AVIATION Archives

27/04/2016by EOS Intelligence EOS Intelligence No Comments

New Wings to Fly – Post-Sanction Scenario of Iran’s Aviation Industry

397views

The Nuclear Deal between Iran and the six super powers is seen as a boon for the aging Iran aviation industry. Iran now plans to add 300 new aircraft in the next five years and 500 in the next 10 years by growing the national fleet as well as additional airports and facilities to the country’s existing infrastructure. Although many view this as a tremendous opportunity, there are many hurdles along the way – how does the country plan to tackle them?

On July 14, 2015, Iran and the six super powers (the USA, UK, France, Russia, China, and Germany — collectively known as the P5+1) finalized a Joint Comprehensive Plan of Action (JCPOA). This agreement is meant to ensure that Iran’s nuclear program can only be used for peaceful purposes in return for lifting the sanctions from P5+1 countries. On January 16, 2016, International Atomic Energy Agency (IAEA) announced that Iran met the requirements of the JCPOA and the sanctions were immediately lifted. One of the reliefs for Iran was the ability to conduct business with the EU and US companies across a range of sectors, including aviation-related industries.

The lifting of the sanctions was a relief for the aviation industry of Iran, as the entire in-service fleet of 225 airplanes is in a dire need for repairs and maintenance. Due to import sanctions, much needed machinery and parts have not been available for the airlines to repair and maintain their fleet, while the access to new airplanes was very limited. The average age of Iran’s fleet is 25 years, which is among the oldest in the world. This is also one of the reasons why Iran’s civil aviation has had one of the world’s worst safety records – more than 500 people dead in the past few years in air crashes of various Iranian airlines.

The lack of access to new machinery and aircraft has affected the growth of the domestic airlines – this includes the flagship carrier, Iran Airways, as well as other top airlines such as Aseman Airlines and Mahan Air. These three airlines hold the maximum in-service fleet and they are likely to also be the first to benefit from any deals made in the aviation sector in the country. And the deals are expected to start pouring in soon. The lifting of sanctions has enabled Iran to seek the possibility of doing businesses with companies such as General Electric (GE), a US-based equipment manufacturer, which has shown interest in investing in Iran to provide commercial aircraft engines, parts, and services, which is likely to be a boon for the local airlines in working towards improving their safety record over time.

Iran has already initiated talks with two leading aerospace equipment manufacturers, US-based Boeing and France-based Airbus, to buy equal amount of airplanes from both companies. As of January 2016, a deal was signed between Airbus and Iran to deliver (although the delivery timeline is still unclear) 118 jetliners worth US$27 billion. Boeing is working out the details with the US Treasury and a contract will go under negotiation once these details are clear. Both companies are motivated to convert the talks into a deal – even though both companies are giants, selling to most airlines around the world, the number of airplanes ordered by a Iran is still going to be a large contract for them.

Iran plans to re-vamp the entire aviation industry, including the purchase of new airplanes and construction of new airports along with refurbishing the existing infrastructure. The new planes are planned to slowly replace the older ones with the ambitious objective for the airlines to have brand new in-service fleet, which would reduce the repairs and maintenance costs over time. Apart from investment in airplanes, Iran also plans to develop five new airports with a total investment of US$8 billion. Iran’s Civil Aviation Organization (CAO) has already outlined two airport projects to be developed with an investment of US$1 billion expected to be completed by 2022, while the rest of the projects are yet to be announced.

The idea is to develop these airports as international corridor and transit hubs by reviving the historical trade route advantage, which Iran had through the Silk Route in ancient times. Iran, back then known as Persia, connected the Western countries to the Eastern ones – it was one of the transit hubs for trade. In current attempts to revive that route, Iran considers two airports, Dubai, UAE and Doha, Qatar, as competitors, due to these airports’ advantage of the same central geographical location connecting the West and the East. Dubai and Qatar have already leveraged their location and facilities by offering transit hubs to many international carriers, which brought good volumes of international traffic into these two countries. This has also led to the development of hospitality and tourism industry in the areas along with business and job opportunities to the local and expat population of UAE and Qatar. These countries have also worked on establishing their flagship airlines – Emirates and Qatar Airways, and both of these airlines are among the top airlines in the world now.

