Last week, Airbus had a blockbuster order from Iran.
While attention is focused on the rapid acceleration in orders from Iran, there are some subtleties that must be noted.
- The ATR deal was signed in Tehran, not Paris, Rome or even Toulouse.
- The deal uses export credits from France and Italy.
What does this deal mean?
- The deals being done by Iran and its airlines are valuable to aircraft and engine makers. The Iranian market is large and has great potential for more business, for spares and training. The entire commercial aerospace supply chain benefits from the opening of this market. Iran offers a long tail of market benefits.
- For investors, a key issue here is that these new deals with aerospace companies are low risk. When sanctions were first introduced, Grumman had risk in its sales of F14s to the Iranian Air Force post regime change. By using export credits, aerospace companies face much less risk.
- Iran will do more aircraft deals with Boeing (NYSE: BA), Bombardier (OTCQX:BDRBF) and Embraer (NYSE: ERJ). It will do these deals because the more it ties other countries and their national champions into its own economy, these exporting nations will have a very difficult time being drawn into any renewed sanctions.
- If western nations (specifically the USA) were to try reimpose sanctions, France and Italy will be most reluctant. It is their tax payers who are at risk for any default by Iran on the ATR orders. We don't know for sure, but probably also for the Airbus orders.
- An example of a deal outside commercial aviation is that of France's Renault (OTCPK:RNLSY) to rebuild its Iran factory.
- These moves by Iran must be seen for what they are. They are exceptionally clever because the attention is being placed on the first impressions. By first impressions, we mean the attention is on the deals being announced rather than what they mean later on. Exporting nations are excited about the deals. It is less clear what the medium- or long-term impact of these deals could be.
- But we must be aware of the second part - the tying up of nations into a complex series of deals that will make it virtually impossible to reimpose sanctions.
One cannot be sure, are these deals being set up because Iran suffered severely under sanctions and it wants to ensure they can never be reimposed again? Or is there something more nefarious at play?
Is the concern to make reimposition of sanctions very difficult because Iran plans to not only maintain its belligerence and aggression on the Middle East, but use a lot of its new cash from returned blocked funds to stoke even more regional conflict?
Investors would be wise to step back from the initial excitement to these deals and not be caught up with first impressions. The first impressions may be way off what is really going on.
Iran desperately needs more revenues from its oil exports and current low prices don't help at all. Iran needs to see oil prices much higher - at least $80PB or more. What does Iran need to do for this to come about? Almost certainly there has to be something else going on than what we are seeing now. Tread carefully.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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