Iran Air: Sanctions and Sanction Relief
Managing against US sanctions is a supremely difficult task, requiring political rather than commercial skills. For the last three decades, sanctions have blocked Iran Air from obtaining new aircrafts and spare parts. On the cusp of finally obtaining modern aircrafts, Iran Air faces the imminent possibility of dashed hopes.
As a flag carrier airline, Iran Air is materially exposed to the vagaries of international politics and security developments. Iran’s aviation industry has faced international sanctions since 1979, the year of the Iranian nationalist and religious revolution. Specifically, over the last decade, the United States and European Union have imposed a tighter sanctions regime on Iran in response to Iranian policies deemed contrary to American and European national interests, in particular the possible military dimensions of Iran’s nuclear program.[1] The sanctions have blocked Iran Air from obtaining new aircrafts and spare parts. Without the ability to import foreign aircrafts, Iran Air has struggled to maintain a fleet to support customer demand in terms of quality and scope of service. The central issue facing the management of Iran Air is how to avoid the progressively increasing threat of a major accident.
Foreign isolationist measures have forced Iran Air, as well as other Iranian carriers, to operate some of the oldest fleets in the world. Iran Air Chairman, Farhad Parvaresh, said that his primary challenge was to “keep the company alive” in dealing with the problems arising from operating an elderly fleet.[2] The lack of access to spare parts has grounded approximately 130 aircrafts in the nation’s fleet, the majority of these belonging to Iran Air. Maintenance, repair and overhaul expenses account for approximately 25% of total costs of Iranian airlines, compared to the global industry benchmark of 10-15%. Due to Iran Air’s shortage of long range jets, its current network is geographically limited to destinations within a six to seven hour flight radius. Overall, operational costs have been rising, the performance constraints of an aging fleet cannot meet the growing demands of a developing country, and, most importantly, the operational risks that arise pose massive safety concerns. Since 2009, Iranian airlines have suffered several fatal accidents. Iran Air Flight 277 was a highly publicized crash in 2011 that killed at least 77 passengers onboard.[3]
In 2016, Iran Air benefitted from sanctions relief. Under general license J-1, the US Treasury filed an amendment to the Iranian Transactions and Sanctions Regulations “authorizing the Reexportation of Certain Civil Aircraft to Iran on Temporary Sojourn and Related Transactions.”[4] Iran Air immediately concluded two parallel deals for aircrafts with the world’s two leading aircraft suppliers; Boeing of America and Airbus of the European Union in December 2016. Both contracts were huge. Boeing announced a $16 billion agreement for 80 aircraft that would provide nearly 100,000 jobs in the US economy. The first planes under these terms are scheduled for delivery in 2018.[5] Similarly, Airbus recorded 98 firm orders placed by Iran Air. The first Airbus aircraft was delivered in March 2017.[6] Iran Air’s managers are pursuing a short and medium term aggressive purchasing strategy that is almost entirely dependent on these contracts remaining legal. However, the Trump Administration has stated that a return to the formerly held isolationist policy may be imminent.[7] The potential snapback of sanctions would bar both Boeing and Airbus from doing business with Iran Air. Airbus requires a US license to trade with Iran due to the aircraft’s reliance on US parts.[8]
In an effort to head off the imposition of new sanctions and realize the large numbers of aircraft orders, Iran Air should work intensely and closely with Boeing. Boeing’s influential and well-connected lobbyists on Capital Hill are in constant contact with Senators and Congressmen. The purpose of this approach is to ascertain which, if any, Iranian government statements or acts could sway congressional votes in the matter – and then pass on such recommendations to the Iranian government. Secondly, Iran Air should place any politically required commercial orders regardless of economic cost with manufacturers in swing vote congressional districts. Again, this should be done in close coordination with Boeing, which has so much to lose financially if Congress imposes sanctions. However, any acts by Iran Air to save its orders for Boeing or Airbus jets may, in the end, prove ineffective given the strength of the political forces in play.
Some questions remain. Could Iran Air coordinate Airbus and Boeing’s support to effectively have European governments address American congressional concerns directly through their Washington Embassies? Could exposure in media be pursued to highlight the benefits of the Boeing deal as it bears on the United States economy?
[Word Count: 716]
References:
[1] Adebahr, Cornelius. Europe and Iran: the Nuclear Deal and Beyond, Routledge, Taylor & Francis Group, pp60, (2017).
