Iran's Mahan Air Hit With New Sanctions

WASHINGTON, D.C. TheStreet) -- Iran's commercial aviation sector, already constrained by sanctions, now faces new limitations on banking relationships following allegations the country's officials were involved in plotting to murder Saudi Arabia's U.S. ambassador.

The U.S. Treasury said Wednesday that Mahan Air, Iran's second largest airline, would be sanctioned because of its close coordination with the Islamic Revolutionary Guard Corps-Quds Force, the same group that was involved in the alleged plot. The carrier also assists the Iranian backed terrorist group Hezbollah, the Treasury said. The designation means U.S. persons cannot do business with Mahan and the carrier's U.S. assets are frozen.

"The designation of Mahan adds teeth to the sanctions program (and represents) a continued tightening of the noose around a major infrastructure element of Iran," said Michael Zolandz, a partner at law firm SNR Denton in Washington and an expert on sanctions law.

Over time, he said, restricting bank access will make it harder for Mahan to finance the acquisition of parts for its jets, even from third-party dealers, "not because of the inability to get the parts, but rather because when banks can't deal with you, your ability to finance (transactions) becomes more difficult," Zolandz said.

The new restrictions on Mahan Air come several months after sanctions were imposed on Iran Air, the national carrier. Both airlines serve cities around the world from Tehran's Iman Khomeni International Airport. Mahan's destinations include Birmingham, England, and Dusseldorf, Germany, according to its route map.

The Mahan Air fleet includes five Boeing ( BA) 747s and about 25 A300 Airbus jets. Boeing has not done business with Iranian carriers since the late 1990s, said spokesman Tim Neale. Sanctions on Iran started in 1995 and were tightened several times and "by 1997 virtually all trade and investment activities with Iran by U.S. persons were prohibited," he said.

Airbus, based in Toulouse, France, has apparently been able to continue to do business with Iran's airlines, although it is unclear whether that can continue. An Airbus spokeswoman was not immediately prepared to comment.

Refueling at European airports has been a problem for the Iranian carriers. Most flights apparently refuel in Kiev, Ukraine, en route to Tehran.

Zolandz noted that sanctions have been imposed in recent months in the petroleum, insurance and shipping industries, all intended "to make it more difficult for international banks which have relationships with U.S. and European banks to finance Iranian sales."

"Whether the revolutionary guard is (allied with) Mahan Air is largely irrelevant," he said. "The designation of Mahan Air as a front for the revolutionary guard is a technical designation so that the U.S. can get more information about banking relationships."

"Particularly for banks in Europe, China and India, this makes Mahan Air far more prominent in terms of restrictions on the ability to finance sales of parts and fuel (because) it puts (the carrier) on the flag list for banks," he said. "It demonstrates that Europe and the U.S., who have been divergent on sanctions, are starting to converge. In light of the (alleged murder attempt) there is a growing consensus that meaningful sanctions need to be upgraded and implemented."

Various international carriers, not including U.S. carriers, continue to fly to Tehran. "Right now it's not possible to predict if new sanctions would have a negative impact on our seat load factors," said Lufthansa spokesman Martin Riecken.

Despite its financing problems, Mahan Air appears to have generally been operationally sound, said a U.S. aviation consultant, experienced in the Middle East, who asked not to be named. "It's a decent airline, a decent operator," he said. "I never heard anybody (complain) about them. I noticed them because there were not many 747s that flew to Dubai during the day -- everybody else flew 777s and A330s."

-- Written by Ted Reed in Charlotte, N.C.

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