BASA is not along just for the ride

By Juan Carlos Valles-Zavala & Sergio Roldán of Baker & McKenzie
Tamaulipas features one of the most dynamic borders with the United States. Tamaulipas offers some of the best conditions for international trade logistics that can be found. It certainly has important advantages, not only its geographic location and infrastructure, but also the availability of resources and good labor conditions. With all this to offer Tamaulipas is certainly an excellent option for establishing operations on the U.S. – Mexico Border.

Background

Aviation has been present in Mexico since 1786 when two friends, Manuel Valdés and Felipe Zúñiga, sent a hot air balloon into the air without a crew, but it was until 1915 when Mexico opened its first factory “Talleres Nacionales de Construcciones Aeronáuticas” (“TNCA”) dedicated to the manufacturing of airplanes. However, TNCA became part of the history by the mid 1900’s when production ceased.

Air transportation has been increasing significantly over the years, and nowadays global air travel has become so ordinary that even many companies and individuals own planes and helicopters, and the rise of new developments, such as unmanned aircraft systems, ultra modern aircraft technologies and space travel, are now the real breakthrough for the aerospace industry.

According to the Mexican Federation of the Aerospace Industry (FEMIA for its acronym in Spanish), the worldwide “eet of civil aircrafts has an average age of 18 years, and some 20,000 units shall be replaced or updated within 10 years. However, there is a worldwide production capacity of approximately 1,800 units per year, which represents a backlog of more than 10 years.

Although backorders may be interpreted as years or months of revenue to come, some executives of the aerospace industry consider that backorders should no longer be seen as a measure of the health of an aircraft manufacturer. Jim Albaugh, president of Boeing, indicated that “when a customer is coming to you, and they want airplanes in a year or two and you have to tell them to get in line, that’s not a good place to be” as companies would be forcing their customer to turn to their competitors. Therefore, among other factors, it seems that backorders launched aircraft manufacturers over the globe on a race to see who delivers the best aircraft at the lowest cost first.

As a result of this, many aircraft manufacturers have expanded their operations around the world, looking for countries that provide the best conditions for the aerospace industry, which puts Mexico as one of their options. Mexico has many reasons for being an important aerospace product supplier for the aerospace industry, including its strategic location, great infrastructure, specialized aerospace technicians and workforce, manufacturing costs, and a government fostering foreign investment.

President Felipe Calderón has widely insisted on promoting foreign investment in the aerospace industry as he has always stated that Mexico is an attractive country for foreign investors, and most recently that his government “has made a strong decision to promote the economy towards specialized industries where we can be very competitive and have great added value… We are strengthening our investment opportunities, not only in the aerospace division, but also in the automotive industry.” As a result of the increase demand from aircraft manufacturers, and the promotion efforts of the Mexican government, the development of the Mexican aerospace manufacturing industry is evident. Currently there are over 230 companies of the aerospace industry in Mexico; high end facilities are being built in Baja California, Chihuahua and Querétaro, among other States, and educational institutions are fostering research centers.

Since 2002 there has been a significant rise in the trade balance of the Mexican aerospace industry, a sign of the foreign investment in the industry. Nowadays Mexico is part of the ‘top 10’ aerospace product largest market for aerospace products. Notwithstanding the above, although it is positive to have a larger aerospace manufacturing industry, there is a need of having a reliable industry, where manufacturers are subject to specific certifications of airworthiness.

Air space sovereignty

Before the dawn of aircraft and everything that came with it, the governments cared little about their air space and ‘air law’ did not exist. However, it was until 1919 when several countries signed the Convention Relating to the Regulation of Aerial Navigation in Paris, to recognize that each participating country had sovereignty over the air space above its territory. Later on, other international agreements were executed, until 1944, when the Convention on Civil Aviation was signed in Chicago by most countries, including Mexico and the US, seeking to promote civil aviation in a safe and orderly manner.

Based on the air space sovereignty recognition, every country has designated its own civil aviation authorities and has its own regulations for aircraft operation, which any aircraft manufacturer must comply with if it wants its products to ‘”y’ in that country. This represents that products manufactured in a foreign country must be certified by the civil aviation authorities of the country where they will be used.

