How Will Brexit Affect Aircraft Parts?

Brexit is coming.  It is currently scheduled to happen at midnight on October 31 (European time).  November 1 is a Friday and it could represent a whole new slate of frustrations and issues for every industry – including the aircraft parts industry.

The UK is an important participant in the global aviation community so Brexit will affect the whole world.  Understanding what plans and standards have been put into place can help reduce the frustrations and facilitate both safety and compliance after Brexit.

Short History of Brexit

The United Kingdom joined the European Union on January 1, 1973.  44 years later, on March 29, 2017, Tim Barrow (the Permanent Representative of the United Kingdom to the European Union) delivered a letter invoking Article 50 to Donald Tusk, the President of the European Council.  The Article 50 deadline has been extended, and currently the United Kingdom is expected to leave the European Union at midnight on October 31, 2019.

Article 50 is the provision of the Treaty on the European Union that provides for exit from the European Union.

All of this is pretty well known to anyone who has followed any major news source over the past two years.  Yet, how this will all affect the aviation community remains less clear than we would like.

Options

The world has been anticipating two basic options for Brexit.

The first option, known as a “soft-Brexit,” is that the UK and the EU come to an agreement that allows them to have continued trade relations.  It has been widely anticipated that in the event of a soft-Brexit, UK CAA would join EASA as a third-party participant, much like Iceland, Liechtenstein, Norway and Switzerland (which are not EU member states but are EASA members).

The second option is known as a “hard-Brexit,” or a “no-deal Brexit.”  Under a hard Brexit, there would be no deal between the UK and the EU.  Politically, it is likely that EASA would be unable to extend to the UK an offer to join EASA as a non-EU member.  This would mean that the UK CAA would have to shoulder all of the airworthiness responsibilities for itself – they already handle many airworthiness duties but the additional duties undertaken by EASA would transfer back to the UK CAA.

The UK is in a fairly good position to support airworthiness.  UK CAA has continued to function for the UK by providing direct oversight in areas like production and maintenance.  UK CAA has already begun to increase its staff in anticipation of a hard Brexit.  UK CAA has also been hard-at-work establishing and updating bilateral aviation safety agreements with the UK’s major trading partners – these agreements will come into force immediately after Brexit.

One organization with which they have not formally negotiated is EASA.  The EU has taken the position that they cannot legally treat an EU member as a foreign entity, and thus they cannot negotiate international agreements like bilateral aviation safety agreements with a member state like the UK.  Despite this, the EU and EASA have issued regulations, and discussion papers explaining the position EASA intends to take in the event of a hard Brexit.  As discussed below, EASA and UK CAA have an excellent working relationship which should permit them to work well together when (and if) they are allowed to do so.

EU Position on Acceptance of UK Parts

The original April 2018 European Commission Notice to Stakeholders had painted a bleak picture of the near future between the UK CAA and EASA; it would have cancelled all UK approvals and it would have refused to recognize any UK-sourced EASA Form One after March 29.  The EU’s January 2019 updates to Brexit policy, though, have set much more reasonable short-term policies for the EU, and the subsequent March 2019 regulation has established a greater level of confidence that aviation will not come to a halt on November 1, 2019.

In essence, the EU intends to grant a nine-month grace period after Brexit.  This will permit the EU to continue negotiations with the UK; and it may allow the UK to join EASA as a non-EU member, or to otherwise establish a working arrangement with EASA.  Nine months is a short time period for negotiations and the UK CAA will be “under the gun” to achieve results during this time frame, but results to extend the UK CAA-EASA relationship are possible.

During the nine-month grace period, EASA will consider certain EASA design approvals issued to parties in the UK to remain valid.  This includes

  • Type certificates and restricted type certificates,
  • Approval of changes to type certificates and restricted type certificates,
  • Supplemental type certificates,
  • Approval in respect of repairs,
  • European Technical Standard Order authorizations,
  • Design organization approvals.

In addition, EASA will continue to recognize the validity of Authorized Release Certificates (EASA Form 1) for products, parts and appliances.  This includes the original certificates issued by the production organization, as well as maintenance certificates for articles that have already been installed in aircraft as of the Brexit date.  Unlike the nine-month recognition of design approvals, this recognition does not have a time limit.  This means that EASA will continue to recognize articles tagged in the UK before Brexit as valid articles.

But let’s look at some of the details in this pronouncement, because there are problems.  The regulation is ‘triggered’ by Brexit and enters into force on the following day.  The new regulation specifies that EASA will continue to recognize the validity of Authorized Release Certificates (EASA Form 1) that were valid as of the day before the regulation becomes active.  This means that an EASA Form 1 that existed on October 31 (assuming that is the day of Brexit) will continue to be valid on November 1.  But an EASA Form 1 issued on Monday November 4 will not be valid because it was not valid on October 31.

