Advances in Economics, Business and Management Research, volume 98

3rd International Conference on Trade (ICOT 2019)

The Impact of Aircraft Spare Parts Import Duty

Exemption on the MRO Industry’s Competitiveness
and Its Services Export
Farida Rahmawati Choirin Nisaa’
Trade Analysis and Development Agency Trade Analysis and Development Agency
Ministry of Trade Ministry of Trade
Jakarta, Indonesia Jakarta, Indonesia
[email protected] [email protected]

Herindra Adhi Nusantara Rizka Isditami Syarif

Trade Analysis and Development Agency Trade Analysis and Development Agency
Ministry of Trade Ministry of Trade
Jakarta, Indonesia Jakarta, Indonesia
[email protected] [email protected]

Abstract—This study aims to identify the impact of import market niche is still wide open. In the Asia Pacific region,
duty exemption on aircraft spare parts on the competitiveness there is potential for Indonesia's MRO industry to grow and
and service export of the Aircraft Maintenance, Reparation, take the market gap. In 2016, Indonesia's MRO market size
and Overhaul (MRO) industry including factors affected MRO is still valued at USD 970 million. Projected, based on the
competitiveness. In addition, this study aims to identify the growth of domestically operated aircraft, the domestic MRO
problems encountered during the implementation of the policy, market value is USD 2.2 billion in 20251. Indonesian Aircraft
the types of aircraft parts to be exempted and the criteria for Maintenance Service Association (IAMSA) stated that
products to be eligible for exemption from import duties. The domestic MRO grew by 9.6% per year or the second largest
method of this study used qualitative and quantitative
after India's average growth of 10% over the last five years2.
descriptive analysis, Porter’s five-force model and Analytical
Hierarchy Process (AHP). The results of the study showed that
The low market value of domestic MROs is allegedly due to
the import duty exemption policy increased MRO services the lack of competitiveness compared to neighboring MROs,
from 30 percent to 49 percent during 2013-2017. Constraints in Malaysia and Singapore. The reason is besides the internal
implementation are procedures and differences in customs factor constraints, also by the constraints of the availability
areas where the longest is for bonded zones. Special customs of aircraft parts which are exclusive commodities and 99%
policies for MROs as well as the exemption of import duties for are imported. Azka and Nurcahyo [2] conducted a study on
goods related to MROs which 90 percent originating from the quality management strategy of Indonesian aircraft MRO
imports will greatly encourage competitiveness which relies companies to serve the needs of airlines customers aircraft
heavily on aircraft down time. The types of goods that need to maintenance. The main role of the MRO is to provide high-
be exempted from import duties are consumable and service aircraft with minimum costs and optimal quality [3],
repairable groups in both new and non-new capital goods this is an opportunity for MRO companies to compete in
categories. offering airlines maintenance services since most airlines still
Keywords—MRO, Porter’s Five Force Model, AHP, import outsource their aircraft maintenance [3,4], so MRO
duty companies should be able to implement the right strategy to
I. INTRODUCTION gain new markets and customers globally. This should be
The Economic Policy Package VIII issued by The supported by the availability of aircraft spare parts. Through
Government of Indonesia included the reduction of import PMK No.35/2016, the Indonesian Government lowered the
tariffs for 21 tariff posts related to the List of Goods and 21 tariff posts (HS 8 digits) to 0%. Nonetheless, the MRO
Materials to Repair and/or Maintenance of Aircraft from a industry stated that there was a need to improve the policy of
total of 300 tariff posts for aircraft parts. This policy was elimination of customs duties aircraft spare parts as there are
taken as a support for increasing competitiveness for the constraints in the import policy implementation mechanisms,
aircraft’s Maintenance, Repair and Overhaul (MRO) it is also necessary to add additional tariff posts exempted
industries. The increase in demand for air travel in 2018- import duties. This study aims to identify the impact of
2028 mostly occurs in airlines in emerging markets, import duty exemption on aircraft spare parts on the
including Asia with an estimated growth in the Revenue competitiveness and service export of the aircraft MRO
Passenger Kilometer (RPK) of 5.7% [1]. The aviation industry including factors affected MRO competitiveness. In
industry had growth in terms of passengers, number of addition, this study aims to identify the problems
airlines, aircraft, flight routes and airports. During 1990- encountered during the implementation of the policy, the
2016, the number of passengers increased from 9 million to types of aircraft parts to be exempted and the criteria for
90 million. While the number of aircraft increased from 102 products to be eligible for exemption from import duties.
in 1990 to 1,030 aircraft in 2017. However, of the total
aircraft operated by domestic airlines, only about 30% have
been absorbed by domestic MROs. That is, the domestic

