Over the past few months, I have encountered a number of PMA exporters, and European PMA importers, who have asked for clear guidance on how to distinguish a “critical” PMA parts from a “non-critical” PMA part.
This is an important distinction because under the Bilateral Airworthiness Safety Agreement (BASA) that was signed between the United States and the European Union, there are three types of PMA parts that are accepted in the European Union (for installation on products certified or validated by EASA) without further showing. Those three “acceptable” situations, as described in the BASA Technical Implementation Procedures (TIP) are:
(1) The PMA part is not a “critical component”; or
(2) The PMA part conforms to design data obtained under a licensing agreement from the TC or STC holder according to 14 CFR §21.303; or
(3) The PMA holder is the holder of an EASA STC which incorporates the PMA part.
Thus, non-critical PMA parts are directly acceptable (and they should have text on their export 8130-3 tag that states “This PMA part is not a critical component”). So there is a significant advantage to having a clear understanding of when a PMA part is critical and when it is not critical.
This can be a little confusing if you don’t know where to look. The FAA has used the term “criticality” to define different categories of parts for approval purposes, and to set differnt levels of FAA involvement in the approval process. The distinct use of the term means that we need to look in the right place for the definition of “critical” that applies to our export/import transactions.
For purposes of US exports of PMA parts that are imported into the European Union, the controlling guidance is found in the BASA’s Technical Implementation Procedures for Airworthiness And Environmental Certification (BASA TIP). The definition of critical component for purposes of that document is found in Section 1.6(i) of the BASA TIP:
“Critical Component” means a part identified as critical by the design approval holder during the product type validation process, or otherwise by the exporting authority. Typically, such components include parts for which a replacement time, inspection interval, or related procedure is specified in the Airworthiness Limitations section or certification maintenance requirements of the manufacturer’s maintenance manual or Instructions for Continued Airworthiness.
Don’t fall for the temptation draw a semantic difference between a “critical component” and a “critical part.” The PMA acceptance procedures found in section 2.8.2(a)(1) of the BASA TIP explicitly cross reference the definition in section 1.6(i).
In light of this definition found in the BASA TIP, the question of whether a PMA part is “critical” will be based on the decision of the FAA (the exporting authority) about whether it was critical at the time of approval.
The regulatory guidance for critical parts is found in the marking requirements discussion in section 45.15(c) of the FAA’s regulations. That section makes it clear that an article is “critical” if it has a hard time specified in the Airworthiness Limitations section of the manual (instructions for continued airworthiness), like a life limit, then it is a critical part (or critical component).
Under normal circumstances, there are two methods for specifying such a limit on a PMA part. The first is during the FAA approval process (usually as an airworthiness limitation published in the instructions for continuous airworthiness), when the airworthiness limitation section associated with the part would be approved. The second is by an FAA airworthiness directive issued after initial approval in response to an identified safety issue.
Thus the best source for identifying whether a PMA article is “critical” is the PMA manufacturer, who should be able to tell customers whether there were any such hard times associated with the article as part of the approval process (or review of the PMA manufacturer’s instructions for continuous airworthiness). If the FAA did not establish that the part was critical at the time of approval, and if they did not subsequently issue an airworthiness limit (such as through an airworthiness directive), then the part is not critical.
The U.S. Commerce Department will hold a webinar on November 29 to discuss the effect of European Evironmental Regulations on U.S. Aerospace companies.
The European Union has a regulation called the REACH regulation. REACH stands for Registration, Evaluation, Authorisation & restriction of CHemicals.
REACH imposes certain obligations on companies that manufacture certain chemicals in Europe, and on companies that import certain chemicals into Europe. Under REACH, the continued marketing of substances of Very High Concern (SVHCs) requires an authorization. Businesses active in the aerospace marketplace use a number of substances that are being considered for SVHC classification, and unauthorized import into Europe of such substances could violate REACH.
For more information, see the notice on the Commerce Department website.
At the MARPA Conference, Kevin Cox of LarsenAllen mentioned IC-DISCs as a way to minimize federal taxes on profits from exports. After his presentation, I asked if his organization could provide us with more information, because this seemed like a useful structure for MARPA members performing significant exports. In response, his colleague Steve Roark wrote us the following article describing the IC-DISC and the way that a US exporter can use an IC-DISC to reduce its tax obligation. Contact information for LarsenAllen is at the bottom of the article.