According to Iran officials, both these airports (Dubai and Doha) and their flagship airlines (Emirates and Qatar Airways, respectively) are direct competitors to Iran’s airports and its key airline – Iran Air. Iran can also learn from these two airports’ history in its quest to restore growth in aviation and several associated industries. The development of Dubai airport has been attributed as one of the major turning points to the development of the city, Dubai – the airport was earlier used for transit flights, repairs and/or refueling of the airplanes, gradually increasing the international flights and footfall in the city. This spurred interest of international players in hospitality industry to expand their existing infrastructure in the city, which in turn lead to the development of hospitality and tourism industry in UAE, which was a relevant step UAE took in diversifying its oil-based economy. Currently, Dubai handles passenger traffic of more than 75 million on a yearly basis. Recently it was announced that Dubai will be expanding its airport to accommodate the increasing traffic on its terminals.

Iran would like to draw a similar story for itself and follow Dubai’s footsteps by putting its flagship airline in the global picture and using its airports as transit hubs. The major challenge in Iran’s case is that it has missed out on this opportunity by at least a decade, if not more. Dubai and Doha already have the infrastructure, policies and rules in place to accommodate growing traffic, along with businesses looking to invest or expand in the city or the country. Iran still needs to develop or update the basic infrastructure it has so it can start to match its competitors. For this development, it needs heavy investment and planning to execute the vision it has for the aviation industry and developing other industries such as tourism and hospitality.

The Realistic View

Iran used its natural resources to attain economic development, a similar scenario as in other oil-based countries such as Saudi Arabia. Iran and Saudi Arabia are two countries, which can leverage on the onshore oil reserves available at a low cost. According to the Organization of Petroleum Exporting Countries (OPEC) data, Saudi Arabia accounted for 22.1% (266.56 billion barrels) while Iran accounted for 13.1% (157.53 billion barrels) of world’s total crude oil reserves in 2014. Over the years, Saudi Arabia has built its financial strength from oil revenues, but Iran was not able to achieve the same due to the economic sanctions imposed on it by USA, originally in 1979, strengthened in 1995 and then again in 2012.

Recent developments finally gave hope for Iran to catch up, though the process is expected to be slow. While the agreement with P5+1 has allowed Iran to stabilize its oil exports at about 1 million barrels per day, it is still 50% less than what Iran used to export before 2012. Another challenge are the declining oil prices, which have reached a level below US$30 per barrel in January 2016 from US$105 per barrel in 2012. Iran’s oil revenue accounted for about 12.5% of its GDP in 2012, a share that declined to 6.25% in 2014. The infrastructure spending share in GDP also declined by 3% points since 2012, as Iran has limited access to financing and the Oil Stabilization Fund (OSF), a fund to stabilize the economy against fluctuating oil revenues, was no longer operational.

In a scenario where majority of the economic development of the country is dependent on the natural resources such as oil and gas, once the oil and gas market slows down, the economic growth slowdown soon follows. Market fluctuations for oil and gas industry have led oil-based economies to diversify into other industries or build up financial reserves to sustain economic fluctuations. For Iran, aviation might be a tool to achieve that – the country plans to re-build aviation industry to make way for the tourism industry, which the country hopes to develop as part of the shift from being an oil-based economy.

The first step in this shift for Iran is to gather investment to develop and support the growth of aviation industry. However, Iran is in dire need of investments from external sources since it has no funds, assets, or resources to re-build or stabilize the economy. Iran was able to gain access to some funds worth US$32 billion from unfrozen assets abroad, which were available to the country once the sanctions were lifted – however, these frozen assets are not unlimited, and the Airbus deal worth US$27 billion was made from those unfrozen assets. At the same time, the investments cannot come from the growth of other industries such as manufacturing or agriculture, as any growth achieved from these industries will have to attribute to fiscal spending on developing human resources such as education and health of the population. Iran also needs trained staff personnel to support the development of non-oil based industries such as aviation and transportation. To do this, the country has to invest in training institutes and infrastructure to sustain the economic development Iran is hoping to achieve in the next few years.

