Persian promise

posted on 3rd April 2018

The easing of economic sanctions on Iran this year potentially opens a major new air freight market. But there are still significant challenges to overcome,
writes Mike Bryant

In July last year, after almost two years of negotiations, Iran, the EU, and the so-called 5+1 nations (the five permanent members of the UN Security Council – the US, the UK, France, Russia and China – plus Germany) reached an agreement to significantly ease the sanctions regime on Iran in return for a curb by Tehran on its nuclear programmes.

On 16 January this year, following verification that Iran had indeed implemented key changes, UN nuclear-related trade sanctions imposed on the Islamic Republic were relaxed, although some restrictions remain in place, such as on arms sales. The international air freight industry was quick to see the possibilities, but the fruits of any benefits are likely to be unevenly distributed. US companies are still excluded from most trading activities with Iran because of unilateral US sanctions that remain in place in response to perceived Iranian violations of human rights, its support of terrorism, and its ballistic missile programme. Indeed, many of the relaxations provided for in the nuclear-related agreement relate only to ‘non-US persons’.

Iran’s difficult relations with many of its neighbours in the Middle East also remain an issue and an unwanted brake on trade. On 4 January, Saudi Arabia broke off relations with Iran in reaction to attacks on the Saudi embassy in Tehran. Bahrain broke off relations at the same time, while relations between the UAE and Iran have also been strained this year – representing a potential problem for Dubai, in particular, which has for many years acted as an important gateway for goods entering Iran.

But in Europe and in Iran itself, many air cargo players are looking to the future with greater positivity than for some time.

Forwarders abroad

Forwarders have taken very different approaches to the relaxation in sanctions and changes that are taking place in the Iran market, with US forwarders still more of less prevented from dealing with Iran. This also applies to some non-US-headquartered firms such as Ceva Logistics, where even its non-US entities are treated as ‘US persons’ because of Ceva’s ownership structure.

But other supply chain service providers are in a better position to do business through Iran. For Switzerland-headquartered logistics giant Panalpina, a large volume of the imports it is currently moving into Iran consist of pharmaceuticals from across Europe. Europe used to be Iran’s number one trading partner before the sanctions.

“Iran certainly has a lot of potential now that sanctions have been relaxed,” says Slavey Djahov, regional head of air freight for the MEAC (the Middle East, Africa and CIS) region at Panalpina. “The sanctions hindered the economic development of Iran, which represents the second-largest economy in the Middle East (after Saudi Arabia).

“There is a great need for modernising infrastructure and the population of approximately 80 million people make up a great domestic consumer market. Still, it will take some time before air freight really starts picking up,” he continues. “Even though economic sanctions have been eased, some still remain and dollar-denominated transactions are still out of reach. This is still a challenge for the development of the cargo business.”

Oil and gas will remain the backbone of Iran’s economy, Djahov considers. “This is certainly one area where we see opportunities in actively participating and providing freight forwarding solutions,” he notes. “The respective infrastructure will have to be upgraded in order to meet the growing demand. Other civilian infrastructure, such as telecommunication networks, need to be upgraded as well.”

He concludes: “There is a positive dynamic, but it still requires political courage in Iran and the international community to move forward. Sanctions have been lifted or relaxed, but it is still not easy to do business with Iran. For example, many companies and their lawyers outside Iran are still waiting for detailed guidelines from the US Treasury’s Office of Foreign Assets Control (OFAC) before trading with Iran.”

Iran’s freight agents

One of the Iranian freight forwarders that is looking to reap the benefits of the relaxation in the overseas sanctions regime is Tehran-based Pishtazan International Transport Co. Pishtazan has typically imported air cargo shipments including spare parts for car manufacturers, chemicals, and spare parts for petrochemical companies. It has also exported shipments for petrochemical companies operating in Iran.

Imported shipments are entering Iran from all over the world, explains managing director Hossein Lotfi, from locations including Germany, France, Serbia, Switzerland, Austria, Turkey, Dubai, Korea, Hong Kong, and the UK.

Lotfi is certainly expecting air cargo volumes to increase in the wake of sanctions removal. “Iranians living outside Iran, such as in the US, continental European countries, the UK, Australia, will send many small goods to Iran,” he says. “In addition, there will be many industrial and commercial goods, like critical parts for production lines, coming in from all the world over to Iran – and vice versa.”

As to whether Iran has the infrastructure to deal with any significant increase in air freight traffic, he says: “We suppose there will be no specific problem in this respect, as there are many airports across Iran, although most airlines are focused on Tehran Imam Khomeini Airport (IKA). Most of the goods coming in from all the world over will arrive at IKA, then transit from there to final destinations across Iran.” And IKA has the infrastructure and the equipment required to handle large volumes of freight, he believes.

But he also confirmed issues regarding international financial transactions. “Regretfully we are still encountering some difficulties in handling money remittance from Iran to the outside world,” Lotfi notes.

