Extracted Text — “The Problem of Illegal Charter”
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Aviation Business Journal | 1st Quarter 2018
The Problem of Illegal Charter in the On-Demand Air Transportation Industry
Aircraft “Damp” Leasing: Operators Who Use Aircraft “Dry” Leases that Aren’t So Dry and Stray into the World of Illegal Charter – or an “Operations under Part 134 1/2” Redux
BY DAVID T. NORTON
This article follows another that appeared in the First Quarter 2017 edition of the Aviation Business Journal, which discussed the “operational control” of aircraft under the Federal Aviation Administration’s (FAA) federal aviation regulations (the FAR). That article noted a number of problems that can arise from confusion over the concept of operational control, sometimes leading to improper “Part 134 ½” operations, such as using a sole-purpose “flight department company” to be the liability-shielding operator of an aircraft under 14 C.F.R. Part 91 for the benefit of that company’s members when those flights should legally be conducted under 14 C.F.R. Part 135. This current article focuses on another type of operation that is also intimately intertwined with the concept of operational control—the non-commercial, or “dry” leasing, of aircraft.
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Aircraft dry leasing can be a tricky subject, but it is not inherently bad. Dry leasing is, in fact, how the vast majority of charter operators flying under Part 135 gain access to most, if not all, of their fleets. They generally don’t own all of their aircraft, but instead obtain them under dry leases from owners who want those aircraft to be operated under Part 135 for any number of valid reasons. Moreover, when set up correctly, dry leasing is also an important tool for the appropriate non-commercial use of aircraft in the business aviation community.
The conventional wisdom, however, is that a growing number of individuals or companies are setting up what are purported to be Part 91 dry leases, when they are in fact “wet” leases that should be operated under Part 135. (Continue reading for definitions and distinctions between the two types of leases.)
Why is this happening? Consider that if your neighbor down hangar row is operating their own flights under a Part 91 dry lease, then that operator does not need to obtain an air carrier certificate and fly the aircraft under Part 135. That operator can instead conduct flights that cost less and are less restrictive than the flights you are conducting under the authority of your air carrier certificate and in full compliance with Part 135.
So, what is the big deal? Well, if that operator down the tarmac has set up a true dry lease and is flying its own employees and guests as passengers on the aircraft in support of its own business operations as a legal non-commercial operator under Part 91, then it is not a big deal. But, if that operator is instead using what purports to be a dry lease in order to conduct a cheaper, more flexible flight under Part 91, but that flight is, in fact, an illegal charter operation for the benefit of unsuspecting third-party passengers that should by conducted under Part 135 instead, then it is a very big deal because:
(a) it leads to significant passenger-safety and regulatory non-compliance concerns, and
(b) it creates an extremely unfair playing field for those charter operators who do choose to actually comply with the law.
“DRY” LEASES, “WET” LEASES, AND “ILLEGAL CHARTER”
When you hear that an aircraft operator has a lot of dry leasing going on (or when you want to do your own dry leasing), how do you know whether true non-commercial dry leases are in place, or what is really going on is consistent with illegal charter? The answer to that question is really based on an analysis of a series of underlying questions.
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The Problem of Illegal Charter (Continued from page 27)
The first question is: Just what, exactly, is a lease? At its most basic level, an aircraft lease is simply an agreement under which one party—called the “lessor”—provides an airplane to another party—called the “lessee”—in exchange for some kind of payment.
As a quick aside, many states typically recognize that any lease can be either verbal or written. The FAR, however, compels parties to use written leases for “large” aircraft (i.e. aircraft with maximum certificated takeoff weights of over 12,500 pounds) due to the truth-in-leasing notice provisions found at 14 C.F.R. Section 91.23. And, even though you do not technically need a written lease for “small” aircraft, it is still a very good idea to have one because it can be very difficult to establish that a verbal lease was really in place after the fact, especially if the flight is being reviewed by the FAA or some taxing authority long after it took place.
Once you have identified a situation where you have a lessor providing an airplane to a lessee in exchange for some payment, the next question is: Who is actually conducting the flight (i.e. who really has operational control of the aircraft) under that lease?
Why this question? Because, as the FAA Chief Counsel has repeated on many occasions over the years, the FAA recognizes two general types of aircraft leases—dry leases and wet leases.
The dry lease of an aircraft is one in which the lessor provides the aircraft, and the lessee supplies its own flight crew and assumes operational control of the flight. Conversely, under a wet lease, the lessor provides both the aircraft and the crew and normally retains operational control of the flight, in which event the flight is considered to be commercial in nature and, except in a few very limited circumstances, must be operated under the authority of an air carrier certificate and under the applicable commercial rules, such as Part 135.
