Will Iran Airlines Take Off?

Professor of Economics
Will Iran Airlines Take Off?
Will Iran Airlines Take Off?

In recent weeks there has been rising speculation about the future purchase orders from Iran’s aviation industry. Officials such as Abbas Akhoundi, minister of transportation and urban development, say Iranian airlines need 400 aircraft to renovate their aging fleet. However that may not be enough.

Airline companies share in overall domestic travel in Iran is relatively small, 7.6%, although they annually handle  close to 17 million domestic and 6 million foreign air passengers.

However for a country as large as Iran covering an area as large as Alaska with more than 12 neighboring countries commercial aviation is apparently a strategic industry. It provides access to the remotest parts of the country while connecting Iran’s major business and population centers to the regional hubs and business centers in Istanbul, Dubai and Doha.  

The demand for air travel has been growing in Iran. Although few have taken into account the dynamics of demand for air travel in regulating air fares in the country of 80 million people. It might be one of the last places where an airline ticket has a fixed price which does not vary with time of purchase, destination, seat number or time of travel.

This is particularly significant when we notice the demand for air travel is heterogeneous and strongly seasonal in Iran. While many have covered the impact of international sanctions on aviation industry in Iran few have addressed the pricing regime of this key industry. Iranian airlines earn much less than what they can. The official approach to pricing has cost Iranian airlines' profitability and undermined their financial status.  It is here that the aviation paradox only begins.        

The government sets the price for the product, air travel, and it also is the only provider of airport services, fuel and security, thus setting the price of production factors in the market. It also pays subsidies and provides public funds for airlines operating in the least developed regions.  It seems because of this obsolete system the government ignores airlines’ huge and accumulating debt. They owe 7,000 billion rials ($220 million) to the National Iranian Oil Company for jet fuel and another 4,000 billion rials ($120 million) to the Iranian Airports Holding Company. To this one must add the accumulated loss of Iran Air, the national carrier and some other carriers. Few analysts would dare say Iran’s aviation industry is financially healthy.

It is worthy of mention that an end to sanctions does not necessarily mean access to spare parts and new aircraft. When the sanctions, imposed on Tehran due to its nuclear energy program, end, Iranian airliners will face the full force of regional competition in the Middle East. Even now airlines from Turkey, Qatar and UAE are well established in Iran’s tourism industry. They fly tourists from all over the world to destinations in Iran. With their modern fleet these carriers are better placed to benefit from an end to the sanctions than Iranian airlines.

It is true that Iranian airlines have better local ties and benefit from an inexpensive labor force. The expansion of private flight schools in the past decade means Iran has enough young pilots and ground crew to maintain the new aircraft. However they do not have access to foreign investors and international banking. Even if foreign investors show interest in this sector the current pricing regime and the accumulated debts and losses mean that they cannot expect a promising return on their investment. Iranian authorities may continue talking of wanting to buy 400 planes but in this weather those birds will not fly far.

When sanctions become history Iranian airlines will realize they need and must demand regulatory reforms. Pricing schemes must change to accommodate the financial realities of this industry in the 21st century. The financial managers must rise to the occasion to meet the challenges of managing dwindling revenues and reducing costs in an increasingly saturated and competitive market. Minus this crucial need and Iranian airlines will simply fail to attract foreign investors. It will be up to the decision-makers to implement the much-needed reforms, otherwise the new acquisitions will only add to the list of assets without enough revenues to cover their depreciation. Yes, Iranian airlines can and should take off. But an end to sanctions, although necessary, is not enough.