1
https://www.dat-aero.com/2018/01/30/indonesia-aircraft-maintenance-industry-opportunity-2018/
2
http://www.republika.co.id/berita/en/national-politics/18/02/02/p3j39f414-aircraft-maintenance-industry-grows-by-9-percent-in-5-years
Copyright © 2019, the Authors. Published by Atlantis Press.
This is an open access article under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/). 200
 Advances in Economics, Business and Management Research, volume 98

II. RESEARCH METHODOLOGY where CR is consistency ratio, CI is consistency index, and

RI is Random Index. For AHP model, comparison matrix can
A. Descriptive Analysis Approach be accepted if the value of Consistency Ratio (CR) ≤ 0,1 [9].
The data was analyzed using descriptive statistics to The AHP hierarchy is composed of four levels which show
obtain an overview of the development of aircraft spare the stages of the priority process for spare parts to be exempt
parts imports, the development of the MRO industry in from the tariff, starting from the determination of focus on
Indonesia and competing countries, either by using level 1, the alternative groups of spare parts proposed, the
secondary data, surveys and roundtable discussions. Data is results of in-depth interviews and FGD. Level 2 is an actor
presented in tabular, charts and diagrams. involved in the use of spare parts. Level 3 is a factor
considered in the selection of parts. Level 4 is the focus
B. Porter’s Five Force Analysis (goal), the group of selected parts based on the weighting
The competitiveness examined in this study is Porter’s value of the respondents.
competitiveness model, using a descriptive approach. III. RESULT AND DISCUSSION
According to Porter [5], a country gains a competitive
advantage if the company (in that country) is competitive. In Indonesia, there are 64 AMO-certified domestic
There are five determinants competitiveness of an interacting MROs and 84 foreign MROs companies. Domestic MRO
industry: the existence of competitor industries, demand companies are members of the IAMSA. Currently the
conditions, condition of production factor suppliers, potential domestic MROs absorb only 51% of the domestic market
threats from new industries, and the threat of substitute where GMF handles 34%, BAT handle 14% and 3% were
products. These factors are important for the industry to handled by other MRO [1]. While the remaining 49% use
formulate the right strategies in the market [6]. Five forces foreign MRO services. The existing MRO industry is
determinants of MRO industry competitiveness are: threats supported by aircraft component companies joining the
of new MRO industry, supplier bargaining position, Indonesian Aircraft and Component Manufacturer
bargaining position of MRO users, and threat of substitution Association with 30 companies member, and only 8
MRO services. According to Porter [7], the government does companies engaged in Aerospace Part Machining.
not include as a force, because the government, through its A. The Impact of Aircraft Spare Parts Import Duty
