No doubt huge potential exists for manufacturers to sell a large number of aircraft into Iran following the recent nuclear agreement between six nations – but exactly what the fleet will look like and how it will be financed is still being hammered out by the sector.
Iran is littered with aircraft at the end of their useful lives as US and European sanctions – some in place since the Islamic Revolution in 1979 – have thwarted the nation from purchasing aircraft and spare parts.
However, the 190-page pact that Iran, the USA, Germany, France, the UK, China and Russia signed on 14 July in Vienna would lift sanctions – including those preventing the sale of commercial aircraft – in return for a halt to Tehran's nuclear weapons programme.
The 160 passenger jets in service with Iranian airlines have an average age of 22.9 years, Flightglobal's Ascend Fleets database shows. This compares with an average age of 10 years for the 20,500 commercial jets in airline passenger service globally.
Iranian officials have said the county needs to spend about $20 billion to purchase 400-500 aircraft during the next decade to rejuvenate the ageing fleet.
However, Ascend's head of consultancy Rob Morris estimates that some 100-200 fewer units will in fact be needed.
"The replacement challenge is evident with largely the whole fleet required to be replaced in the next 10 years, and with some element of growth," he says. "I'd hesitate to agree that there is demand for 400 aircraft in the next decade, but probably agree that it could be in the [vicinity of] 300 or so."
Demand in Iran, which is included in the Middle East region in Ascend's Fleet Forecast, is "probably masked" by growth from the Gulf states, he adds.
By applying generic delivery values for the seat sizes of the aircraft that need to be replaced, and then "ratio-ing" up to demand for 300 aircraft, Morris estimates that the financing required for those aircraft, based on 2015 delivery pricing, will be in the region of $18 billion.
The forecast shows the mix of regional aircraft, single-aisles and twin-aisles remaining the same as in the current fleet. That results in demand for around 80 regional aircraft, 130 single-aisles and 90 twin-aisles, says Morris.
He assumes average delivery pricing of $30 million for regional aircraft, $50 million for single-aisles and $110 million for twin-aisles "on the basis that there will be a healthy slug of A330s in there".
DVB Bank chairman Bertrand Grabowski agrees with the forecast of a smaller fleet requirement.
"For a nation of that size and pricing power as it is, modest still now, 300 sounds about right, given that anything currently flying in this country needs to be retired immediately," he says. "It is not only about landing a high rocket number of aircraft as manufacturers are dreaming of. It is about rebuilding all infrastructure that goes with it."
OUT WITH THE OLD
The opportunity to plough money into transportation and infrastructure in a country that has been off-limits for many years would appear to be an appealing but extremely complicated one for financiers.
"There will be no easy, fast cash to be made here in aviation," says a European banker. "Eyes must be wide open to do business in Iran, as there are a lot of moving parts to account for."
Christian McCormick, chief executive of Athyenia Finance and Advisory Solutions, notes that although Iran has been faced with sanctions for many years, the nation is "reputed to have an excellent international credit rating with no defaults for many years".
He adds: "The need in Iran is great and it represents an exciting market."
The most "logical" step, argues an operating lessor, would be for the region to "opt for vintage aircraft and a bunch of spare parts and ramp up almost overnight". He dismisses the prospect of a wave of new aircraft orders "anytime soon", for Boeing at least.
An Asian financier agrees: "Iran has good relations with Airbus, so I see most of the deals there, whether they are for new or used kit. But they are also close to the Chinese and Russians, so I could also see them buying and or leasing aircraft from those countries too."
Airbus declined to comment on what the agreement agreed with the six nations would mean for Iran’s aviation sector, saying: "It has yet to be formalised and implemented. Once this takes place, we will evaluate what commercial implications it has in strict compliance with the accord."
Boeing likewise declined to comment on the implications.
Middle Eastern and Chinese banks and particularly lessors are seen by many financiers as the obvious solutions to Iran's funding problems.
"The Chinese want to grow their aviation platforms and, depending on the financing structure, the yuan could be used to avoid US-dollar jurisdiction issues," says one. "It depends on what this agreement with the six nations looks like once it is implemented, but doing deals outside of the US dollar currency is very attractive for Iranian airlines."
The yuan is already the second-most used currency in trade finance after the US dollar, said UK Export Finance chief executive David Godfrey following the industry's first offshore yuan-backed loan, signed in July. The loan helped to finance an Airbus A330-300 for China Southern Airlines.
China makes sense as a financing partner as it has a long history with Iran, notes a banker. Trading Economics research indicates that China is the world's largest importer of Iranian oil and has been the region's largest main export partner, accounting for 21% of total exports between 1974 and now.
In the view of a financier who previously worked for an export credit agency, the aviation market could potentially see a deal where China barters for Iranian oil with aircraft instead of hard cash.
"It has done it before, with consumer goods for example, so with an expensive and needed asset such as aircraft, it makes a lot of sense, particularly if you consider the likelihood that sanctions could return," he says. "Getting around cash payments is very attractive for the airlines."
LEASING THE WAY FORWARD
Regardless of the aircraft type selected, some financiers believe leasing is the natural choice for Iranian airlines.
"I don't see direct orders, as I imagine second- and third-tier lessors – and those that are not public – would be very eager to put planes to work in Iran," says one.
Leasing is the best method of acquiring aircraft when "the odds are stacked against you, as in the case of Iran", notes a European banker.
He adds: "Leasing is the first option when you need modern equipment, you have to be quick, your credit is not bankable, your capital base and funding capabilities are thin, and you have no access to export credit support."
Softness in the used A330 and Boeing 777 markets could also create attractive leasing opportunities for the region's airlines.