Where is the problem?  EASA will consider UK type certificates, STCs and ETSOAs to remain valid for nine months, but all UK production organization approvals (POAs) are considered invalid on November 1 (remember, EASA has offered to issue third country POAs to manufacturers in the UK).  This means that UK Form 1 (or other-named-forms) issued by UK manufacturers after October 31 will likewise remain invalid.  After decades of hearing requests for “fresh tags,” we may find ourselves preferring “stale tags,” because a Form 1 issued on or before October 31 by a UK manufacturer will be acceptable in the EASA system, while a Form 1 issued on or after November 1 by a UK manufacturer may not be acceptable in the EASA system.

Practice Tip: Because EASA Form 1 issued after October 31 may be invalid for EU-registered aircraft, companies who rely on parts produced in the UK, or parts overhauled/repaired in the UK, should ensure that the UK EASA Form 1 tags are dated by or before October 31, 2019.

What other problems are on the horizon?  Plenty of detail problems will be arising after October 31.  For example, the US-UK agreement will permit UK-produced articles to continue to be installed in US-registered aircraft, but US-based repair stations will have to be careful to check the date on the EASA Form 1!  While dates likely won’t matter for US-registered aircraft and US customers, EU-registered aircraft and EU customers may be unable to accept UK-sourced tags that were issued after Brexit.

Practice Tip: US repair stations with an inventory of articles with EASA Form 1 issued before October 31 should consider saving those articles for use on EU-registered aircraft and for EU-clients.  To facilitate this, use articles with UK CAA tags dated after October 31, 2019 on US-registered aircraft.
Practice Tip: Distributors should train their receiving inspectors to look carefully at the tags for articles produced in the UK.  The source of the POA (UK vs. EASA) and the date of the tag will influence who is permitted to use the article.

UK CAA Prepares

The UK CAA hasn’t been sitting idle.  Richard Moriarty reached out to EASA in a letter on June 1, 2018 to propose formal technical discussions to lay the groundwork for future cooperation.  The stressed the importance of clarity for the benefit of the regulated industry.  In a July 18, 2018 response, EASA Executive Director Patrick Ky made it clear that EASA would not be able to discuss practical cooperation with the UK CAA until after the specifics of the UK withdrawal had become clear and certain.  Over a year later, today, that certainty remains elusive.  While formal technical negotiations have not yet begun, UK CAA remains a member of EASA, and so there are normal channels of discussion about business matters that will likely help smooth the way toward an agreement between UK CAA and EASA (if an agreement is warranted).

As an example of the trust between the two organizations, EASA has offered to issue third-country certificates, like repair station certificates and production organization authorizations, to UK businesses.  The certificates would be issued immediately after Brexit (as soon as the UK becomes a “third-country” relative to the EU) in order to support safety and business continuity.  To allow the certificates to be issued immediately after Brexit, EASA needs to assess the applicants before Brexit.  EASA has made it clear that it is relying on the UK CAA to perform those assessments as the EASA technical agent.

UK and the US

UK CAA has been working closely with the US FAA on planning.  They have negotiated two different agreements – one that assumes a hard Brexit and one that assumes a soft Brexit.  Whichever one is appropriate will be signed immediately upon the occurrence of Brexit, in order to support continued, smooth, support of airworthiness between the UK and the US.

The US-UK agreement will be practically identical to the existing US-EU agreement,  The reason for this is to keep transactions smooth, under a set of transactional rules that all parties recognize.  So this means “business as usual” between the UK and the US.

While there may be minor issues that arise, the basic transactional model is expected to be solid between the UK and US.  This means that UK’s EASA Form 1 will likely continue to be valid in the US, and the future UK CAA Form 1 is also expected to be valid in the US after Brexit.  There are a substantial number of FAA 145 certificates in the UK.  Based on this, the US has discussed permitting UK-based companies with both a US 145 and a UK 145 certificate to issue the FAA 8130-3 as their maintenance release document for component-level work.  This allows the repair stations to use a globally-recognized tag, rather than having to educate the industry about a new UK-specific maintenance release document.

UK CAA has also been modifying its internal structures to support all of the elements that EASA has addressed over the past 16 years.  We expect them to be ready for Brexit.  We also expect this UK CAA staff to be overwhelmed with industry issues after Brexit, despite their best efforts to prepare.  The reason for this is because there are always details that fall under the radar during negotiations.

Politics in the UK and Brexit

There are a number of Brexit options lying in front of the UK.

