Why Iran Will Never Proceed With The Proposed Plane Purchases
Wednesday August 3, 2016
In deciding whether to formally prohibit plane sales that already seem commercially infeasible, Washington should consider one question: if the Islamic Republic is going to shoot itself in the foot, why refuse it the gun?
In the continuing debate about the proposed Boeing and Airbus plane sales to Iran, the focus has been on whether the United States will license the deals. Yet a more important question is whether Iran would ever proceed with the purchases if approved.
THE DEALS MAKE LITTLE SENSE FOR IRAN AIR
Currently, Iran’s airlines have a total of about 150 large planes, with more than two-thirds of them in the hands of private airlines rather than the state-run Iran Air. Earlier this year, Iran Air signed three agreements to purchase about 260 planes: a firm contract with ATR for 20 turboprops, a preliminary agreement with Airbus for 118 planes, and a preliminary agreement with Boeing for about the same number. The airline currently has 22 Airbus planes, all of which were certified by the EU’s Air Safety Committee for flights to Europe as of June 16. Assuming it retires its two Boeing 747s and fifteen Fokker-100s not certified for European flight, Iran Air would have about 280 planes if the agreements go through as announced.
Yet there are four basic reasons why that plan makes no commercial sense: financing, competition, inadequate demand, and the problems associated with accommodating such rapid growth. First, Iran Air will have grave difficulties financing those planes. The company reports that it makes a respectable profit of about $150 million per year, but its finances are nowhere near robust enough to cover the depreciation and interest on multibillion-dollar plane purchases. Moreover, its current cash flow and profits are possible in no small part because it buys fuel at less than half the international price, and it does not pay in full even with that subsidy, according to the National Iranian Oil Refining and Distribution Company. With government finances under strain due to low global oil prices, Tehran is unlikely to place high priority on facilitating such a large purchase.
In fact, many major airlines around the world have turned to leasing planes rather than buying them outright. Yet that is not an option for Iran Air because Tehran is not party to the Cape Town Convention on International Interests in Mobile Equipment. Seventy-one other countries plus the EU have signed onto t...