expose the parents to liability for facilitating such activity contrary to sanctions prohibitions – even as to Iran-related activity in which their non-U.S. subsidiaries are permitted to engage.
  4. The U.S. government has announced that it will license certain other activities that are subject to embargo prohibitions, including supply of civil aircraft and parts and components to Iran and imports from Iran of Iranian-origin carpets and foodstuffs.
  5. As companies evaluate their opportunities under the changed sanctions regimes, much could depend on how regulatory authorities interpret and administer the new arrangements. Furthermore, circumstances regarding Iran sanctions remain fluid and uncertain, particularly given continuing opposition to the Iran nuclear agreement.  Depending on political developments, one or both of U.S. and EU authorities could expand sanctions against Iran at any time.

Overview of EU changes; all nuclear-related economic and financial EU sanctions against Iran have been lifted by the EU. The decision was taken by the EU following the presentation of the report by the Director-General of the IAEA to the IAEA Board of Governors and the United Nations Security Council confirming that Iran has taken the nuclear-related measures as agreed under the JCPOA. The EU legislative acts listed below terminate and amend the provisions of the EU nuclear-related sanctions legislation against Iran as set out in Council Decision 2010/413/CFSP and Council Regulation (EU) 267/2012, Council Decision (CFSP) 2015/1863 of 18 October 2015, Council Regulation (EU) 2015/1861 of 18 October 2015, and Council Implementing Regulation (EU) 2015/1862 of 18 October 2015. More information can be found here “EEAS Sanction Implementation Notice

Overview of U.S’ changes; the U.S. government lifted certain sanctions against Iran in compliance with the Implementation of the JCPOA. The sanctions lifted by the United States are limited to those set out in Section 17 of Annex V of the JCPOA, and relate mostly to “secondary sanctions,” meaning sanctions directed toward non-U.S. persons for specified conduct involving Iran that occurs entirely outside of U.S. jurisdiction. Most sanctions governing the conduct of U.S. persons remain in place, with a few exceptions. U.S. policy on transactions regarding aviation has also been liberalized, as outlined in Section 3 below. A licence from OFAC is still required for involvement in an Iran-related transaction of any aircraft having 10% (or more) U.S.-origin by value. More information can be found here; Treasury; Iran Sanctions

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Iran’s Deputy head of the Civil Aviation Organization of Iran has announced that the country is planning to grow international flights to nations utilizing growth of bilateral agreements and diplomatic ties to grow capacity nations operate between Iran and counterpart nations. A statement released by the Public Relations Department of the organisation quoted Mohammad Khodakarami as saying that due to vast international network of airlines, development of aviation cooperation with predominantly European, Middle Eastern, African and Subcontinental aviation companies is a priority of the Civil Aviation Organization. He added that Iran is also trying to update its memorandums of understanding with other countries in order to increase the number of weekly flights to various destinations and also increase the number of those destinations. Iran’s transport ministry has appointed Mohammad Khodakarami as head of the country’s civil aviation authority. The appointment has been confirmed by the Civil Aviation Organisation, which oversees air transport in Iran, following the resignation of the previous chief.

Developments have also been made to air tickets, which is to be liberalized by the end of the current Iranian year (March 19, 2016) as part of the Fifth Five-Year Economic Development Plan (2011-16), said the head of Iran Civil Aviation Organization, Ali Abedzadeh, noting that the move will not necessarily translate into higher prices. The move is certainly a contributing factor to the development of air transport by improving services, IRNA quoted the official as saying. The ticket prices of busy air routes linking Tehran, Mashhad, Isfahan, Shiraz and Tabriz will be the first to undergo liberalization, he added.

 

