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16-Dec-2015 1:00 PM

Iran Airport Investment Outlook: A market with enormous potential

Analysis

Iran Airports Holding Company (IAHC), a state-owned enterprise under Iran's Ministry of Roads and Urban Development, plans to undertake a significant amount of airport development over the next 15 years. Projects are planned to take place in Mehrabad, Esfahan, Tabriz, Mashhad, Shiraz and the plan includes new airports in Ahvaz and Bushehr.

Even before the now-formality of lifting of sanctions (after a positive announcement by the IAEA on 15-Dec-2015), Iran has had annual passenger traffic of 47 million through 67 airports, with traffic growth of 6% per annum Speaking at the CAPA Asia Aviation Summit in Singapore on 23-Nov-2015, Ahmadreza Bayati Doosti, IAHC Deputy International Cooperation, said that approximately USD3 billion in investment opportunities were available in airport infrastructure during 2016.

Summary
  • Iran Airports Holding Company (IAHC) plans to undertake significant airport development projects over the next 15 years, including new airports in Ahvaz and Bushehr.
  • Iran has an annual passenger traffic of 47 million through 67 airports, with a growth rate of 6% per annum.
  • Iranian airlines anticipate demand for 300 aircraft within 5 years, and 500 within 10 years.
  • Tehran has the potential to become an international hub, but its carriers lack the brands to support such expansion at this stage.
  • French and Chinese companies have shown the most interest in investing in Iran's airport sector.
  • Investors in Iran's airport sector should be prepared for a long-term commitment and thorough preparation.

Meanwhile, Iranian airlines anticipate demand for 300 aircraft within 5 years, and 500 within 10. Tehran could potentially emerge as an international hub to rival those in the Gulf, though its carriers lack the brands to support such ambitious expansion at this stage. That said - so did Qatar and Emirates some 30 years ago, and just over 10 years ago Etihad Airways didn't even exist.

That there are opportunities waiting for both strategic and portfolio investors in post-sanctions Iran - a country of almost 80 million people, holder of the world's fourth largest proven crude oil reserves and its second-largest reserves of mostly untapped gas - is undeniable. That those opportunities will come to be realised in the airport sector earlier than in oil and gas, where risk-aversion often equates with opportunity losses that are enormous, is very unlikely. Investors in Iran's airport sector should be prepared to play the long game, and not to rush in without thorough preparation

Download the full report: Airport Investment Outlook: A market with enormous potential, Iran.

Despite sanctions, Iran is the second largest economy in the Middle East and North Africa

Iran is in west Asia, but for the purposes of statistical analysis it is included in the Middle East in the CAPA Airport Construction Database. According to that database there are 72 airport projects across the Middle East as of 01-Dec-2015, with a value of USD147 billion.

Iran's primary airports are Tehran's Imam Khomeini International Airport (TIKIA), the (larger) Tehran Mehrabad; Mashhad; Shiraz and Tabriz airports. All are operated by the Iran Airports Holding Company (IAHC), a state-owned entity under Iran's Ministry of Roads and Urban Development.

TIKIA is roughly equidistant from Dubai, Abu Dhabi and Doha airports to the south, each of them major hubs, and Dubai a mega-hub. The fast growing hub at Istanbul to the west is about twice the distance.

So while it is possible that TIKIA could emerge in time as a hub for the region, that timescale is not short, and the international role would be a relatively minor and limited one initially. The situation is compounded by the lack of brand awareness of Iranian carriers outside Iran itself. Moreover, while Tehran is geographically well located for domestic to international connections and vice versa, an airport transfer is necessary, since TIKIA handles international flights only, while Mehrabad has almost entirely domestic service.

Within Iran there are 11 actual or potential projects that are known of and recorded in the Airport Construction Database. IAHC intends to undertake USD1.3 billion of airport developments over the next 15 years. The main projects will take place in Mehrabad, Esfahan, Tabriz, Mashhad, and Shiraz, and new airports are planned in Ahvaz and Bushehr.

Location of Iranian Airports

Source: mapsofworld.com

It is a fast-changing environment, with new announcements being made frequently, so a degree of caution needs to be exercised.

For example, an announcement was made by the Roads and Urban Development Minister that the country also plans to construct five new airports in the Araz and Qom regions, and to upgrade facilities at 27 others. Numbers vary, but a combined investment of more than USD8 billion is believed to be required from 2016 onward, with construction complete around 2025.

CAPA has noted that a plethora of transport infrastructure investment announcements often follows a change of economic and/or political circumstances, and on many occasions they are made in the expectation of attracting private investors.

But those anticipated private investors may be wary of exposure to a new location that lies outside their typical portfolio profile, and commitment may be longer in coming than is anticipated by governments. Some may choose to hold back so they can see how the first movers fare, as was the case in China, and to a lesser degree, in India and Brazil. Investment prospects are dealt with in more detail below.

The investors - who are they, and what types of investment will take place?

Earlier it was stated that some private sector investors may be wary of exposure to a new location that lies outside of their typical portfolio profile, and commitment may be longer in coming than is anticipated by the government.

There will always be companies that are risk averse, from both a political point of view and an economic one. There are few benchmarks on which to base assumptions in the immediate region, let alone in Iran itself. Of the neighbouring countries, Iraq (for example) is entering into a period of projected extensive construction activities, with USD50 billion to be invested by 2024, either in new airports or in the re-building of existing ones, but large parts of the nation are still subject to intense civil strife and it is unable to offer any clues.

In Iran's favour is the fact that changing circumstances in Iran have already encouraged some foreign companies to register their interest in airport construction and financing. Numbered among them are some that one might regard as 'the usual suspects', in that they have prior experience of the very particular demands of working in this region; they are predominantly French.