Manufacturers and distributors work hard to provide products and services competitive in the global economy. Now more than ever, generating foreign sales is a necessary component to growth. Competition for export sales is burdened by many factors including foreign competition, tariffs, fees, foreign taxes and so forth. Wouldn’t it be great if companies could get a break from this burden? The rallying cry by many companies is that Congress needs to act now to allow U.S. manufacturers to be more competitive in the global market. Well, Congress did act – they just acted about 30 years ago. Years ago, congress recognized the growing disparity in global competition and provided a way to help compete on a level footing in the face of these burdensome requirements. The vehicle to do this is through the tax strategy called an IC-DISC.
Organizations that have export sales can significantly reduce their Federal tax by creating an Interest Charge-Domestic International Sales Corporation (IC-DISC). It’s a long name, but the concept is quite simple. By creating a separate entity, a domestic organization with international sales can defer and/or reduce their overall tax burden related to the income on these international sales.
The IC-DISC reduces U.S. taxation on exports of property originating in the United States for direct use outside the U.S. There are two types of sales that qualify. The first is for products shipped directly outside of the U.S. The second is for products sold in the U.S. that ultimately are added to a product that is shipped internationally. Many contract manufacturers and distributors are part of a supply chain that serves large OEM’s whose products end up outside the U.S. Parts shipped domestically to these OEM’s may also qualify for this tax advantaged status, even though on the surface they aren’t what you think of as foreign sales.
An IC-DISC can be used in a number of ways. Some of the advantages and benefits provided by an IC-DISC include:
• Permanent tax savings on export sales. Although an IC-DISC is a tax exempt entity, any cash distributed out of an IC-DISC is taxed to the shareholders at the capital gains rate of 15 percent. This results in up to a 20% savings on Federal taxes on the income associated with foreign sales.
• Tax deferral on export sales. An IC-DISC also allows a company to defer up to $10 million dollars of taxable income to the future. This can be a significant benefit if cash flow is tight, or if you are a proponent of deferring the payment of tax to Uncle Sam.
• Means to facilitate succession planning. An IC-DISC offers a number of capabilities for executing a succession plan. An important feature of the IC-DISC is that shareholders can be corporations, retirement accounts, individuals or a combination thereof. This can result in an effective means to distribute cash to beneficiaries in a tax-advantaged manner.
It doesn’t take much for a company to benefit from an IC-DISC. Companies with as little as $500,000 of export sales have shown savings from establishing an IC-DISC. In addition, the set-up and recurring maintenance of this strategy is relatively minimal compared to the savings.
IC-DISC’s have been around for close to 30 years, yet they are not widely used in small to mid-sized organizations – why is that?
One reason is the misconception that they are too complicated or administratively burdensome. An IC-DISC strategy does require a company to establish a separate entity to report these international sales. The IC-DISC is a “paper” entity created to make the company more competitive. It does not require corporate substance or form, office space, employees, or tangible assets. It simply serves as a conduit for export tax savings. Customers do not need to know about the IC-DISC, and contracts remain as they are today. In addition, the transactions required to be reported in the IC-DISC can be summarized and reported once a year.
Another reason is that in the past this structure didn’t provide much benefit. There were other provisions in the tax code that provided deductions for international sales. These provisions expired a number of years ago resulting in the IC-DISC strategy once again becoming more advantageous.
If you think this strategy may be an option for your company, it is important to act quickly. An IC-DISC is only allowed to provide benefit beginning on the date the IC-DISC is formed (benefits are not available retroactively). The sooner a taxpayer creates an IC-DISC entity the greater their benefits will be.
To maximize savings and ensure proper IC-DISC formation and administration, businesses that wish to create an IC-DISC should seek assistance from a qualified tax advisor. While the concept and administration are relatively simple, it is important that the initial set-up is done properly to maximize and protect this tax advantage status.
About the Author: Steve Roark is a Manager in the Manufacturing and Distribution group of LarsonAllen. Steve can be reached at 888.529.2648 or firstname.lastname@example.org. To learn more about LarsonAllen, visit www.larsonallen.com.
Today, MARPA filed Comments on the Proposed FAA ICA Policy (Policy Statement, PS-AIR-21.50-01: Inappropriate DAH Restrictions on the Use and Availability of ICA). MARPA’s comments supported the policy, and provided both a historical and legal context for the acceptance of the FAA policy.
The FAA policy was written in response to the growing practice of manufacturers licensing their manuals on the condition that the licensee repair station or air carrier/operator pledge to refrain from using competitive products like DER repairs or PMA parts. We have written about this practice in past blog posts.
