IranAir's huge expansion plan raises questions

IranAir's huge expansion plan raises questions
IranAir currently has just 26 planes operating 58 routes.
By bne IntelliNews December 15, 2016

IranAir has agreed to buy an initial 80 passenger planes from Boeing, following a deal signed earlier in the year with Europe’s Airbus for 118 jets.

But many industry-watchers question whether Iran’s national carrier will be able to afford the huge purchases, or that it can attract the passengers to make the increase in capacity viable.

The contract between the two sides is part of an overhaul of Iran’s ageing airlines and supporting infrastructure. Until the lifting of sanctions at the start of this year there were US sanctions banning the purchase of new planes, following the Iranian Revolution that ousted the Washington-supported Shah Reza Pahlavi in 1979.

Under the agreement the Iranian airline will receive 50 twinjet narrow-body Boeing 737s and 30 long-range wide-body 777 capable of reaching the US and Canada, at a total cost of $16.6bn. At the full list price, the value of the deal would be $17.16bn.

The landmark deal with the American plane company spans 10 years and is one of the largest Boeing has received in the past half decade. According to Aero Analysis, Boeing could make a profit of $9.5bn on this contract.

Yet the deal could be risky for the US aerospace group because it will apparently put up the money for the first six planes itself and assist with finding bank lending for the order, while how Iran will eventually pay this back is unclear. There is also significant political risk, given that incoming US President Donald Trump has criticized the Iran sanctions deal.

Following criticism in some quarters in the country about the order, Farhad Pavaresh, managing director of IranAir, told Fars News Agency how the airline would pay the huge sum. He explained, “Boeing would finance the first delivery of six jetliners, with the rest of the order paid for by a third-party group”.

He added that Boeing would arrange the financing through “foreign groups”, with the rest paid in large tranches of cash, without saying where the payments would come from.

Parvaresh said the National Development Fund of Iran (NDFI), a national bank account for infrastructure projects, would pay for another 15% of the order, with IranAir working out a repayment scheme with the national fund at a later date.

An airline expert told bne IntelliNews that they doubted whether the airline group would be able to follow through on the order. The expert, who has extensive experience with Iran’s national airline, said, “I just don’t think that IranAir is able to pay for this deal, no matter what they say.”

He said that how the group will be able to tap national funds when budgets are already strained remains to be seen. The industry insider added, “This is not like 15 years ago when IranAir had huge assets in foreign countries … people like Parvaresh know too well that our national airline doesn’t have the funds or infrastructure [currently] to make this deal fly.”

Unfair Competition

Unlike its European counterpart Airbus, the American aerospace company has been given the approval to sell parts and planes to Iran by the outgoing Barack Obama administration.

Airbus previously signed a memorandum of understanding (MoU) with IranAir for 118 aircraft, but the France-based aerospace company only received permission to sell 18 planes initially to the Iranians from the US Office of Foreign Assets Control (OFAC). By contrast, the OFAC has already approved Boeing’s sale of 100 jets to IranAir.

"With the signing of this contract, the first significant step has been taken for the modernisation of the country's aviation fleet," Iran’s transport minister Abbas Akhoundi was quoted by AFP as saying.

Boeing’s official press release on the deal said: “Today’s agreement will support tens of thousands of US jobs directly associated with the production of the 777-300ERs and nearly 100,000 US jobs in the US aerospace value stream for the full course of deliveries.”

The first plane delivered will be in 2018, unless Boeing can persuade other airlines to let IranAir push ahead in the queue.

Capacity vs Dreams

Another little discussed issue is how IranAir will actually make use of the planes. The order for some 200 planes represents a massive expansion of the national carrier, which currently has just 26 planes operating 58 routes.

IranAir, however, believes there is great scope for expansion. It has been reported by Iranian government officials that around 4mn people use Iran’s airports annually, yet IranAir’s passenger numbers were only a small proportion of this because of its ageing stock of planes. The current aircraft age is believed to be around 25-27 years.

With the huge number of planes on the order books for delivery over the next decade, Iran’s current airport capacity also looks lacking.

The modernization of Imam Khomeini International Airport, Iran’s largest hub, is behind schedule, according to some engineering experts. The airport even lacks a domestic transfer terminal on the site.

If the country’s airports are not ready in 2018 for the arrival of the planes, which is looking increasingly likely, heads including the current transport minister may roll.