For more than a year, Boeing (NYSE: BA) has been trying to break into the newly opened Iranian aircraft market. However, still-strong tensions between the U.S. and Iran have hindered the company's efforts to take advantage of strong demand for new planes in Iran.
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On Tuesday, Boeing announced its second memorandum of agreement with an Iranian airline. But unless the U.S. government moves toward reconciliation with Iran, Boeing's agreements with Iranian carriers may never turn into firm orders.
The Iranian market awaits
Worldwide, aircraft order activity is slowing after a multiyear order spree that began in 2011. As a result, Boeing and Airbus (NASDAQOTH: EADSY) have been fighting hard to make every sale they can, in order to meet their ambitious production goals.
Global aircraft order activity is slowing after years of strong sales. Image source: Airbus.
The two companies got a huge break in early 2016 as the world powers began to lift economic sanctions on Iran. Decades of sanctions have left Iran's airlines with obsolete, decrepit fleets, which they are eager to refresh with modern, fuel-efficient jets from Boeing and Airbus.
Airbus very quickly reached an agreement to sell 118 planes spanning its full product lineup to Iranian flag carrier Iran Air. Airbus and Iran Air eventually finalized an order for 100 aircraft in December 2016, and Iran Air took delivery of its first new plane -- an Airbus A321 -- just one month later.
Iranian airlines seem to be equally interested in Boeing airplanes. However, so far, Boeing is having trouble closing any deals due to political and regulatory hurdles.
Boeing tries to do business in Iran
Last June, Boeing signed a memorandum of agreement to sell 80 airplanes to Iran Air. While the total size of the deal was smaller than Iran Air's Airbus order, it included 30 orders for Boeing's highly profitable 777 family -- a product line that recently has been plagued by slow sales.
Boeing announced in December that it had reached a contract with Iran Air for this order. However, the order still hasn't shown up in Boeing's official order book, indicating that some "contingencies" still need to be resolved.
Iranian airlines are ready to buy dozens of Boeing planes -- if they can line up financing. Image source: Boeing.
Chief among these problems is the difficulty of arranging financing. While the U.S. has eased its economic sanctions on Iran, its financial sanctions remain intact. The U.S. banking system cannot be used for any deals with Iran. Even foreign banks have been worried that they would run afoul of the U.S. financial sanctions if they try to do business there.
Thus, Boeing's recent announcement that Iran Aseman Airlines plans to purchase 30 737 MAXs is not especially meaningful. Unless the financing issues can be worked out, these planes will never be delivered. The "good" news is that the first delivery for this order is scheduled for 2022, giving Boeing and the airline plenty of time to try to line up financing.
Victim of bad public policy
Airbus has been able to get around the problem of financing aircraft sales -- albeit with difficulty -- by conducting the transactions in euros. Boeing doesn't have that luxury, putting it at a competitive disadvantage.
To be blunt, Boeing is the victim of terrible public policy in the U.S. Congress, which has made it very difficult for U.S. companies to do business with Iran, and many congressional Republicans want to crack down even further on trade with Iran. Boeing's deals with Iran have aroused particularly vehement opposition from lawmakers who claim that planes sold to Iran could be used for military or terrorist purposes.
Leaving aside the merits of this argument, Iran is now getting new planes from Airbus that are functionally equivalent to Boeing planes. The only thing the U.S. financial sanctions are doing in this case is pushing Iranian airlines to buy from Airbus rather than Boeing.
This could have very real consequences in terms of job losses. Iran Air wants to buy 777s that Boeing desperately needs to sell. If the two companies are unable to find a way around U.S. financial sanctions, Boeing will probably have to reduce 777 production further, and cut even more jobs in the next year or two.
Hopefully, cooler heads will prevail and Congress will eventually dismantle the sanctions, which are doing very little other than encouraging Iran to buy other countries' products. But given the long-running history of enmity between the U.S. and Iran, investors shouldn't count on Boeing delivering planes to Iranian airlines anytime soon.
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