policies, has no effect (positive or negative) on the Exemption on the MRO Industry’s Competitiveness
company's profits. The government’s policy on
competitiveness is seen as influencing five industrial forces. Transactions in domestic MRO businesses all use USD
For example, patent rights affect barriers to entry encourage currency, both aircraft managed by foreign airlines and
industrial development and potential profits. The government domestic airlines. The use of domestic MRO services by
affects several levels, through different policies. domestic airlines means that there is import substitution for
MRO services so that it can save foreign exchange. The use
C. Analytical Hierarchy Process (AHP) Analysis of domestic MRO services by foreign airlines is a form of
The AHP method is used to formulate recommendations MRO service exports, which generates foreign exchange.
on the tariff exemption policy for importing aircraft parts. Increased domestic MRO services reflected by increased
Data processing of the priority strategy in the AHP method imports of aircraft components, as much as 99% of it is an
using Expert Choice 2008 software. AHP was developed by imported commodity. Imported aircraft components will
Saaty [8] that can solve complex problems with quite a lot automatically increase if domestic MRO services increase.
of aspects or criteria taken. Basically, the mathematical Figure 1 shows the aircraft component imports performance
formulation of the AHP model is done by using a matrix. before and after the zero percent tariff reduction. Imports had
For example, in an operating system there are n operating declined in the last quarter of 2014 to the first quarter of
elements, namely operating elements A1, A2,...,An, then the 2016, a slight increase after the zero percent tariff policy was
results of pairwise comparisons of the operating elements implemented, even though it was still below the initial
will form a comparison matrix. Pairwise comparisons import achievements in 2014 were over USD 5 million.
starting from the highest hierarchical level where a criterion
used as the basis for comparison. Then consider the
elements to be compared. The weight matrix obtained from
the paired comparison results must have the cardinal and
ordinal relationship. Deviations from consistency are
expressed as Consistency Indexes. Consistency
measurement is expressed through an index called
‘consistency index’ (CI), as for CI formula
CI= (λmaks – n) / n-1 (1)
where λmaks is maximum eigenvalue and n is matrix
size. Random matrix consistency index (CI) with a rating
scale of 9 (1 to 9) and the reverse as Random Index (RI). By Fig. 1. Export-Import Performance of Aircraft Components
using the amount of CI and RI, it can be used a criterion for
determining the consistency of a matrix, which is called At the MRO level, the increase in competitiveness after
‘consistency ratio' [8]. the import duty exemption policy, as can be seen from the
domestic MRO contribution in the aircraft belonging to the
CR = CI / RI (2) national airline (excluding public property and military