The country is trading its natural resources to lure international companies to start or increase their businesses with Iran. For example, Total, a France-based oil and gas company, has signed a Memorandum of Understanding (MoU) to buy crude oil from Iran and promised research to look for other opportunities so it can invest in Iran. Such a deal brings in investment, which will help Iran to stabilize the economy or build financial reserve to later on invest in other industries such as aviation.

Currently, Iran needs close to US$220 billion in investment to uplift its aviation industry. The country cannot afford to sponsor this investment from its own reserves or funds from any other industry growth. These funds will need to be used to help maintain the economic stability as Iran is struggling with high unemployment and inflation. One of the best options for Iran is to leverage the natural resources such as oil and gas to other countries; in the pre-sanction period Iran could only do that with Asian countries such as China, India, or South Korea. Since the sanctions are lifted, Iran is open to expand its business options to European regions and USA as well.

EOS Perspective

The World Bank has forecast an optimistic growth of 5.8% for Iranian GDP in 2016, owing to the fact that Iran’s economy will benefit from the lifting of the sanctions from six super powers. In spite of the promise of industry growth, Iran has a lot on its plate to deal with before it can be considered a stable economy.

For starters, Iran has to gain the market share it once had in the pre-sanction period in the global oil industry, which means that it is going to adopt an aggressive strategy to gain back its lost clients especially European clients such as France, Italy, and Greece (in the pre-sanction period, these European countries were its major clients for oil trade). These countries used to do business with Iran but shifted to Saudi Arabia, Russia, and Iraq once the sanctions were imposed. Iran’s oil minister, Mr. Bijan Namdar Zanganeh, in an interview on November 5, 2015 was clear on Iran’s next steps when he said “Our only responsibility here is attaining our lost share of the market, not protecting prices”. Iran plans to sell oil at rates cheaper than its counterparts to gain the European clients back, which may result into an oil surplus in the market pushing the oil prices lower than US$30 per barrel. This also means that Iran would have short and medium term issues building up investments it needs to develop the aviation industry or even stabilize the economy to reduce unemployment and inflation. Apart from investments, Iran has to make changes to its existing policies to incorporate the growth of aviation industry. The country also has to gain access to trained and skilled staff who can handle the organizational and operational change the aviation industry will undergo in the next few years.

One major challenge for the aviation industry is that Iran still has not finalized a contractor for the repairs and maintenance of its already aging fleet. Lufthansa, the German-based aviation company, is in talks with Iran to set up a maintenance unit in Iran but nothing has been set it stone yet. With new airplanes in the pipeline and no immediate maintenance support for Iranian airlines, the industry growth might continue to be hampered more than before.

Iran needs to give priority to keep the in-service fleet in service. It might take years for aviation companies such as Airbus to complete the orders and during that time it is imperative that the older planes have access to machinery and repairs to stay in business.

26/08/2015by EOS Intelligence EOS Intelligence No Comments

Flying LATAM Skies on a Low Cost Carrier: Dream or Reality?

381views

With 600 million population, Latin America still remains highly unexploited by low cost carriers (LCC). The region is dominated by only six homegrown low cost airlines, which makes it a promising growth market for discount carriers. With growing middle class, flourishing trade and commerce, and appetite for travel, Latin America is destined to become a discount air travel hub. However, even with such substantial opportunities, LATAM region is yet to overcome the hovering hurdles standing in its way to fulfill its potential as a dynamic market for low cost airlines.

Some regions housing emerging economies such as South East Asia have grown to accommodate 22 low cost airlines while Latin America is stalled with only six — Azul, Gol, Interjet, Volaris, VivaAerobus, and VivaColumbia. Currently, travelers flying across only Brazil, Columbia, and Mexico have the privilege to book their tickets with a low fare airline. Other potential markets such as Argentina, Chile, Ecuador, Peru, and Venezuela remain unexplored by LCCs with minuscule penetration or complete absence of any discount carriers. Some of the roadblocks hindering LCC development in the region include high costs of operation, government bureaucracy, economic headwinds, etc.

Obstacles faced by new entrants and existing LCCs in LATAM

Is there any growth prospect for LCCs in Latin America?

