The Chinese Market Begins to Warm to New Sources of Supply

2nd Annual Aviation Part Support and Supply Chain Management Forum – Panel on Used Serviceable Material and Aircraft Disassembly

Last week, I attended the 2nd Annual Aviation Part Support and Supply Chain Management Forum in Shanghai, China.

The conference was quite-well attended.  The organizers told me that they had registered 230 people.  At one point I counted the number of bodies in the room and counted 160 (which is a very good percentage for a spot-count).  Many of the attendees were from Chinese air carriers and Chinese MROs.  Several ASA members were there and they all seemed impressed with the potential customers that were available for networking.

Useful Information

Anyone who wanted a lesson in airline spares management could have attended a presentation by Jet Airways’ K. “Adi” Adikesavan.  He provided a very detailed analysis of the spares world, from metrics for vendor selection to strategic tips.  Adikesavan explained that the safest thing is to own every possible part in sufficient quantity to ensure no shortage, but admitted that of course this is not realistic.  He explained that the best thing is to not own inventory, because everything has a but cost.  He presented spares sourcing as a data-based balance between the two ideals of owning nothing, and owning everything.

The conference also included some cutting-edge discussions for stock optimization and the latest word in aerospace-usage of 3-D manufacturing from Stratysys (the largest producer of 3-D manufacturing equipment).

There were a range of real opportunities in the room, based on upon how willing companies were to diverge from their past practices.  One large Chinese air carrier described their range of parts supply options as running from holding inventory in their own warehouses, and purchasing from inventory held in OEM warehouses.  I asked about purchasing from other sources, like pooling with other carriers or with MROs; but it was clear from the answer that many of the parts supply options that are common in other parts of the world are not yet common in China.

But it is evident that this is changing.  Daniel Stromski, the Executive General Manager of HAECO’s Inventory Technical Management business, talked about parts pooling opportunities that went well beyond what some air carriers seemed comfortable with, but that would have seemed perfectly normal in the Americas or Europe.  He provided an excellent breakdown of how Haeco’s inventory technical management program helps air carriers meet their inventory needs efficiently, effectively, and economically.

One concern raised by the audience in response to the poling discussion was whether lessors would be opposed to this sort of method for sourcing parts.  Stromski explained that lessors typically do not have a problem with pooling.  They are not interested in technical management.  He explained that from the leasing perspective, the aircraft is an asset, and they want the maintenance risk to be pushed to the airline, so they are comfortable with arrangements like pools that facilitate on-time dispatch of the aircraft.  So Stromski’s challenge is convincing air carriers of the value of his services.

While Chinese air carriers recognize the importance of OEMs as aircraft parts sources, several of them complained that some OEMs took unfair advantage of them, charging unusually high prices and providing sub-par service.

Business for ASA Members

Dissatisfaction with current suppliers was a topic in both hallway-chat and in the formal presentations – this dissatisfaction provides a potential opportunity for distributors who want to expand into the Chinese market.

For distributors in the US looking to support the Chinese aviation market, targeting major MROs as potential customers might be the best way to start.  MROs seemed much more open to working with a wide range of sources, and are presenting themselves as mechanisms for reducing air carrier burden by using their parts sourcing resources to obtain the best deals for parts needed by air carriers.  It was also clear that in some cases, air carriers may look the other way when a MRO uses a source that the air carrier itself might not use, as long as the MRO takes responsibility for safety.  One example of this is used serviceable material (such as overhauled material).  More than one air carrier declared that used serviceable material is not acceptable in China; nonetheless, more than one Chinese MRO explained that they consumed used serviceable material in their repairs (for these same air carriers) and they found it to be both effective and economical.  They stressed that it provides more options to allow maintenance organizations to meet the air carrier’s needs.

It appears that some Chinese air carriers – especially those that are not the state-supported legacy carriers – are interested in exploring alternatives to their traditional parts sourcing paradigms.  So there is room to expand in to that direct market but success may require more work in building relationships and trust.

Having a distinct presence in China is certainly helpful.  Companies with a physical presence in China seemed to be much more successful, and those without a physical presence suggested that having an agent in China was the next-best thing.

