Financial Constraints Impeding Iran Air Plane Deals

EghtesadOnline: US President Donald Trump’s threats to leave the nuclear agreement has so far made no direct impact on Iran Air’s contracts to buy airplanes from western planemakers, an advisor to the minister of roads and urban development said.

News ID: ۷۴۵۲۳۳

30 April 2018

Gholamreza Salami added that deliveries will continue to be made by 2020, provided the flag carrier manages to arrange for the down payments.

“There is no problem regarding required licenses, as the Office for Foreign Assets Control’s license is valid till 2020. Finding foreign resources to finance Iran Air’s plane order is the only challenge we are facing,” the official told the Persian-language daily Shargh earlier this week.

“We are not experienced in this regard … The government is also set to refrain from direct involvement in guaranteeing plane deals. This, combined with the US administration’s decisions, has affected financiers’ approach toward the deal,” Financial Tribune quoted him as saying.

Iran’s Ministry of Roads and Urban Development is in charge of Iran’s aviation sector, though the responsibility is not reflected in the ministry’s title.

According to Salami, Minister of Roads and Urban Development Abbas Akhoundi believes that any credit attracted from foreigners must be backed by state-owned companies rather than the government, so that companies could repay their debts using their own earnings.

“Such an approach will help promote state-owned firms’ creditability and prevent the growth of government debts,” Salami added.

Iran has reportedly signed two preliminary contracts: one with a Chinese company and another with a European firm to finance its airplane orders, though the two deals seem to have made no progress in recent months.

Cape Town Treaty

The Iranian official said negotiations with foreign financiers have not come to a halt, but “some of them require specific guarantees that are not affordable … They insist on Iran’s accession to Cape Town Treaty, which we are not a member of at present”.

Cape Town Treaty is an international treaty aimed at standardizing transactions involving movable property. The treaty creates international standards for registration of contracts of sale (including dedicated registration agencies), security interests (liens), leases and conditional sales contracts and legal remedies for default in financing agreements, including repossession and the effect of states’ bankruptcy laws.

“They also ask for guarantees from major international banks, but lenders are still refusing to work with us, due to pressure from the US administration,” he said.

Salami added that the problem is only facing Iran Air’s contracts with Boeing and Airbus, which involve higher sums.

“Our contract with ATR is moving ahead … We will soon take delivery of two more planes,” he said.

Iran’s Bank of Mine and Industry has reportedly financed the purchase of all ATR planes using the National Development Fund of Iran’s resources.

Using resources from Iran’s capital market could be another option for the flag carrier to finance its massive plane orders.

The Economic Council agreed earlier in March that the government issue 10 trillion rials ($222 million) worth of bonds for purchasing the new airplanes.

The two giant planemakers were reportedly committed to financing a limited number of planes for Iran Air, though this method is also not challenge-free.

“Receiving finance from Airbus and Boeing also requires working with international credible banks,” Salami said.

Kamaledin Shahriari, a member of Majlis Development Commission, said the delay in the delivery of Iran Air’s new airplanes is mainly due to banking problems.

“Iran has failed to provide the down payments for new airplanes because of recent fluctuations in the foreign exchange rates, along with major international banks’ reluctance to work with Iran,” he said.

The lawmaker added that a part of the finance needed for purchasing new airplanes is set to be provided by local investors. He did not provide further details.

Violation of JCPOA

Iranian officials have made it clear that any attempt by the US to block the sales of aircraft to Iran is tantamount to a blatant violation of the Joint Comprehensive Plan of Action on Tehran’s nuclear program.

“One of the clearest clauses of JCPOA stipulates aircraft sales to Iran,” deputy minister of roads and urban development for international affairs, Asghar Fakhriyeh-Kashan, has been quoted as saying.

“Not only aircraft sales, but also sustained supply of parts, after-sales services and related technology.”

JCPOA led to the removal of most international nuclear-related sanctions against Iran on January 2016. In exchange, Tehran has committed to limit the scope of its nuclear program.

In December 2016, Iran Air agreed through separate contracts to buy 100 Airbus aircraft worth an estimated $27 billion and 80 Boeing jets valued at $16.6 billion.

Earlier that year, in February, it signed a deal to buy up to 20 ATR turboprop passenger planes (with the option of adding 20 more in the future). The Iranian flag carrier has received 3 Airbus and 8 ATRs so far.

Iran Air is just one of several airlines in the country to have placed significant orders for new aircraft since January 2016. In total, local carriers have placed orders for more than 300 new aircraft with options for a further 50. These orders are twice as large as the collective existing fleet of the country’s 17 commercial carriers.