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aircraft). MRO with the capability of maintaining the mature are rarely needed just got a tariff reduction.Sixty seven
generation aircraft, competitiveness increased with the percent of world MRO expenditure for material
exemption of import duties on aircraft spare parts. In 2013 procurement are for the procurement of new and original
the national MRO contribution only reached 30%, in 2016 (OEM) components. Other expenses for use and
increased to 49%. In 2017 the national MRO contribution serviceable material (USM), pool material outsourcing
has reached 51% or USD 1.1 billion, the remaining 49% (PMA), and repairable parts. The high cost of procuring
using foreign MRO such as in Singapore, Malaysia, Hong these new components shows the need to reduce prices so
Kong and so on. Of the entire national MROs, GMF that domestic MROs can compete in the international
contributed 67%, BAT 30% and the rest were other MROs market. The reduction in import duty to zero percent is
such as FL Technics, Indopelita Aircraft Service and very strategic to increase competitiveness, considering
Sriwijaya Maintenance Facility. National MRO services that 99% of aircraft components are imported
exports can be seen from the use of national MRO by foreign commodities.
airlines. MRO services export is the use of national MRO by
foreign airlines. Decreasing import duty on spare parts to 0% C. Domestic MRO Competitiveness: Five Force Model
does not directly affect the MRO service exports, because The development of the MRO industry is inseparable
currently the foreign airlines have enjoyed the 0% tariff from internal and external forces. The government targets,
facility (import policy for export purposes). Decreasing by 2020 Indonesia can enter the top 10 of Asia2. MRO
import duties on aircraft parts, opens up the opportunities for industry in Indonesia has been recognized by the
MRO to develop its capabilities, especially airframe international aviation regulatory agencies or the Federal
modification capacities that are relatively labor intensive. Aviaton Administration. However, the Indonesian MRO
Foreign airlines choose national MROs because the wages of industry's human resources capabilities are still limited,
labor in Indonesia are 50% of the wages of workers in moreover the lack of complete facilities also affect the
foreign MROs. competitiveness of domestic MROs.
B. Constraints on Import Duty Exemption Policy a) Threats of Newcomer MRO Company and AMO
Implementation Certified Foreign MRO
a) Administrative Procedure for Tariff Exemption New MRO companies and expansion MRO
Submission companies are competitors for existing MROs. Besides
The main problem facing the MRO industry is the having the potential to create oversupply (idle capacity
long administrative process to obtain a 0% tariff facility for existing MROs), the development of MRO also has
so that it had an impact on not achieving the minimum the potential competition to obtain expert human
aircraft downtime. Furthermore, the cost of aircraft resources. The existence of the new MRO is a threat to
downtime borne by the customer for administrative the existing national MRO, especially the independent
processes is higher compared to the tariff facilities that MRO (not integrated with the airline). But there are still
can be saved. MRO in the FTZ area can take advantage opportunities to develop domestic MROs with specific
of the zero percent tariff facility easier so it can be capability specifications. Relatively cheap labor costs
achieved minimum aircraft downtime. However, this become Indonesia's comparative advantage.
facility is only for aircraft operating outside Indonesia By 2017, from 64 domestic MROs registered at
(similar with re-exported goods treatment). For aircraft AMO (Approval Maintenance Organization), only two
operating in domestic areas (PK aircraft), customers are MROs have engine capabilities, they are PT DI (for
still required to apply for import tariff exemptions. The military) and Indonesian Aviation College (STPI) for
treatment for MROs in bonded areas is when the goods training aircraft. While of the 65 AMO-certified foreign
will be used by the customer (for aircraft repairs), the MROs, there are 7 MROs have engine capabilities. The
customer must take care of the 0% tariff exemption. It absence of engine capability in the national MRO has
takes 2-3 days for the submission process until the tariff caused engine maintenance carried out through
exemption agreement before the plane can take off. For outsourcing from foreign MRO. When the engine re-
MRO in the PLB area, goods from the port directly enter enters Indonesia, subject to import regulation of not-new
the MRO warehouse. Goods can be directly installed on capital goods (Minister of Trade Regulation
the aircraft, administration of tariff exemptions can be No.12/2018). Other aircraft components that require
done later by the customer. Therefore the aircraft can special treatment are tires and pooling components
operate immediately so that it can achieve minimum (spare parts). Not all airlines have their own spare parts
aircraft downtime. The process of inspecting goods and pooling facilities due to costs considerations. Spare parts
documents in ports for MROs that are not included in the to be processed in pooling business are directly subject
special economic zone area takes five to twenty days to import duties. The imposition of import duties can
(still in the red/yellow lane). burden the pooling company's cash flow when compared
b) Incompatibility of Non-Tariff Components with to tax imposition when used on aircraft. These
Customer Needs regulations reduce the competitiveness of the MRO for
engine maintenance.
The proposed aircraft components to lowered tariffs
to 0% has not been based on needs analysis. Of the 27 HS b) Bargaining Power of Customers and Suppliers
components proposed in 2016 (25 HS is approved), MRO is a capital and labor intensive industry. The main
determined based on the HS description containing the suppliers needed by the MRO are aircraft components
word "for aircrafts" so that some of the components that and human resources. Aircraft repairs cannot be

