MIAMI — The global aerospace industry is set to witness an order bonanza not seen since the fall of the Soviet Union, as the landmark nuclear deal between Iran and Western powers is set to allow Iranian airlines to order modern Western aircraft for the first time since the late 1970s. The Iran deal has cleared its last major hurdle in the United States despite handwringing by foreign policy hawks on both sides of the aisle, and the Iranians have begun to take their first tentative steps to rejoin the modern world economy. Under the terms of the blockbuster deal orchestrated by US president Barack Obama in July of this year, the Iranians will get access to more than $100 billion in frozen overseas assets and sanctions that have hampered the integration of the Iranians into the global economy will be eliminated.
Specifically on the aerospace front, Iranian airlines will now be able to embark upon the daunting task of modernizing their fleets. Thanks to economic sanctions that were put in place after the US Embassy hostage crisis in 1979-80, Iranian carriers have been restricted to flying second- and third-hand aircraft that are at least 20-30 years old and to find repair parts on the secondary market. This led to several anachronisms: the last Boeing 707, 727, and 747SPs in service all were flown in Iran. But despite this handicap, Iran actually has a well developed air travel market, as would befit a large (population of 78.2 million) middle income (Purchasing Power Parity [PPP] GDP per capita of $16,463)
Understanding the Iranian Air Travel Market
There are currently 13 passenger airlines in Iran, as well as 51 airports with scheduled commercial service. We currently estimate total airport traffic in Iran to be just over 50 million passengers for 2014 (we made projections instead of using exact data as we could not find an English language traffic source for 2014). An overview of the airports in Iran and their passenger traffic level can be found in the table below.
*Note* – Passenger figures in italics are airports for which we could not find an English language source for their 2014 passenger traffic
As the table indicates, the Iranian air travel market is centered on the capital city Tehran, which represents just over 40% (~ 20 million passengers) of the overall market. Other major hubs include Mashhad International Airport, which serves Mashhad, Iran’s second largest city (metro area population of 3.1 million versus 15.2 million for Tehran), Kish Island, and Shiraz. In the aggregate, Tehran and Mashhad are genuine connecting complexes, whereas the other large (1.5 million plus annual passengers) airports offer a mostly point-to-point network.
The 3 major airlines in Iran are Iran Air, Mahan Air, and Iran Aseman Airlines. Iran Aseman Airlines is the most important domestic carrier, with a broad network based at Tehran-Mehrabad (the larger, domestic airport). Mahan Air and Iran Air (the national carrier) are more externally focused with a larger international network. Together these three airlines are the most financially secure in Iran, and they represent nearly 2/3 of the overall civil aviation fleet for Iran. Accordingly, they will be the target airlines for initial sales from manufacturers and lessors.
Identifying Iran’s Commercial Aircraft Needs
The following table illustrates the current fleet of passenger aircraft for Iran’s 13 airlines:
This table neatly illustrates the immediate opportunity represented by the Iranian civil aviation fleet. Outside of a few A320s and A340s, the majority of aircraft operating in Iran today are 30 years old (and older). So when figures in Iran talk about ordering 80-90 new aircraft from Airbus and Boeing each year up to 300 aircraft, those figures are not unreasonable.
While 240 new orders would allow for one-to-one replacement of the current fleet, we actually project that over a 5 year time horizon, Iran will order 450 new airplanes over the next five years – 400 mainline (150 widebody), and 50 regional (mostly turboprops).
There are several reasons why we project Iran’s fleet needs as much higher than the current figures. First and foremost, opening up Iran’s economy to the world and allowing foreign businesses freer access to the market will push up air travel, particularly for international routes that would require wide body aircraft. The deal opens up an entirely new long haul market, with VFR and even business driven traffic to the US. There are roughly 700,000 Iranian-Americans, and Los Angeles (the largest community), New York, Washington D.C., and Houston could all support service to Tehran over the medium to long run.
Even in markets without restrictions, demand to Europe and China, particularly as Iran comes into its own as a tourist destination, should also expand sharply. And economic growth will push up domestic and regional traffic, particularly amongst tier 2 and tier 3 cities. Iran’s terrain is not necessarily easy to traverse, and this helps support demand. That effect will only expand over the coming years as regions outside of the capital develop. If the price of oil swings back towards historical norms, then all of these figures will likely have to be pushed up by 20-25%.
Capital is a major limiting factor
Access to capital is going to be a problem, because it is going to take some time for Iranian carriers to build ties with foreign banks, lessors, and other sources of capital. This is where used aircraft from the current generation (i.e. built within the last 20 years) are going to be a huge play in the next 5-6 years, especially if oil stays low. On its last earnings call, DL talked about a glut of used wide bodies, particularly Boeing 777s. Iran will immediately snap those up, and clear some of that excess capacity.
In fact while we project demand for 450 new airplanes, Iran’s emergence onto the world market is likely to drive 50-70% more overall aircraft transactions (including used aircraft purchases and leases). There are plenty of reasonably priced Airbus A320s, Airbus A340s, Boeing 737s, Boeing 757s, Boeing 767s, and Boeing 777s on the market that are too inefficient for Western airlines but that represent an immediate jump in operating economics for Iranian carriers. Iranian airlines will need to bridge the gap between their current fleets and the Boeing/Airbus new generation planes, and there’s no way Airbus and Boeing will be able to turn over the entire fleet of 250 planes immediately given how tight delivery slots are.
As far as the new orders go, the airlines will certainly order new generation aircraft like the Boeing 737 MAX, Airbus A320neo, Airbus A350, and Boeing 787. But given that these aircraft don’t have many delivery slots left, you can also expect the carriers to order present generation aircraft like the Boeing 737, Airbus A330, and Boeing 777-300ER, helping fill Airbus/Boeing’s production gaps in the process. And there’s always the outside chance that they throw Boeing a bone and buy some 747-8is, thereby allowing Boeing to hold out until they can fulfill the replacement of Air Force One. Even if the economics of the 747-8i are subpar, the symbolism of the Iranians ordering Boeing’s biggest jet might be too big to pass up.