Economy, Business And Markets

Is the $25b Deal Making Progress?

Iran has signed a preliminary agreement with Boeing for purchase and lease of some 100 aircraft worth more than $20 billion.
Iran has signed a preliminary agreement with Boeing for purchase and lease of some 100 aircraft worth more than $20 billion.

Three separate groups of Boeing officials are in Iran this week to discuss their $25 billion aircraft sale to the country. The official trip to the Islamic Republic follows ongoing obstacles Iran has faced to close the deal with the American aircraft manufacturer, BidnessEtc – the media subsidiary of US financial data platform Qineqt Inc. reported.

“Right now, Boeing representatives, including three financial, legal and technical groups are in Tehran and negotiating,” Iran’s Minister of Roads and Urban Development, Abbas Akhundi was quoted as saying earlier in the week. He said Airbus has already been through similar negotiations with the Islamic Republic, although no official outcome of the negotiations have been revealed.

A Baker Donelson attorney in Washington DC, Doreen Edelman said: “This is a very big deal. Boeing has been working on this, behind the scenes, for a very long time.” She further added that according to the notwithstanding government approval of the deal, the aircraft manufacturer is legally allowed to move forward with its deal with Iran, in negotiating key parts of the complex transaction.

The agreement with Boeing, as well as that with its French rival Airbus, is still subject to approval from the US Department of the Treasury’s Office of Foreign Assets Control (OFAC). Even if approved by the OFAC, the deals can still be overruled by the US administration.

The US House of Representatives recently proposed a measure that may well stop both companies from making sales to the country as both businesses use a large number of US made parts. While US President Barack Obama is expected to veto that legislation, it has pushed back the clock for the airplane deliveries, much to the annoyance of Iranian officials.

“It’s very consistent with past efforts by Congress to undermine the nuclear deal,” said Farhad R. Alavi, managing partner at the Akrivis law group, a Washington firm that specializes in sanctions compliance.

Meanwhile, the deals are facing the reluctance of large financial institutions to fund them. Despite the lifting of sanctions, big European banks have been slow in engaging with Iran, fearing punishment by the United States. As a case in point, French bank BNP Paribas had to pay a record $9 billion in fine in part for dealings with Iran during the sanctions.

Iran’s access to new planes was part of negotiations leading to the nuclear pact Iran reached in July 2015 with six world powers. The deal went into effect in January, putting limits on Iran’s nuclear program in exchange for the lifting of the international sanctions, including those on the country’s aviation industry in place since 1979.

Soon after the nuclear deal, President Hassan Rouhani signed a memorandum of understanding with Airbus to purchase 118 planes worth at least $25 billion for flag carrier Iran Air.

The airline later reached another accord with Boeing for purchase and lease of some 100 aircraft worth more than $20 billion to rejuvenate its dilapidated fleet of more than 23 years.

  Boeing to Benefit

Iran has been looking towards the aerospace industry to help boost its economy. The country’s airline industry has suffered due to trade sanctions and was unable to compete with other market players. The country has placed an order valued at over $25 billion for more than 80 new planes and may seek Boeing’s help to lease additional planes.

The order with Iran will also help bolster Boeing’s order books that haven’t been as impressive of late. In addition, the plane maker has had a tough time securing orders lately due to the current state of the airline industry where companies are more attracted in leasing older planes with prolonged cheaper fuel prices. Likewise, Boeing has also witnessed intense competition recently with airplane manufacturers’ offering their planes at highly competitive and aggressive rates.

Iran has also been looking at other options apart from Airbus and Boeing to place orders for aircraft. Recently, it announced plans to purchase 20 regional jets from Japanese Mitsubishi Heavy Industries, showing how serious the country actually is in moving forward with its airline industry. Embraer of Brazil and Canada’s Bombardier are also marketing their aircraft in Iran.

Supporters of the Boeing sale say American firms will lose out to foreign competitors, if the US government bars sales to Iran.

Boeing’s chief executive, Dennis A. Muilenburg, speaking last month at the Farnborough International Airshow in Britain, said if his company could not sell planes to Iran Air then “nobody should”.

Late July, Iran brushed off speculations that the multibillion dollar agreements it signed with Boeing and Airbus are threatened by delays resulting from financial and political issues.

“All sides are committed [to the preliminary deals] and there have not been any changes in the procedures,” said director of Iran Civil Aviation Organization’s Foreign Affairs Office, Reza Jafarzadeh.

The official said Iran’s diplomatic corps and the Ministry of Roads and Urban Development are following through with finalizing contracts with the two plane manufacturers. The remarks come after The New York Times, citing aviation lawyers and analysts, reported that the delays in finalizing the contracts could unravel the deals.

According to Iran’s Deputy Minister of Roads and Urban Development Asghar Fakhrieh-Kashan, the country needs 500 new aircraft in the next seven to eight years.