The emerging Latin American countries offer an array of opportunities for low cost airline industry, leading to new LCCs slowly starting to enter the market with recent example including the Southwest Airlines, an American low cost carrier, which in March 2015, started operating flights between Costa Rica and Baltimore (USA).

Currently, Latin American travelers typically opt for long haul buses, which are an economically viable, yet time-consuming option, to travel long distances. However, the advent of LCCs in the region could completely change the landscape for time and money conscious travelers. The LCCs could offer cost effective travel in a much shorter time.

New emerging customers

The burgeoning demand for air travel is increasingly accompanied with favorable conditions such as the growing middle class and signs of recovery in GDP growth, which collectively are likely to push low cost airlines’ growth in the near future. Presently, the middle class represents about 34% of the population in Latin America, approximately 200 million people, and is likely to grow resulting in higher demand for no frills airlines. The growing middle class, possessing the required financial means, is likely to push intra-regional travelling, as these people will want to travel for tourism and work. This section of the population is prone to consider travel options that are more expensive but less time consuming than long haul buses, but would still not be able to afford mainline airlines fares. Hence, they would prefer flying with a low cost airline.

As in 2015, the Latin American economy is forecast to show signs of recovery from years of slow GDP growth, the overall economic growth in the region is likely to increase investments in the LCC market and put higher disposable income in hands of the middle class population. This might lead to higher spending on vacation, thus, pushing the interest in LCCs. Economic growth is likely to pick up in countries such as Mexico, Chile, Colombia, Brazil, and Panama. In 2015, Brazil is forecast to grow at 1.4% from 0.3% in 2014. Chile is expected to rebound witnessing a 3.3% GDP growth in 2015 after slowing to 1.9% in 2014. Mexico’s GDP growth is likely to accelerate from 2.4% in 2014 to 3.5% in 2015.

Cost cutting and revenue generation

LCCs are seeking opportunities to reduce cost of operation and generate more revenue. For ticket reservation, LCCs are switching to direct sources (airline website) or metasearch engine (a search tool that takes input data from other search engines to produce its own results) instead of relying on Online Travel Agencies (OTA) such as Despegar, which sell various airline tickets. While the OTAs are perceived as a convenient platform for travelers to compare prices and book airline tickets, they seek a healthy cut from airline ticket sales. Switching to direct sources or metasearch engines could help LCCs cut intermediaries and boost profits.

Airlines are trying to drive revenues by selling ancillaries such as luggage, seats, hotel services, etc. by driving traffic to their own website. VivaColombia and VivaAerobus have refused to pay OTAs and have started distributing tickets through metasearch engine, Escapar, while Volaris has switched to Kayak (a US-based metasearch engine).

Further, airlines are focusing on international route expansion — particularly to the USA — to earn higher passenger yield (average earning of an airline generated by transporting passengers) and to take advantage of the growing international travel demand. In 2015, airlines such as Volaris, VivaAerobus, and Gol plan to bolster international network breadth. In H1 2015, Volaris increased international capacity by 33% and its traffic grew by 28%. By the end of 2015, Azul plans to start flights between Guarulhos (Brazil) and Orlando (USA) as well as Belo Horizonte (Brazil) and Orlando.

Despite the setbacks, jetting across Latin America on a low cost airline does seem like a reality in the foreseeable future

Presently, the low cost airline market in Latin America faces various challenges such as high cost of operation, currency depreciation, and regulatory hurdles. However, with new airlines starting to slowly enter the market, growing middle class pushing the demand for LCCs, and higher forecast GDP growth resulting in more disposable income in hands of people, the future of low cost airlines seems rather bright.

04/02/2014by EOS Intelligence EOS Intelligence No Comments

Vietnam’s Macroeconomic Environment: FDI Paving the Way for Growth

975views

2013 was the sixth consecutive year since Vietnam first witnessed macroeconomic instability. With high inflation levels, a collapse of the banking system, and relatively lower growth levels compared with its Asia-Pacific peers, the economy faced immense pressures. However, thanks to continuous efforts by the government to uplift the economy as well as the presence of several inherent benefits that Vietnam offers to foreign corporations, the economy has been resurging, largely on the back of soaring FDI.

