Iran: Airfares Skyrocket in Wake of Forex Crisis

EghtesadOnline: The Civil Aviation Organization of Iran issued a directive on Thursday, saying that the foreign currency needed by airlines to finance their ongoing operations would be determined at the rates set by the Central Bank of Iran’s Sana system, as the government would no longer supply forex at subsidized rates.

News ID: ۷۸۳۶۷۳

14 August 2018

Sana rates are the average of exchange rates at which foreign currencies are traded at bureaux de change on any given day.

Fees paid to airports and  maintenance costs that should be paid in foreign currency take a huge chunk out of airlines' expenditure budget. Without subsidized foreign currency, such expenses would weigh down airlines’ bottom line, leaving them with no options but to increase ticket prices. And they did raise the fares, and fast.

“On Wednesday, the quotes offered for flights from Tehran to Basel by Qatar Airways and Turkish Airlines were in the neighborhood of 38 million rials ($400), today they were priced at 84 million rials ($884),” tour organizer, Farid Dolatabadi, told Financial Tribune on Saturday.

Fares set for domestic flights have increased as well. For example, a ticket from Sari to Mashhad increased from 1.5 million rials ($15.7) to 3.5 million rials ($36.8) following the implementation of the government’s new forex policy.

As per the latest “rescue package”, the government will only allocate hard currency at a subsidized rate for the purchase of essential goods, such as medicine, wheat, vegetable oil and paper. Non-essential goods and services, including airline tickets, will no longer be eligible to receive foreign currency at preferential rates from the central bank.

Maqsoud Asadi-Samani, secretary of the Association of Iranian Airlines, said the government has decided to supply domestic airlines with foreign currency at the rates set through the Forex Deals Integrated System (known by its local acronym Nima), which are generally lower than rates set by the Sana system (open market) but still higher than subsidized rates.

“The bylaw on the government’s new decision is yet to be signed,” he said.

Round-the-clock changes in the forex rates released by Sana system is a source of trouble because “the airlines need to consider a single rate for at least a day”.

Calling on the government to include airplane parts and air travel among goods and services entitled to receive subsidized foreign currency, Asadi-Samani noted that the rise in the value of dollar and euro would result in a 100% rise in the ticket prices of international airlines and a 50% increase in the fares of domestic airlines as the expenses of the latter are partly paid in rial.

Referring to the 20% growth in passenger traffic following the deregulation of airfares in late 2015, Asadi-Samani said the new state of things will undo the gains made by the aviation industry in the past three years and will lead to a drastic decline in the number of air travels, particularly those on international routes.

“Air travel is bound to be removed from Iranian households’ so-called basket of consumer goods and services,” he said.

Reza Jafarzadeh, the spokesman of the organization, told the Persian daily Iran that the Civil Aviation Organization of Iran is obliged to comply with government policies and directives.

Noting that CAO has not officially requested the government for subsidized foreign currency for airlines, Jafarzadeh said, “We have to respond to the complaints of both the providers of aviation services and the customers, and reflect their comments to the authorities, if necessary.”

When he was asked about the new policy adopted by international airlines to sell tickets in foreign currency, the official said, “All airlines must list their ticket prices in the local currency. CAO will take legal action against all infringements."

Dolatabadi also told us that in view of the skyrocketing fares, air travel won’t be affordable for middle-income population anymore.

“The government has introduced a nearly threefold rise in departure tax—from 750,000 rials [$7.8] last year to 2.2 million rials ($23) since the beginning of the [fiscal] year [March 21]. The decline in the purchasing power of Iranian tourists due to the depreciation of the rial and inflation will practically cripple tourism. A slew of jobs in the tourism industry, from travel agents to tour guides and tour operators will simply vanish,” he said.

Whether the government will allocate subsidy or provide financial assistance for people to travel and prevent unemployment in tourism industry remains to be seen.

The rial's value in this article has been converted to dollar using the Sana rate 95,000 on Monday.