Major changes are underway for the country’s aviation industry, following the initial lifting of sanctions on Iran on Jan. 16.
The first new Iranian aircraft orders for over three decades have been announced and foreign carriers, most notably European airlines, are hastening to add new routes.
These are just the start of what promises to be a seismic shift for aviation in Iran. During the sanctions period, the country’s aviation authorities, its airlines and even airports adopted a survival mentality, according to the Center for Aviation, also known as CAPA, a leading provider of independent aviation market intelligence, analysis and data services, covering worldwide developments.
Now that the sanctions are being rolled back, the focus is shifting to new opportunities for growth and the sector is planning for a brighter future.
> First Action: Acquisition of New Aircraft
One of the key points emerging in discussion from CAPA's Iran Summit 2016, held in Tehran on Jan. 24-25, was the significant potential of the revival of the country’s commercial aviation fleet.
Speaking at the summit, Iranian Deputy Minister for Legal and International Affairs Seyyed Abbas Araqchi said the most important immediate outcome of Iran’s deal with major powers was the removal of sanctions that had previously blocked the purchase/acquisition of commercial aircraft and parts.
Iran’s 14 airlines have a combined commercial fleet of about 280 aircraft, operating around 22 million seats per annum. Barriers to Iranian airlines acquiring new aircraft have left them operating one of the oldest fleets in the world and the lack of access to spares and parts has grounded around 130 of its aging fleet.
For Iranian airlines, it has been a struggle just to keep their aircraft flying. Maintenance, repair and overhaul accounted for around 25% of the costs of Iranian airlines, compared to a maximum of around 10-15% in the rest of the world.
According to Iran Air Chairman and Managing Director Farhad Parvaresh, speaking at the CAPA summit, his primary challenge was to “keep the company alive” and deal with the “problems, issues and sufferings” that cropped up in day-to-day operations with its old fleet.
Iran Aseman Airlines vice president for executive affairs and fleet development, Mohammad Gorji, said about 60 Iranian aircraft could immediately be returned to service once parts are available from western manufacturers.
Putting these aircraft back into the sky would be a strictly short-term measure, to meet pent-up demand while local airlines begin the long process of negotiations to buy or lease aircraft.
Iran Civil Aviation Organization projects the country will need 80 to 90 new aircraft per annum over the next five years and as many as 550 aircraft within a decade, just to deal with local demand.
The Association of Iranian Airlines is even more bullish, projecting the surprisingly specific demand figure of 581 aircraft over the next 10 years.
This sort of demand may appear extreme, but it really represents merely a correction to normal levels. Neighboring Turkey, with a similar population and half the land area, has a commercial fleet of nearly 500 aircraft, and another 300 on order.
Germany, which also has a population of about 80 million, has a commercial fleet of 750 aircraft, and around 200 aircraft on order.
Iran is planning to reset the clock on its civil aviation industry. The vast majority of its commercial fleet is simply too inefficient and too maintenance heavy to be commercial in today's world.
Only 20 aircraft in the active Iranian commercial airline fleet are less than 20 years old.
At the CAPA summit, Iran's Deputy Minister of Roads and Urban Development Ashgar Fakhreih Kashan revealed that Iran had reached the final stage of negotiations with Airbus on a deal for more than 100 aircraft.
Just four days later, during a visit to the French capital Paris by President Hassan Rouhani, Iran signed an agreement worth $27 billion to buy 118 Airbus aircraft.
This was followed up with a firm deal with ATR for 20 ATR 72-600 turboprops, as well as 20 further options, again for Iran Air.
> Airbus Order
A firm Airbus order is expected before the end of Feb. 2016. The Airbus deal cover most of the manufacturer's product line: 21 A320ceo and 24 A320neo narrowbodies; 27 A330ceo and 18 A330-900neo midsized widebodies; 16 A350-1000 high capacity widebodies and 12 of the very large, four-engine A380s.
This combination of aircraft would be more than sufficient to reestablish Iran Air as a major international network airline. At present, Iran Air has a network of 27 international and 25 domestic destinations, but the vast majority of its operations are limited to flights of no more than about 6 to seven hours. The two exceptions are the carrier’s flights with 747SPs to Beijing and to Kuala Lumpur.
The A320 narrowbodies are suitable for domestic routes and regional flights of up to around five hours. The A330 mid-sized widebodies can be used on shorter, high demand trunk routes or long haul flights of up to 6250-6550 nm.
The larger A350-1000s, capable of carrying 350-400 passengers, can operate very long haul routes of up to 8000 nm and the A380 is already a favorite with Middle Eastern sixth freedom carriers, in service with Emirates, Etihad Airways and Qatar Airways.
> Domestic Market Ripe for Growth
The smaller ATRs will be used primarily for short-range domestic routes, mostly tourist destinations and smaller Iranian towns and cities.
Iran has more than 65 airports, but the vast majority of them are under-served due to a lack of regional jets and turboprops.
The aircraft orders also come with aggressive delivery timetables. The ATR turboprops will start delivery from Nov. 2016 and will be completed by the end of 2018.
Airbus deliveries are set for as early as 2016 and are to be completed by the end of 2022, with the majority to be delivered by the end of 2020.
Iran Air’s current in-service fleet consist of just 35 aircraft. If a majority of the new aircraft are to be delivered before 2020, the carrier will at least triple its current fleet size in under five years.