"The Iranians could be spoilt for choice as there are plenty of A330s and 777s available right now. Look at the Skymark A330s, and A330s coming out of Singapore Airlines – and Emirates and Malaysia Airlines has plans to dispose of several widebody aircraft," he says. "Airbus is clearly the strong contender for this market given its A340 exposure, A330 'bridge' requirements and also some A320 availability in the production lines."
However, repossession risk is bound to send jitters across the lessor community and carry some disconcerting echoes of the row with India's Kingfisher Airlines in 2013
"Any aircraft financed or leased into Iran will have to be registered outside the country," says DVB's Grabowski. "I can't think of any financier allowing local registration, or perhaps some brave lessor would do so, but aircraft would be unencumbered."
A leasing source suggests the financing mood "should change gradually if Iran is acquiring a lot of aircraft" and adds: "What will happen is, as part of the sanctions relief, Iran will incorporate laws that will provide protection for assets, such as the Cape Town Convention, and as such, I expect lessors will definitely move into there – perhaps Middle East-based lessors at first, but inevitably, with the size of the Iranian market, they'll be there."
The lessor points to Vietnam by way of comparison: "It started out a geographically and demographically interesting country for business to target, but had a poor business climate, inadequate regulation, uncertainty of legal enforcement, etc. However, now it is now booming for the aviation business: consider the success of VietJet."
In any case, whether lessors have an interest or not will depend upon the appetite of the financial markets for Iranian risk, argues a US banker.
"I suspect that there will be considerable political momentum in countries like Germany and France. Germany has maintained 'connections' with Iran, and France will be salivating at the prospect of trade with a Middle East market," he says. "As there are plenty of aerospace banks in those two countries, debt financing at some level may not be impossible. Iranian government guarantees may become popular."
Banks will remain "extremely cautious" about the region, argues another banker.
"Sanctions are still in place, and most of the global names have been hit by US authority for one reason or another, but I believe we see some Chinese banks moving in there for sure," he says.
OWNING THE ASSETS
However, the idea that leasing will be the preferred option in Iran is disputed by an airline fleet planning source who insists that buying the aircraft will be a priority.
"Outright purchases mean the airlines control the aircraft long-term should the positive sentiment erode in the future," says the airline source. "This is extremely important, as they have been flying certain aircraft since the Islamic Revolution, and they don't want to be caught out again."
One leasing source actually agrees that airlines will prefer to be aircraft owners. "I don't believe leasing will be favoured at all, even though I am a lessor. There's a one-stop shop for used and new, and that's Airbus. Iranian airlines will want to own not lease the A340s, A330s and the new A320 and A330s coming into the market. They know [the easing of] sanctions could be short-lived."
The USA and Europe will expect to sell new aircraft into the region as a quid pro quo for releasing the sanctions, a manufacturing source proposes. "Only if Iran does opt for some older equipment too, which is still new technology by their standards, then lessors would play a role," he adds.
Long lead-times for in-demand aircraft such as 787s and A350s could "almost force" Iranian airlines into used aircraft, suggests another lessor.
"These airlines need aircraft sooner than later, so I can't really see how they can hold out, even though the lifting of the sanctions will take time – it will most certainly have to be used aircraft unless some slot-swapping goes on."
Avolon's commercial chief John Higgins echoed this comment during a second-quarter earnings call. He noted that aircraft manufacturers are largely sold out over the next five years. "The first tail of placements will fall to lessors, both for new and used equipment," he says.
The Irish operating lessor's chief executive Domhnal Slattery adds: "There is no question that a great deal of that demand would be for used aircraft."
Some financiers are sceptical about whether new aircraft orders are even needed due to strong competition from Emirates, Etihad Airways and Qatar Airways.
"Does Iran really have the need for new kit in the face of the Middle East carriers? They will all be serving the same airport [Tehran], so perhaps the best solution is a lot of leased aircraft or purchased older aircraft with a few new orders," says a leasing source.
Another consideration is maintenance capabilities, he adds. "They [Iran] will need to appoint a partner to service their 'new' jets, so maybe Turkish Airlines or Lufthansa say, as they don't have the capabilities. All financiers will be watching for those agreements before any aircraft are moved into the region."
EXPORT CREDIT CONCERNS
While export credit agency support may seem an obvious resort for a country that cannot access attractively priced financing, the ECAs might not be the best solution in the case of Iran, argues a financier.
"Remember, ECAs are in their own right determining their own risk, and here I think they might think twice about extending their credit due to the likelihood that sanctions could be reinstated at some point down the road," says a former export credit financier. "It is a very real concern. I can tell you that there are a number of steps, both political and practical, that would need to happen before aircraft financing for Iran were done by an ECA, particularly by the US Export-Import Bank."
UK Export Finance says the nuclear agreement is a "welcome development" but the agency is currently considering what the agreement means for the lifting of existing sanctions.
"UKEF is currently off-cover for Iran. The UKEF has outstanding claims on Iran and we would expect these arrears to be regularised to a large degree before we would be in a position to restore full cover," it says. "We will be initiating a review of Iran to assess creditworthiness, in light of the new agreement, and the expected positive effect on the Iranian economy."
The US Export-Import Bank declined to comment on likely outcomes, noting: "We are currently unable to authorise any new financing or even to accept applications, which precludes our speculating about future possibilities."
Despite the risks, a banking source remains optimistic: "I imagine that the export credit agencies will soon be open for cover eventually, supporting the political initiatives, but of course the major uncertainty over the future of US Ex-Im Bank is an inhibiting factor."
The expiry of its charter at midnight on 30 June has prevented Ex-Im Bank from accepting any new financing applications.
However, of far greater concern to Iran's aviation sector than the lapse of the Ex-Im charter is the vote by the Republican-led US House of Representatives on whether to reject the nuclear agreement when politicians return to session in September.
Source: Cirium Dashboard
