The beginning of 2016 brought the arrival of 'Implementation Day' under the Joint Comprehensive Plan of Action (JCPOA) and its potential for business opportunities in Iran that had been shut off for decades (for further details please see "'Implementation Day' brings openings for commercial aircraft sales with Iran"). Since then, actual opportunities under this programme have been slow to develop and subject to intense scrutiny.
However, a breakthrough of sorts emerged on September 21, when US company Boeing Co and European firm Airbus SAS reported that they had received licences from the US Office of Foreign Assets Control (OFAC) allowing them to proceed with sales and leases of commercial aircraft to state-owned Iran Air. With these licences, both companies take important steps forward in thawing the freeze in the commercial aircraft market in Iran.
The commercial aviation industry was uniquely positioned to benefit from the trade restrictions that were lifted on Implementation Day. The JCPOA included a specific commitment by the United States to allow for the sale of commercial passenger aircraft to Iran by licensing their export and the provision of certain related services. On Implementation Day, OFAC issued a statement of licensing policy establishing "favorable" treatment for licence applications for sales of commercial passenger aircraft to Iran. Even though many sanctions against Iran remain in place, these actions were expected to open up a multibillion-dollar market in desperate need of overhauling its ageing fleet of commercial aircraft to US companies.
Efforts to capitalise on the new market proceeded quickly at first, with high-profile entities jumping to take advantage of the new opportunities. Soon after Implementation Day, Airbus announced that it had reached an agreement with Iran Air for the sale and lease of up to 118 aircraft – a deal valued at approximately $27 billion. This was followed in June with a provisional agreement between Iran Air and Boeing for the sale and lease of an additional 109 aircraft – a deal worth roughly $20 billion.
Both of these deals were contingent on obtaining the necessary licences from OFAC authorising the transactions. The scope of OFAC's jurisdiction is expansive and includes both US persons and foreign persons dealing with US origin goods. Boeing's negotiations with Iran were delayed due to the uncertainty that Boeing – as a US entity – faced over whether even discussing terms of an agreement with Iran constituted facilitating a transaction that would have been prohibited without its own licence. While Airbus was not necessarily restrained in the same way, most Airbus aircraft incorporate more than the 10% threshold of US origin components, so its aircraft in the deal are also subject to OFAC's prohibitions under the US-Iranian sanctions regime.
These aircraft deals have become high-stakes test cases to gauge how business deals with Iran could be organised, structured and financed in a post-JCPOA environment. Both deals faced scrutiny from the US Treasury Department and from conservative groups which were opposed to the nuclear agreement with Iran. The Boeing deal in particular drew negative feedback from Capitol Hill. In July the US House Financial Services Committee introduced amendments into the 2017 appropriations bill that would have prohibited the use of any funds for OFAC to issue licences or authorise transactions involving exports of commercial aircraft to Iran. Committee reports made clear that the amendments were brought in part to put a hold on Boeing's provisional agreement, due to concerns about whether aircraft included in the deal could be used for military purposes, including for the transport of troops or weapons into Syria.
For its part, Iran expressed indignation at the slow pace of OFAC's licensing process. At a Centre for Aviation Finance conference in Tehran on September 18, Iran's roads and urban development minister, Abbas Ahmad Akhoundi, criticised what he saw as unfair delays by the United States in holding up the licences for the aircraft deals. Iran reportedly held to its commitments concerning the diversion and stockpiling of nuclear material outlined in the JCPOA; and the International Atomic Energy Association – which monitors Iran's commitments to the nuclear deal – has reported no diversions to date. The delays in the licensing process, compounded by delays in arranging the necessary financing from European banks, raised concerns that the Airbus and Boeing deals may have to be renegotiated or reduced in scale. However, Akhoundi also expressed optimism that OFAC would issue the necessary licences "soon".
The minister's predictions proved to be accurate, as OFAC's licences to Airbus and Boeing were granted on September 21. Boeing's licence reportedly covers the sale of 80 aircraft, including 46 single-aisle 737s, four 747s and 30 wide-body 777s. Meanwhile, Airbus reported that its licence from OFAC authorises the sale of 17 single-aisle passenger aircraft to Iran Air. Both licences contain explicit conditions to ensure that the aircraft involved in the transactions are used solely for commercial purposes. A second licence application from Airbus for the remainder of the aircraft in its deal – including its 'superjumbo' A380 aircraft – is still under review at OFAC; as is a licence application from turboprop manufacturer ATR, which has a pending deal with Iran for roughly 40 of its aircrafts.
Implementation Day under the JCPOA rightfully raised many hopes that the US commercial aviation industry could begin to do business with a market that had long been sealed off and in need of their products and services. Subsequent months have shown that, even with the relaxation of US sanctions under the JCPOA, the road to doing business with Iran is still complex and riddled with possible compliance faults. The licence applications by Airbus and Boeing underwent months of intense scrutiny before being approved by OFAC and ATR's licence application is still under review. Even with OFAC's approval, many other components of the deal that will still require careful navigation around sanctions and prohibitions that continue to exist, including handling financing arrangements without involving US dollars or the US financial system, both of which are still restricted activities.
A key question ahead is whether the month-long timeframe for OFAC to license Boeing's and Airbus's transactions served as 'brush-clearing' for future transactions to be handled more expediently, or whether it will be representative of how all such transactions will be scrutinised. While those looking to engage with Iran in commercial aircraft deals can hope for the former, they should prepare for the latter – in part by making sure that any OFAC licence applications are accurate and comprehensive in their scope and coverage of the potential transaction.
For further information on this topic please contact Timothy J Lynes, Stewart B Herman or Jane Cavanaugh at Katten Muchin Rosenman LLP by telephone (+1 202 625 3500) or email ([email protected], [email protected] or [email protected]). The Katten Muchin Rosenman LLP website can be accessed at www.kattenlaw.com.
Eric Rock and Benjamin Shanbaum of Rock Trade Law LLC contributed to the preparation of this update.