Boeing-Iran Deal: Desperate Times Call For Desperate Measures

Boeing (NYSE:BA) and its main rival Airbus have been plagued by a slowing commercial airplane market. The weak economy has forced air carriers and governments to delay or cancel orders for new aircraft in recent quarters. Furthermore, airliners built more than 20 to 30 years ago are still flying regular routes after being refurbished multiple times. This has increased pressure on both companies to lower prices on their jetliners to win deals. At present, Boeing has only been able sell 558 planes this year, that’s a whopping 36% drop in sales year over year.

Earlier in the month, Boeing had announced that the company had finalised a deal with Iran Air to sell it 80 planes at a market value of close to $17 billion. That said, one must remember that aircraft sales are almost never made at list prices. In this respect, the Iranian leadership has mentioned that due to the nature of the particular order and the choice possibilities, the deal is actually worth only half the of the book value. This has helped calm tensions in Iran at a time when hardliners have heavily criticized President Hassan Rouhani over the costs of the purchases.

The deal covers the sale of 15 777-300ER long-haul jets and 15 of the newer 777X widebody aricraft which is currently under development. Apart from this, the deal also includes the sale of about 50 737MAX single-aisle jets.

Airbus’s contract has also been affected similarly. Late last week, the French airplane manufacturer had finalised a deal to sell 100 planes to Iran Air in a deal valued to be around $18 to $20 billion at list prices. However, a spokesperson from Iran Air recently confirmed that the deal will not exceed $10 billion. Further, Iran Air has decided not to buy the A380 wide-body aircraft.

These deals have been a topic of intense debate in the U.S. over this past year. Since the deal was announced earlier in the year, most Republicans have opposed it calling it un-American. It is their belief that Iran is the biggest sponsor of terrorism and that the country will use its commercial aircraft to propagate terror further. Back in 2011, it was noted, Iran used commercial airplanes to transport military vehicles and weapons to Syria in a covert operation to supply Hezbollah active in the region. It is of their opinion that the monetary trade-off is just not worth the risk.

As a further deterrent, by a 243-174 vote, lawmakers (mostly Republicans) introduced legislation that would prohibit the Treasury Department from issuing any licenses U.S. banks would need to complete the transactions with Iran. However, it seems that despite all these problems, Boeing and Airbus managed to finalise the deals without much of a hassle, but likely at a hefty cost.

At present, Boeing has more than 5,700 firm orders valued at close to $500 billion. That said, the company has suffered from lower than average orders this year which has put immense pressure on revenues and profits. The heavy discounts offered to Iran now further shave off potential earnings that could have greatly benefitted the company going forward. The only silver lining is that Boeing could see more orders from Iran in the future, where pent-up demand for domestic travel could realise the potential for more than 400 new planes.

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