farhad emam Farhad Emam
Publish Date : 02/12/2016

Finance and Leasing Law in Iran Case of Airbus


Key terms

Airbus, international finance lease, EETC, aircraft financing


In an interview with Ilna on February 7, 2016, Mr. Ali Sabbaghi, a member of the board of directors of Iran Aseman Airlines explained that:

One of the strong points in this contract [with Airbus] is to use ILF (international lease finance) which means the method of financing based on leasing. By using the proceeds of using the airplanes and reimbursement of their prices through leasing, our investment has been guaranteed and therefore, threats of those who think about harming our system is thwarted. This method is one of the best and the most updated and efficient ways of financing in the field of transport that does not impose any expenses on the public budget of the country. Other methods of financing are Enhanced Equipment Trust Certification (EETC) as well issuing shares, debentures, compound debentures or to benefit from the services of the financial organization that are involved in project financing such as investment funds. Financing could also be materialized by using Islamic participatory or barter contracts, or through granting loans to finance applicants.

The questions to answer are:

1) Who are the main players in the aircraft financing market?

2) What are two main aircraft financing methods?

3) What practical issues must be kept in mind at the time of selecting the most appropriate financing methods for a country or a company?

I. Players in the aircraft financing market

Airbus has a brief report on “Anatomy of Aircraft Financing” published in 2003. In page 4 of this report, major players in the market of aircraft financing are explained:

·         Export Credit Agencies: Government backed institution which provide credit guarantees in support of exports, i.e. Hermes, Coface, ECGD, EXIM Bank; this represents about 5 Bio $ bn USD per annum.

·         Commercial Banks: Providing secured/unsecured loans.

·         Secured Bonds: Market debt instruments, freely traded and liquid, benefiting from the underlying asset as collateral.

·         Aircraft / Engine manufacturers: Atypical. In 2002, from a total of €20 bn Airbus aircraft revenues, only €600 mio net additions of finance exposure.

It is reported on the website of Bloomberg.com on January 31, 2016 that:

Prior to the announcement of the Airbus order, Iran’s central bank sealed two agreements with France’s Coface and Italy’s SACE. These export credit agencies could provide guarantees for European banks involved in the transaction.

This means that two export credit agencies (Coface and SACE) and few European commercial banks are involved in financing purchase of Airbus airplanes by Iran.

II. Two main aircraft financing methods

2.1. International Finance Lease (IFL)

The following definition of finance lease is put forward by Patricia Evans on the website of Wilmingtontrust.com:

A finance lease gives you some of the benefits of ownership while at the same time providing a way to finance all of the costs of acquiring the asset. Under a capital finance lease:

·         You can claim the depreciation, unlike under an operating lease. Ownership of the asset may pass to you at the end of the lease term or be subject to a purchase option, providing the benefits of equity buildup.

·         You cannot fully expense the payments, as would be permitted under an operating lease, but you can deduct the interest.

·         The transaction likely will be treated as a loan for bookkeeping purposes, reflected as both an asset and liability.

·         The monthly or periodic payments likely will be the lowest with this form of lease.

2.2. Enhanced Equipment Trust Certification (EETC)

According to William C. Bowers in his report “Aircraft Lease Securitization: ALPS to EETCs”:

An EETC securitization enhances the creditworthiness of traditional equipment trust certificates ("ETCs") secured by lease receivables and the leased aircraft as follows: First, the issuer of the EETCs is bankruptcy remote (and insulated from a bankruptcy of the lessee) to the satisfaction of the rating agencies. Second, the EETCs are tranched to take advantage of the expected residual value of the aircraft, i.e., the lower the advance level, the higher the rating. Third, a liquidity facility is provided to ensure the continued payment of interest on the EETCs during the remarketing period following a default by the lessee.

III. Practical issues

3.1. The report of Wilmingtontrust.com explains the criteria to be taken into consideration in choosing the most appropriate aircraft financing method:

Selecting the best type of aircraft lease for your company requires consideration of the company's cash flow, working capital, balance sheet, accounting, and tax needs. Experienced professionals can help you weigh the relative advantages and disadvantages of the different types of aircraft leases and can structure the transaction to satisfy relevant tax and accounting rules.

3.2. The report of Bloomberg “Five unanswered questions about Iran’s Airbus mega order” focuses on two other major issues:

·         Required technical know-how: Although the last airplane is scheduled to be delivered in 2022, but it would take longer than that to train the Iranian airlines’ maintenance and operation technicians.

·         Dividing the airplanes among different airlines of Iran: The number of purchased airplanes is too high for even the biggest and strongest Iranian airlines. It is reasonable to infer that they will be divided among most or perhaps all of the Iranian airlines.


What are the practical results of the air transport renovation plan of Iran in the decade to come? Temel Kotil, the boss of Turkish Airlines, another regional goliath, believes that:

Passenger numbers in Tehran could overtake Dubai within a decade “if they mean it”. He says Tehran's geography is better than Dubai's for some intercontinental stopovers—Europe to South-East Asia, for example—and unlike Dubai it has a vast population to tap into (Iran is targeting more than fleet renewal after the lifting of aviation sanctions, Economist, February 4, 2016).


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