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The IRS May Disregard Your LLC, But You Shouldn’t.

by Greg Reigel 4. December 2018 10:30
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As you may know from my previous articles, an aircraft owner may use a limited liability company (“LLC”) to register and hold title to the owner’s aircraft. An LLC is formed by filing articles of organization with Secretary of State (or equivalent) in the state in which the LLC is organized. The LLC has members who hold/own membership interests in the company that are represented by the members’ capital accounts. The LLC may be managed by managers or it may be managed by the LLC member(s).

An LLC is a type of business entity that has distinct legal personality from its owner(s)/member(s) and managers. An LLC is treated as a separate “person” in the eyes of the law with an independent existence from its members. Thus, if the owner/member of an LLC dies, the entity continues to exist (although an LLC needs to specifically elect to have this continuity of existence).

However, once set up, the laws governing LLCs require that certain formalities be observed (e.g. annual meetings, separate checking accounts, maintaining corporate/company books and records, filing annual renewals/registrations etc.). If the LLC does not comply with those formalities, it is possible that the law will not recognize the LLC as a separate “person” and will look to the LLC’s members or managers to personally honor the LLC’s obligations. This is called “piercing the corporate veil.” Not only is this a bad situation for the LLC members, this concept is frequently confused with the Internal Revenue Service’s treatment of an LLC as a “disregarded entity.”

Although an LLC is a “legal entity”, the Internal Revenue Service (“IRS”) does not treat an LLC as a “tax entity.” Rather, the IRS “disregards” LLCs for federal tax purposes as if the entity does not exist. Most LLCs with a single member are taxed as a sole proprietorship, while a multi-member LLC is usually taxed as a partnership. In some cases, the LLC can elect to be treated as an “S” corporation if the LLC satisfies certain criteria.

As a disregarded entity, a single-member LLC does not file an income tax return or report income, loss, deduction, or credit. Instead, the LLC member incorporates these tax items into the member’s tax return. Similarly, a multi-member LLC’s members and the members of an LLC that has elected “S” corporation tax status would report on their respective tax returns.

If you are using an LLC to own an aircraft, keep in mind that the IRS’s disregard of your LLC for tax purposes does not relieve you of your responsibility to comply with the formalities required by the laws applicable to LLCs. Failure to comply with the formalities can negate the personal liability protection otherwise afforded to an LLC’s members, and can also render the aircraft’s registration invalid. So, it is important to pay attention to both the tax and the legal aspects applicable to your LLC to take advantage of the benefits of owning an aircraft with an LLC.

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Greg Reigel

Thoughts on Crew Resource Management (CRM)

by Tori Williams 1. December 2018 18:18
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Crew Resource Management (CRM) is defined by the Federal Aviation Administration as, “the effective use of all available resources: human resources, hardware, and information.” The history of CRM comes from NASA research that took place in the late 1970s. NASA focused its research solely on the human error element involved in aircraft accidents with multiple crews. During this time of research, much of the focus of CRM was on the pilot/copilot relationship. It was discovered that select airline captains thought very little of their first officers. In turn, first officers felt that they could not challenge their captain when they didn’t agree with his or her actions. They felt that it was disrespectful to challenge them as captains were the boss in the cockpit. The purpose of the research at that time was to “gain an environment of equal respect, teamwork and cooperation to safely accomplish the mission of the flight.” The most recent CRM model has evolved into “teaching pilots risk management strategies, focusing on workload management, recognizing hazardous attitudes or patterns, maintaining situational awareness, and communicating effectively to operate efficiently and safely in all aspects of flight.” CRM is an important aspect to any flight training department and is critical for an airline pilot’s career.

