AMERICAN BAR ASSOCIATION
VOLUME 34, NUMBER 2, 2021
Published in The Air & Space Lawyer, Volume 34, Number 2, 2021. © 2021 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Improper Aircraft “Dry” Leasing and Other Illegal Charter
By David T. Norton
One of the most confusing issues facing business and general aviation aircraft operators is the question of whether they can operate their aircraft solely under the Federal Aviation Administration’s (FAA) general, or noncommercial, operating rules, or whether they must also obtain certification as a commercial operator and operate their aircraft under the applicable commercial rules.
This is especially complicated when their aircraft are leased to other parties. Although the FAA’s position on this question has been consistent since the 1970s, its enforcement of these rules has been sporadic. This has recently begun to change, however, as the FAA has recognized that it needs to pay more attention to this industry segment to ensure that the appropriate regulations are being followed.
This article provides an analysis for determining whether an operator who is conducting flights under the noncommercial rules may face an FAA administrative or legal enforcement action because the FAA has determined that the operator should be complying with its commercial rules. The analysis primarily focuses on situations where an operator is conducting improper “dry” leasing but also touches upon other common forms of illegal charter.
Basic Regulatory Concepts and Requirements
Our Focus: Regulation of Smaller Aircraft
Our focus is on the FAA’s federal aviation regulations (FAR, codified in Part 14 of the Code of Federal Regulations (C.F.R.), Parts 1–199) that apply to the operations of aircraft ranging from small, single-engine pistons up through, but not including, piston and turbine or jet airplanes with a passenger seating configuration of 20 or more or a maximum payload capacity of 6,000 pounds or more.
Think, for example, of a small Cessna 172 aircraft up through a Gulfstream G700 aircraft, but not a Boeing 737 or larger aircraft outfitted for maximum seating capacity.
Who Is the “Operator”?
When assessing which operational rules must be followed, the first step is to determine exactly who is the “operator” of the aircraft.
The starting presumption is that the registered owner of the aircraft is the operator, but the operator can become a different party through an agreement, such as a lease or operating agreement, with the owner.
A third party such as an aircraft manager may also effectively become the operator when a lease is not involved.
Although the FAR does not define the term “operator” directly, it does provide that:
“Operate, with respect to aircraft, means use, cause to use or authorize to use aircraft, for the purpose of air navigation including the piloting of aircraft, with or without the right of legal control (as owner, lessee, or otherwise).”
The FAR further provides that:
“Operational control, with respect to a flight, means the exercise of authority over initiating, conducting or terminating a flight.”
Thus, the operator of an aircraft is the person or entity exercising operational control over the aircraft in order to operate it in the national airspace.
Which Operational Rules Apply?
Once the actual operator is identified, the analysis continues as to which rules that operator must follow.
FAR Part 119 provides the gateway set of rules that instruct an aircraft operator as to whether that operator may simply comply with the noncommercial rules found at FAR Part 91, or whether it must seek certification for and then operate under the applicable commercial rules.
Those rules would generally be the rules applicable to commuter and on-demand operators found at FAR Part 135.
Definitions
The article then explains several key regulatory definitions including:
- Air commerce
- Interstate air commerce
- Commercial operator
- Air transportation
- Interstate air transportation
- Air carrier
- Direct air carrier
Core Summary
A person is acting as a commercial operator when carrying persons or property for compensation or hire.
A direct air carrier goes further by engaging in common carriage, meaning holding itself out to the public for hire.
The FAA also does not recognize the federal income tax concept of a disregarded entity for these purposes.
Additionally, any value flowing from one person to another to help pay for a flight can constitute compensation, even without profit.
Analysis Under FAR Part 119
The article summarizes the analysis into four questions:
1. Is the operator acting in common carriage?
If yes:
- It is a direct air carrier
- Must obtain an air carrier certificate
- Must comply with FAR Part 135
2. Is the operator receiving compensation but not holding out to the public?
If yes:
- Continue to Step 3
3. Do exceptions apply under FAR §§ 91.501, 91.312, or 119.1(e)?
If yes:
- Operations may occur under Part 91 within limits
If no:
- Must obtain certification and comply with Part 135
4. If no compensation and no holding out:
Then the operator is noncommercial and may operate under FAR Part 91.
Improper Dry Leasing and Other Illegal Charter
Each time an aircraft departs, the operator should walk through the above flowchart.
Many fail to do so and end up conducting illegal charter: operating under Part 91 when they should be certificated and operating under Part 135.
Improper or “Sham” Dry Leasing
One of the largest areas of noncompliance is improper use of aircraft dry leases to raise revenue.
Wet Lease
Defined as a lease of an aircraft with at least one crew member.
FAA presumes the lessor retains operational control.
Usually requires Part 135 certification.
Dry Lease
Lease of aircraft without crew, where operational control transfers to lessee.
Examples:
- Aircraft rental to private pilot
- Aircraft operating agreements
- Trust arrangements
But calling something a dry lease does not automatically make it legal Part 91 flying.
The real issue is:
Who actually has operational control?
FAA Factors for Determining Operational Control
The FAA may consider:
- Who accepts flight requests?
- Who initiates / conducts / terminates flights?
- Who trains and qualifies crew?
- Who sets operating conditions?
- Who determines weather and fuel requirements?
- Who pays fuel directly?
- Who pays airport, hangar, catering, rental car costs?
- Who ensures regulatory compliance before departure?
- Who ensures airworthiness?
- Who maintains aircraft?
- Who decides maintenance timing/location?
- Who pays maintenance directly?
If the lessor effectively controls these items, the FAA may determine the “dry lease” is actually a wet lease in disguise.
Consequences of Illegal Charter
Where a sham dry lease exists and no valid exception applies:
- FAA civil penalties
- Enforcement actions
- Insurance coverage problems
- Loan covenant defaults
- Potential criminal exposure in severe cases
Other Forms of Illegal Charter
The article also identifies:
Flight Department Companies
Entities formed mainly to own and operate aircraft for owners or affiliates.
If transportation is the company’s main business, it may be a commercial operator requiring Part 135.
Misuse of Part 91 Exceptions
Examples include:
- Time sharing agreements
- Cost reimbursement arrangements
- Other narrow exemptions used beyond allowed scope
Aircraft Managers Acting as Operators
If a management company coordinates all aspects of the flight and exercises operational control for compensation, FAA may treat it as an illegal charter operator.
Part 135 Operators Flying Outside Ops Specs
Example:
Using aircraft not listed on the certificate to conduct passenger revenue flights.
May result in suspension or revocation.
Conclusion
Improper dry leasing and illegal charter are difficult to detect, partly because FAA has fewer routine interactions with Part 91 operators.
However, FAA enforcement has increased significantly.
Operators and advisors should carefully analyze operational control, compensation, and applicable exceptions before conducting flights under Part 91.
Author
David T. Norton
Partner and head of aviation practice at Shackelford, Bowen, McKinley & Norton, LLP in Dallas, Texas.
If you’d like, I can also turn this into a clean Word document, summarized checklist, FAA dry lease compliance guide, or extract every legal citation and case reference from the article.
