Aftermarket companies tend to be set up in areas where demand for their services exceeds supply or in regions with airline growth. Other factors, such as local knowledge and partners, come into play in choosing a location, too, but MRO providers also need to think very carefully about how national and state-level customs regimes will affect their cost and ease of doing business.
In China, for example, many aviation aftermarket companies establish a presence in free-trade zones that benefit from simplified customs procedures. Others use bonded warehouses to streamline repair of units received from overseas. There is no import duty for such units and materials consumed if the material is also imported as bonded goods.
Florida-based GA Telesis (GAT) uses bonded warehouses around the world, and Jason Reed, president of GAT’s flight solutions group, says these save the company time and money, especially for parts that it supports with flight-hour-based maintenance deals.
“Should the turn time be held up by customs, GAT runs the risk of not having the component back in stock as serviceable or overhauled when the operator next requires it,” Reed says. “Should that happen, GAT is obligated to still provide a part to the customer and has to use additional stock or source the market for additional components, thus increasing cost to the program overall.”
Reed estimates that parts moving through nonbonded facilities can incur up to three times the duties for warehousing and be held up for 1-2 days on both entering and exiting such facilities.
GAT also uses preclearance procedures and fast-tracking in combination with its bonded warehouses. “This ultimately reduces the amount of possible touches of a component in a GAT distribution facility from four down to two, since the part skips the in/out process initially when the core removed part departs the airline customer in as-removed condition,” Reed says.
Gameco, based in Guangzhou, China, also has a bonded warehouse. “We use it for storage of selected parts and material before customs clearance or storage of consignment parts and spare components, so the owner can serve mainland China or other countries in the region quickly,” says Gameco Chief Executive Norbert Marx.
Like GAT, Gameco also uses other customs strategies in combination with its bonded warehouse, notably its authorized economic operator (AEO) status in China. “This approval was granted after extensive investment in processes and infrastructure and close cooperation with customs,” Marx says. “Under this approval, the privilege of customs clearance of shipments is delegated to Gameco directly, while compliance is enforced on an audit base. It cuts down the time needed for clearance significantly.”
Lufthansa Technik (LHT) Shenzhen was another China-based MRO provider to have used a bonded warehouse in combination with an AEO certificate, although in 2021 it announced that it would convert its bonded facility into a 2,100-m2 (22,600-ft.2) maintenance shop. LHT Shenzhen President and CEO Benjamin Scheidel says this aligns with the component specialist’s goal of offering “vastly expanded” MRO capabilities and a greater range of part number capabilities for its customers.
Scheduled to be completed in June 2021, the new facility will expand LHT Shenzhen’s capabilities to more than 70 Honeywell components for the Airbus A350. Previously, such repairs would have been performed abroad, so the company clearly sees value in becoming the first licensed repair station for the aircraft type in the Asia-Pacific region. The increase of maintenance capabilities will also include heat transfer component repairs, overhaul and core replacement services under a newly announced partnership with TAT Technologies. This will support most major platforms and components on the environmental control, bleed air and fuel inerting systems.
“In the past, the bonded warehouse mainly served foreign airlines and material providers to store engines and parts,” Scheidel says. But he also notes that LHT Shenzhen retains its AEO certificate and its “highly efficient import/export mode to handle aircraft materials, components and engines,” enabling it to serve foreign customers without customs-related delays.
The company also benefits from new Chinese regulations that allow airlines, domestic MRO and aircraft parts distributors to import and export aircraft parts for MRO at a 0% duty rate. Scheidel adds that a “13% [value-added tax] will be levied only after those parts are used to repair components from Chinese customers,” but there is no duty for repairs for foreign customers.
Taxes and Tariffs
India was once notorious for its labyrinthine tax and duty regime, which could vary enormously from state to state and was often blamed for holding back the country’s aviation sector. In 2017, however, India simplified things by rolling out a standardized goods and services tax that Anand Bhaskar, managing director and CEO of Gurugram-based MRO provider Air Works, calls “one of India’s biggest tax system overhauls since independence.” He adds: “It replaced a plethora of indirect taxes such as states’ sales tax, service tax, excise, etc. with a single central tax regime applied uniformly on all products and services.”
Air Works and other Indian MRO providers currently pay no basic customs duty on parts imported for maintenance purposes, although these are subject to a tax of 5-28% depending on the part number.
However, tax anomalies remain, and Bhaskar notes that India needs to do more to build up its MRO capabilities and capture more of its huge local market. He says that “certain specific tax notifications” make it less costly for Indian airlines to conduct high-value work—such as end-of-lease and redelivery checks—outside the country. “Unless such instances are corrected, Indian MROs are unlikely to attain their rightful scale,” Bhaskar says.
Of course, import and export strategies can also be affected by regulations external to an MRO’s country of operation. This came into focus during the Trump administration’s use of tariffs and export restrictions for aircraft parts. At the time, LHT Shenzhen said it had experienced a noticeable cost impact due to increased trade duties, “since the vast majority of the parts we use for repair is from abroad.” It also noted that “the duration and severity of this impact depends on the outcome of the negotiations between China and the USA.”
In January 2021, shortly before President Joe Biden assumed office, the U.S. said it would begin collecting new duties on aircraft parts from France and Germany in a move linked to the then-ongoing Airbus-Boeing World Trade Organization (WTO) dispute.
However, GAT’s Reed says the effect of this on the aftermarket was minimal. “For those that are made by European manufacturers, we are able to keep parts in-country or in Europe utilizing a local repair network [in Europe] as well when required,” he says. “Plus, for those parts that were manufactured in Europe, they all have repair stations in the U.S. as well, so no export is required.”
The tariffs had been suspended since March, in any case, to give the EU and U.S. time to resolve the 17-year WTO dispute, which they did with a draft deal in June. “We now have time and space to find a lasting solution . . . while saving billions of euros in duties for importers on both sides of the Atlantic,” EU trade commissioner Valdis Dombrovskis said in June.
Reed shares Dombrovskis’ confidence in better EU-U.S. relations going forward. “Ultimately, we see [tariffs] going away with the new U.S. administration working together with leaders in Europe,” Reed says.
This article was originally published August 17 2021.