> Skills, Infrastructure Needs
This pace of expansion will inevitably place tremendous strain on the carrier’s resources.
Iran Air currently employs around 7,000 staff, roughly 200 per aircraft–a figure in line with its regional peers. If it is to build its fleet to around 120 aircraft by 2020, it will need to expand employment to around 20,000 staff, or more.
In addition, Iran Air will need to expand its technical infrastructure on a massive scale to deal with new aircraft types and a growing fleet. Airbus has already announced it will provide assistance for airport and aircraft operations, training on the technical and academic levels, guidance in maintenance and repair operations, as well as industrial cooperation and wide harmonization of Iran’s air regulations.
The European manufacturers have gained a first mover advantage, but Iran has no intention of just relying on European aircraft. Shortly before the end of 2015, the acting director of Iran’s Civil Aviation Organization, Mohammad Khodakarami, said the country plans to split its aircraft orders evenly between the major manufacturers.
Orders are certain to come in Iran for Boeing, but it will take time. The US sanctions against Iran are notably more involved than the European sanctions and will take longer to unwind, meaning Boeing will need to be patient before any deal can be announced and finalized.
Boeing said on Friday that the US government cleared the manufacturer to begin talking with approved Iranian carriers about their fleet needs, a first step toward entering the country’s resurgent aircraft market.
The planemaker will still need a separate license to complete any commercial jetliner sales.
At the CAPA summit, there were also indications that there are opportunities for the regional aircraft manufacturers such as Embraer, Bombardier and Mitsubishi to compete for more orders.
Parvaresh revealed at the CAPA summit that, as part of long-term planning, the airline is examining the possibility of adding more than 50-100 seat aircraft to its fleet to improve its domestic network with an “air taxi” type operation.
Plans for a commuter airline subsidiary are also under consideration.
Meraj Air VP has also announced intentions to add new regional aircraft, as well as adding two regional bases, serving Iranian tourism destinations.
> Funding Remains an Issue
Japan relinquished its sanctions against Iran on Jan. 21, 2016, and Canada followed in early Feb. 2016. Brazil never enacted sanctions against Iran, but exports were blocked due to US sanction rules about US-manufactured content.
Embraer Commercial Aircraft CEO Paulo Cesar de Souza e Silva noted in early 2016 that the company believes there is “a huge opportunity" to replace and expand the Iranian regional jet fleet.
There is still plenty of ordering to come in Iran, but questions remain about how these deals will be financed.
Iran Air is a state corporation and benefits from its sovereign ties. ATR noted that during the order negotiations, the Italian and French states played important roles to achieve the signing of this deal, through the participation of their export credit agencies, Sace (Italy) and Coface (France).
The UK export credit agency has also announced that it is ready and willing to provide support for Iranian fleet purchases.
However, support for the private airlines in the Iranian market may not be as readily forthcoming. Aircraft financing deals are mostly conducted in US dollars and while certain US Treasury sanctions remain in place, Iran remains largely locked out of the international financial system.
Additionally, some US sanctions will remain in place indefinitely, as they are imposed outside the generalized sanctions over Iran’s nuclear program. The US Treasury is also keeping some financial sanctions in place for the time being, which make deals with US companies and deals denominated in US dollar highly problematic.
Aviation lessors and non-western financiers, particularly Chinese banks, provide an alternative to the traditional US and European transport financiers. However, even here, there are lingering concerns about the levels of risk and regulations in Iran, particularly among European entities.
Dubai Aerospace Enterprise CEO Firoz Tarapore, speaking at the CAPA summit, commented that lessors and aircraft owners require the recognition of their ownership rights and recognition of aircraft registration outside Iran before they will be comfortable doing business.
Iran is not yet a signatory to the Cape Town Convention, which protects the interests of aircraft lessors and owners by guaranteeing rights concerning aircraft ownership, defaults on leases, recouping debts and repossessing aircraft.
Full implementation of the convention would also bring with it access to cheaper financing, thanks to the reduced risk exposure for lenders.
Iran’s Deputy Transport Minister Asghar Fakhrieh Kashan stated in Jan. 2016 that the country has started the process to join the convention and discussions between the transport and finance ministries are underway on the subject.
However, signing up to a major international convention is an involved process that will take time to complete. Even so, it will provide reassurance to potential financiers.
According to Tarapore, if lessors see regulatory progress in the right direction, this will open doors to do business in Iran, even if there is still a significant regulatory ground to be covered.
DVB Bank managing board member, Bertrand Grabowski, commented at the CAPA summit that there needs to be “much more clarity” on what the US Treasury is willing to authorize when it comes to financing deal in Iran. Grabowski suggested that it will be more than 18 months before western lenders are comfortable lending into the market.
> Major Aspirations
Even with financing and infrastructure concerns less than settled, Iran is thinking big for its national carrier and is optimistic about the opportunities for its aviation sector.
Member of Iran's Majlis Development Commission Mehdi Hashemi noted at the CAPA summit that aviation will take a special place in the development of Iran, as a focus for development of the country’s industry, technology and overall good governance and modernization.
Iran is surrounded by examples of states that rapidly and successfully developed their national carriers, which have been developed into major economic assets.
The country has some of the conditions for success already in place—a growing market, favorable geographical position, a regulator willing to meet the needs of the sector. However, much remains to be done before Iran is able to mount a serious challenge to its regional rivals.
