Tapping into underdeveloped markets provides growth potential for both Boeing and Airbus.
On September 21, Boeing and Airbus individually announced that the US Treasury Department will grant each company export licenses to remove the final roadblock obstructing the companies’ ability to sell commercial aircraft to Iran.
From a business standpoint, the move is positive for both Boeing and Airbus and the commercial aerospace industry as a whole by laying the foundation for further business opportunities in the area going forward and helping to create more jobs.
Iran is an oil-rich state with a population of 80 million and manufacturers would expectedly benefit from helping develop the country’s commercial aerospace industry.
The market for commercial aerospace has slowed for the past 1-2 years; for 2016, Airbus’s orders are down 32% year-on-year, with Boeing’s down 16%, reads an article posted on the crowdsourced content service for financial markets Seeking Alpha on Thursday. Below are excerpt:
In June, Boeing signed an agreement with the Republic of Iran (final terms pending) to supply Iran Air with more than 100 planes, comprised of 737s, 747s and 777s. The export licenses effectively put into motion Boeing’s sale of 80 aircraft to Iran’s flagship carrier, Iran Air, and the leasing of an additional 29.
The orders from Iranian airlines could range between 40-50 jets per year over the ensuing decade, which could increase overall commercial aircraft demand by roughly 2-3% during that period.
Iran Air is looking to add more than 200 jets to its fleet since most of its aircraft have been rendered inoperable by EU regulatory concerns over malfunctioning and poorly maintained aircraft.
Prior to the US-Iran nuclear deal, economic sanctions had contributed to Iran collectively having one of the world’s oldest fleet and without the means to ensure proper maintenance and repairs. Only 162 of the country’s 250 planes are currently available for commercial flight, with the remainder out of service for the lack of replacement parts.
Iran Air’s fleet is limited to just 45 aircraft, with an average age of approximately 27 years. Six Airbus A320s comprise the airline’s youngest aircraft, yet are still over 20 years of age. By comparison, for major US commercial airlines, the average age tends to hover at around 10-14 years.
Back in January 2016 when negotiations first gained traction, Iran Air tentatively agreed to buy 112 planes from Airbus, pending US approval. The initial plan was to purchase 118, but six were heavier models made for long-distance flights that were not optimally suited to the Iranian market. The company has already been approved for an initial sale of 17 jets.
Despite the fact that Airbus is domiciled in the Netherlands, the agreement still necessitated US approval, given that its business activity within the country exceeds a stipulated threshold (i.e., more than 10% of the company’s aircraft parts are sourced from US-based vendors and manufacturers).
Airbus Advantage
Most noticeably, Airbus has an immediate numbers advantage relative to Boeing in terms of aircraft purchases. Airbus’s initial amount is 40% higher than Boeing’s as a consequence of Airbus submitting its licensing application sooner and receiving “first mover” advantages.
However, this agreement comes with some important caveats. Any aircraft that the two companies sell to Iranian airlines must be used for the sole purpose of commercial passenger flights. Typically, aircraft are not retired once they exceed a certain number of flight hours as passenger jets. Older aircraft are regularly turned over for use as freight transporters, which help squeeze out additional service life.
Nonetheless, as per the terms of the agreement, these aircraft are restricted from eventually undergoing this conversion. Moreover, resale to any entity or organization that remains under US sanctions within the country is expressly prohibited. As these provisions can realistically chip off some of the intrinsic value of these aircraft, the financing element also becomes more complicated.
On top of that, the country is still reeling from economic challenges from roughly four decades of economic sanctions and presently weathering an extended run of low oil prices. Iran holds 11-12% of the world’s proven oil reserves (and 15% of OPEC’s) and oil sales constituted 47% of the Iranian economy’s revenues in 2015. (In normal oil price years, it’s closer to 60%.)
Assuming each aircraft costs around $100 million, the purchase of these ~200 aircraft will likely come somewhere in the vicinity of $20 billion. In relative terms, this is about 5% of Iran’s overall GDP and will require significant financing.
The key to making the deal work lies in spacing the aircraft delivery-and therefore the financing needs-out into manageable chunks over the next +10 years. But this also gets back to the central issue of whether western financial institutions would be willing to take on such a deal at an accommodating price given the fluidity of the issue on the US foreign policy front. Therefore, the extent to which Boeing and Airbus benefit from the Iran agreement long-term remains to be seen.
