The Civilian Aircraft Exemption

The Civilian Aircraft Exemption:
The Economic Benefits of Commercial Diplomacy

Mohsen Farshneshani
Legal Fellow, USIRCC

April 26, 2018

In the Summer of 2015, history was made when world powers – the United States, United Kingdom, Germany, France, China and Russia − collectively signed the Joint Comprehensive Plan of Action (“JCPOA”) with Iran. The agreement aims to regulate Iran’s nuclear program under the monitoring regime of the International Atomic Energy Agency (“IAEA”) in exchange for sanctions relief. Although U.S. primary sanctions continue to largely bar U.S. persons from doing business with Iran, the JCPOA includes three exceptions to that general rule. One of those exceptions is for the sale of commercial passenger airplanes. The JCPOA establishes a favorable licensing policy under which persons may request specific authorization from the Office of Foreign Assets Control (“OFAC”) to engage in transactions for the sale of commercial passenger aircrafts and its related parts and services to Iran (of course, provided such transactions do not involve any persons on OFAC’s Specially Designated Nationals list or for whom a due diligence investigation is unsatisfactory.)

The commercial aircraft provision in the JCPOA opened the floodgates for companies like Boeing, Airbus, and the sea of associated suppliers and manufacturers in the aviation industry. These companies have billions of dollars in incentives to furnish the needs of Iran’s deprived passenger fleet. The February 18, 2018 crash of Aseman Airlines Flight 3704, which claimed the lives of all 65 people on board, attests to the urgency of this civilian crisis.

Iran Air’s $16.6 billion deal with Boeing included the sale of 50 twin-jet, narrow-body 737s and 30 long-range, wide-body 777 airplanes. The delivery of American aircraft was expected to begin this year as Iran’s Minister of Roads and Urban Development Asghar Fakhrieh Kashan specified in January that the first Boeing would be received in the last quarter of 2018. However recent reports tell that the three planes Boeing had tentatively scheduled for delivery in 2018 has been reshuffled with other orders due to the “U.S. government process.”

Boeing also secured another deal with Iran’s Aseman Airlines: $3 billion for 30 Boeing 737s. The agreement provides Aseman the purchase rights for 30 additional jets, a guarantee Aseman officials are keen to utilize so long as domestic U.S. politics “do not disrupt the contract.” Nevertheless, Boeing has yet to receive the OFAC license on which the deal is contingent, and had expected to receive the license by September 2018.

In December 2016, Iran Air signed another contract worth an estimated $27 billion to purchase 100 aircraft from Airbus, Boeing’s European rival. However, business dealings akin to those with Boeing and Airbus are currently on ice as uncertainty clouds the future of the JCPOA.

With the approaching May 12th deadline to renew sanctions waivers, President Trump continues to express his intention of either “fixing” the Deal or withdrawing from it. The Trump administration has initiated talks over a follow-on deal with European powers that would impose new restrictions on Iran. Conversely, the EU has said that it remains “fully committed” to the JCPOA, just as Iran is, given the nation’s enduring compliance.

Following a visit to Tehran by Sukhoi personnel, Aseman Airlines and an Iran Air subsidiary signed deals on April 25th to each buy 20 Sukhoi SuperJet-100s. Sukhoi’s February 12th delegation bore fruit as the Russian aircraft company capitalized on the complications of Iran’s various aircraft deals. An Iranian official announced that modifications made to the Sukhoi Superjet-100 would allow for sales to Iran without OFAC approval given that less than 10 percent of the aircraft’s components are American-made.

At the time the Iran Air deal was announced, Boeing said in a statement that the deal would support tens of thousands of U.S. jobs directly associated with production and delivery and nearly 100,000 American jobs in the U.S. aerospace value stream for the full course of deliveries. According to the U.S. Department of Commerce, an aerospace sale the size of Boeing’s $3 billion deal with Aseman Airlines creates or sustains nearly an additional 18,000 U.S. jobs.

Failure of these deals, either by OFAC license denial or U.S. withdrawal, would have consequences for Boeing’s manufacturing jobs and Iran’s aviation safety.

This niche exemption to U.S. sanctions on Iran stands as a model to the potential benefits that the free flow of commerce can bring to both the American and Iranian people. This demonstration of trade diplomacy rewards the U.S. with jobs, while Iranians receive a much-needed upgrade to their aviation standards by improving transportation safety for the general public. Both parties to the long-estranged relationship benefit when diplomacy and trade prevail. In the absence of this specifically tailored trade opportunity, not only do commercial airlines and manufacturers lose, but so do every day Americans and Iranians.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of the US – Iran Chamber of Commerce.

About the author: USIRCC