The 2018 Conference will take place in Shanghai in March.  It is an excellent opportunity for distributors who are looking to expand their presence in the Chinese marketplace.

 

Where Do I Find Lithium Batteries and How Do I Ship Them?

Lithium batteries continue to be a particular concern in the aviation world.  For many aircraft parts distributors, it is important to be able to recognize the presence of lithium batteries in an article or assembly in order to be able to ensure that the article or assembly is shipped properly.

Some known uses of lithium batteries on airplanes include:

  • Flight deck and avionics systems such as displays, global positioning systems, cockpit voice recorders, flight data recorders, underwater locator beacons, navigation computers, integrated avionics computers, satellite network and communication systems, communication management units, and remote-monitor electronic line-replaceable units;
  • Cabin safety, entertainment, and communications equipment, including emergency locator transmitters, life rafts, escape slides, seat belt air bags, cabin management systems, Ethernet switches, routers and media servers, wireless systems, internet and in-flight entertainment systems, satellite televisions, remotes, and handsets;
  • Systems in cargo areas including door controls, sensors, video surveillance equipment, and security systems.

Source: Special Conditions: AmSafe; Non-Rechargeable Lithium Battery Installations, 82 F.R. 14164, 14165 (March 17, 2017).

Once you have identified a lithium battery, you need to ascertain the correct proper shipping name for the battery.  There are currently six main proper shipping names that apply to lithium battery configuration:

  • Lithium Ion Batteries
  • Lithium Ion Batteries Contained in Equipment
  • Lithium Ion Batteries Packed with Equipment
  • Lithium Metal Batteries
  • Lithium Metal Batteries Contained in Equipment
  • Lithium Metal Batteries Packed with Equipment

Each of these proper shipping names leads to a different packing instruction or packing regulation, and different standards for how to identify, package and ship the articles.  Most aircraft batteries are lithium ion, but it is important to properly classify the battery before you ship it.

The rules concerning shipping lithium batteries as hazardous materials (US term) or dangerous goods (international term) have been changing frequently in recent years.  This is meant to ensure that they are shipped safely, based on the latest knowledge.  But these changes in the standards can make compliance difficult.  In order to ensure compliance, we recommend that you always do these things:

  • Before you even consider shipping a hazardous material, make sure you are trained and that your training is current (it’s the law!);
    • We offer a live, interactive, online course for hazmat certification;
  • Pick up the current version of the relevant regulations (e.g. US DOT regulations or the ICAO Technical Instructions) and read the relevant requirements;
  • Read through the packing instruction or packing regulation carefully (yes, even though you know it, read it again, right before using it);
  • Identify what subsection of the packing instruction or packing regulation applies to your shipment (there are usually tw0 [I/II] or three [IA, IB, II] different subsections that could apply in each IATA/ICAO packing instruction – you must choose the correct subsection based shipping configuration factors like mass, watt-hour rating, number of batteries, etc.);
  • Follow the instructions carefully and don’t get mixed-up (when using the IATA DGR Packing Instructions, you should be following the instructions in your proper subsection and also the general instructions at the beginning of the packing instruction that apply to all of the subsections).

On April 5-6, 2017 we will be conducting an online class on how to ship aircraft parts when the parts are characterized as hazardous materials or dangerous goods. The class includes units and exercises designed to help you identify hazardous materials in aviation, in addition to teaching you how to package, identify and ship them.

Those who successfully pass the course will be certified in accordance with US DOT regulations and IATA/ICAO standards.  The class is inexpensive and there are additional discounts for trade association members.  It is also a live, online class.  Since it is taught online, you can participate from the comfort of your own desk, with no need to travel.  Since it is also live, you can ask the instructor questions and get answers immediately.

What is the Difference Between FAA PMA Parts and FAA STC Parts?

A member recently asked “what is the difference between FAA PMA parts and FAA STC parts.”

A PMA is a production approval.  14 C.F.R. § 21.1(b)(7).  The PMA gives the holder the power to produce articles for use on aircraft.  E.g. 14 C.F.R. § 21.9(a)(2).  Parts produced under an FAA PMA are approved parts.

