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By: Nadejda Popova

In 2015, we highlighted in our Global Trends Report the growing popularity of Iran by identifying this market as the “next big tourism destination” in the Middle East. A recent announcement for an order of 118 aircrafts for its biggest flag carrier Iran Air signed by the Iranian president Hassan Rouhani with the airline manufacturer Airbus further supports this trend. The move demonstrates the ambition of the Iranian Government to revive its airlines industry by modernising its fleet, and thus meeting growing tourism demand.

Zooming in on the macroeconomic indicators

With real GDP growth expected to reach 4% in 2016 compared to 2% in 2015, Iran is on its way to resurrect and rebuild its economy and boost its consumer markets. Inflows of foreign direct investment have been declining for years. However, the end of economic sanctions would give Iran access to frozen assets estimated at roughly US$56 billion. In the period 2013-2030, total consumer expenditure will grow at an average annual rate of 2.5%.

The mega deals

Airlines’ value sales are expected to rise at a CAGR of 6% at constant 2014 prices to reach IRR38.6 billion in 2019, supported by growth in tourism flows in the country. Indeed, inbound arrivals are expected to record growth of 5% in terms of number of trips for the period 2015-2020. Iran Air remains the leading carrier, servicing 60 destinations with 51 aircrafts as of 2014.

In early 2016, the carrier began its shopping spree for new aircraft and put an order for 40 ATR 72-600s for US$1.1 billion, in addition to its purchase of 118 aircrafts from Airbus, estimated to be worth US$25 billion. In addition, the aircraft manufacturer will provide pilot and maintenance training to help improve the capabilities and technical skills of the Iranian airline, which has been struggling for years with a 22 year old fleet and a very poor track record in terms of safety and security.

There are also suggestions that Iran Air is holding discussions with such manufacturers as Bombardier and Embraer for the purchase of smaller size aircraft to meet its domestic route expansion.

Foreign appetite

The attractiveness of the country’s airline industry is recognized by international carriers, which are keen to take a sliced of the 77 million population market. Emirates Airlines, Qatar Airways, Turkish Airlines, AirArabia, Lufthansa, Kuwait Airways are only some of the carriers already flying to and from the country. The list is expected to expand further almost on a monthly base, with players such as British Airways joining the queue to enter the market. For example, The German airline Germania launched five direct flights from Berlin, Hamburg and Dusseldorf to Tehran and Mashhad per week as of 25 February 2015. Germany is a major source market and destination for Iran and this move will further contribute to growth in traffic on the routes.

Infrastructure

The years of international isolation have left tourism infrastructure in need of major investment, particularly hotels, facilities and transportation. To meet increasing airline demand, the country’s dilapidated transportation infrastructure urgently requires a revamp. The Iranian Government appears to be keen to inject the much-needed boost, by opening expansion projects for its main airports. Among those is Imam Khomeini International Airport, where a new terminal with a capacity of 45 million passengers per year is planned to be built by a French joint venture company for a staggering US$2.8 billion. Procedures for modernisation and expansion are also underway for Mashhad and Isfahan Airports, located in the second and third biggest cities respectively in Iran, as well as airports in Tabriz, Ahvaz and Bushehr. The Holy City of Mashhad is a popular destination for Iranians on religious trips who visit the Imam Reza shrine each year. There are more than 20 million visitors to the shrine every year.

Next steps

The more active involvement on the side of the Iranian Government, which is now aiming to promote tourism for the first time in years, is a good sign for eager investors and tourism players. For example, many nationalities, such as French, German and Russian citizens can obtain a visa upon arrival. The country looks to resume activity with such markets as China, India, Russia and even US, among others. Ambitions to revive direct flights to the US, the opening of three tourism offices in China by the end of 2016, along with multi-million US dollar foreign hotel investments are only some of the new developments in the country.

However, although sanctions are being lifted, ongoing tensions with Israel, Saudi Arabia and other regional powers means that there is a lingering threat of violence and instability. Strongly devalued local currency in recent years has also affected Iranians’ purchasing power, and hence their capacity to take trips both internationally and regionally. All these factors represent major threats to the resurrection of this market.

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