[2] Centre for Aviation, CAPA, Iran Air’s Fleet Order Signals Serious Intent for the Iranian Aviation Industry, (2016), https://centreforaviation.com/insights/analysis/iran-airs-fleet-order-signals-serious-intent-for-the-iranian-aviation-industry-266339
[3] Centre for Aviation, CAPA, Iran, with an Educated Populace of 80 Million, Becomes a Potentially Major Aviation Force, (2016) https://centreforaviation.com/insights/analysis/iata-iran-with-an-educated-populace-of-80-million-becomes-a-potentially-major-aviation-force-282989
[4] Department of the Treasury, Office of Foreign Assets Control, Iranian Transactions and Sanctions Regulations 31 C.F.R. Part 560, (2016)
[5] Boeing, Boeing, Iran Air Announce Agreement for 80 Airplanes, (2016) http://boeing.mediaroom.com/2016-12-11-Boeing-Iran-Air-Announce-Agreement-for-80-Airplanes
[6] Airbus, 2016 Annual Report, pp31 (2017)
[7] Bloomberg, Trump’s Iran Decision Throws Uncertainty Into Business Plans, (2017), https://www.bloomberg.com/news/articles/2017-10-12/trump-s-iran-decision-throws-new-uncertainty-into-business-plans
[8] Reuters, Treasury chief says reviewing Iran’s aircraft licenses, (2017), https://www.reuters.com/article/us-usa-iran-sanctions/treasury-chief-says-reviewing-irans-aircraft-licenses-idUSKBN18K2U4
Having flown a Boeing aircraft for the past 6 years, I can tell you that the political connections with that company run much deeper than people realize from the surface. In fact, you probably could have written a supply chain management paper on this subject, since I am pretty sure that they manufacture components in nearly every congressional district.
I was actually surprised near the end of the article when you began to address political concerns surrounding losing the deal- in fact, I enjoyed a bit of an internal laugh when, in the middle of your article, I read that we carved out an exemption to very rigorous sanctions to allow for civil aviation exports. Indeed, as the Iranian government makes steps, particularly in Iraq and Syria, that are so counter to American interests abroad, I would have expected further sanctions or a hardening of the lines around the sanctions currently in place. The fact that the exception for Boeing and Airbus exists at all is really a strong statement of their political capabilities.
You could probably update the “McDonald’s” and “Dell” Theories of International Relations, both of which by and large state that wars between countries sharing economic connections, or a significant amount to lose from supply chain disruptions, are extremely unlikely to engage in armed conflict. In this case, countries willing to purchase roughly $30 billion in exports from large American and European manufacturers are unlikely to face sanctions precluding them from doing so.
As with the Apache Helicopter and other American military exports from the Boeing corporation (most recently the F35 being linked to Arab nation exports), the real money for Boeing lies in maintenance, parts, and tooling support. I wonder if the long term implications of this relationship will serve to loosen up some of the vitriol between the nations, as opposed to the vitriol killing a deal so clearly beneficial to the American worker.
Very interesting problem set. The same issues are prevalent in the supply chain for military equipment procured prior to the revolution, including Iran’s infamous purchase of 79 F-14 Tomcats that today are almost impossible to maintain. So accustomed to seeing a constant influx of Russian technologies into the country, I had never stopped to think how sanctions were impacting Iranian civil aviation.
As Lucas mentioned, the backbone of profitability for these aviation companies is the long-term parts and maintenance relationship. However, without running the numbers, I’m assuming that Boeing has priced in a healthy margin to hedge for any future political instability disrupting that side of the contract. I would also trust Boeing to continue to fight politically for a contract valued at ~20% of 2016 revenue. The US defense contractors have it figured at from a lobbying standpoint already: as an example, it currently takes 45 states and Puerto Rico for Lockheed to build one F-35. In terms of vested interests, a comparable measure for this purchase would not surprise me.
Quite an interesting article and perspective about a company that faces significant political challenges as it relates to its supply chain. Given the political tensions between the United States and Iran, which the United States State Department names as a State Sponsor of Terrorism, I am surprised that Iran Air purchased aircraft from Boeing in the first place. While the creation of 100,000 jobs and significant revenue is behind Boeing’s interest in the contract, I would want to ensure full access to parts and maintenance over time if I was the CEO of Iran Air. As a result, I would have solely dealt with Airbus given that they are a French company. While it may have presented challenges given the duopoly nature of the aerospace industry, I believe Iran Air should have worked exclusively with Airbus to minimize chances of supply disruptions going forward.
