Business And Markets

Expensive Parts Won’t Restore Airline Industry

Expensive Parts Won’t Restore Airline Industry
Expensive Parts Won’t Restore Airline Industry

Iran’s airline industry, whose fleet is heavily outdated due to years of sanctions, stands for new challenges as a partial lifting of sanctions has led Western companies to behave monopolistically.

The Geneva interim deal on Iran’s nuclear energy program that was signed between Iran and global powers late last year exempted the Islamic Republic’s commercial airline industry from US sanctions for the first time. United States’ sanctions that prohibit sales of aircraft and spare parts had been in place since the 1979 Islamic Revolution toppled the Shah.

In Europe too, companies have mostly refrained from doing business with the Islamic Republic and apart from a brief period in the 1990s when the Dutch company Fokker B.V. was allowed to sell its products, the majority of plane sales to the country have been through second-hand markets. While Europe does not explicitly ban sales of civilian aircraft or spare parts, it is the ‘dual use’ of many of these parts that has given the pretext to companies not to sell. An exception is the Russian Antonov AN-140-100, which is assembled under license by the Iran Aircraft Manufacturing Industrial Company (HESA).

Iran also made its own efforts in producing commercial aircraft domestically. At the end of former president Mahmoud Ahmadinejad’s second term, an attempt was made to produce small commercial planes but this was marred by difficulties and failures. The Rouhani government ordered a halt to the production of these airplanes, notably the Iran 140, in line with passenger safety.

Currently, Iran’s fleet consists of 250 commercial planes. However, Alireza Jahangirian, head of the Civil Aviation Organization, said back in May that only 150 of these were functional. Experts estimate that the average age of Iran’s fleet stands at about 22 years, which is well above the global average of about 10 years. Safety tests also recommend discharging airplanes with around 20 years of age as the risk of accidents increases rapidly after having flown more than 60 thousand times.

Iran also needs to expand its fleet in line with growing domestic demand. Tasnim news agency reported Jahangirian as saying that “with regard to existing demand, there is a need for 300 new airplanes.” He stated that due to the sanctions, “industry volume has a shortfall of at least 50 percent in relation to demand.” He also referred to the country’s airports, saying that “a total capacity of 85 million passengers is used by only 45 million passengers and in some airports capacity runs at 5 percent.”

The situation is particularly bad for flag carrier Iran Air, whose 47 active aircraft have an average age of 25 years, according to a report by the CAPA Centre for Aviation. Two of its active Boeing 747s have been flying for almost four decades. The country’s four largest airlines, which include Iran Air, Iran Aseman Airlines, Mahan Air and Iran Air Tours, all have average fleet ages above 22 years.    

 Major Obstacles

However, even within this new alleviated sanctions regime, major obstacles remain. Boeing and General Electric, less than three months after the Geneva accord was signed, petitioned the US for a sales permission to Iran. After this was granted to Boeing, it became clear what dangerous consequences its monopolistic position in relation to Iran could have. According to Jalil Sar-Ghale, an Iranian MP, Iran has so far not imported any spare parts from Boeing because the company supposedly offered prices three times above current market prices and even above prices at which Iran currently buys spare parts.

Another setback for Iran came in June when the US federal court fined the services branch of Fokker for allegedly violating US sanctions. Although spare parts from Fokker have become relatively cheap after the bankruptcy of the company in 1996, renewed legislative pressure on Fokker pushed up costs and diminished the willingness of this company to trade with Iran. US strictness also affected other European companies like Airbus, which had otherwise been interested in selling to Iran since the start of the Geneva accord, but has so far refrained from any major deals. The fear that strict US investigative supervision on sales will broaden the definition of what constitute ‘dual use’ items, or items that can be used for military ends, inhibits companies from doing business with Iran.

However, the lift of sanctions has also breathed new air in the wings of Iran’s aircraft industry. Spare parts are more easily bought from international markets and this has led to many aircraft being restored to the active fleet. Hamid Habibi, who directs the Flight Standard Department of the Civil Aviation Organization, stated in an interview with Mehr news agency that the lifting of sanctions and the allowance of trade in spare parts would result in the return of 30 percent of the total fleet to active use. In line with this, Abbas Akhundi, minister of roads and urban development, two months ago announced that 12 aircraft were added to the fleet in one year.

Despite Western pressure, the government of President Rouhani is doing its best to diversify the suppliers of spare parts in order to diminish the individual power these companies have over prices. The Europe-Iran Forum, the first business event of its sort to be held between European and Iranian companies, came to a close in London last Thursday. During this high-level networking event, representatives from Airbus were present and seen talking to their Iranian counterparts, proving that this company is still looking for ways to cope with the sanctions regime.

Jahangirian also noted the positive effect on employment an extension of Iran’s fleet could entail, stating that “adding 100 aircraft [to Iran’s fleet] means the creation of 15,000 jobs.” He added that: “every year 1,500 students graduate [in aircraft industry-related fields] and we should be thinking about increasing capacity in the future.”