This week we finally saw a beginning to the end of U.S. sanctions against the Iranian Republic, resulting in Iran reentering the world economy. The United States formally lifted sanctions on Iran which included aircraft sales, banking, shipping, steel, as well as other sanctions which has kept Iran almost completely cut off from international markets for the past 5 years.
One of the biggest hurdles will be Iran rejoining the commercial aviation industry. Iran has had a horrible aviation safety record over the past 30 years due to the inability to gain parts to safely maintain their aging aircraft. In lifting these sanctions, not only will it make it easier to maintain current aircraft but it will likely lead to purchasing of brand new aircraft. Bloomberg is already reporting a possible purchase of aircraft from Airbus. This can’t come soon enough, remember last fall when a Mahan Air Airbus A300 took off from Tehran and the engine decided not to go with the aircraft on the journey?
Abbas Akhundi who is the Minister of Roads and Urban Development in Iran, has stated that Iran would likely need as many as 500 commercial aircraft over the next 10 years, orders which could be valued at over $50 billion dollars. Currently, Iran’s civil aviation fleet consists of about 250 aircraft averaging and age of 20 or more years each – 100 of those aircraft are grounded and considered not airworthy without lengthy repairs, needing parts which the country has been unable to import due to sanctions. This would allow them to add more flights, domestically and internationally – more competition means lower airfares. We could even see resumption of non-stop flights between Tehran and New York.
The most interesting thing for U.S. travelers in regards to these sanctions being lifted has just begun. On Monday January 18th, 2015, Iran gave the order to increase oil production by 500,000 bpd (barrels per day). While that might seem very little when worldwide there is over 95 million barrels produced per day, supply is already exceeding demand, and that will continue to drive down the cost of oil. While it’s not known if this was a quid pro quo, but if anything this was a strong nod from Iran to the U.S. that they are more than willing to play in the international market. This has already begun to cause a panic in the U.S. Stock Market as well as other Stock Markets across the globe.
Last month, OPEC, which has 13 members including Saudi Arabia and Iran – decided against slashing high output levels despite the drastic fall in global oil prices. Why? OPEC stated its decision was made on the basis that they wanted to maintain their market share as they are beginning to feel competition from the North American output. As the U.S. is a heavy oil user and a large portion of the U.S. economy is based on oil the price of oil can heavily disrupt our economy which was seen in the mid 2000s.
One of the largest users of petroleum are of course airlines which directly affects their bottom line. Labor and Jet-A fuel are usually their largest costs. The U.S. is home to 3 of the 5 largest airlines in the world, American, Delta, and United – Lufthansa and Air France/KLM come in a quick 4th and 5th. Anyone who studies economics can tell you that the cost of your ticket will go up and down depending on the price of fuel. As the price of oil continues to fall, you’re likely to see your ticket prices fall along with them.
It’s been noted before that U.S. carriers are actually best positioned to make the most gains when the price of oil falls. After the 9/11 attacks U.S. carriers began shedding costs as quickly as possible. Since then, we’ve seen a wave of mergers removing overlapping routes and airlines return service items to passengers, like Delta return to offering free alcohol on transoceanic flights to United’s recent return of offering free snacks on domestic flights in the U.S.
Now the airlines are lean and have trimmed their costs allowing them to make the most gains when the price of fuel drops. Hopefully, airlines will continue to invest those gains in their areas best set for future opportunity to compete with each other, adding flights to new destinations and gaining market share, lowering ticket prices which will benefit the consumer.
This past fall in 2015 we finally saw air fares drop in response to lower oil prices. Current expectations are that the price drop for oil hasn’t ended – and may not anytime soon, we could see oil as low as $25 a barrel in the next few months. That would mean some serious profits for the airlines, as well as the ability to drop prices to compete with each other. While we don’t expect Delta to match Ultra Low Cost Carrier Spirit Airlines $9 airfares, it does mean that you might actually find a bottle water more expensive than a gallon of gas – but of course, not in an airport concession stand.