The FAA retains the power to influence the method of distribution for ICAs, because the regulatory appendices that describe the minimum standards for such ICAs require the ICA-publisher to have a mechanism for distributing the ICAs and their amendments, and to submit that mechanism to the FAA. This permits the FAA to establish standards for what will be considered acceptable or unacceptable among such distribution mechanisms.
The FAA policy makes it clear that it is not acceptable for manufacturers to license their ICAs using restrictive licenses that preclude competition. For example, an engine manufacturer may not license its ICAs on the condition that the licensee agree not to purchase PMA parts for the engines.
MARPA has encouraged its members to make their ICAs available to the industry without inhibition. MARPA has also decried practices that would preclude access to PMAs as a condition of obtaining ICAs (when ICAs are already required to be made available under the regulations). Thus, MARPA is very supportive of the FAA policy.
MARPA exhorts the entire aviation community to file comments with the FAA supporting the FAA ICA Policy Memo. Comments may be filed by sending an email to John.Cerra@FAA.gov.
After months of warnings, it should have come as no surprise to anyone that yesterday, American Airlines parent company, AMR, filed for bankruptcy protection under Chapter 11 of the bankruptcy code.
This is a restructuring, so it is expected that AMR will emerge form the restructuring. Most aircraft parts are sold to airlines on credit, so many MARPA members may have concerns about their receivables owed by AMR.
It is normal during restructuring for post-filing transactions to receive a preference in the payment scheme. So if you sell AMR an aircraft component the day after the bankruptcy, then you are much more likely to get paid 100% of the transaction price than if you had sold the same part the day before the bankruptcy petition was filed. If the restructuring is converted to a liquidation, then liquidity problems could make the preference meaningless.
Existing creditors may receive only a percentage of the amounts owed them or they may receive all of their outstanding receivables from AMR depending on the nature of the debt and the negotiations with the bankruptcy trustee. The bankruptcy trustee has the power to terminate contracts that are not favorable to AMR, and it has the power to make deals with irreplaceable vendors who demand payment of prior receivables in exchange for continued service. If you have a very large receivable outstanding with AMR, or if you have an ongoing relationship with AMR, then you should seriously consider hiring bankruptcy counsel with experience in negotiating post-filing remedies.
Ongoing case information will be posted to the AMR restructuring website.
Supplier and vendor inquiries are being routed through the Trading Partners Response Center (TPRC). You can call that response center at (866) 736-9011 (toll-free from the United States) or (703) 286-2757 (international toll).
For questions pertaining to the administration of this Chapter 11 case, you can contact AMR’s bankruptcy claims administrator, GCG, at:
These contacts represent the best interests of the AMR estate, so if you have serious legal questions, or need to discuss strategies for defending your right to get paid, then you should seek the counsel of a qualified bankruptcy attorney.
The FAA has updated the advisory circular that provides guidance on detecting and reporting suspected unapproved parts (SUPs). This advisory circular is identified as Detecting and Reporting Suspected Unapproved Parts, FAA AC 21-29C CHG 2 (August 17, 2011).
The update provides new references to various sections in Part 21, to coincide with the October 16, 2009 changes in Part 21. It also makes reference to the new commercial parts definition (part of the 2009 rule change), and clarifies that commercial parts are approved parts.
All references to “fabrication inspection systems” are removed from the guidance in this change. The concept of “fabrication inspection systems” was removed from the regulations in favor of unified standard production quality system regulations for all production approval holders. Now, PMA regulations point to 14 C.F.R. 21.137 as the source for standard production quality system requirements for all production approval applicants and holders.
Finally, the guidance is updated to reflect changed addresses and telephone contact numbers.
The newest guidance can be found online here:
At the 2011 AFRA Conference, Stuart Rubin discussed some of the economic factors affecting the current aviation marketplace, and affecting the future of certain aircraft types. For PMA part producers, this information provides valuable insights into the markets for PMAs – illustrating both diminishing markets for certain older aircraft types, as well as increased competition from surplus spares.
Rubin concluded that increases in fuel costs are causing the discontinuation of use of smaller transport category aircraft (like 50 seat jets). He feels that it is just too expensive to operate these smaller aircraft relative to the potential revenue that can be realized from their operation.
Rubin examined a series of cacts about “parked” aircraft (those tha tare “parked” in the desert).
Rubin used these data points to examine some aircraft valuations. He noted that larger aircraft tend to be more successful in holding their value for longer periods, as compared to smaller aircraft.