I was surprised by the question on whether “Iran Air coordinate Airbus and Boeing’s support to effectively have European governments address American congressional concerns directly”. In my view, Airbus has little to gain from helping Boeing. On the contrary, they have a lot to gain if Boeing is prevented from fulfilling their contract – i.e. more business from Air Iran if sanctions in EU are not re-instated.
Moreover, I would be careful with media coverage. I would be worried about the backlash that it might create for Boeing, if strong campaign is developed around the issues that cause the sanctions in the first place. We all know that masses respond strongly to strong messaging even if it is in the form of fake news.
Airbus has a lot to lose if they don’t help Boeing. Their contract with Iran Air will also be void – Airbus requires a US license to trade with Iran due to the aircraft’s reliance on US parts (unless they find parts elsewhere, which may be a solution). If the US sanctions are reinstated, neither Boeing nor Airbus will be able to fulfill their orders under current conditions.
I agree with MC that media exposure describing the implications of a restructured deal would likely be ineffective. Any media strategy would have to be sure that the lobbyists have already received favorable reactions from the current administration. Because the message to maintain this agreement would likely be targeted toward the lower income Republican base, it would be immediately counteracted by any counter-messaging by the administration. Furthermore, throughout the campaign the Iran deal was commonly associated with negative language, so it would be difficult for Boeing to overcome that consistent messaging. Additionally, the populace is often more able to sympathize for the loss of American jobs for products purchased by America, rather than products being sold to other countries, least of all one that is not an ally (which is a whole other challenge to combating isolationist tendencies). For these reasons, I think the best strategy is to rely on the lobbyists in Washington to get the job done, however, the outlook does not look good based on the administration’s current view of the Iran deal.
Thanks for sharing!
Economic sanctions are a very interesting topic… and the Iranian case illustrates several problems related to them.
– UNINTENDED CONSEQUENCES. Often, economic sanctions have unintended and undesirable consequences. They hurt the targeted country’s population (by increasing poverty and scarcity) and can even benefit their regimes (by fueling an enemy/victim rhethoric). In this case, it is the Iranian civilian population that is affected, by restricting their air travel options and making them much less safe.
– EFFECTIVENESS. While they sometimes can help achieve foreign policy goals, economic sanctions are often ineffective – as has been the case in Serbia, China, Cuba, Libya… (details: https://www.brookings.edu/research/economic-sanctions-too-much-of-a-bad-thing/)
– IMPACT ON IMPOSING COUNTRY. Sanctions affect the imposing countries’ economy – for instance, limiting Boeing’s revenue.
Economic sanctions are a very tricky subject, kudos to you for writing about it. I question to what extent the US government should balance its desire to drive jobs and wealth with its moral principles. I am by no means an expert on the matter and am certainly against sanctions in the general sense. That said, if the bar for extremely serious international sanctions are met, I question whether these sanctions should be relaxed to increase profitability or jobs. To what extent will this represent a race to the bottom. I think it shows how technology can still be so wrapped up in nationalism, even in 2017.
A number of airlines fly to Tehran – I imagine that planes sold to Iranian domestic carriers would expand the market, but to what extent do the 80 planes sold to Iran Air represent marginal planes sold as an expansion of the industry as a whole? Would other carriers simply have filled the void in much of the international Iranian passenger demand?
I am generally in favor of cooled relationships and more sane governmental policies. I imagine that the parts and support supplied by Boeing will increase plane accessibility and service for the average Iranian, increasing their quality of life, and driving economic activity. To what extent can economic ties and shared technology and operations between nations diffuse tensions and cause them to act more peacefully? Can technology and shared interest help us work to a better future with less brinkmanship?
To the question about the media exposure, I agree with MC and Thomas about the risks associated with media exposure. Trying to put myself in the shoes of people around the country, watching media coverage about a US company dealing with a country that has been vilified for decades would likely make me come out strongly against the deal, rather than for, even if I would personally gain via my job. I think that approach would just play more with the emotions of people than they intend.
To respond to Richard Richardson above, I am not surprised at all that they decided to do a deal with Boeing. They were clearly trying to generate favor with the US by doing a deal with one of their largest companies. I think the concern about the ability to get parts in the future is extremely valid, but given the dire situation that Iran Air was in already it seems like the upside related to dealing with Boeing (and using that as negotiating leverage against Airbus) is way larger than the downside.