CRM covers many different concepts including decision-making and risk management. The decision-making side of CRM covers pilots that are faced with an in-flight decision. Pilots are trained to use the knowledge and technology they have available to them when they are faced to make a decision during flight. CRM includes not only pilots but other crew members, flight attendants, ATC, weather reports, and maintenance workers. Pilots can utilize these people and tools to help them make their in-flight decision. Risk management involves preventing risks and how to manage them appropriately if they do arise. Risks include not only environmental such as weather or operational policies but pilot’s personal risks. Pilots can have personal risks such as fatigue, illness or stress that they are aware of but not always tell their crew members about. Factors such as aircraft weight and runway conditions can also influence risks. Two flight cases below highlight the importance of CRM and why proper training is crucial before the flight crew steps in the cockpit.

Korean Air Cargo Flight 8509 is a perfect case study into what tragedies can happen when there is a breakdown of CRM. The Boeing 747 was flown by a crew of 4 out of London Stansted Airport on December 22, 1999. Maintenance personnel warned the Flight Engineer that the captain’s Attitude Director Indicator (ADI, or artificial horizon) was unreliable during a roll before they boarded the aircraft. It was dark outside at the time of takeoff, so the captain was flying entirely by instruments. The captain began a sharp left turn after takeoff, which was not reflected on his inoperable ADI. The CRM breakdown in this instance was that the co-pilot’s ADI was functioning normally but he remained silent as to not challenge the captain. The Flight Engineer began yelling “Bank!” repeatedly, and an alarm rang out warning of the error, but the pilot continued his sharp turn until the left wing dragged the ground and the plane smacked the ground at high speed and 90 degrees of left bank. All 4 crew onboard perished in the cash.

Southwest Airlines Flight 1248 is another example of where CRM training is crucial. On December 8, 2005 a Boeing 737-7H4 ran off the departure end of runway 31 center just after landing at Chicago Midway Airport. The aircraft rolled through the blast pad fencing and the airport’s perimeter fence where it finally came to a stop after striking a vehicle, which killed a child that was in the vehicle. The cause of the accident was the pilots’ failure to use available reverse thrust in a timely manner to safely slow or stop the airplane after landing. This failure occurred because the pilots’ first experience and lack of familiarity with the airplane’s autobrake system distracted them from thrust reverser during the challenging landing. This case shows that not only were the pilots at fault for the accident but Southwest Airlines as a company. The company failed to train the pilots and assure that they were clear on the operating procedures for the aircraft they were flying.

Between 60-80% of aviation accidents are caused by human error, and a large portion of that are specifically caused by poor Crew Resource Management. Millions of dollars have been invested into CRM training at airlines, flight schools, and other businesses that operate aircraft. Continual CRM training that focuses on teaching pilots and aircraft crew error avoidance, early detection of errors, and minimizing consequences resulting from CRM errors generally has a positive outcome and desired behavioral change. However, it can be difficult to evaluate the impact of CRM training as it is hard to quantify the concept of accidents avoided. Thus, it was determined that more research into the long-term effects of CRM training needs to be conducted in the coming years.

Companies are wanting to dig deeper into how they can better equip and train their employees to use CRM tactics. The FAA has an Advisor Circular (AC) published specifically for crew resource management training. In addition to the certain essential that are universal to CRM, the Advisory Circular also lists effective CRM characteristics which include: CRM is a comprehensive system of applying human factors concepts to improve crew performance, CRM embraces all operational personnel, CRM can be blended in all forms of aircrew training, CRM concentrates on crewmembers’ attitudes and behaviors and their impact on safety, CRM uses the crew as a unit of training, CRM is training that requires the active participation of all crewmembers. It provides an opportunity for individuals and crews to examine their own behavior, and to make decisions on how to improve cockpit teamwork. The number one goal in aviation is safety. Where CRM characteristics are compromised or left out, there’s room for error to slip in which can lead to incidents or accidents that could cause fatalities. Companies in the aviation industry need to ensure that they are taking all of the right steps in training their crews before they are put on the aircraft with souls on board.

