Iran aims to shake up its ageing aviation sector with a series of ambitious airport projects and plans to privatise flag carrier Iran Air.

But years of sanctions following the 1979 Islamic revolution and the threat of new restrictions as a result of Tehran’s nuclear programme are hindering attempts by the country to establish itself a serious player in the regional aviation sector.

While the trade embargoes affect all aspects of Iran’s airline industry, the most serious is the impact on the safety of aircraft.

The sanctions prevent the country from acquiring parts and support essential for aircraft maintenance. Airlines are also unable to buy new aircraft because of the restrictions. Critics opposed to the sanctions say they go against article 44 of the Chicago convention, which states that as aviation safety affects human lives and human rights, it should be put as a priority over political differences.

Ageing fleet

Forced to operate old and unsafe aircraft, in particular Russian-made Tupolev Tu-154s, Iran’s carriers have suffered numerous fatal crashes. The most recent was on 24 January when a Tupolev Tu-154 caught fire while landing at Mashhad airport in the northeast of the country.

“The fleet is a major concern. There is still a lot of Russian aircraft around, which are not safe. And there is a lot of demand for western-style equipment,” says Hossein Hosseini, director of marketing and route development at Mahan Air, a Tehran-based private airline.

Sanctions prevent the country from acquiring parts and support essential for aircraft maintenance

In September 2007, Mahan Air was added to the European Commission’s blacklist of airlines banned from flying in EU airspace as its fleet did not have collision-avoidance systems. Mahan Air was taken off the list in July 2008.

“There is little doubt that ever-tightening sanctions are having a negative impact on both the safety and growth of Iranian airlines. The fact that such a large percentage of aircraft parts can be considered dual-use, with a potential military function, means that it is inevitable that such a high-tech sector will continue to struggle,” says a London-based political analyst.

The sanctions are not only damaging the safety record of Iran’s airlines, but are also hindering plans to upgrade and develop the country’s airports.

The Iranian Airports Holding Company says there are currently more than $1.4bn-worth of investment opportunities open to foreign investors in the country’s aviation sector, excluding plans for the expansion of Tehran’s Imam Khomeini airport. More than 34 million domestic and international passengers passed through Iran’s airports in 2009, the majority using the major airports of Tehran, Qom, Esfahan and Shiraz. Iran expects this figure to rise exponentially, driven by rapid population growth. Tehran’s population alone is set to rise to 20 million by 2030 from around 12 million today.

We hope the government really accelerates the deregulation of Iranian airlines

Hossein Hosseini, Mahan Air

It is estimated Iran has about 98 commercial airports, with the vast majority being small domestic terminals.

Iranian Airports Holding Company says there are plans to renovate and expand existing airports of Ahvaz, Tabriz, Esfahan, Mashhad, as well as plans to expand Imam Khomeini International airport.

Despite the high number of existing airports, Iran is studying plans to build more domestic airports in the smaller cities of Modaress, Abadeh, Borujerd, Saghez, Maku and Gonabad.

But local aviation sources and industry experts say the country already has too many airports and plans to develop new ones in areas that cannot sustain economic growth are unnecessary.

“How several new airports will be utilised fully is a mystery when air travel in Iran is very limited,” says Saj Ahmad, chief aerospace and airline analyst at consultancy FBE Aerospace UK. “There is nothing on the table beyond key cities, such as Tehran, Qom and Esfahan, to warrant such expansion when no airline is talking [of] increased flights to Iran. Rather its neighbour Iraq seems to be the pick of the bunch at present.”

The multibillion-dollar expansion of Imam Khomeini International is the centrepiece of plans to upgrade the country’s aviation industry. France’s Aeroports de Paris Ingenierie is currently finalising the masterplan for the second phase of the airport, which lies on the outskirts of Tehran.

The expansion will initially increase the airport’s total capacity to 20 million passengers a year, from the current level of about 6.5 million passengers a year.

The masterplan involves three or four phases of construction, with the final capacity at the airport set to be 90 million passengers a year. By comparison, Dubai’s new airport at Jebel Ali in the UAE due to open on 27 June, will have an eventual capacity of 120 million passengers a year, and the new terminal at Jeddah airport in Saudi Arabia will be able to handle 80 million passengers when complete in 2035.

Other components being considered as part of the masterplan include a logistics park and a freezone, as well as an airport city that Tehran hopes will attract foreign investment. While the budget is not yet clear, the project is likely to run into billions of dollars.