Although the sovereignty of each independent country requiring airworthiness certifications for products may be seen as a major setback for many producers, it may also be seen as an opportunity for the Mexican aerospace industry if it is able to continue its current trend of professionalization, as may give an additional competitive advantage before other countries.

BASA: Removing cross-border certifications

Many countries, especially the US, started to engage Bilateral Aviation Safety Agreements (“BASA”) with other countries, which facilitate the reciprocal certification of civil aeronautical products, avoiding recerti fications and second inspections by the other country’s aviation authorities. BASA also provides for the creation of Implementation Procedures, which is a procedural document developed by the civil aviation authorities of the contracting States which establishes the technical specifications for the cooperation between them.

The main aviation authorities in the world are the Federal Aviation Administration (“FAA”) for the US, the Dirección General de Aeronáutica Civil (“DGAC”) for Mexico and, the European Aviation Safety Agency for Europe, as well as the United Nations’ International Civil Aviation Organization which promotes the development of worldwide civil aviation.

While currently Mexico has only executed a BASA with the US in 2007, the latter has executed BASAs with many countries, including the European Union in 2008. Nevertheless, considering the efforts of the Mexican government to foster the aerospace industry, it is very likely that in the following years additional BASAs be executed with other countries.

Taking into account the importance of the US market for aerospace industry, US regulations oblige the FAA to find that the design of an aeronautical product meets US airworthiness standards, and that products are in condition for safe operations.

In this certification turbulence, BASA becomes the landing strip, since through it, Mexico and the US agree to a reciprocal acceptance of each others aviation airworthiness approvals, facilities and personnel, and provides cooperation in sustaining an equivalent level of aviation safety.

While the DGAC accepts the FAA’s certification and authorization for most aeronautical products, reciprocally, the FAA only accepts the DGAC’s certificates for Technical Standard Order (“TSO”) equipment, instruments, parts and replacement parts, which are components that do not affect the “ight operation of the aircraft and comply with the US minimum performance standard.

However, thanks to BASA and its Implementation Procedures, it is expected that in a near future the FAA will begin to accept other DGAC’s certifications for additional products, such as aircrafts, aircraft engines, propellers and, most aviation parts and instruments.

Functionality

Before the existence of BASA, aerospace manufacturing was already an emerging industry in Mexico even with the additional operational costs that the compliance with aviation regulations of other countries represents.

With BASA comes the future of Mexican aerospace manufacturing, since it provides the possibility of having complete aircraft approved and certified at the same place where it is built and assembled, and even though it is not fully implemented, it is imminent that it will be within the following years.BASA is functional; proof of it is that aerospace manufacturers are already certifying TSO products directly with the DGAC, for their subsequent export directly to the US customer, without having to certify with the FAA.

ITR became the first company to obtain BASA certification in Mexico, for a special component, which may now be used on Mexican or US aircrafts. Many other companies have and will be impacted by BASA, including: BC Manufacturing, General Electric, Labinal, Bombardier, Cessna, Hawker Beechcraft, Honeywell and others.

Moreover, the State of Queretaro, with support of other governmental entities, is building a certified laboratory for aeronautical product testing, which is anticipated to increase the number of entities with BASA certifications.

There are several aerospace corridors in Mexico, some are focused on electrical and electronic systems, others on maintenance and repair procedures, and others focused on manufacturing advanced engine components, however the need for a Mexican tooling supplier is evident to boost even further the manufacturing industry in Mexico, mainly since imports of aerospace tooling exceed 2 billion dollars.

Consequently, BASA fosters additional investments as it represents a major cost reduction for the aerospace industry, and when fully implemented it can be expected that the aircraft manufacturing industry in Mexico will take off for a less turbulent certification process, allowing a larger participation of Mexico in this strategic industry.

Juan Carlos Valles and Sergio Roldán are tax lawyers of Baker & McKenzie. They have experience as advisors of multinational companies with experience in the areas of international tax planning, permanent establishment issues, cross-border transactions, taxation of nonresident entities and individuals, corporate taxes, and with respect to indirect taxes such as the value added tax. Also litigation on tax, customs and foreign trade matters.
They may be contacted at:
Juan.Valles-Zavala@bakermckenzie.com and Sergio.Roldan-Guerra@bakermckenzie.com