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Aircraft Accidents | Aviation History | Aviation Safety

When Is An Aircraft "Destroyed" Versus "Repairable"?

by Greg Reigel 12. November 2018 15:27
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Unfortunately, the terms "destroyed" and "repairable" are not defined anywhere in the regulations. But, as you might expect, the FAA has a policy/opinion about what these terms mean. In fact, the FAA has issued Order 8100.19, Destroyed and Scrapped Aircraft which spells out what these terms mean and how they are to be applied by FAA inspectors. If an aircraft is capable of being repaired and returned to service after it was unserviceable due to wear and tear, damage, or corrosion then it is "repairable." But this means that when the repair is complete the aircraft to returned to service in "its original (or properly altered) condition that conforms to its type design."

The FAA clarifies further that an aircraft is only eligible for repair if it has at least one primary structure around which a repair can be performed. According to the FAA, it "considers an aircraft’s primary structure to be the structure that carries flight, ground, or pressurization loads, and whose failure would reduce the structural integrity of the aircraft." If only some, but not all, of the major structures of an aircraft are replaced, then that would still be considered a repair.

However, if all of an aircraft's primary structures must be replaced then the FAA does not consider the aircraft to be "repairable." Rather, in that situation the aircraft is being "replaced" after being "destroyed." And if the identification plate from the original aircraft was then placed on the "destroyed" aircraft that would violate 14 CFR § 45.13(e) ("No person may install an identification plate removed in accordance with paragraph (d)(2) of this section on any aircraft, aircraft engine, propeller, propeller blade, or propeller hub other than the one from which it was removed.”)

In order to comply with Section 45.13(e), the primary structure must be identifiable and traceable to the particular aircraft and its identification plate. As an example, if a heavily damaged aircraft is repaired by performing many major repairs on its fuselage and replacing all other primary structures that may be destroyed such as the wings and the empennage, that aircraft would not be considered destroyed because the fuselage is repairable. But if the fuselage of that aircraft also needed to be replaced along with the other primary structures, then the aircraft would be considered destroyed.

The Order also provides the following examples for use in determining if an aircraft is destroyed:

  1. All primary structures of an airplane or glider, including the fuselage, all wings, and empennage are beyond repair.

  2. The fuselage and tail boom of a rotorcraft are beyond repair.

  3. Only the aircraft identification plate is reusable.

How is this determination made by FAA inspectors? Well, according to the Order, "FAA accident investigators will apply their specialized knowledge and expertise and follow the guidelines in this order when evaluating aircraft wreckage to determine whether an aircraft is repairable or should be declared destroyed."

Fortunately an aircraft owner can dispute a determination that an aircraft is destroyed by providing the appropriate FAA FSDO or ACO with a repair process that explains how the damaged aircraft can be repaired provided that at least one primary structure of the aircraft is capable of being repaired rather than requiring replacement. If you are faced with a situation where it is unclear whether an aircraft has been "destroyed" or is still "repairable", you will definitely want to consult the Order, as well as the aircaft's maintenance manual.

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Aircraft Accidents | Aviation Safety | Greg Reigel

Runway Incursions: What's the Big Deal?

by Tori Williams 1. November 2018 14:46
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A runway incursion is defined by the FAA as, “Any occurrence at an aerodrome involving the incorrect presence of an aircraft, vehicle or person on the protected area of a surface designated for the landing and takeoff of aircraft." There are four categories of runway incursions, Categories A-D. Category A being the most severe and Category D being the least severe. Category A is classified as an “incident in which separation decreases and participants take extreme action to narrowly avoid a collision.” An accident can be the result of a runway incursion, and therefore exceeds the categories described.

The FAA estimates that approximately three runway incursions happen every day at towered airports in the United States. Thus, the number of unreported incursions at non towered airports must be much larger. Although a runway incursion is by definition a near miss at the worst, they are often a contributing cause in serious aircraft accidents. An accident that perfectly illustrates the dangers of runway incursions is the 1996 collision of United Express flight 5925 and a Beechcraft King Air 90A in Quincy, Illinois. A miscommunication between the landing Beechcraft, the departing King Air, and a third taxing aircraft turned deadly when the King Air failed to look for traffic and the Beechcraft wrongly assumed a radio transmission confirmed they were okay to land. Although the airport was not towered, the presence of both aircraft on intersecting runways was extremely dangerous and lead to a collision at the intersection. A total of 12 people lost their lives in that accident that could have been easily avoided.