Carrying the cargo

In recent years, a lot of the freight moving from Europe, Asia or the US has reached Iran via elsewhere in the Middle East, particularly through Dubai. Indeed, despite certain political sensitivities, Dubai has served to an extent as an offshore consolidation hub for Iran-bound freight, officially and sometimes unofficially, with some in freight describing Iran in the past as Dubai’s de-facto home market. Perhaps because of some of the political sensitivities, regional carriers including Emirates, Etihad, and Qatar Airways declined to comment on the implications of the opening of Iran’s economy for their air freight businesses.

Meanwhile, a number of European carriers fly direct from their home hubs into Tehran, carrying belly freight on these passenger services. Lufthansa is one such carrier, and it is currently scaling up its Iranian frequencies and cargo capacity as a result of significantly increased passenger numbers this year compared to last year. Indeed, on 4 July Lufthansa resumed flying to Tehran from Munich, a service that previously operated between spring 2004 and summer 2006. Operating non-stop, three times a week, the A330-300 service out of Munich complements the German flag-carrier’s daily B747 service to the Iranian capital out of Frankfurt.

The weekly capacity available on the Tehran connection to Frankfurt is 66.5 tonnes, and to Munich it is 47.5 tonnes, explains Thorsten Braun, Lufthansa Cargo’s general manager Middle East, Iran & Pakistan. “We also offer a monthly MD-11F charter from Amsterdam to Tehran with a capacity of 85 tonnes,” he adds. Austrian Airlines, part of the Lufthansa Group, offers an A320 operation flying out of Vienna twice a day to Tehran and will add a further three weekly frequencies from Vienna to Isfahan International Airport with A320 equipment from September; however, these narrowbody flights do not carry cargo.

“Our team in Tehran is doing its best to fill the ten weekly flights,” Braun continues. “However, exports have not significantly increased since the lifting of selected sanctions. Furthermore, competitors have significantly increased their capacity, resulting in strong competition.”

According to Lufthansa, most Iranian industries are centred on Teheran, most notably the nation’s vitally important – and huge – oil and gas industries. Other economic sectors important in the region include the textile, agriculture, and building materials industries, many of whose players are likely to require air cargo capacity. Some of the major cargo types flown out of Iran by Lufthansa are personal effects, dry fruits, carpets and mail. However, currently, the growth of capacity seems to exceed the growth in outbound demand, Braun warns.

“As a German carrier we, of course, have a focus on the German and European market, but we are also happy to carry a good part of the shipments to other destinations, such as to Canada,” he observes.

But things are more positive for inbound shipments. “Thanks to the relaxation of the sanctions, we have seen a significant increase of imports into Iran,” Braun notes. “As mentioned before, we have regular charters to Iran, and we hope to see a similar impact on the exports out of Iran in the second half of this year or at the beginning of 2017 concludes.”

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European links
Since 1 July, Italian GSSA company Aircargo Italia has been helping Iran Air’s official general sales agent in Italy, Adineh Travel, marketing the carrier’s cargo capacity on its weekly flight between Tehran and Rome and twice-weekly flights linking the Iranian capital with Milan-Malpensa. There have also been some unconfirmed reports that frequencies on these services might increase before the end of the year.

John Bartalotta, manager of Aircargo Italia’s Bologna branch, has close contacts in Iran and has kept a watchful eye on the Iran market for many years. Last year, he says, it was becoming clear that the situation vis-a-vis Iran was in flux, that it could be the “beginning of something interesting”, confirmed during a visit to Iran in November in which he met members of Iran Air’s management team.

It was quickly recognised in the market that the easing of sanctions would create opportunities for business with a country that traditionally has strong ties with Italy and many other European states. There is certainly demand in Iran for European goods, Bartalotta suggests, including many of those that Italy can provide – fashion items, high-tech goods, electronic devices, medial equipment and so on.

As yet, demand for freight capacity on these flights is limited, but it is not through a lack of space or of will, it appears. The impediments to trade and to greater air cargo volumes are primarily financial. In particular, what is holding back trade is the inability of Iranian individuals and companies to source foreign currency with which they can buy goods or supplies from abroad. Once those credit lines are opened up and once there is that access to foreign currency, trade volumes will build quickly, Bartalotta considers.

Another problem is that recent declines in oil prices have affected revenues in Iran, which is believed to have the world’s fifth-largest oil reserves and the second-largest natural gas reserves.

But things are changing, Bartalotta says. Many foreign airlines, most notably some of the Middle Eastern carriers, have stepped up their services to Iran and, once some of the obstacles to growth are removed, things will move much more quickly, he says.