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automated, so the number of MRO human resources must prioritized to exempt import tariffs is carried out using AHP
be available with high competence. Currently 99% analysis based on stakeholder judgment. The hierarchy of
aircraft components are imported, Indonesia has been spare parts criteria is shown in Figure 2, the hierarchy is
able to produce aircraft components for the non-critical arranged from the highest to the lowest level. The highest
component categories, but these components are license level is the focus, followed by the factors, actors and groups
from an aircraft manufacturer whose purchase must be of alternative proposed parts. The principle of AHP
through an authorized overseas supplier (import). Import assessment is pairwise comparisons the level of importance
duties on aircraft components are also relatively high or influence of one element with other elements that in one
compared to European Union member countries which level based on certain considerations. The value given is in
impose 0% import duty on all aircraft components. the scale of opinion issued by Saaty [11]. The geometric
mean of all respondents from each opinion value compared
c) Threat of the Substitution Industry is processed using Expert Choice software. This analysis is
MRO is always needed as long as the aircraft used to interpret the priorities of the factors and actors that
operates. However, MRO faces changes in aircraft influence the selection of groups of spare parts whose import
technology. The MRO industry is required to follow tariffs are exempted.
technological changes in providing services. Based on the
manufacture year, CIF divided the aircraft into three
generations, they are old, mature, and new generation
[10]. Decreasing old and mature generation aircraft
substituted with new generation whose population
increased 32.7% per year. In 2021, the new generation
contributed estimated to 25% and in 2026 the dominance
will be 47%. New generation aircraft that implement e-
enable aircraft require different maintenance from the
previous generation aircraft. Handling is taken over by
OEMs and MRO integrators. OEM companies are
collaborating with Microsoft and IBM to build analytical
capabilities to serve AHM (Analytical Health
Maintenance). Small-scale independent MROs, such as
those in Indonesia, are difficult to obtain big data aircraft,
so they cannot invest in AHM on new generation aircraft. Fig. 2. AHP Spare Parts Hierarchy Diagram for Exempt Tariff
The existing small MROs need to collaborate with OEMs The result of AHP analysis is weighted at each level of
or MRO integrators to survive in the new generation era. the hierarchy. The weights and priorities analyzed are the
d) Level of Competitive Rivalry results of a combination of stakeholders' opinions on each
paired matrix. Based on the results of the FGD and in-depth
MRO is an international business, foreign MRO interviews, composed of priority parts criteria to exempt the
companies that continuously increase capacity and import tariff. Figure 3 to Figure 5 shows the priority order of
provision of facilities are the main competitors. policy criteria (factors and actors) and alternative spare parts.
Government support for the development of the MRO The value of the consistency ratio (CR), all below 10 percent
industry in Indonesia are realized through incentives of so that it meets the requirements as stated by Saaty [8]. This
21 post tariffs for aircraft components to 0%, Minister of means that there is consistency of assessments conducted by
Finance Regulation (PMK) No. 35/2016 is an the respondents towards the criteria of policy makers.
opportunity for the MRO industry to be able to compete
with its competitors at the regional level; plans for the a) Factors Criteria Weighting
construction of integrated industrial zones in with Increased MRO’s competitiveness and its service export
supporting facilities such as airports, aircraft repair is the main factor (highest value) in determining spare parts
facilities, training of flight employees, as well as business which are prioritized to be exempt from tariffs. If the
and residential areas, industrial human resource national MRO has competitiveness, the MRO market will be
development; and strengthening the aircraft component wider and will have a positive impact on other factors.
industry in collaboration with aircraft manufacturers,
especially Airbus and Boeing in order to establish
Aircraft Engineering Centers in Indonesia.
D. Criteria for Priority Parts Exempt from Import Duty
Aircraft spare parts as a whole are included in the 312 HS
code (6 digit) category. By 2015, with the addition of 21
tariff posts, aircraft spare parts obtained tariff exemption
facilities were 92 HS codes, so there were still 220 HS whose
import tariffs were not 0% yet. In order for tariff reduction
not to disrupt government finances in terms of tax revenues
and provide maximum benefits for MRO industry’s Consistency ratio: 0.1
competitiveness, hence it needed component criteria for Fig. 3. Priority factor criteria from AHP results
prioritized in lowering the tariff. Selection of spare parts are

