Tuesday 07 February 2017

Boeing's $17 billion Iran jet deal still at risk

Boeing's agreement to sell 80 passenger jets to Iran may not be directly impacted by new U.S. sanctions on Tehran but the deal still could unravel, according to analysts.

President Donald Trump's administration on Friday imposed new sanctions on Iran after a ballistic missile test by the Islamic republic. The U.S. claims the missile test was a violation of a United Nations resolution.

"The Trump administration is absolutely determined to ratchet up tensions and the Iranians will of course, being hardliners there, want to do the same," said Richard Aboulafia, vice president of analysis at Virginia-based industry consultancy Teal Group.

In December, Boeing announced an agreement for Iran Air, the country's flag carrier, to buy 50 of its narrow-body 737 passenger jets and 30 of the wide-body 777 aircraft. The aircraft manufacturer valued at the deal at $16.6 billon, based on list prices for the planes.

Industry observers suggest Tehran could pull out of the Boeing deal if tensions continue to worsen. Besides the new sanctions, Trump's travel ban against Iran and six other majority-Muslim countries also drew criticism from Tehran and vows of retaliation.

Besides the airplane sale, the Boeing deal involves aircraft maintenance services as well as ongoing support with spare parts on the jets.

"It's a risk, but not something that will overwhelm [Boeing]," said Moody's analyst Russell Solomon, who covers the aerospace and defense industry. "They do have a tremendous amount of operating and financial flexibility because of strength of the balance sheet, a strong liquidity profile and a very significant order book."

At the end of 2016, Boeing's backlog stood at $473 billion with more than 5,700 commercial airplane orders. Boeing led Airbus in commercial airplane deliveries last year, 748 aircraft compared with 688 for Airbus.

On Friday, a Boeing spokesman said the Chicago-based company was still operating under the U.S. Treasury Department's Office of Foreign Assets Control license, which provided federal authorization for the plane sale during the Obama administration. "Should we receive new guidance from the Treasury Department, we will act accordingly," the Boeing official added.

According to the Moody's analyst, the economics of the Iran deal were "far less compelling than they are for Boeing on average when it conducts business with airline carriers." He explained that some of the orders were for older plane models while the current generation planes are considered potentially more lucrative and desirable.

Moreover, Boeing "can afford to give a bigger discount [on the current generation planes] to keep the production line humming along," he added.

The new set of sanctions imposed Friday by the Trump administration targets individuals and entities that provide support to Iran's ballistic missile program and to the country's Revolution Guard Corp's Quds Force. Iran claims the missiles were not intended to be capable of carrying nuclear warheads and for defensive purposes so they were not in violation of any U.N. resolution.

Iran's leadership dug in its heels Saturday, conducting new military exercises to test missile and radar systems "to deal with hypothetical enemy's aerial attacks" on sensitive sites, Iran's Tasnim news agency reported. The same outlet also reported Monday that Iran unveiled a new guided rocket and assault weapons to show off what it called Iran's "self-sufficiency in arms production."

The first airplanes under the Boeing deal are scheduled for delivery in 2018. Last month, France's Airbus delivered its first passenger jet to Iran Air under a separate commercial aircraft contract that includes wide-body A380s, the world's largest passenger jet.

Iran's aging fleet of passenger jets is among the oldest in the world due to commercial and financial sanctions that were in place for decades. The average age of Iran Air's planes now exceeds 20 years and Tehran and been looking to Airbus, Boeing and other airplane manufacturers to modernize its fleet.

Iran's Fars news agency reported Saturday that another Western airplane manufacturer, French-Italian aircraft company ATR, was preparing to sell turboprop short-haul airplanes to Iran. Talks were scheduled Sunday.

Analysts say financing airplanes to Iran remains risky business too. That is partly due to Iran not being a signatory country to the Cape Town Treaty, which provides legal remedies for default in financing agreements as well as the repossession of capital goods such as aircraft.

"Boeing will probably have to backstop a lot of that [financing] on its own," said Solomon. That said, he believes Boeing may only go so far without having third-party financiers.

Indeed, Airbus is believed to have provided backstop financing for as many as six passenger jets to Iran but is relying on third-party financiers for the rest.



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