A supplemental type certificate (“STC”) is a design approval only.  14 C.F.R. § 21.1(b)(4).  It does not provide any inherent production approval.  Thus, an STC holder who wants to produce articles for use on aircraft will need some other production basis (in addition to the STC).  When parts are offered for sale and described as “STC Parts” it is important for the buyer to understand the production approval basis for the parts.

STC Holder Options for Production

Generally speaking, if a person knows that a replacement or modification article is reasonably likely to be installed on an aircraft, engine or propeller, then the person may only produce that article under one of the categories listed in the FAA regulations – specifically in section 21.9(a) of those regulations. These represent the FAA-acceptable mechanisms for production.

STC holders can and do use production certificate (PC) and/or parts manufacturer approval (PMA) to obtain FAA production approval for parts where the design has been approved under an STC.  14 C.F.R. § 21.9(a)(2).  In these cases, the production approval permits the holder to produce articles that are likely to be installed on aircraft, engines or propellers.

An STC holder (or the licensee of such a holder) could produce parts for consumption during maintenance or alteration.  14 C.F.R. § 21.9(a)(6).  But if that company decides to sell those parts, instead of consuming them itself, then that may violate the regulations.  14 C.F.R. § 21.9.

An owner/operator could produce an article for maintaining or altering that owner or operator’s own aircraft, engine or propeller.  4 C.F.R. § 21.9(a)(5).  An STC could serve as the design basis for the article.  So this is another possible way to produce parts based on STC data.

It is also possible for an article that is called-out in an STC design to be produced as a commercial part or a standard part; but when such articles are produced under one of these categories, they are typically not called “STC parts.”

Conclusion

I have seen situations where STC holders mistakenly believe that they have the authority to produce and sell aircraft parts under the STC (alone).  This is, of course, not true.

Because of this history, whenever someone tells me they intend to buy STC parts, I always want to follow-up to identify the production approval basis of the parts.

FAA Guidance on Approval for Return to Service (Right-Side-Signed 8130-3 Tags) – Comment Period Extended

The FAA has issued a draft guidance document for 8130-3 tags when the tags are completed as Approvals for Return to Service (ARTS).

The draft guidance is currently known as AC 43-ARTS, Use of FAA Form 8130-3 for Approval for Return to Service Under Part 43, and can be found online at

https://www.faa.gov/aircraft/draft_docs/media/afs/AC-43-ARTS_Coord_Copy.pdf.

The draft guidance may impose new standards with inadequate regulatory basis.

The purpose of the new guidance is to provide guidance for compliance with the approval for return to service requirements found in part 43; but it seems to impose new requirements that are not found in Part 43.  The draft guidance also suggests that one may not use an 8130-3 tag as the ARTS unless the person follows the AC; this would make the AC a de facto regulatory requirement in light of the strong emphasis that the FAA has placed on the use of the 8130-3 tag as the norm for approval for return to service.

The draft guidance also requires following the standards published in AC 120-78 as a condition of being permitted to use electronic 8130-3 tags.  This mandate contradicts AC 120-78 which made those standards voluntary/advisory.

Comments were previously due on March 13.  ASA joined with several other trade associations to request an extension, and now the comment period has been extended to June 12, 2017.

The draft advisory circular is available for review online at https://www.faa.gov/aircraft/draft_docs/media/afs/AC_43-ARTS_Coord_Copy.pdf.  Comments should be submitted by email to Griffin.CTR.Moar@FAA.gov.  Please send a copy of your comments to ASA so we can be sure to echo our members’ concerns.

EU Considers Listing US as Tax Haven

Looking for a Tax Haven?  Maybe the Answer is in the United States!

The European Commission is developing a list of jurisdictions that are considered to be risks for tax avoidance.  They are in the process of updating this list and the United States has been flagged as a risk in the area of tax good governance.