Another infamous accident involving a runway incursion is the Russian Aeroflot Flight 3352 that took place in 1984. In short, the ground Air Traffic Controller fell asleep after he authorized several maintenance vehicles to enter the runway. A commercial aircraft carrying 170 passengers came to land at the airport, and the approach controller, oblivious to the maintenance crew on the runway, cleared them to land. To make matters worse, visibility was extremely low and the maintenance trucks did not have their rotating beacons illuminated. The commercial aircraft collided with the vehicles, resulting in 178 fatalities. In this example, the accident investigators placed the majority of the blame on the Air Traffic Controller, but there were mistakes made by all parties involved.

The airport environment is a complex operation with hundreds of moving parts. Pilots, air traffic controllers, and airport designers have to understand the hazards that come with miscommunications and poorly designed airport layouts. It only takes one moment of confusion for a runway incursion to happen, which could be deadly.

The FAA has a record of 1747 total runway incursions happening in the Fiscal Year 2017. There are several reasons that runway incursions occur. One of the most prevalent ones is miscommunication or a total lack of any communication. Many times, pilots and air traffic controllers get “stepped on” or, talked over on the radio frequency. It is highly critical that pilots repeat back their instructions to confirm with the controllers that they heard them correctly and that the directions were for their aircraft and not another. As in the above case study, although there was not a tower at the airport, the landing aircraft assumed that the aircraft announcing they would be holding short was the only one holding short. There was a misunderstanding in this case because one pilot’s radio transmission got covered up by the other aircraft holding short making the pilot of the landing aircraft assume that there was only one aircraft and they were holding short. Other common types of runway incursions include incorrect entry or vacating of an aircraft or vehicle onto the runway protection area, incorrect runway/taxiway crossing, incorrect spacing between departing and arriving aircraft, and landing or taking off without air traffic control clearance.

According the the FAA, approximately 65 percent of all runway incursions are caused by pilots. Detailed investigations of runway incursions over the past 10 years have identified three major areas contributing to these events including failure to comply with air traffic control instructions, lack of airport familiarity, nonconformance with standard operating procedures. Clear, concise, and effective pilot/controller communication is paramount to safe airport surface operations. This is something that is often stressed during initial and recurrent pilot training, but evidently the information does not always stick in the pilots’ minds.

Air traffic control instructions must be fully understood and complied with. Air traffic controllers are in place to assist pilots and want to help when there is confusion but many pilots don’t ask for the help. They are caught up in other tasks such as checklists, taxi directions, and non-essential chatter with the copilot. Pilots are to taxi with their heads-up and eyes outside to ensure they are aware of all aircraft and airport vehicles.

Major factors that increase the risk of runway confusion and can lead to a wrong runway departure include airport complexity, close proximity of runway thresholds, joint use of a runway as a taxiway (FAA, 2017). During the summer construction time, many airports will close runways or taxiways to resurface them or replace them. If a taxiway is closed, this can force aircraft to use runways as a means of getting to another open taxiway. It can also force the aircraft to back taxi on the runway they are departing from.

Thorough planning is essential for safe taxi operations. Aircraft accidents are more likely to happen on the ground than in the air because there are so many moving parts on the airfield. Pilots need to utilize the following services/tools in order to ensure safe airport surface movement: Notices to Airmen (NOTAMS), Automated Terminal Information Service (ATIS), Airport/Facility Directory (A/FD), and recognizing Hot Spots. Although using these pilot tools will not end all runway incursions, they will lower the risks if all pilots are equipped with the proper and current information.