The airport serving the capital city is naturally the one that foreign construction companies and investors will look to for guidance on future prospects. In Aug-2015 the Iranian Civil Aviation Organisation reported it was specifically engaged in negotiations with Aéroports de Paris Ingénierie (AdPI) regarding not only the expansion of Tehran International Airport but also the development of many of the airports named above, together with Isfahan Airport and this was confirmed by the Deputy Minister of Transport and Urban Development in Oct-2015.

AdPI has considerable experience of the Middle East and west Asia, with around 15 completed projects, including recent ones (2013-14) in Oman, Qatar and Dubai. The other company that was mentioned, France's Bouygues Bâtiment, has worked with AdP and its subsidiaries before, it knows the Middle East, and specialises in complex projects.

It is the French, and also the Chinese, who are showing most interest so far. Other French companies that might be attracted include Vinci, though that company has a lot on its plate managing its Portuguese airports portfolio; the Osaka airports; Santiago Airport in Chile; concession bids in southeast Asia; and preparation for further privatisation in its own backyard.

Separately, a Chinese province, Gansu, is reported to have signed an MoU with officials from Iran's Qom province covering infrastructure investment in airport and rail projects. The value of the investment partnership could exceed USD100 million.

On the fringe are companies such as Japan's Mitsui Group, which held talks with the Iranian Ministry of Roads and Urban Development in Aug-2014 on a USD4 billion investment in the development of Iran's airport, rail and shipping infrastructure.

Without going through the entire 652 companies listed in the Global Airport Investors Database it is a safe bet that these two countries, France and China, will continue to make the running where investment into Iran's airport sector is concerned, while their potential competitors will bide their time.

In many cases other companies are already operating at close to full capacity anyway, without taking on the time and expense of investigating opportunities in a country in which foreign direct investment has been hindered, as much by unfavourable or complex operating requirements as by the international sanctions that are now in the process of being withdrawn.

Those that have had experience in India or Russia, especially, may be wary. Much of the attractiveness or otherwise of the investment environment will depend on the degree of control the government wishes to retain over the operational functionality of the airports, given that some of them are dual purpose facilities together with the military.

In the case of TIKIA, for example, a semi-governmental foundation, Naja Bonyad Taavon, was selected as the developer of most of the second phase there, rather than a private sector entity.

The deals themselves are more likely to be of the BOT (build-operate-transfer) variety or one of its variants, which will see a terminal or two at an airport constructed and managed by the private sector over a specific period of time. During that time it pays royalties from its earnings, before eventually returning a modernised airport to the state, possibly with a golden handshake. That way the state never loses control. Outright privatisation by way of a sale or IPO is less likely in the immediate future at least.

Opportunities are undeniable, for investors prepared to play the long game

At present, 36 foreign and domestic airlines serve Iran, and a number of these have recently announced plans to expand capacity. Flydubai recently launched service to Tehran and Mashhad, while Emirates recently increased Dubai frequency.

Air France, Austrian Airlines, Eurowings, Oman Air and Lufthansa all plan to commence or expand their operations, while others are watching the market quietly.

While the risks of doing business with Iran appear to be dissuading serious economic openings at the moment, the country has been well on the radar of interested investors for much longer, due to ever-present market potential coupled with current momentum, as well as expansion within Iran and the wider region.

That there are opportunities waiting for both strategic and portfolio investors in post-sanctions Iran - a country of almost 80 million people, holder of the world's fourth largest proven crude oil reserves and its second-largest reserves of mostly untapped gas - is readily apparent.

Investors in Iran's airport sector should be prepared to play the long game, and not to rush in without thorough preparation.

Download the full report: Airport Investment Outlook: A market with enormous potential, Iran.

CAPA Iran Aviation Summit: The not-to-be-missed event of 2016

CAPA - Centre for Aviation, the leading global provider of aviation research, data and analysis, is excited to announce a unique global leaders' summit for 2016, with the launch of the CAPA Iran Aviation Summit which will take place in Tehran on 24-25 January 2016. This will be the first major international aviation summit to be held in Iran in almost 40 years and is provided with the full backing of Iran's aviation authorities and industry leaders.

The Summit is being convened with the cooperation of CAPA's hosts, the Iran Airports Company and the Iran Civil Aviation Organization, who have played a central role in coordinating the participation of all of the key decision-makers from across the aviation value chain in Iran. We are honoured to be able to convene such an illustrious and unprecedented gathering. Confirmed participants to date include:

*Subject to final confirmation

The CEOs will be accompanied by delegations consisting of the key executives from their respective organisations e.g. CFOs, COOs, CCOs, Heads of Fleet, Network, Strategy, Safety etc.

Foreign nationals may register to attend as delegates or sponsors. We would advise that places are strictly limited and preference will be given to CAPA Members.

The summit website is www.capaevents.com/iran16

Important note regarding Sanctions

On 15-Dec-2015, the Board of Governors of the International Atomic Energy Agency voted to close investigations into the possible military dimensions of Iran's nuclear programme. This should pave the way for the implementation of the Joint Comprehensive Plan of Action negotiated in Jul-2015 between Iran and the five permanent members of the UN Security Council plus Germany, accompanied by the lifting of sanctions in the next few weeks.

However, please note that most sanctions will continue to remain in force until implementation day is reached, the date of which is as yet unknown. As a result, the CAPA Iran Aviation Summit is strictly a forum for information gathering and networking only; business transactions may continue to be restricted by sanctions.

Delegates and sponsors must seek their own legal advice on the nature of activities in which they may or may not engage. The defined activities vary from country to country. CAPA takes no responsibility for the status or actions of participants, nor their consequences, should they breach national or international regulations.

For more information contact:

+61 2 9241 3200
events@centreforaviation.com

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