Financial constraints

But the expansion planned for Imam Khomeini airport is ambitious for any country, let alone one constrained by sanctions and with few foreign investors.

Iran needs to get sufficient funding in place before beginning the development, meaning the expansion is unlikely to be finished within the next decade.

Obtaining finance will be a major challenge. The airport authorities failed to receive the required $300m from the government in 2009 to finish the phase one construction of the airport, which involves building a second runway, a cargo terminal and a hajj terminal. Work on that phase is ongoing.

“Infrastructure growth is being hindered by the lack of financial backing and the less-than-appealing status Iran has at present, largely because of its nuclear programme and the threat that Iran may be attacked,” says Ahmad.

For the expansion project to go ahead, assistance will be needed from the private sector as government funding is limited.

Plans for a $103m expansion of Qeshm International airport have also been stalled by a lack of financing. The design has been completed by New Zealand-based Airways International and an unnamed Chinese company has expressed an interest in financing the project, but nothing concrete has been confirmed as yet.

The planned new airports projects will also require the airlines to play their part if future increases in passenger capacity are to be met. There are numerous small, domestic airlines operating in Iran alongside the main players, including Zagros Airlines, Safat Airlines, Aram Air and Caspian Airlines.

Mahan Air is Iran’s largest private carrier and it is planning to expand with new routes to Milan and Shanghai that are scheduled to begin in 2010. The airline carried about 3 million passengers in 2009 and is owned by a charity called Mol-al-Movahedin, based in the southern desert province of Kerman.

Rumours that former president Akbar Hashemi Rafsanjani, a political rival of current president Mahmoud Ahmadinejad, owns the charity has fuelled speculation that this is why Mahan Air has been overlooked for development by the present government.

While deregulation of the aviation sector was high on the agenda of the previous administration, the issue now seems to have been forgotten. Deregulation would allow the airlines in Iran to compete freely with other regional counterparts.

“As a private airline, we hope the government of Iran really accelerates the deregulation of Iranian airlines. This [would] mean open skies in Iran, so that we could have formidable operations in the region – a region that has very powerful airlines,” says Hosseini. “The government of Iran must decide … or else we can’t compete.”

While commercially, the GCC may support an open skies agreement with Iran, until Tehran resolves its long-running dispute with the UAE over the ownership of three islands of Abu Musa, Tunb and Lesser Tunb in the Gulf, an open skies deal is unlikely to be agreed.

But, the recent news that Iran Air is on the government’s privatisation list for the current Iranian year, ending 21 March 2011, may be the strongest sign yet that the government is serious about upgrading its aviation industry.

Expansion stalled

Iran Air currently has a fleet of 52 aircraft, with one more plane on order. But the carrier’s plans to expand its routes hinge on being able to buy new aircraft. “Due to unfair sanctions imposed on Iran, we have no access to any new aircraft and are not able to go directly to the manufacturer, so we purchase the needed aircraft through the used market,” says Farhad Parvaresh, chairman and chief executive officer of Iran Air.

The airline carried some 6.5 million passengers in 2009 and 8.5 million together with its subsidiary Iran Air Tours, which mainly operates internal flights. The national carrier currently enjoys a 30 per cent break on its fuel costs, but will lose this subsidy as it moves closer to being privatised.

The government says it will sell 60 per cent of the airline, as well as fully privatising Iran AirTours.

The airline is now preparing the initial documents to submit to the Tehran Stock Exchange for the process to move ahead, says Parvaresh.

The carrier recorded a net loss of IR461bn ($46m) in the year ending 20 March 2009.

Even if privatisation does go ahead, Iran Air will be unable to buy new aircraft and expand its routes to Europe and the Middle East, unless sanctions are lifted.

“At present, it doesn’t look at all likely that sanctions would be lifted given the inextricable link to the nuclear programme, nor does it look likely that privatisation would yield any candidate ready and willing to invest,” says Ahmad. “Rightly or wrongly, Iran Air will continue to be propped up by the state.”

Ultimately, if Iran is to have any success in floating Iran Air on the Tehran Stock Exchange and executing its planned expansion of Imam Khomeini International airport, it needs to take steps to attract foreign investors.

But to do this, the government needs to abandon its isolationist policies. Failure to do so mean Iran will continue to have an outmoded aviation sector, whose safety record can only be expected to worsen if it cannot access vital spare parts.