Flying High on the Iran Deal
Does Iran represent a great enemy to our fair nation or a great opportunity for some long-overdue profits? They've enjoyed calling us the Great Satan for nearly half a century and remain one of the few nations on Earth (along with North Korea and Somalia) with which the US has no official diplomatic relationships. All of Iran's pugnacity and belligerence came to a head in mid-July, however, as they signed an agreement with the United States, EU, Russia, and China in order to leverage their oil exports without western sanctions provided that they will give up their as-yet-unfounded dreams of nuclear yields. While the Iran deal has the biggest repercussions for the petroleum industry, since nine out of ten export dollars stem from crude, a novel market segment will also profit from each nation adding ink to the paper: aviation.
Iranian Air: Smoggy and Shoddy
Getting into Iran represents a pilot's nightmare. The capital city of Tehran has some of the worst air quality in the entire world, behind only the worst industrial cities of India and China, making it supremely difficult to navigate and land a plane by the old-fashioned eye test. Worse still, once a piece of equipment breaks or malfunctions, you need a hefty dose of luck in order to find a replacement in the Islamic Republic. That's because the Iranian aviation industry has been heavily ravaged by supply shortages brought on by a critical lack of heavy engineering, leading to outbound flights turning to the black market in order to scrounge necessary parts whenever a plane cannot lift off on its own power. Mahan Air, for instance, the second-largest aviation firm in Iran, had to purchase nine defunct Airbus jets from an Iraqi criminal syndicate in order to salvage the necessary components for their own fleet. Iran averages one and a half plane crashes per year, one of the worst operating records in all the world, claiming some 500 passenger and crew lives within the past 15 years alone. Iran Air's fleet of planes stand at 26 years of age on average, about twice as old as the average American passenger jet en route through the skies over our heads. The series of sanctions placed on the growing Iranian nuclear threat meant further bad news for the aviation industry, but also the chance to blame western enemies whenever a pilot error or computer malfunction or faulty part turned an ordinary flight into a set of statistics. With the close of these sanctions, however, Iranian aerospace will happily turn to American corporate structure in order to get all their necessary supplies, meaning a new slice of big business for the fattest of cats at the aviation table.
By Executive Order
Access to American business represented one of the most tantalizing carrots put on the negotiating table by President Obama. While no US business can directly sell or market goods in Iran -- much like our embargo with Cuba -- shell companies can sell cut-down versions of products ranging from Coca-Cola to 797 engine spark plugs through multiple middlemen. With the end of some or all of the economic sanctions on Iran, the rapidly-aging fleet of airplanes patrolling Iranian skies will get a lot of welcome relief. The Joint Comprehensive Plan of Action, the official name for the diplomatic treaty that eliminates sanctions at the cost of Iranian nuclear sovereignty, specifically permits the sale of aviation parts to Iranian vendors. That's great news for the biggest companies like Boeing (BA on the NYSE, trading for $147.45 a share), whose share price has risen by over ten percent in the first half of 2015. The same goes for Airbus (AIR on the Euronext Paris Exchange, trading for $62.99 a share), who have seen growth of some fifty percent since 2014. The growth potential of aviation stocks, and affiliated heavy aerospace engineering firms, in tandem with the Iran deal make for a perfect opportunity for portfolios that suffered from the May market correction. There's ample reason to be optimistic about the investment: Iran wants to market their airport facilities as the ideal bridging point for flights ranging from Europe to Eastern Asia, Africa to Australia, a badly-needed move to catch up with the United Arab Emirates's current standing as the most-connected flight path in the world.
Iran has happily traded nuclear dreams for aviation realities. Whether the US has dodged a nuclear bullet or whether we've been hoodwinked, our industries will nevertheless reap a profit from the opening of this new market of 80 million consumers. Iran needs aircraft in the worst possible way, with an estimated one hundred deliveries per year for the next five years needed in order to get their air fleet up to standards. At a time when Boeing is struggling to find customers for some of their new jets, including the expensively-plush 747-8, that's as welcome news as the sound of a jet engine itself. Investors can profit by turning to some of the bigger aviation firms and affiliates. As two examples, General Dynamics (GD on the NYSE, trading for $146.02 a share) will represent a likely source of aviation electronics and onboard systems, while the Goodrich Petroleum Corporation (GDP on the NYSE, trading for $.96 a share) offers bargain-priced shares of a company that manufactures engine pumps, passenger safety features, and anti-icing gear. Aviation stocks represent a great value buy for a large new market that's eager for a new set of just about everything in the product catalog.