It is looking increasingly likely that the UK will move into a hard Brexit.  The British press has reported that Boris Johnson has no intention of renegotiating the withdrawal agreement proposed by the EU and rejected by the UK.  This is partly because he has established – as a precondition to further UK-EU negotiations – that the EU must agree to withdraw the Irish backstop (and this is something the EU is unwilling to surrender).  The British press has also reported that a hard Brexit is Johnson’s “central scenario.”  It is clear that if Brexit does not happen on October 31 (in some form), then Johnson will be seen as reneging on his promises.

Despite the evidence favoring Johnson’s “central scenario,” a hard Brexit is not the only option.  Member of Parliament have discussed a no-confidence vote for Johnson as an early order of business upon their return in September in order to thwart the hard Brexit.  The Guardian newspaper has suggested that revocation of the Article 50 declaration is the only way forward for the UK (this would keep the UK in the EU).

But the Johnson camp has plans of their own: in the event of a no-confidence vote, one option would be to schedule elections for November (after Brexit happens) so that the new government would be too late to stop a hard Brexit.  Another option being discussed is proroguing Parliament.  Prorogation is the formal end of a parliamentary session and it is normally invoked through an announcement by the Queen.  When Parliament is prorogued, that ends the life of all incomplete motions and bills (although they can be introduced again in the next session).  Boris Johnson could ask the Queen to prorogue Parliament in an effort to prevent Parliament from interfering with the hard Brexit on October 31.  Although the Queen is legally permitted to act contrary to ministerial advice, she historically has not done so.

A hard Brexit is not a certainty; but it is a likelihood that must be considered as a reasonable possibility by aviation companies establishing their business plans vis-à-vis their UK business partners.

Expect Problems, But Work With Us On Solutions

Even in relationships specifically designed to weather Brexit, like the US-UK relationship, we will be facing new agreements that must be squared with a global market.  This means that there will be problems that arise where business models do not match the expectations of regulators who negotiated the agreements.  As you encounter these issues, please be sure to reach out to ASA so we can work with regulators to address and resolve these concerns.

 

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ASA and ACPC Partner to Offer Classes on Changes in the Global Parts Paradigms; NEXT WEEK!

ASA will be at the Air Carrier Purchasing Conference (ACPC) in Washington, DC this weekend and next week. Look for us all weekend long, but we hope to see you all on Monday during our FREE classes!.

On Monday, August 12, 2019, Jason Dickstein will teach three professional development classes at ACPC that will be useful for the aircraft parts community. The first, in the morning, will focus on what we expect out of Brexit, and how it will impact global aircraft parts transactions. The second, after lunch, will discuss import law – as the US imposes new tariffs on imported aircraft parts, it is important to understand your compliance obligations as well as the duties you need to pay on the imported parts. Finally, the third session will look at a number of parts issues documentation issues, including both recent and impending regulations that are changing the parts transactional paradigms.

Read on for expanded descriptions, below!


Monday 10:00 AM – 11:00 AM

Doing Business in the Post-Brexit World

Brexit is almost upon us…. Maybe. We will discuss what factors to watch as the world approaches the current Brexit deadline, what the aircraft parts community should anticipate under several different Brexit possibilities, what aviation negotiations are going on behind-the-scenes and how to protect yourself from the worst-case scenarios.


Monday 2:00 PM – 3:00 PM

Import Law for Aviation Professionals: From Harmonized Tariffs to Country of Origin

Most aircraft parts are usually imported “duty-free” and this can give us a distorted view of import law; a view that is upset when you receive ab unexpected bill for import duties. With existing China tariffs and proposed tariffs on Airbus parts, many aircraft parts importers are facing unwanted surprises in the form of import duties. We will examine the process for importing, how to classify your imports, and how to identify the tariff and related import duties for your import.

If you import parts, then tariff duties can have a direct impact on your bottom line – this session will help you to avoid surprises.


Monday 3:15 PM – 4:15 PM

How Do International Agreements (like the MAG) Affect Aircraft Parts Transactions?

The rules for aircraft parts transactions are changing! This session will begin with an examination of the relationships between international agreements and acceptance of traceability documents, but it will also address recent and impending rule and policy changes that could significantly affect the documentation requirements for aircraft parts transactions. If you have questions about documentation and international transactions, then this is the place for answers.


All sessions will be held in the Maryland Suites in the Marriott Wardman Park Hotel on Monday, August 12, 2019.

China Aviation Parts Management Forum Releases Draft 2019 Agenda

Many Americans are pessimistic about business with China because of the rhetoric between President Trump and President Xi, and the tariffs that have arisen from that rhetoric.  But neither the tariffs nor the fiery rhetoric will last forever; now might be just the time for Americans to reach out to their Chinese colleagues and to develop the relationships that will lead to business in the near future.

