All posts tagged 'Part 135'

What Is The Difference Between Owning And Operating An Aircraft Under Part 91 Versus Part 135?

Owners of business aircraft frequently face the question of whether their aircraft should be operated under 14 C.F.R. Part 91 (“Part 91”) or Part 135 (“Part 135”). And it isn’t uncommon for owners to simplistically choose Part 91 because they have been led to believe that Part 135 is far too expensive and restrictive. Unfortunately, that answer isn’t necessarily the correct answer for all circumstances. The question is more complicated and requires a thorough analysis of the facts.

Generally speaking, it is true that aircraft may be operated under Part 91 with fewer restrictions and regulatory requirements than when operating under Part 135. However, from a risk management perspective, Part 135 exposes the charter customer to the least amount of regulatory and legal liability risk. As a result, it is necessary to understand the key distinctions between operations under Parts 91 and 135 in order to determine how they apply to a particular situation.

Let’s look at some of the differences between Part 91 and 135:

RISK MANAGEMENT

The operator of an aircraft has primary legal liability for injury to persons or property arising from an aircraft accident or incident regardless of whether the operation is conducted under Part 91 or Part 135. The operator is the party who exercises authority over initiating, conducting or terminating a flight (“Operational Control”). The operator of the flight has legal liability whether the operator is the actual owner of the aircraft or merely a lessee.

Part 91

An entity that owns an aircraft may operate that aircraft under Part 91 as long as (1) that operation is incidental to its business, and (2) the operator is paying for those operations out of its normal revenue without receiving compensation or reimbursement from some other person or entity. That is, the entity must derive at least 51% of its revenue from business that is unrelated to its use of the aircraft, and then use and pay for that use incidental to that primary business activity. In such a situation the entity is exercising Operational Control of the aircraft and as the operator it has liability for its operation of the aircraft.

Expanding on this concept, an entity whose sole purpose is to own the aircraft (an “SPE”) may not operate the aircraft without certification from the FAA to act as an air carrier, i.e., it must have a “Part 135 certificate.” However, it is common under the FAA’s rules for an SPE to own the aircraft solely for the purpose of leasing it to other parties. For example, an aircraft may be owned by an SPE and then leased to an individual or business lessee who will then operate the aircraft under Part 91 pursuant to a “dry-lease,” with, as noted above, such lessee’s use being incidental to the lessee’s primary non-aviation-related business. A dry-lease is a lease for the aircraft alone, without crew, and may be with or without fuel, with the lessee then being responsible for providing its own flight crew either directly (e.g. lessee’s employee(s)), or hired as independent contractors from an outside source (e.g. a pilot services or aircraft management company). In this situation, the lessee is exercising Operational Control, and as the operator of the aircraft it has assumed all regulatory and civil liability for each of its operations of the aircraft under the lease (regardless of how it obtained its pilots, who performs the maintenance, and so forth).

Part 135

Conversely, where the Part 135 certificate holder exercises Operational Control over the aircraft and all flights, that Part 135 certificate holder has assumed regulatory and civil legal liability for injury to persons or property arising from an aircraft accident or incident. Passengers on the aircraft do not have legal liability.

An aircraft owner, whether SPE or otherwise, may lease an aircraft to a Part 135 certificate holder under a dry-lease. The Part 135 operator then provides the crew (either using the Part 135 operator’s employees or independent contractors who are then agents of the Part 135 operator) and conducts operations pursuant to its Part 135 certificate. In most cases the entity that owns the aircraft will not have any legal liability for the Part 135 certificate holder’s operation of the aircraft.

OPERATIONAL CONSIDERATIONS

In addition to risk management, various differences between operational conditions and limitations under Parts 91 and Part 135 must also be considered. These include:

 

  1. Airport Limitations:

    • Runway Length Requirements.

      Part 91 - Runway length requirements are determined solely by aircraft requirements and limitations.

      Part 135 - The aircraft must be capable of landing within 80% of the runway length. This affects/limits access to a significant number of smaller airports that may be more conveniently located to the ultimate destination.

    • Weather Reporting.

      Part 91 - An aircraft may begin an instrument approach to airports where there is no weather reporting and the pilots determine when they approach the airport whether they can land safely. Additionally, an aircraft may depart from an airport below IFR weather minimums.