The FAA’s Advisory Circular (AC 00-56A) sets forth steps that are necessary in order for a civil aircraft parts distributor to become accredited. The FAA lists five accreditation organizations that will certify a distributor: Aviation Suppliers Association (ASA); American National Standards Institute (ANSI); General Aviation Parks Suppliers Association (GAPSA); Society of Automotive Engineers (SAE); and Transonic Aviation consultants, Inc. It is important to note that the FAA reminds distributors that being accrediting is entirely voluntary and not mandatory.
AC 00-56A mandates that civil aircraft parts distributors, in order to be accredited, must have a quality system in place. A quality system is defined as “[t]he total network of administrative and technical data and detailed procedures required to maintain the product and parts thereof to specified airworthiness standards.” In other words, a parts distributor must have a quality system in place to assure customers that parts documented with the correct information indicating what the part is for as well as administrative procedures to ensure that employees are trained in their respective roles.
The elements of a quality system are set out in section 6(a) of AC 00-56A. The following is a summary of the elements:
A distributor becomes accredited by one of the accreditation organizations certifying that the distributor is in compliance with AC 00-56A and with the accreditation organization’s own standards. Therefore, if a distributor meets the accreditation organization’s quality system standard—a standard that ensures that the distributor’s quality system provides acceptable level of control as mandated by AC 00-56A—they will become accredited. For example, ASA has their own standard known as the ASA-100 standard. In order to be accredited by ASA a distributor must meet their standards. For a copy of the ASA-100 standard please visit: http://www.aviationsuppliers.org/ASA/files/ccLibraryFiles/FILENAME/000000000035/ASA-100%20Rev%203-5.pdf
It is common to see most distributors accredited because of their interest in robust quality assurance. Many customers require that distributors be accredited in the first place before a business transaction takes place. Therefore, it is important to be aware that when dealing with a distributor, they may or may not be accredited which could in turn affect your business.
I recently wrote a blog article on the misuse of CMMs to gain anti-competitive advantages in the parts aftermarket through tying arrangements.
In response to that article, we have been hearing a lot from people about restrictive ICA/CMM licensing agreements. These agreements condition access to the ICA or CMM on a licensing agreement that restricts the repair station or air carrier from using PMA parts. In some cases the restriction may be explicit, but in other cases it may be more subtle (like an agreement that forbids use of the OEM ICA for inspecting the PMA part, despite the fact that the FAA has already approved the PMA part with ICA provisions that require continued reliance on the OEM manual).
In essence, the repair station’s or air carrier’s access to necessary manuals is held hostage to an anticompetitive agreement that adversely affects their ability to purchase competitive products, and that undermines safety by preventing the use of maintenance manuals in contexts that have already been deemed appropriate by the FAA (and where there is no other FAA-acceptable alternative).
We have been shocked, already, at the number of examples of this sort of anti-competitive behavior that we’ve discovered.
We frequently speak with the media about PMA issues, and this is an issue that is attracting a great deal of media attention. I gave an interview to AIN and they published an article based on our work in this area.
This is an important issue for the entire industry. Repair stations and air carriers are being asked to sign ICA/CMM licenses that restrict their ability to purchase independent (competitive) PMAs. And they being coerced into doing so by the threat of losing access to the ICAs and CMMs.
An important point here is that agreements that tie a monopolized product (like a OEM CMM, which repair stations MUST have under 14 C.F.R. 145.109) to a competitive product (the OEM parts, which are in competition with PMA parts) may be violations of the U.S. antitrust laws (and may violate the latest European antitrust laws). Where an OEM requires the purchase of OEM parts as a condition of access to ICAs/CMMs, there are serious potential antitrust consequences.
We have already gotten copies of several examples of restrictive language that forbids or limits use of PMAs as a condition of obtaining the manuals. I would appreciate it if the reading audience could help me by sending me copies of any examples you might find of such restrictive language.
At the 2011 Gorham Conference, Michael Howard of Aerostrategy explained that oil prices are likely to continue to increase. This means that airlines are going to need to find ways to cut costs in order to remain profitable. This helps to drive air carriers to investigate use of PMA parts as a means of saving costs without jeopardizing safety,
At the same time, this could affect some of the markets for older types. High fuel prices exacerbate aircraft operating costs – less fuel-efficient aircraft become even more expensive to operate – and thus high fuel prices put pressure on air carriers to retire older aircraft in favor of newer, more fuel-efficient, aircraft. Howard explained that aircraft retirements are surging – they seem to be at a 400 aircraft per year level, which means that air carriers are already replacing large quantities of older aircraft. The older aircraft are often the ones with the most PMA-saturation, so this means that fuel prices are influencing the market that is available to PMA parts.