As we said in December, one of the best conferences for meeting Chinese air carriers and MROs is the Aviation Parts Management Forum.  This year, it will be help in Xiamen, China on March 28-29.

The Forum has released their first draft agenda for the 2019 event.  While it is not yet complete, it gives you a good idea of what topics will be covered.

If China is a part of your business strategy, or if you are wondering whether it should be a part, then you should examine the agenda and consider joining ASA in attending the Forum.

International Court Requires U.S. to Sell Aircraft Parts to Iran

The International Court of Justice (ICJ) has ruled that the United States must remove all sanctions that would prohibit the export of aircraft parts to Iran.  The ruling also directs the United States to “ensure that licences and necessary authorizations are granted and that payments and other transfers of funds are not subject to any restriction in so far as they relate to the goods and services.”

The Iranian Complaint in this matter was bought on or about July 16.

The Decision was issued on October 3.  It is a preliminary ruling in the case.  The court describes it as a “provisional measure[] responding to humanitarian needs [that] would not cause irreparable prejudice to any rights invoked by the United States.”  This is analogous to preliminary injunctions issued by U.S. courts (including a finding of irreparable harm, likelihood of success on the merits, and a weighing of the equities).

In response, the United States announced that it would withdraw from the Treaty of Amity that serves as the legal basis for the Iranian claim.  Article XXI of that agreement explicitly granted jurisdiction over US-Iranian disputes to the ICJ.

What effect will this ICJ ruling have?  In the United States, the Administration has already been critical of the decision, and has announced plans to withdraw from treaties that serve as the legal basis for elements of the court’s jurisdiction over the matter.  This is a strong signal that the US intends to ignore the ICJ ruling.  For US exporters, this is likely to mean that US law will continue to apply sanctions prohibiting export of aircraft parts to Iran.  But there is a stronger likelihood that the United States may stand alone in these sanctions, and other nations will continue to follow the Joint Comprehensive Plan of Action (JCPOA) that permitted nations to begin exporting certain aircraft parts to Iran.  US exporters will have to be especially vigilant about compliance in international transactions, to ensure that they are not inadvertently made parties to exports with a forbidden final destination.

For now, US exporters should continue to forbear from exporting aircraft parts to Iran unless the exporter has a valid export license covering the transaction, from the United States government.

Doing Business With Iran Under a JCPOA License? Get Your Transactions Completed by August 6, 2018.

As we reported on May 8, the United States’ decision to end the JCPOA agreement with Iran means that existing JCPOA-based licenses will be revoked on August 6.  A number of ASA members have these export licenses, which permit aircraft-parts-business with the specified Iranian parties.

On May 8, the President announced his decision to discontinue the United States’ participation in the Agreement with Iran, and to reimpose sanctions against Iran.

The Treasury has published a document explaining the wind-down process, including answers to frequently asked questions.  The wind-down document explains that the United States government plans to revoke JCPOA-related authorizations, such as the aircraft and aircraft parts-related export licenses that were issued pursuant to the US-Iran Agreement.  Those export licenses are scheduled to be terminated as of August 6, 2018.

Those ASA members who hold JCPOA export licenses (which are being terminated) may consider applying for replacement licenses under the safety of flight statement of licensing policy found in 31 C.F.R. § 560.528. That provision permits licenses on a case-by-case basis for exporting to Iran in order to ensure the safety of civil aviation and safe operation of U.S.-origin commercial passenger aircraft.  Historically, the United States government has not issued many of these licenses, but if the transaction is valuable to the United States then the transaction might be considered for licensing.

Unapproved Parts Notice – Update

We’ve gotten a number of phone calls and emails about a recent Unapproved Parts Notice (UPN) known as UPN 2018-2017-0001120.  This UPN claimed that several parts (Clamp Loop, Cushion, part number TA025030-06; Filter Element, part number 26570; Base Plate, part number 232012; and Bushing, part number S700B0455-6C011) were distributed without traceability to a FAA Production Approval Holder.  As many of you know, U.S. law does not require this sort of traceability as a regulatory condition for distribution of expendable parts like these.

This purported traceability-basis for the UPN has confused many ASA members who are extremely familiar with both the law and the industry practice concerning traceability.

Two weeks ago, we sent an email to the FAA that explained:

On February 15, the FAA issued a UPN on some expendable parts (UPN 2018-2017-0001120).  The claim in the UPN was that the parts were “distributed … without traceability to a FAA Production Approval Holder.”  This appears to be the sole violation described in the UPN.