      Part 135 - An aircraft may not begin an approach to an airport that has no weather reporting facility unless the alternate airport has approved weather reporting. This may not only adversely impact whether or when a flight may depart, but it again has the potential to limit access to airports that are more conveniently located to the ultimate destination. Takeoff and alternate airport minimums also restrict whether and when a flight may be conducted.

  2. Flightcrew Member Restrictions:

    • Pilot Agency.

      Under both Parts 91 and 135 Flightcrew members must be agents of the party exercising operational control. This agency may be established by employment or contract. Flightcrew members who are employees of an entity other than the Part 135 certificate holder may be paid by their employer and still be agents of the Part 135 certificate holder provided the flightcrew members have entered into an appropriate agency agreement with the Part 135 certificate holder.

    • Flightcrew member Duty Time Limitations and Rest Requirements.

      Part 91 - Flightcrew member duty time and rest requirements are not imposed. This means the flightcrew members may operate the aircraft on multiple flights as long as they feel they are adequately rested and safe to fly.

      Part 135 - Flightcrew members are requirement to comply with specific duty time and rest requirements. The rules are complicated, but generally provide for a maximum assigned 14 hour duty day, limitations on the number of flight hours during a 24-hour period and required rest periods. Once a flightcrew member has reached his or her limit, that flightcrew member may not fly until the applicable rest requirements have been satisfied.

    • Drug and Alcohol Testing.

      Part 91 - Drug and alcohol testing of flightcrew members is not required.

      Part 135 - Certificate holders must comply with the same drug and alcohol testing requirements as air carriers operating under Part 121. Flightcrew members are subject to pre-employment/transfer, random, reasonable suspicion/cause, post-accident, return to duty, and follow up drug and alcohol testing pursuant to the Part 135 operator’s drug and alcohol testing program.

  3. Restrictions and Fees in Foreign Countries:

    Part 91 - Operations may be subject to some additional fees, but are typically not required to obtain additional licensing to operate in foreign countries.

    Part 135 – Certificate holders operating within foreign countries are subject to bilateral air transport agreements between the U.S. and those countries. These agreements subject the Part 135 operator to fees, regulations and additional licensing imposed by foreign countries for its commercial operations. The fees are typically passed on to the customer, increasing the cost of the charter flight.

  4. Maintenance and Equipment:

    Any U.S. registered aircraft must be maintained under some form of approved maintenance program. Under Part 91 this is typically done under the manufacturer’s basic recommended maintenance program, and so long as the operator meets those requirements, no further compliance or oversite by the FAA is required. Under Part 135, the aircraft must be maintained in accordance with a program that has been specifically approved by the FAA for that particular operator, and while these plans are commonly based on a manufacturer’s programs, they also typically include additional requirements imposed on top of the manufacturer’s requirements. Thus, depending upon the age and condition of the aircraft and whether it is currently enrolled in any maintenance or warranty programs, the cost of maintenance for an aircraft operated under Part 135 is potentially higher than if the aircraft were operated solely under Part 91. Because a Part 135 certificate holder cannot operate an aircraft unless it can document that the aircraft has been continuously maintained under its FAA-approved program, the practical effect of this is that if the aircraft is held in an SPE and then leased to both a Part 91 operator for its occasional use and to a Part 135 certificate holder for its use, then the aircraft will need to be maintained at all times under the approved Part 135 program, so the cost differential between Part 91 and Part 135 maintenance programs will largely become irrelevant.

  5. TSA Security Requirements:

    Part 91 – Operations are not subject to TSA security program requirements. Part 91 operators are not permitted to operate within sterile areas at airports.

    Part 135 - Certificate holders operating aircraft with a gross take-off weight in excess of 12,500 pounds are required to have a TSA approved security program in place. The Part 135 operator’s flightcrew members are subject to criminal history records checks and certain training requirements. The security program requires timely transmittal of crew and passenger lists in advance of flights. This means that last-minute changes of passengers on a particular flight is usually not possible. Also, if the flight will be enplaning or deplaning within the sterile area of an airport then additional screening requirements must be met.

CONCLUSION

As you can see, operations under Parts 91 or 135 have both advantages and disadvantages. Owners and operators of business aircraft need to carefully consider each in the context of their own circumstances. An in-depth discussion with a knowledgeable aviation attorney is also recommended to make sure their decision is the right one for their situation.

Considerations For Putting A Private Aircraft Onto A Part 135 Certificate

For an FAA Part 91 aircraft owner who is looking to reduce the cost of their aircraft, one thing to consider is placing the aircraft onto a commercial certificate. By doing that, when the aircraft is not being used by the owner, it can be earning revenue by flying charter. 