While that makes sense on an initial reading, how can you actually tell if the lease in question is dry or wet in real life?
Sometimes it is very clear. A charter agreement between a certificated air carrier and some third-party passenger that says the charter operator will take the passenger from point A to point B and all the passenger has to do is show up at the appointed time and pay a charter fee, is very clearly a wet lease.
On the other end of the spectrum, when the lessor is a bank that purchases an aircraft on behalf of a borrower, and that bank/lessor then leases the aircraft to the borrower as the lessee, who must take full responsibility for all aspects of maintaining and operating aircraft as if that borrower/lessee were the owner of the aircraft in the first place, that lease is very clearly a dry lease.
The problem is, quite often, leasing is conducted between these two extremes and the question of whether or not those leases are dry or wet is not quite so clear.
How do you decide in these in-between situations? As the FAA Chief Counsel has also repeated on many occasions, whether a lease is dry or wet is determined on a case-by-case basis and the FAA will look at multiple factors to determine whether a lease that the parties are calling “dry” is in fact “wet.”
First and foremost, the FAA will look at who is providing the pilots. As 14 C.F.R. Section 110.2 states, the very definition of a wet lease is “the lease of an aircraft plus any one crew member.”
So, if the lease in question specifically provides both the airplane and the pilots, then the matter is clear—that is a wet lease.
But beware—even in situations where a purported dry lease is entered into by the parties and it appears on the surface that airplane and aircrew are coming from separate places, but a review of the actual underlying facts shows that the plane and pilots are really being offered as a package deal, the FAA may find that the parties have really entered into a “sham dry lease”—a wet lease in disguise.
A review of applicable FAR sections; various provisions from FAA Order 8900.1 (Flight Standards Information Management System) such as the guidance to aviation safety inspectors contained in Vol. 3, General Technical Administration, Ch. 13, Lease and Interchange Agreements; various advisory circulars such as AC 91-37B, Truth in Leasing; and multiple Chief Counsel Interpretation Letters addressing this issue over the years all show that the key question in determining whether a lease is truly a dry lease is the analysis of whether operational control has been assumed by the lessee under that lease.
These resources also describe various “operational functions” the FAA will look at to determine if the lessee has really assumed operational control of the aircraft.
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The Problem of Illegal Charter (Continued from page 29)
Examples of these functions include, among other things, a review of which party:
- is providing one or more of the crewmembers,
- is arranging for the training of those crewmembers,
- selects or assigns particular crewmembers for particular flights,
- employs and/or is directly paying for those crewmembers,
- has responsibility for determining the airworthiness of the aircraft,
- has responsibility for ensuring that proper maintenance of the aircraft is performed,
- has responsibility for initiating and terminating flights,
- has been specifically designated to be in operational control of the flight,
- is accepting regulatory liability and responsibility for the conduct of the flight, and
- is providing insurance and/or otherwise addressing any civil liability that can come out of a flight.
Other than in situations where the aircraft and aircrew are explicitly provided together, no one of these items is absolutely dispositive in and of itself.
And although what the lease says on its face can be very important, the more these factors collectively point to one person (who, by the way, can be the lessor, the lessee, or even a management company or pilot who is in the middle and arranging everything), the more likely it is that this one person has assumed operational control of the aircraft.
And, if that one person is not the lessee, then the agreement you are looking at is not a dry lease.
Keep in mind the old saying: “if it looks like a duck, and walks like a duck, and quacks like a duck, then it’s a duck.”
A Chief Counsel Interpretation Letter issued as recently as December 28, 2017, summarizes the situation nicely:
“If the aircraft is dry leased, the FAA will conduct a case-by-case analysis to determine whether the companies assumed operational control of the aircraft. The Agency will evaluate Lessee’s discretion to procure independent flight crews, and will look for any pattern of evidence that denotes that the parties to the lease agreement ‘acted in concert’ through a combination of transaction or dealings to furnish a ‘leasing package’ that includes both the aircraft and crewmembers.
The FAA will consider who maintains liability for the operation of the flights, who conducts maintenance, and who dispatches the Aircraft.
The goal of conducting this analysis is to identify and prevent execution of ‘wet leases in disguise’ which seek to avoid part 119 certification.”
Ultimately, someone will have operational control of the flight.
If the lease has successfully transferred that control to the lessee, then the lease can fairly be called a dry lease.
