Aerospace industry pundits and the media have been aflutter with the news yesterday that the “Iran Nuclear Deal” has been cancelled. Speculation abounds about who will be hurt and who benefits, some of it spurious and based on false interpretations of what is about to happen.

Let’s clear the air with some facts. First, this is not a treaty, and the agreement was never signed by the Iranians, making it null and void. While the Obama administration did reverse sanctions and repatriate an estimated $150 billion of frozen Iranian funds from assets previously seized in the US, those actions, of themselves, do not provide validation to the agreement, which was technically never legally in effect. That has now been formally corrected, with the leaving the accord.

Second, this was not a deal that was popular in the United States. One of its major proponents, Ben Rhodes. famously misled the media. He is also famous for the “echo chamber” comment. Subterfuge helped the impression that a deal was actually in place. The truth is that this deal was an executive agreement and not a treaty, hence the ease through which Donald Trump could reject it. Were it a true treaty, a Senate vote would have been required.

One particularly onerous condition rumored to be included in the executive agreement was a provision for the to come to the military aid of Iran in the event it was attacked by Israel or other foreign powers. Iran didn’t co-sign the “deal” and went to on defy the US in other ways probably a reasonable sign it wasn’t interested in any meaningful detente.

The Implications for Aerospace

The cancellation of the Iran nuclear accord brings impacts in several areas oil prices, aircraft orders, and MRO and spare parts. Let’s examine each of them.

Oil Prices

There is a concern that rejection of the accord will drive up oil prices. This may happen in the short-term, as speculators react or if Iran threatens to close the Straights of Hormuz. But since the is now the swing oil producer in the world market, we can expect US oil fields to uncap and once again begin producing if necessary. US oil exports are flooding the market and there is no immediate shortage of oil. What goes up will come down, as the cyclicality of the oil business continues. We do not expect a meaningful increase in oil prices in the near future, once the initial speculative spike works its way out of the market. But do expect higher Memorial Day gasoline prices.

Aerospace Deals

The aerospace industry is nervous about the loss of $40bn in deals. Boeing is downplaying this. But despite the Obama administration returning to Iran billions of dollars, the deals Iran made with Airbus and Boeing were not going to be paid using that money. The OEMs were being asked to help with creative financing. National export banking credits were expected to play a crucial role. The ATR deal for 20 aircraft came with an offer from ATR to finance eight of the planes.

Neither Airbus nor Boeing can do business with Iran under the new rules and sanctions – close to half an Airbus is tied up in US-made parts. Moreover, as we have seen prior to the Trump decision, the deals made with Airbus and Boeing did not move forward quickly, and weren’t on the books as firm orders, merely letters of intent.

A key reason for this is fear of any financial institution to do a deal that touched the banking industry. Breaking sanction rules would incur huge fines and possible banning from the US banking system, which most financial institutions cannot afford to do. Iran offered nothing worth covering that risk, particularly given an abundance of aircraft financing opportunities elsewhere. Had Iran used the billions from the Obama repatriation largesse they could have acquired many more aircraft than they did during the period without sanctions. But they did not want to pay for them using this cash.

So what potential orders will now likely be lost? Airbus had negotiated LOIs for 95 aircraft with Iran, including 16 A350 and 28 A330neo orders, which will be difficult to replace with new orders from elsewhere in the near term. In addition, 50 A320 family narrow-body aircraft were included in the LOI arrangements.

Boeing had LOIs for 30 777 wide-bodies for Iran Air, as well as 50 737 MAX-8s for that carrier and another 30 for Iran Aseman Airlines. The total of these deals at list prices would have been about $47 billion. Most of the 777 order, for the existing model, have already been replaced in the Boeing skyline, and the 737 MAX8, Boeing’s best selling airplane ever, has a massive backlog.

While there is no question that Iran needs new airplanes, the sanctions imposed by the will prevent Airbus and Boeing from delivering new airplanes, given the high content. In addition, those restrictions will continue to apply to spare parts, making it more difficult for Iran to maintain its aging fleet of aircraft types that have for the most part already been retired in the US.

With Boeing and Airbus out of the picture, and Bombardier and Embraer as well, given the US content on their aircraft, that leaves Russia and China. Today, only regional aircraft are offered by each, the Sukhoi Superjet (itself with substantial western content but also with an option for more Russian content) and the Chinese ARJ-21, which is not very efficient nor being produced in volume. The forthcoming Irkut MS-21 and Comac C919 will be larger A320 sized aircraft, but won’t be ready for several years. In the wide-body category, there are no viable alternatives, and the Russian-Chinese RC929 will likely not be available for another eight years.

The Iranians will be stuck with old aircraft for quite some time, and a lack of spares that will likely negatively impact their schedule performance.

So for Iran, what is the way out? Had they signed the treaty, they would not be in this predicament today. But given the circumstances, Iran will likely move closer to China, who may fill the vacuum from US and EU trade sanctions.

The Bottom Line

The cancellation of the Iran “Nuclear Accord” by the US will likely result in no new aircraft deliveries to Iran for the foreseeable future, and the need for life extension of what is already a very old and inefficient fleet of aging aircraft. From a safety standpoint, this is not a good situation for Iran. From an economic standpoint, there are no options for Iran other than Airbus or Boeing for wide-bodies, and no viable options for the scope of single-aisle fleet renewal required from either Russia or China in the near term. These sanctions will hurt, and further cripple Iran’s transportation infrastructure.

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