Vietnam has faced several economic pressures since 2008, which resulted in high levels of inflation, stagnated growth, and a crumbling financial system primarily led by rising bad debts and loss of liquidity. This also brought a negative impact on the real estate sector and its periphery industries. Over the past few years, the country has struggled to find its ground and has undertaken several policy measures to instigate investor interests. In fact, the Vietnamese government is largely focusing on increasing FDI investment levels and exports as the key tools to pull its economy out of stagnation.

The government made substantial moves with regards to economic policies. These initiatives, which led to a boost in the country’s FDI in 2013, included:

Equitization of 573 state-owned enterprises (SOEs), wherein foreign investors are eligible to hold stake in SOEs with few conditions
Tax allowance that reduces corporate income tax from 25% to 22% from January 2014 and further to 20% in January 2016
The approval of a scheme to enhance FDI management in Vietnam

These efforts by the government appear to have started yielding results, as the registered FDI rose by 95.8% to US$13.1 billion during the first 10 months of 2013, and the disbursed FDI rose by 6.4% year-over-year to $9.6 billion for the first 10 months of the year.

In addition to these initiatives, the government has stepped up to strengthen the country’s banking sector since 2012. Over the past two years it has significantly reduced average lending rates, equitized four state-owned commercial banks, and set up Vietnam Asset Management Company, a state-owned company created solely to purchase bad debt from existing banks in order to clear their books. This company purchased bad loans worth about US$1.6 billion in 2013. In an effort to further speed up the restructuring of the banking system, the government announced that it would increase the allowed limit for foreign strategic investors to invest in a domestic financial institution from 15% to 20% in February 2014.

The government efforts to stimulate FDI have also been supplemented by the existence of several positive intrinsic factors that Vietnam boasts off. The country remains an attractive investment destination thanks to its abundance of natural resources and cheap labor availability (according to JETRO report, monthly pay for general workers in Vietnam is about 32% of levels in China, 43% of that in Malaysia and Thailand, and 62% of that in Indonesia). The country also offers a young and dynamic consumer base domestically, as well as favorable conditions and location to supply within the subcontinent. It also enjoys a stable political environment, a significant advantage over several of its neighbors.

The resurfacing of negotiation talks regarding Vietnam becoming a member of The Trans-Pacific Partnership (TPP) is also positive news for the export sector, which is expected to receive a significant boost with the signing of the agreement (especially in the area of garments, footwear, and wooden furniture). This will also ease investment inflow in Vietnam from other TPP members.

Backed by the aforementioned factors and a robust young population, several sectors in the country are registering a double digit growth and intensified attention from foreign investors.

Vietnam’s aviation sector, for instance, is expected to be the third-fastest growing sector globally with regards to international travel and freight, and the second-fastest with respect to domestic travel in 2014.
The electronics sector has also witnessed keen interest from foreign players. Nokia, a leading telecom handset player, opened its first factory in Vietnam in 2013. Samsung and LG have announced plans to build factories in the country primarily for export purposes.
Retail, consumer goods, and tourism are some of the other best performing sectors with strong growth potential in the near future.
Moreover, in anticipation of the TPP agreement, Wal-Mart is also exploring investment opportunities in Vietnam that would entail sourcing of several products, such as clothing and footwear, entertainment, home appliances, toys and seasonal goods.

It is clearly visible that Vietnam is on the right path of growth and expansion, nevertheless, there is still a long way to go. While the FDI levels rise, the government has to channelize this investment to develop support industries and high-quality workforce to sustain growth. Moreover, while Vietnam enjoys abundant natural resources and cheap labor that attracts FDI, these factors remain exhaustible, especially in the light of new investment hotspots (such as Myanmar) emerging. Therefore, in addition to just focusing on economic policies, Vietnam must work towards creating better investment climate to lure FDI. The country’s legal framework still presents several hurdles to foreign investment and the country ranks very poorly on the global corruption index (114 out of 177 countries). While it is almost certain that Vietnam will continue to see an inflow of foreign investments, it is to be seen if it can use this to achieve sustainable growth for its economy.

Who We Are

Connect With Us

Work With EOS