If not, then operational control resides with either the lessor or some other party (such as the manager); and, that person with operational control:
(a) is most likely the very definition of a commercial operator—a person who transports persons or property for compensation or hire, and
(b) most likely must obtain commercial certification and conduct the flights in question under the applicable commercial rules, such as Part 135.
Additionally, even when a true dry lease is in place, that does not necessarily end the inquiry.
Just because a lessee has assumed operational control of the aircraft under a dry lease does not necessarily mean that the lessee can conduct its flights under Part 91.
For example, if the lessee is actually a “flight department company,” then that company would still need to obtain an air carrier certificate and conduct its flights under Part 135.
Moreover, if a dry lease transfers operational control to a lessee, who then turns around and further leases the aircraft to others in exchange for compensation, then the first lease may be dry but the second one is most likely wet.
In short, you cannot stop just at the level of the first lease, but need to drill down to the final operator of the actual flights in question to see if they can be conducted under Part 91 or must be conducted under Part 135 instead.
CONSEQUENCES
What are the consequences of doing all of this wrong?
First, from the regulatory standpoint—and keeping in mind that one of the FAA’s fundamental regulatory obligations is to protect the safety of passengers, especially when commercial operations are involved—you have to understand…
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The Problem of Illegal Charter (Continued from page 31)
…that the FAA strongly opposes commercial operations conducted without having the appropriate authority to do so.
Such activity can, therefore, lead to some of the highest civil penalties available under the FAR—meaning penalties that can be in the tens-of-thousands to hundreds-of-thousands of dollars by the time you are through.
Moreover, depending on the particular circumstances, the FAA could also turn to certificate suspensions or even revocations for the airmen and agencies involved, and if the activity is intentional and egregious enough, the guilty individuals could be even looking at a visit to the local federal prison.
With respect to civil liability consequences, if an accident or incident occurs during a flight that is supposedly conducted under a dry lease that is later determined to be wet, that operator may very well find itself in state court defending against significant claims for damages.
Most states impose the highest standard of care against common carriers, such as those operators that are acting as commercial operators (whether they know it or not), which in turn makes it easier to find liability against, and to assess higher damages on, those operators.
Now put on top of that the question of whether or not that operator’s insurance carrier will stand up and provide coverage under the operator’s non-commercial or business-and-personal use insurance policy after the FAA has determined that the flight in question was actually an illegal charter flight, and the operator could end up being in a very bad place.
Finally, illegal charter activity creates a significant threat to the air charter industry, and, therefore, to the entire traveling public.
It creates an unfair playing field that arguably encourages people to not follow the rules, or drives those operators who are trying to follow the rules out of business because they cannot compete with the operators who do not.
That, in turn, reduces the relative number of safe charter operators that are available for the traveling public to pick from.
Again, this is not to say that all appropriate dry leasing is bad. But sham dry leasing can be very bad for those persons who have no idea what is going on with the aircraft and simply want to pay someone to get them from point A to point B.
CONCLUSION
What is one to do?
First and foremost, educate yourself enough to know what the proper parameters are for true dry leasing.
Second, if you are inadvertently conducting flights under Part 91 through improper wet leases that should be flown under Part 135, either fix it or stop conducting those flights for all of the reasons noted above.
Finally, if it appears that someone else is conducting Part 91 flights under what are really wet leases in disguise, then call the FAA and let them know.
One of the FAA’s key responsibilities is to enforce its own regulations, and this is one of the most important regulations in place.
But FAA aviation safety inspectors are not, and cannot be, everywhere at once; they often need a hand if there are bad actors out there who are not doing it right.
At the end of the day, for the sake of the safety of the traveling public—and for the sake of those industry members who are actually doing it right—let the FAA know of potential violators so they can check to see if, in fact, those dry leases are just a little too damp.
Author Bio
David T. Norton is a partner and head of the aviation practice at the law firm of Shackelford, Bowen, McKinley & Norton, LLP, in Dallas, Texas.
He holds:
- a B.S. from the USAF Academy,
- an M.B.A. from Louisiana Tech University, and
- a J.D. from Southern Methodist University Law School.
He focuses exclusively on business aviation industry regulatory, transactional, tax, dispute resolution and risk management issues.
He is active in aviation-industry committees and previously served as a commissioned officer in the U.S. Air Force from 1984 to 1993 as a KC-10A pilot and aircraft commander.
He currently holds FAA certification as:
- an airline transport pilot (multi-engine land) with a DC-10 type rating,
- a commercial pilot (single-engine land), and
- a certified flight instructor, instrument and multi-engine instructor, and advanced ground and instrument instructor.
Contact:
- Phone: (214) 780-1407
- Email: dnorton@shackelfordlaw.net