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Building capacity
One thing that could help spur air freight trade would be an expansion in the cargo capacity of the home carrier, Iran Air. In January this year, it was confirmed that it had ordered 73 wide-body and 45 narrow-body aircraft from European aircraft manufacturer Airbus. The wide-body aspect of the order incorporates 27 A330ceo family, 18 A330neo (-900), 16 A350-1000 and 12 A380 aircraft.

If delivered, such aircraft would allow Iran Air to begin the process of replacing old aircraft in its inventory, some of which date to prior to the Islamic Revolution in 1979. Most Iranian-registered aircraft have been banned from EU airspace on safety grounds.

Then, in spring this year, US manufacturer Boeing said that it had begun discussions with Iranian airlines about possible aircraft sales. No firm deal appears possible at this stage, although the US government did give Boeing its permission in February to hold talks with Iranian carriers.

There is reason to believe that both Iran Air and other Iranian carriers may have access to freighters: A330s, B747Fs, Il-76s and even B747 combis have all been listed as on the inventory of various Iranian carriers, although how many are operational is unclear.

The question of supply of air freight capacity seems, therefore, to be as difficult to pin down as changing demand.

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Dubai’s role as a hub for Iran: Q&A with Panalpina’s Slavey Djahov
What role does Dubai currently play as a hub for air freight entering or leaving Iran?

Today, Iran is among the top five trading partners for the UAE and we anticipate that with the easing of sanctions, trade will flourish. Emirates Airlines has one of the largest air freight shares into Iran with daily wide-body capacity into both Tehran and Mashhad. Dubai is the top destination served from IKA, accounting for a market share of 26% and is served with combined 67 weekly departures by Emirates, flydubai, Iran Air, and Mahan Air.

Will the role of Dubai grow or diminish in a post-sanctions environment? Will the role of any other hubs change as a result of the relaxation of the sanctions regime?

With Dubai’s geographical position and with nearly half a million Iranians living in the UAE, the easing of the sanctions will, I believe, further grow trade. The Iranian market in particular offers opportunities for both Turkey and Azerbaijan to position themselves as key players.

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Focus on Tehran Imam Khomeini Airport (IKA)
According to the aviation website anna.aero, Iran’s capital Tehran and its population of 8.3 million is served by two airports, Tehran Imam Khomeini Airport (IKA) and Tehran Mehrabad Airport (THR), with the former now being the main international gateway to the largest city in Western Asia. Analysis of Innovata annual scheduled data indicates that IKA’s capacity has grown by an average annual rate of 23% in the decade from 2005 to 2014, anna.aero reports.

IKA has one passenger terminal, with a total annual handling capacity of 6.5 million passengers and 120,000 tonnes of cargo. A second terminal is set to open next year and a third due to open in a further two or three years.

Operated by the Iranian Airports Holding Company, IKA offers non-stop flights to 46 destinations in 30 countries across Europe, the Middle East and Asia (according to Innovata schedule data for this March). By comparison, its mainly domestic airport peer at Mehrabad provides services to 28 domestic points, Baghdad and Al Najaf in Iraq and Kiev Boryspil in Ukraine. In addition, IKA serves as an operating base for Iran Air, Mahan Air and Iran Aseman Airlines.

Dubai was the top destination served from IKA in 2015, accounting for a market share of 26%. The UAE city is served with a combined 67 weekly departures by Emirates, Iran Aseman, flydubai, Iran Air and Mahan Air, according to anna.aero. Ranking second with a market share of 17%, Istanbul Atatürk Airport is flown by five airlines, namely Iran Aseman, Iran Air, Atlasjet, Turkish, and Mahan Air.

Lufthansa has the highest frequencies among western European carriers serving IKA, although IAG commenced a six-times weekly London Heathrow-Tehran service on 1 September. The route will be served by a British Airways B777-200 aircraft, providing forwarders with belly-hold capacity of six pallets and up to 20 tonnes of lift on each flight. IAG Cargo said that with Iran’s economy in 2016 and 2017 expected to grow by 4.8% and 5.4%, respectively, the service would offer businesses “a significant trading opportunity”.

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Connecting hubs
The launch of new links to Iran obviously has a beneficial effect on the cargo traffic through the airports from which those connections are launched. The introduction in July of Lufthansa flights to Tehran from Munich was good news for the airport operator, Flughafen München, with the airport’s director for cargo traffic development, Markus Heinelt, expecting “large volumes of cargo exports on the Tehran route as soon as the requirements are fulfilled”.

He explains: “We see a need for cargo from the mechanical engineering, telecommunications, automotive, and parts sectors” to be carried on the lane. Southern Germany is a major industrial centre, a base for those industries, while Lufthansa can generate transit cargo from its worldwide network to move through Munich, he notes.

Those “requirements” that need to be fulfilled, for both imports and exports, are both economic and political, he notes, and plenty of work is required in both these fields if the recent changes in the sanctions regime and those that can be achieved in the future are to have a real and lasting impact on trade flows and on the air cargo business through Iran.