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MRO revenue is the main determinant of business

sustainability. Positive revenue can be obtained if MRO
operates on an economic scale because it requires very high
investment capital [12]. The development of new
capabilities, starting from the MRO’s ability to supply spare
parts for other MROs (logistics services). If logistics services
are large enough, it is possible to develop new capabilities to
achieve economics of scale. The multiplier effect on
employment is not a major consideration in determining the
components proposed to exempt tariffs. Domestic MRO
capability, generally labor intensive to service old generation
and mature generation aircraft who have not used big data Consistency ratio: 0.02
like new generation aircraft, so if the competitiveness Fig. 5. Priority Spare Parts of AHP Results
increases, MRO can develop new capabilities that IV. CONCLUSION AND RECOMMENDATION
aoutomaticly will absorb a lot of labor.
Based on the analysis it can be concluded that there is an
b) Actor Criteria Weighting increase in national MRO competitiveness after the import
MRO’s actors are represented by types of MRO’s duty exemption policy, where in 2013 its contribution only
services (capability groups). Component maintenance is the reached 30%, then in 2017 it increased to 51% or worth
most decisive capability group in choosing priority parts to USD1.1 billion, while 49% still used foreign MRO services.
be exempt the tariff. The constraints encountered during the implementation of
PMK No. 35/PMK.010/2016 are procedures and differences
in customs areas where the longes is for bonded zones, so
that the service does not reach minimum aircraft down time.
The cause of the low competitiveness of the MRO industry is
due to the lack capabilities of MRO (engine), has not reached
the minimum aircraft down time, high costs especially for
rotable/tire and repairable/machine/AC. Priority spare parts
need to be exempted from import duties are consumable and
repairable groups for component maintenance and engine
maintenance capabilities in both new and non-new capital
goods categories.
Consistency ratio: 0.01
Fig. 4. Priority of Actor Criteria from AHP Results
Policy recommendations in order to encourage
competitiveness and the national aircraft MRO are:
Components maintenance are the main consideration in encourage cooperation among MROs in investment, resource
determining the priority parts to exempt tariff, because the and cooperation sharing in terms of components supply in
parts turnover in components maintenance is relatively fast. pooling business form to increase capacity and capability, so
Of the five capability groups, component maintenance and it can reduce overhead costs; encourage MRO cooperation
engine maintenance provide the highest benefits for MRO. In with aircraft manufacturers related to after-sales services;
the cost structure of MRO, the highest material costs is for propose a 0% tariff reduction not based on the HS code but
engine maintenance, the second is the component based on the serial number, or use the specific HS code for
maintenance, while the airframe heavy maintenance and line aircraft components; support the gradually import duty tariff
maintenance, the largest cost is in labor [13]. MROcapability exemption accordance the priority, where it’s need additional
in the engine maintenance field is a source of profit for the tariff posts subject to import duty exemption, especially for
MRO. Engine maintenance is routine maintenance should be groups of consumable and repairable goods; improve the
done by the airline to get the civil administration registration custom clearance system; the tariff exemption procedure
certification. PK-registered old generation and mature needs to be simplified to reach MRO customer down time.
generation aircraft require more intensive engines
maintenance. Repairing aircraft engines was cheaper than ACKNOWLEDGMENT
buying a new engine, so the capability of MRO in engine This research was supported by Trade Analysis and
maintenance was very beneficial for MRO revenue. Development Agency, Ministry of Trade of Republic of
c) Weighting of Input Criteria AHP Results Indonesia. Special thank to our colleagues of Center for
Foreign Trade, Umar Fakhrudin, Hasni, Yudi Fadilah, Nur
The results of AHP analysis show that six of the seven Millah Yazthi, and Nova Aulia Bella, who provided insight
alternative spare parts groups have almost the same weight and expertise that greatly assisted carry out the research.
values (ranging from 0.128 to 0.170). The main priority to be
exempt the tariff is the consumable tool group (0.17), the REFERENCES
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