Aerostrategy analyzes PMA use as a component of the whole (air transport) MRO market. Howard explained that the air transport MRO market was valued at about $43.6 billion in 2010. This was down from a high of $45 billion in 2007, but up from the 2009 level of $42.7 billion. Aerostrategy sees the air transport MRO market continuing to grow at an average annual rate of 3.5% for the next decade – rising to $58.4 billion by 2019.
Howard explained that airlines are simplifying their MRO supply chain in order to preserve cash. This can mean that PMA companies must shift their marketing resources to reach MROs. In some cases, though, air carriers are helping to make sure that they retain their PMA savings by working with their MROs to ensure the use of PMA parts on their aircraft. United Airlines’ Michele Bassi-Degenkolb explained that this is part of her airline’s cost-saving strategy.
In 2009, Aerostrategy estimated that the industry held $47 billion in excess inventory, which could be utilized without replacement in order to cut costs. In response to the poor economy, air carriers were able to reduce MRO spending by 15-20% in 2009. One factor in this reduction was the ability to draw down excess inventory. But air carriers cannot rely on this strategy forever, and Aerostrategy sees a bottoming-out to this trend, with an attendant increase in purchase of new parts (including PMA parts).
While excess inventories may be running out, there are other sources of parts being tapped. Disassembly (parting out) of aircraft for their parts is gaining momentum – this puts more surplus parts in the system and these surplus parts compete with the sale of new parts in the market. Howard explained that there is significant parting-out occurring among 737s and A320s.
Aerostategy estimates that the total surplus parts consumption in 2009 in the transport aircraft industry was about $2.3 billion.
Howard explained that if fuel stays in the $80-$110 per barrel range, then Aerostrategy predicts that we should see modest growth (2-3%) in both U.S. Gross Domestic Product (GDP) and airline profitability. In such a scenario he sees a 5 year CAGR of 12% and strong growth in the air transport market in 2011 and 2012.
In support of this trend, he explained that 2010 PMA was up 4% over 2009 levels from $353 Million to $367 Million. Part of what is driving this faster-than-MRO-growth-rate is increased penetration within air carriers.
Howard explained that the retirement of PMA-friendly platforms, and OEM and leasing impediments will eventually cause PMA growth to slow down, but we do not yet seem to be approaching that “tipping point” because PMA is still seen as a safe and reliable way to reduce costs. Thus, while the growth of PMA cannot go on forever, it will continue to grow for quite awhile and the slow-down point is far enough in the future that Aerostrategy is not willing to even begin to estimate where or when that “tipping point” may be found.
Throughout this year’s Gorham Conference, there was a general agreement that leasing contracts are a major impediment to the growth of PMA, but that some of these hurdles are slowly being surmounted. As with other industry segments, the key to surmounting the perceived hurdles is treating the leasing industry as potential partners and opening lines of communication with them.
An Aerostrategy study shows that airlines believe that leasing companies are the biggest barriers to use of PMAs, but Howard sees situations where leasing companies are starting to get more comfortable with the use of PMAs, particularly for older types.
The Aerostrategy study shows that leasing companies are the biggest obstacle but they are not the only obstacle to PMA penetration. OEM total care and power by the hour contracts often exclude PMAs and they can reflect significant impediments to the use of PMAs – particularly among engines. David Doll added his belief that one of the reasons that OEMs purchased MRO facilities was to protect their aftermarket parts sales markets; he concluded that OEM MRO facilities may reflect another impediment to PMA penetration.
Aerostrategy sees the PMA industry continuing to grow at a rate faster than the rate of MRO growth, and is currently predicting that the PMA market will grow from in $367 Million 2010 to $665 Million by 2015 (assuming fuel prices remain within a moderate $80-$110 per barrel range). If this prediction proves correct, it will mean that the PMA market will have grown at a rate of over 12% over that period
At the Gorham Conference, Michele Bassi-Degenkolb asked if Aerostrategy has looked at air carrier inventories to assess PMA penetration? Howard said that they have not done this for the whole market. Michele Bassi-Degenkolb pointed out that United is pushing PMA at their MRO service suppliers, and is looking carefully at their contracts to make sure that there are no impediments to PMA. She explained that airlines are getting smarter as they understand better how to overcome PMA impediments, in order to take advantage of the savings and reliability improvements associated with PMA.