Since you can’t easily go out and get a Part 135 operating certificate, you will need to add your aircraft to an existing certificate holder. This involves a lot of work, and probably some expense on the owner’s part. Here are a few pros and cons to consider if you find yourself having this discussion.

Pros

You can generate revenue that will offset the cost of owning and operating the aircraft.  As a rule of thumb, the aircraft owner typically gets 85% of the base charter rate while the certificate holder keeps the remaining 15%. The aircraft owner typically pays all the aircraft specific charter expenses such as fuel and maintenance. The excess of charter revenue over those expenses helps offset the fixed costs resulting in a net decrease in total cost to the owner.

The aircraft owner can still fly their own aircraft under Part 91, or they can elect to have the certificate holder operate their aircraft under Part 135. Under Part 135 operations, the certificate holder has operational control of the aircraft and crew, and thus, the liability for the charter flight rests with the certificate holder. If the aircraft owner wants to reduce their aircraft liability, this may be an option.

Charter activity is a business use of the aircraft. If the aircraft owner flies mostly personal, non-business use, the charter activity may qualify them to take a tax deduction for the business use of the aircraft. 

Considerations

The FAA has increased scrutiny of a Part 135 certificate holder. Charter operators are required by the FAA to have operational control of the aircraft and crew during all 135 operations. Operating under Part 135 places greater restrictions on aircraft and crew than does Part 91.

Putting an aircraft onto a charter certificate also requires that the aircraft meet the more stringent safety requirements for commercial operations. The initial conformity checks commonly result in additional costs to the owner as the aircraft must be brought into compliance with those standards. The aircraft must also be maintained to the certificate holder’s approved maintenance practices.  This means that all maintenance must be coordinated through the certificate holder. This adds some cost and complexity to the aircraft maintenance function.

The owner may wish the crew to be employed by the certificate holder. The owner’s crew can’t just start flying 135 operations, even if they are as well or better qualified as the certificate holder’s crew. If the owner’s crew is to fly for the certificate holder, that certificate holder must be able to show they have control over the crew and that the crew (much like the aircraft) meets with their approved training program and has drug testing. 

As the aircraft owner is not actively involved in the charter business, the IRS considers the charter income as passive income, much like rental income. So tax planning for the aircraft owner gets more complicated. Thus, the aircraft owner needs a careful review with an aviation tax person. 

There are more tax issues with for-hire flights. Federal Excise Taxes are due on the aircraft charter income. The charter operator commonly handles this. The tax depreciation status of the aircraft may change. In general, an airplane in not-for hire business-use may qualify for a 5-Year accelerated tax depreciation schedule. If the predominant use is commercial for-hire, the IRS limits an airplane (but not a helicopter) to a 7-year accelerated tax depreciation schedule. Contact my partner Nel Stubbs about this (602-404-1854 or nel@conklindd.com) or for any aviation tax issues.

Your aircraft insurance and lease or mortgage documentation needs a thorough review to ensure the commercial activity is a permitted use. This may be a pro if the certificate holder has a fleet insurance policy that offers a lower policy cost to the aircraft owner.

Lastly, wear and tear will increase on the aircraft. Not only due to the increased flying in general, but charter customers may not treat the aircraft interior as well as the owner. In the case of some rock bands, they will mistreat the interior!  

For an aircraft owner placing their aircraft onto someone else’s commercial certificate requires careful planning and compromise. The arrangement can be beneficial for both aircraft owner and charter operator, but only if both parties compromise, cooperate and communicate. 


FAA Proposes More Restrictive Interpretation Of Part 135 Flight And Rest Time Regulations

In a Notice of Proposed Interpretation published on December 23, 2010, the FAA is proposing to interpret the application of FAR 135.263 and the rest requirements of FAR 135.267(d) to a situation where an operator plans a flight that is anticipated to be completed within a 13.5-hour duty day but, unanticipated delays (e.g. late passengers, late cargo etc.) occur before the last leg of the flight, and these delays would extend the flight beyond a 14-hour duty day if the last leg is completed.

The FAA's current interpretation of these regulations, based upon legal interpretations issued in the 1990's, permits flight crewmembers to take off on flights that were scheduled to be completed within a 14-hour duty period even though circumstances beyond the crewmembers' control extended the actual duty time beyond the permissible 14-hour period. However, this interpretation is inconsistent with its current interpretation of the near identical language in
FAR 121.471(g) which would not permit the crewmembers to take off on the last leg of the flight.