APPENDIX

  • While it will likely be months before sanctions on Iran ease, business and political leaders are wasting no time in trying to tap into a large and what they hope will be a lucrative Iranian market.
  • Germany is dispatching a large trade delegation to Tehran on Sunday. Spain has a similar trip planned, and France’s top diplomat is eyeing a visit too. Ads for European cars and luxury goods are starting to reappear in Tehran. Airlines in Dubai are fast adding new Iran routes to meet growing demand.
  • American firms, though, have to be much more cautious. Deal or no deal, U.S. sanctions not related to the nuclear program will still be in place and bar most American companies from doing business with Iran.
  • That means they stand to lose out to European and Asian companies — some that still have business contacts in the country before sanctions were tightened in recent years. “It’s easier to say who is at a disadvantage. And that will be U.S. firms,” said Torbjorn Soltvedt, principal Mideast analyst at risk advisory company Verisk Maplecroft.
  • On paper, Iran holds plenty of promise. Two and a half times the size of Texas, it is home to some 80 million people, sits atop the world’s fourth-largest oil reserves and the second-biggest stores of natural gas, and has well-established manufacturing and agricultural industries contributing to a $400 billion economy. London-based Capital Economics estimates the economy could surge ahead by 6-8 percent annually over the next several years as sanctions ease. “Everything is in place for economic growth,” said Dominic Bokor-Ingram, portfolio adviser at British asset management firm Charlemagne Capital. His company earlier this year announced a plan to launch Iranian investment funds in partnership with an Iranian company. “Iran has infrastructure, it has the institutions, it has the education,” he added. “It has a lot of highly educated people who will go back to Iran if sanctions are lifted.”
  • Tapping the market won’t be easy. The elite Revolutionary Guard is deeply involved in the economy and corruption is such a problem that President Hassan Rouhani lamented late last year that once-secret bribes are now being handed out openly. Iran ranks only 130 out of 189 economies on the World Bank’s ease-of-doing-business list. Assuming the deal goes ahead as planned it will still take at least several months until nuclear-related sanctions are lifted. And those sanctions can quickly be slapped back on if Iran fails to live up to its end of the bargain. That means many multinationals are unlikely to commit to big investments in the immediate future, though the staggered sanctions relief also gives companies time to gear up their operations, analysts say.
  • The oil industry is one area where Iran could use outside investment. Fitch Ratings expects it will take years for Iran to get back to the roughly 2.5 million barrels a day it was exporting before 2012, because investment in the sector has been limited under sanctions. Chevron Corp. spokesman Kurt Glaubitz said the company is reviewing the nuclear deal to understand its implications, but for now it remains “in strict compliance” with U.S. and international laws. Exxon Mobil Corp. declined to comment.
  • Although planned some time ago, Germany’s three-day trip led by Economy Minister Sigmar Gabriel comes less than a week after the nuclear accord was reached.
  • Spanish Industry Minister Jose Manuel Soria said he will be joined on a September trip by Spain’s foreign and development ministers, and he expects good prospects for Spanish companies in industry, energy, telecommunications, tourism and infrastructure.
  • French Foreign Minister Laurent Fabius said Wednesday he would be paying a visit to Iran as France looks to explore business opportunities, though he made a point of saying commercial interests were not what drove the deal. A large French business delegation, anticipating a resolution to the nuclear issue, traveled to Tehran last year, rankling U.S. officials.
  • Switzerland dispatched a business delegation to Iran at the end of April, soon after Iran and world powers reached a framework deal that paved the way for this week’s agreement.
  • “There is pent-up enthusiasm to do something” said Martin Johnston, director-general of the British Iranian Chamber of Commerce, a network of politicians and business leaders that hope to promote trade. He said he expected businesses would go to Tehran to examine the opportunities for the time being. “They are waiting for the structures to be in place to be able to trade, not only the legal arrangements but the suitable banking arrangements,” he said.
  • AUTOMATIVE; In some ways, loosening sanctions will mark a return to the way things used to be. French automaker PSA Peugeot Citroen has an early advantage in Iran thanks to its strong market position in the country — a legacy of its former partnership with domestic automaker Iran Khodro, which assembled Peugeot-branded vehicles from kits. Other European automakers have good brand recognition in Iran too, as many only officially cut their ties to Iran under pressure earlier this decade. Sergio Marchionne, the chief executive of Fiat Chrysler Automobiles, said this week that the Iranian market “will be an opportunity for all of us” if it opens up. Fiat only stopped selling cars in Iran in 2012, following similar moves by Peugeot, South Korean automaker Hyundai and German sports carmaker Porsche. Ford Motor Co. is taking a more cautious tone, saying it complies with U.S. sanctions and will monitor changes that come out of the agreement. In the meantime, its Chinese partner, Changan, has signed a partnership with Iran’s Saipa Automotive Group to jointly develop new vehicles.
  • In May, Brilliance Auto Group became the latest of several Chinese automakers to begin production in Iran, opening an assembly plant west of Tehran with a local partner, Pars Khodro, to make sedans and hatchbacks. Chinese state-owned manufacturers of subway equipment have found a way around financial sanctions, striking a deal in 2013 to trade 315 train cars in exchange for Iranian oil.
  • South Korean companies have been building market share in Iran, too, after the two countries agreed to let Korean businesses use South Korean currency for financial transactions with their Iranian counterparts. South Korea’s finance ministry said this week that expanding economic cooperation with Iran would be an opportunity for the country, which is a buyer of Iranian crude oil and exported $4.2 billion worth of goods to Iran last year.

 

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