As you know, back-to-birth traceability is a norm for life limited parts, but several Chief Counsel’s Opinion Letters have confirmed that it is not required under the regulations.

For expendable parts like the ones in the UPN, the FAA’s published policy states that it is acceptable to distribute such parts with a “statement as to identity and condition.”  E.g. AC 00-56B.  Thus, FAA published policy comports with FAA Chief Counsel’s Opinion Letters in clarifying that back-to-birth traceability is NOT required.

We are very concerned that this UPN appears to set the wrong standard – a standard that is legally wrong, that contradicts published FAA policy, and that would be unmanageable for current expendable inventories.  This concern is shared by many of ASA’s members and we have fielded a significant number of phone calls this week from concerned members.

It is possible that the real issue for these parts is different from what the MIDO published in the UPN.  If this is the case, then we trust that the FAA will reissue the UPN with the correct information.  But if the identified problem truly was a lack of back-to-birth traceability, then we trust that the FAA will rescind this UPN in the grounds that back-to-birth traceability is not required, and that it is an industry norm for expendable parts purchased from many distributors that they may not have back-to-birth traceability.

Once your staff has looked into this, I would appreciate an update on your plans, if any, to remedy this UPN guidance.

We’ve been talking with the FAA in the intervening two weeks, and they have been diligently investigating this matter. The FAA management people who now have charge of this project are the sort who like to do something once, and do it correctly the first time; so we have a great deal of confidence that they will come to the right decision: a decision that protects the integrity of the industry’s safety focus without imposing unworkable documentation standards.

BIS Revises Sudan Licensing Policy

The U.S. Department of Commerce Bureau of Industry and Security (BIS) issued a final rule today revising its policy for review of applications for the export of parts in support of Sudan’s civil aviation industry from a policy of presumptive denial to one of presumptive approval.  This change makes it possible for exporters of aircraft parts to obtain a license to export parts “intended to ensure the safety of civil aviation or the safe operation of fixed-wing, commercial passenger aircraft.”

Prior to this rule change BIS maintained a general policy of denial of export license applications for “[a]ll aircraft (powered and unpowered), helicopters, engines, and related spare parts and components.” 15 C.F.R. § 742.10(b)(1)(iv).  The rule revision replaces that policy “to a general policy of approval for parts, components, materials, equipment, and technology that are controlled on the CCL only for anti-terrorism reasons and that are intended to ensure the safety of civil aviation or the safe operation of fixed-wing, commercial passenger aircraft.” The new rule goes into effect January 17, 2017.

The rule explains that these changes are being made “in connection with ongoing U.S.-Sudan bilateral engagement, and with the aim of enhancing the safety of Sudan’s civil aviation” in furtherance of U.S. goals to improve regional peace and security. The support and enhancement of safety in civil aviation was one of the carrots the United States used during its negotiations of the Iran nuclear deal as well.

One important caveat to the rule change is that a general policy of denial of export (or reexport) license applications has been retained if the transaction would “substantially benefit a sensitive end user.” Sensitive end users include (but are not limited to) Sudan’s military, police, and intelligence services, or persons owned or controlled thereby. Should you be contacted by a potential customer from Sudan it is therefore important to ensure that you follow your export compliance procedures to establish the identity of the ultimate end users.

The relevant text of the new rule is as follows:

15 C.F.R. § 742.10(b)(3)(ii) General policy of approval. Applications to export or reexport to Sudan the following for civil uses by non-sensitive end-users within Sudan will be reviewed with a general policy of approval.

(A) Parts, components, materials, equipment, and technology that are controlled on the Commerce Control List (Supp. No. 1 to part 774 of the EAR) only for anti-terrorism reasons that are intended to ensure the safety of civil aviation or the safe operation of fixedwing commercial passenger aircraft.

. . .

Note to paragraph (b)(3)(ii). Applications will generally be denied for exports or reexports that would substantially benefit a sensitive end user. Sensitive end users include Sudan’s military, police, and intelligence services and persons that are owned by or are part of or operated or controlled by those services.

The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) has simultaneously amended its Sudanese Sanctions Regulations to authorize these exports.

Remember, this policy change does not mean that you can ship to Sudan without a license; rather, it means that as a general rule an export license will be granted for the export of aircraft parts in support of Sudan’s civil aviation industry. Sudan remains the only country on the Commerce Country Chart controlled under column Anti-Terrorism 1 (AT1), and AT1 applies to ECCN 9A991.d, under which most aircraft parts are categorized.

As always, anyone seeking to engage in new, complex, or unfamiliar export transactions should consult an export compliance attorney.

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