To be fair, the United States enters the list as one of 90 countries that the EU views as potential problems, and in 2017 the EU will winnow that list down to its final resolution.  Only 160 countries were initially assessed so more than half the world is subject to this next-level EU scrutiny.  Countries are identified based on three risk factors:

  • Transparency of the tax system (this seems to be focused more on automatic exchange of information on tax rulings and the automatic exchange of information between tax authorities, as opposed ot making taxation easy to understand)
  • Tax advantages for corporations
  • No corporate income tax or zero-percent income tax

The United States was identified in two out of the three categories: Transparency and corporate tax advantages.

This is just the first step in a three step process.  Now that the European Commission has produced a scoreboard of indicators, they still need to engage in screening and listing.  Under the screening process, EU Member States will identify nations that must be formally screened by the EU.  This screening will include a dialogue between the EU and the country in question, to allow the country to react to any concerns raised (perhaps this could be considered in any tax package that the new Administration proffers).  Then, when the screening process is complete, nations that refused to cooperate or engage with the EU regarding tax good governance concerns would be put on the EU list of ujsidictions without good tax governance.  Presumably this could lead to EU impediments against transfer of funds to or from those tax havens.

The EU will create a map that shows a full consolidated overview of countries and territories ‘listed’ by Member States for tax purposes.  The US is unlikely to be listed on the final list of bad actors, but it is unclear who may finally make that list.  It will be important to gauge whether this effort impacts international payments for members of the aerospace community.

A full review of the EU work program for this effort is available online.

Suspected Unapproved Parts (SUPs) Reporting on Form 8120-11

The FAA has republished the Form 8120-11. This is the form for reporting suspected unapproved parts (SUPs).

The new version of the form was approved by the White House in 2016.  One new feature is that the completion instructions are on the first page of the standard PDF – before the actual form.  This means that people will typically see the instructions before they start to complete the form.

The 2009 version of the form put the instructions on the second page, between the primary form and the continuation sheet.  It is natural for people to .  ASA has received many questions from members about how to complete the 8120-11 form, and many of those questions were answered in the instructions (found on the second page of the PDF).  This is because it is natural for people to start at the top of page one and work their way through completing the form, without skipping ahead to examine the later parts of the form.  Moving the instructions to page one will hopefully answer many of the questions that arise in completing the form.

If you encounter a Suspected Unapproved Parts, or SUP, then reporting is typically voluntary under the regulations; however many aviation companies have imposed mandatory SUPs reporting requirements on themselves through their quality manuals or operations manuals.  Be sure to follow your own internal guidance when considering whether to report a SUP!

Should ASA Support a Repeal of the Estate Tax?

ASA has the opportunity to sign onto a letter supporting a bill that would repeal Subtitle B of the Internal Revenue Code of 1986 that relates to estate, gift, and generation-skipping taxes. The Bill is entitled the Death Tax Repeal Act of 2017.

Although it is typically thought of as only affecting the very wealthy, the estate tax can also have an effect on small and family-owned businesses; particularly those that are land- or asset-rich but cash poor. One oft-cited example is that of the family farmer, whose is land-rich (the value of his real property is high) but operating on very thin margins and doesn’t have a large amount of cash saved or other liquid assets. The family of the farmer may be forced to sell off a piece of the farm land in order to raise the money to pay the estate tax assessed against the total value of the farm upon the farmer’s death.

More close to home, in the aerospace distribution community, companies may have millions or even billions of dollars in inventory on the shelf that would be counted toward the value of a family business owner’s estate. This sort of vast parts inventory cannot be quickly liquidated upon a business owner’s death to cover an estate tax assessed against the value of the business (that includes that inventory). Additionally,  because many businesses rely on their inventory as collateral against which to take out loans or lines of credit, they cannot simply depreciate the value of the inventory to zero to minimize the value of the business for estate tax purposes, or they risk also minimizing the apparent value of the business as a whole, thus making it difficult to borrow in the future.

On the other hand, many people feel that the estate tax is something that only effects the very wealthy and thus repeal should not be a high priority (or a priority at all).

I would like to hear what ASA’s members think. Is a letter supporting the Death Tax Repeal Act of 2017 something ASA should sign on to? The deadline to sign on to the letter is Monday, January 23, so please let us know what you think before then.  You can email your thoughts to Ryan Aggergaard at ryan@washingtonaviation.com.

%d bloggers like this: