Leasing Aviation Articles

Pilots Flying Leased Aircraft Beware! Due Diligence Is Required To Protect Your Certificates.

The FAA is continuing its special emphasis on investigating and pursuing enforcement action against illegal charter operations. Many of these illegal operations involve leasing arrangements that are not compliant with the regulations, and that are also sometimes referred to as “sham leasing” or “disguised charter.”

When the FAA discovers such operations, it does not hesitate to take legal enforcement action against any pilots who operated aircraft on these illegal charter flights.  The FAA’s action typically involves an emergency order of revocation immediately revoking all of the pilot’s airman certificates.

While the FAA may then assess a civil penalty against other parties involved in the illegal operations (i.e. the aircraft owner or the aircraft operator), make no mistake – the pilots are the FAA’s first targets. And that is potentially a significant risk.

But before a pilot decides that he or she will simply refuse to operate an aircraft under a lease arrangement, it is important to understand that it is possible to structure leasing arrangements that are fully compliant with the regulations. Legal aircraft leasing structures are put in place every day.  Do not let anyone, including the FAA, tell you different.

How Does A Pilot Know Whether A Leasing Structure Is Legal?

First, the pilot needs to learn about and understand both legal and illegal leasing structures.  Next, with that education and understanding the pilot needs to perform some due diligence to confirm the legality of the leasing structure for the aircraft he or she will be flying.

What Type of Due Diligence Should A Pilot Conduct?

A pilot needs to do enough to confirm that the aircraft leasing structure and operations are compliant with the regulations.  Due diligence tasks a pilot should pursue include the following:

  1. Get a copy of Advisory Circular 91-37B Truth in Leasing and review. Although truth in leasing may not apply to the leased aircraft that will be operated, this AC provides a good general understanding of leasing arrangements and operational control requirements;
  2. Obtain a copy of the applicable lease agreement for the aircraft to be flown and review. Confirm that the lessee is the party exercising operational control;
  3. If Truth-in-Leasing applies under FAR § 91.23, confirm that the lease was filed with the FAA Technical Branch and notice was given to the applicable FAA Flight Standards Office at least 48 hours before the first flight under the lease;
  4. If the FAA has issued any Letters of Authorization (“LOA”) for the aircraft, review to confirm that the LOA is issued to the party who will actually be operating the aircraft. This should be the lessee;
  5. Enter into a separate pilot services agreement confirming the pilot’s agency on behalf of the aircraft lessee/operator;
  6. Although not a regulatory requirement, it also makes sense to review the insurance policy and endorsements issued for the aircraft to confirm that the policy actually covers the operations to be conducted by the lessee; and
  7. Make sure the aircraft leasing and operating arrangements passes a “gut check.” If the documentation is correct, are the parties actually operating consistent with the documents?  Or are the operations really being conducted as sham leasing or illegal charter?  Is a true leasing arrangement in place between aircraft owner and lessee, or is someone in the middle with whom the lessee coordinates all aircraft operations?

If the due diligence reveals a legitimate leasing structure, then a pilot can fly for the lessee operator with the knowledge that the pilot is not putting his or her airman certificates at risk.  Additionally, if the FAA ever asks about the operations (i.e. in connection with a ramp check, or perhaps after an anonymous tip by an unhappy competitor) the pilot will be able show the FAA inspector the due diligence he or she performed and explain how the operations are structured and conducted in compliance with the regulations.

However, if the due diligence does not check out, then the pilot should be wary about flying under the existing structure. Although it may be possible to restructure the leasing arrangement to bring it into compliance, until that happens any flights by the pilot could put his or her certificates at risk.

And if the aircraft owner or lessee do not permit the pilot to perform the due diligence, then the pilot should be especially cautious.  Since the pilot’s certificates will be the FAA’s first target if the operations are conducted illegally, the pilot should demand that he or she be permitted to confirm that the leasing structure is compliant.  Without that due diligence, the pilot may want to fly for someone else.

Conclusion

The FAA will continue its emphasis on and oversight of aircraft leasing operations.  It will also pursue legal enforcement action when it discovers sham leasing or illegal charter operations. Although pilots may still operate aircraft that are part of legitimate aircraft leasing structures, pilots should do their due diligence before they operate aircraft to ensure that it is not part of a non-compliant leasing structure.

If a particular lease arrangement is questionable, or if it is non-compliant, pilots should get help from a knowledgeable aviation attorney to review the arrangement and to help correct the leasing structure and operations, so they are compliant with the regulations.

Why Should An Aircraft Lessee Use An Operational Control Briefing?

As many of you are aware, the FAA has increased both its investigation of and enforcement against illegal charter operators.  One of the consequences of this heightened oversight is an increase in the FAA's scrutiny of Part 91 dry-leasing structures.  Using an operational control briefing in connection with those Part 91 flights can help minimize unwanted FAA attention.

To start, if structured properly, these leasing structures are legal and comply with FAA regulations. They ARE NOT illegal charter. However, in order to be legitimate, dry-leasing arrangements must be documented correctly.

The actual flight operations also need to be conducted consistent with those documents and the applicable regulations.  But proper documentation will not save an operator from FAA enforcement if the operations ignore the documents and are conducted as illegal charter flights.

How does the FAA figure out whether a properly documented operation is actually being conducted as an illegal charter?  FAA inspectors start asking questions.  For example, if an FAA inspector conducts a ramp check of a Part 91 dry-lease flight, he or she will first speak to the pilot. Next, the inspector will talk to the passengers in the back of the airplane.

The passengers' answers to the inspector's questions need to be consistent with a Part 91 dry-leasing structure. Incorrect answers can, and have, resulted in an illegal charter investigation of an otherwise proper Part 91 dry-lease flight.  And this is where an operational control briefing given by the pilot at the beginning of the flight can make all of the difference in the world.

The operational control briefing is intended to ensure that the passengers are able to tell the FAA inspector who has operational control of the flight.  Subject to a few very specific exceptions, the lessee, not the lessor, has operational control of a Part 91 dry-lease flight, even if the lessee or its principals are not physically on the flight.  The passengers need to know this fact so they can answer the inspector's questions correctly.

So, what should be included in an operational control briefing?  Here are a few, but not necessarily all, of the points that should be covered with the passengers:

  • The flight IS NOT a charter flight.
  • The flight will operate under Part 91 of the Federal Aviation Administration regulations.
  • The flight is operated under a lease between the aircraft owner (or another lessor) and the lessee.  And a copy of that lease agreement is in the aircraft.
  • The flight is under the operational control of the lessee.  (Identification of the lessee is critical, especially when the aircraft may also be leased to other affiliates or related entities).  This means that the passenger, by virtue of his or her relationship with lessee, has operational control of the flight.  He or she has the authority to initiate, conduct and terminate the flight.
  • The pilot is on board to help the passenger operate the aircraft in a safe and prudent manner and in full compliance with the applicable rules and regulations.  He or she will comply with the instructions and directions provided by the passenger, both written and oral, to enable the passenger to exercise operational control.
  • The passenger will still have operational control.  That operational control is only be subject to the pilot's authority to make all safety related decisions relating to the aircraft and the flight.

The operational control briefing should be used regardless of whether the flight is carrying the lessee (or its principal) or the lessee's employees/guests/invitees.  Although the lessee should understand the nature of the Part 91 dry-leasing structure to which it has agreed, the briefing can serve as a reminder of the basic requirements.

When the flight is carrying other passengers, the briefing is an important tool to make sure those passengers understand the nature of the flight so they are able to convey that information to an FAA inspector if or when asked. This will help prevent confusion and, perhaps, an unwanted investigation.

At the end of the day, it is the lessee's responsibility as operator of the aircraft to make sure the lessee's flights are conducted legally. An operational control briefing is a simple, but effective way to make sure the folks in the back of the aircraft also understand who is responsible for the flight.

Tips For Renting Your Aircraft

If you own an aircraft and are not utilizing it as much as you would like or if you would like to try and recover some of the cost of owning the aircraft, you may have thought about renting your aircraft to other pilots. As a practical matter, that makes some sense. But before you actually rent your aircraft to another pilot, here are a few things you should consider.

Aircraft Owners May Rent Their Aircraft To Third Parties

Tips for Renting your aircraftIt is important to understand that the FAA does not prohibit aircraft owners from renting their aircraft. In fact, the regulations specifically contemplate rental arrangements. So, renting your aircraft is permitted, provided that you comply with applicable regulations. The FAA provides guidance on what is and isn't a permissible rental arrangement in Advisory Circular 91-37B Truth in Leasing (although truth in leasing requirements only apply to large civil aircraft, the general lease concepts discussed in the AC apply to leasing arrangements for all aircraft).

Make Sure Your Insurance Permits Aircraft Rental

Most aircraft insurance policies will extend coverage to other pilots who fly your aircraft provided that the pilots are either expressly identified in your policy or if they have the necessary experience/qualifications to meet the "open pilot" clause of the policy. However, if you are going to charge the pilot for use of your aircraft, you need to confirm that your policy allows you to rent or lease your aircraft to a third-party. Most aircraft policies issued to owners for personal/business flying do allow aircraft leasing, but it is important to confirm this with your insurance underwriter.

Also, rather than paying to obtain their own insurance policy or renter's insurance to cover their use of your aircraft, most renter pilots will want to be named as an additional insured under your policy as this can oftentimes be done at no cost to you or the renter pilot. In that case, renters will typically ask for a certificate of insurance that reflects not only that they are added to your policy, but that they are covered for their operation and use of their aircraft. This is important because it doesn't do the renter pilot any good if he or she is added to the owner's policy but only covered for the owner's operation of the aircraft, rather than his or her own use.

Renting Your Aircraft Can Trigger Tax Consequences

In most states, when an aircraft owner rents an aircraft to a third-party the owner is required to collect and remit sales tax on the rent paid by the third-party for the aircraft. If you are in one of those states, in order to rent your aircraft you will need to obtain a sales tax number so you can collect and remit sales tax to the taxing authority. This is the aircraft owner's obligation and the taxing authority will hold the aircraft owner responsible for any sales tax the taxing authority believes the aircraft owner should have collected and remitted, regardless of whether the renter pilot actually paid the sales tax to the aircraft owner.

Also, when you rent your aircraft many taxing authorities view that activity as commercial activity which then means your aircraft could be subject to assessment of personal property tax on the value of the aircraft, or some portion of the value based upon the pro-rata rental versus personal use of the aircraft. Although not all states assess personal property tax on aircraft, if you are in a state that does you will want to determine your potential property tax exposure before you decide to rent your aircraft.

Conclusion

Although you will also have other things to consider as you decide whether to rent your aircraft to other pilots, these three issues should be near the top of your list. And if you understand and address these issues up front that will help ensure a successful aircraft rental experience for both you, the aircraft owner, and your renter pilot.

Greg can be reached at:

Greg Reigel
Shackelford, Bowen, McKinley & Norton, LLP
9201 N. Central Expressway, 4th Floor, Dallas, Texas 75231
Direct: (214) 780-1482 - Fax: (214) 780-1401
E-mail:  [email protected]
Website:  www.shackelford.law

Keep Your Banker Happy

Financing rates for loans and leases are very low. Yet it isn't easy to get financing and the paperwork can be daunting. If you are looking for a lease or a loan for an aircraft, here are a few tips to help you help your financier.

Educate your financier as to how your lease or loan is a great risk. There is plenty of money to lend and financial institutions want and need to do business. They need to do transactions, but they also need to carefully manage their risk. It is up to you to provide them the information they need demonstrating you are a good credit risk. That means lots of financials of course. But is also means that the individual you are working with needs to understand your business.  Much of the decision is based on analytics, but there is room for judgment.

Your local banker with whom you have had a long term business relationship may be more likely to support your need for financing, even if they don't know much about aviation. Educate them on the lower depreciation that aircraft have relative to other transportation forms. Yes, since 2008 aircraft resale values have not fared well, but relative to trucks, they are a much better risk with a much longer life. That may not be obvious to your banker.

Pick your aircraft like a banker or risk manager. New aircraft are easier to finance, but older aircraft do get financing. Turbine financing rule of thumb: aircraft age at the start of the lease/loan plus the length of the term should not exceed 15 years. Example: your should be able to get a five year term on a 10-year old aircraft. Don't expect the five-year term on the age 20 aircraft. Also expect to put 20% down on the loan - more if the aircraft is older. That down payment is the cushion the banker needs to keep what is owed well under what the outstanding debt is at any time.

Reducing financial risk also means that the banker will favor, or even require, a guaranteed hourly maintenance program on at least the engines. This is routine with leases. Lease return conditions generally require all components have at least 50% of their useful life remaining or you pay a detriment adjustment. The engine guaranteed hourly maintenance program both covers the time to overhaul adjustment plus makes the returned aircraft at lease-end more popular in the resale market, either in another lease or as a sale.

Plan on time to research and secure your financing. Talk to your banker early in the acquisition process and see what information they will need. You may need to check out several sources. One banker that deals with turbine equipment up to $5 million in value isn't likely to want to do a deal on a new mid-size business jet. Know who and what your options are.

There are a lot of financial uncertainties in any time. Right now the oil/energy markets, China, the Middle-East, and the US election are in the front of their anxieties. When looking for financing or a lease, don't add to them! And yes, cash is and always will be King. 


 

The Business Mission Drives The Aircraft Mission

Image: Gulfstream G650

The Gulfstream G650 and Citation Ten vie for the world’s fastest business jet. But if you need to get an accident victim from the accident scene to a hospital fast, you most likely need a helicopter. Business jets are not designed to land beside the highway and helicopters won't do for a long cross-country flight. I'm stating the obvious, but how many aircraft choices seem to ignore this?

"To execute the corporate mission" is the answer to the business question "Why do we have an aircraft?" If the aircraft is a personal aircraft, the "why" may be "to enjoy flying." What type of flying is fun to one person can be very different from another. In the world of business aircraft, whether the business is high tech, services, hospitality, acute care, etc., the why of the aircraft must be tied into the why of the company. If it isn't, then the aircraft may be a mismatch to the company mission.

The closer the aircraft's mission can be tied into the reason for the corporation's existence, the more secure the aircraft (and aviation employees' jobs) will be. If IBM were having a tough year financially, no one would ever suggest that they get rid of all their computers! How close does the mission of your business aircraft fit into the reason your company exists? If the aircraft went away, would it have a negative impact on the ability of its users to successfully execute the company's mission?

Our own company mission is: The mission of Conklin & de Decker is to enable the general aviation industry to make more informed decisions when dealing with the purchase, operation and disposition of aircraft by furnishing objective and impartial information.

We are much too small to afford a corporate aircraft, but if/when we get there, the aircraft better directly support our ability to "enable the general aviation industry to make more informed decisions." The added value to the business from the person(s) using the corporate aircraft must exceed the costs of having that aircraft. If the leader of a corporation is worth $1 billion dollars to the corporation, and their use of the company aircraft enhances that value, then the $1 million budget for the aircraft should be easily defensible. If the mission of the health services company includes providing critical care to a large community, then the EMS helicopter should be easily defensible.

A company has a written mission statement that is used to guide its daily business. The aviation department should also have a written mission statement. That mission statement should support the mission of the corporation. The aviation department should be part of the corporate structure just as legal, human resources, IT and other departments. Your may not be making widgets, but you are making the making and selling of the widgets easier and more productive.

After that, the next step is developing the measurement criteria for the aircraft to enable management to determine how well the aircraft is at meeting its mission needs. Then, and only then, can you start the analysis of speed, range, payload, cabin, and performance needed to make a wise aircraft choice.

What you then end up with is measureable criteria that can be used to evaluate the aircraft choices. Each of those criteria stem from the assigned mission of the aircraft. The assigned mission of the aircraft is directly supporting the mission of the corporation. Thus, the answer to the question of why do we need eight seats and 2,400 NM range, is to support the corporate mission.

A caution here is that in some situations, supporting the senior leadership can be mistaken for NOT supporting the corporation. There are no easy answers to the "big boss uses company jet for private retreat" headline. But, that personal use of the corporate aircraft better be documented and reported.

Business aircraft of all types can be used to further the successful mission accomplishment of the corporation. These missions need to be in writing and clear enough so that the justification of the use of a business aircraft can easily be done.

What is your mission statement? Does your choice of transportation reflect it? Let us know in the comments section below!

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