The FAA's interpretation of the language of
FAR 121.471(g), which was upheld by the U.S. Court of Appeals for the DC Circuit, created an exception to pilot flight time limitations, but did not provide an exception for pilot rest requirements. In the Court of Appeals decision, the Court also stated that "[t]he substance of the rules in FAR Parts 121 and 135 is essentially the same and the rules are likewise interpreted." The FAA's interpretations of FAR 121.471(g) along with the Court of Appeals case have been known as the "Whitlow Letter line of interpretations."

According to the proposed interpretation, "[t]he FAA has determined that it is illogical that the nearly-identical regulatory language in sections 121.471(g) and 135.263(d) is interpreted in two different ways" and "the Whitlow Letter line of interpretations best reflects the FAA's current understanding of the pertinent regulatory language." As a result, under the proposed interpretation, if a flight crewmember knows at the time of departure on the last leg of the flight that he or she has not had the required rest,
FAR 135.267(d) would prohibit him or her from departing on the last leg of the flight.

More...

Pros and Cons of Placing Your Aircraft On Someone Else's Charter Certificate

If you are like many business aircraft operators, your aircraft is not being used as much as in the past. Your costs are up and utilization is down, and you are under pressure to keep the budget under control. Your friendly local charter operator suggests having you place your aircraft on their Part 135 charter certificate to gain income from charter.

Why Would You Want To?

To off set your operating costs. A typical charter agreement has the owner paying for all the operating costs. The owner gets the revenue from the charter less a 15% commission to the certificate holder. This is the basic cost/revenue structure, but there are variations.

You will not make money doing this. If this were the case, wouldn't charter operators always own their aircraft? The charter revenues should exceed the variable expenses of operating the aircraft leaving the excess amounts to offset the fixed expenses, thus lowering the total cost to the aircraft owner.

Other benefits may include:

Reduced liability to the owner if all flights are flown under the charter operator's certificate. If your own flights are under Part 135 then the operational control for the flight rests with the charter operator, not the aircraft owner. Although if this is a big issue, don't even own an aircraft in the first place, just charter.

Access to lower costs. Bulk fuel, reduced hangar rates, possible fleet discounts on insurance, and lower personnel costs if you fly with the charter operator's crew.

Why Shouldn't You?

One is control. If you are a control freak, then you should own your aircraft and hire and manage the crew. Then you have 100% control over who flies, and when and where the aircraft is used.

Depending on the aircraft, conformity to Part 135 may increase your costs. Additional maintenance may be required, plus you will have more stringent crew rest regulations. Seating needing to meet current fire-blocking rules may be an issue as well. These costs are dependent on the aircraft type and configuration.

Increased utilization (especially by others) will increase the wear and tear on the aircraft. Plan on refurbishing the interior more often.

Decreased values. The more hours an aircraft flies the greater decrease in value at the time of sale (other factors being equal). A 10-year old airframe with 6,000 hours will have a reduced value and take longer to sell than one in the same overall condition, but with 4,000 hours.

Increased aircraft management and operational issues if operating both Part 91 and Part 135. The FAA adds restrictions on how the aircraft agreements (and contracts for crew) can be structured and can affect how easy it is for you to fly under both Part 91 and Part 135. Flying all Part 135 is easier, but you may want the flexibility that Part 91 offers. .

However, the biggest reason not to place your aircraft on someone's charter certificate is if you already use your aircraft a substantial amount, then there will be little opportunity for offsetting charter revenues.

If you have infrequent use and a predictable schedule, then you might want to look into charter. If you have a constantly changing flight schedule, and take the aircraft on the road for long trips, the charter operator won't have access to your aircraft and you won't get much revenue.

There are also issues that involve legal, tax and FAA. Rental income is generally considered as a passive income. Passive income (and losses) may impact the ability to fully tax depreciate the aircraft. State and local taxes are often different for commercial operations. You need tax guidance from an aviation-tax specialist to full understand the ramifications.

If done under the correct circumstances, placing an aircraft on an operator's charter certificate can be a win-win situation. The owner gets revenues to offset costs, and the charter provider gets an aircraft to charter without having to fully support the costs of owning and operating the aircraft with charter revenues. However, don't go into it without carefully researching all the requirements and conditions, especially legal and tax.

Have you experience with placing an aircraft on someone else's charter certificate? Click reply and let me know your experiences.

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