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Aircraft Accidents | Airlines | Aviation Safety | Tori Williams

Misconceptions about Aircraft Costing

by David Wyndham 12. October 2018 09:01
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Over the years I have written a number of articles discussing aircraft operating costs and methodologies for analyzing them. This month, I’d like to review some common misconceptions about costs that I run into on a regular basis. Most of these result from connecting something that we are familiar with, like the cost of running an automobile or building a house, and using those as an analogy for the unfamiliar cost of owning and operating an aircraft. 

Misconceptions about Aircraft Costing

The biggest misconception is focusing on the acquisition cost to the detriment of operating costs and asset value over time. I have a client whose maximum acquisition budget is $20 million. This is a real limit and not one to exceed. Where the misconception arises is that if we are looking at Aircraft A with a selling price of $20 million and Aircraft B which sells for $17 million, the former aircraft is the less costly option. But is it?

Assume that both aircraft have similar capabilities in terms of range and cabin.

 

The only way to know which one costs “less” is to evaluate the total costs to acquire, operate and dispose of the aircraft. Two major costs are the operating costs, to include maintenance, and the estimated residual value after a set length of time. Looking at our current scenario, Aircraft A has a lower fuel consumption than Aircraft B. Aircraft A also has engine and airframe maintenance costs similar to Aircraft B. Looking at the costs per hour:

Variable cost.                        Aircraft A.                  Aircraft B. 

Fuel                                        $1,376                        $1,521

Engines                                  $ 580                          $560

Maintenance                         $ 784                          $677

Per Hour                                $2,740                        $2,758

There is more:

Aircraft A flies faster than Aircraft by 8%. Remembering the aircraft fly from origin to destination, the faster aircraft uses fewer hours to fly the same trips. If Aircraft A flies 400 annual hours, this requires Aircraft B to fly 432 hours. The annual variable cost is

Variable cost.                        Aircraft A.                  Aircraft B. 

Per Year                                $1,096,000                $1,191,456

Aircraft A costs almost 10% less in variable cost per year than Aircraft B. If both have about $650,000 per year in fixed costs, the annual operating budget favors Aircraft A slightly. While not enough to make up the $3 million price difference, it does account for about $1 million over 10 years. There is still more.

Aircraft A is a popular model and is currently selling better than Aircraft B. Current market values are being maintained better than for Aircraft B. After 10 years the estimated residual (resale)  value in dollars and percent is higher for Aircraft A. Now our 10-year life Cycle Cost is:

10 YEAR COST.                               Aircraft A                               Aircraft B

Acquisition                                        $20,000,000                         $17,000,000

Variable costs                                   $ 10,960,000                         $11,914,560

Fixed Costs                                       $ 6,500,000                           $ 6,500,000

Resale value                                     ($10,000,000)                       ($ 7,500,000)

10-Year TOTAL                                $27,460,000                          $27,914,560

Aircraft A costs about the same to own and operate as Aircraft B. Making the purchase decision just on acquisition price doesn’t tell the entire story. In the above example, we need to evaluate of parameters in addition to just costs to determine which aircraft is the best value. 

There could be other considerations like product support. Not only the perceived quality but where are the service centers located? If Aircraft A has a service center on your home field while Aircraft B’s nearest service center is 300 miles away, Aircraft A will be easier to maintain and, if AOG at home, might be repairable in less time.

Consider the equipment? What if Aircraft B has a more advanced SVS than Aircraft A? But what if you prefer the usability and displays in the avionics system on Aircraft A?

Never let a spreadsheet make a decision for you.  Never just look at a single cost item when evaluating aircraft costs. Aircraft are not commodities sharing essential the same characteristics. That is why I stress to my clients to look for a best value when making the aircraft decision. Costs are a very important part, but even the total costs do not tell the total story. 

If you are currently in the market for an aircraft please review Globalair.com and their Aircraft Exchange.

(This is a 2nd edition of this article and may be found on other websites)

 

 

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David Wyndham | Flight Department



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