When asked what had been keeping him busy re-cently, an attorney in theFederal Aviation Administration’s(FAA) regional counsel’s office replied: ‘inappropriate cost sharing for flights.’ He noted that they would occasionally see—especially during times of economic stress—an increase in operators trying to mitigate their ownership and operating costs by cost sharing on flights in a way that ran afoul of the FAA’s rules govern-ing commercial operations—that is, operators conducting flights under 14 C.F.R. Part 91 (Part 91) when they should have been conducted under 14 C.F.R. Part 135 (Part 135). This article provides a quick refresher—primar-ily from an FAA rules perspective
but also with some Internal Revenue Service (IRS) rules observations thrown in—on when an operator can
fly under Part 91 or when that opera-tor needs to conduct (or have con-ducted) its flights under Part 135, so no one has to give painful answers to FAA questions regarding those flights.
Some Basic Definitions: When do “Persons” Become “Commercial Operators?”
The FAA defines the “operator” of an aircraft to be a person (meaning either an individual natural person or some kind of business entity) who uses or authorizes the use of an aircraft. And, for any given flight, the person who is the “operator” of the flight is the person who is exerting “operational control” over that flight.
The FAA further defines a “commer-cial operator” as “a person who, for compensation or hire, engages in the carriage by aircraft and air commerce of persons or property…. Where it is doubtful that an operation is for ‘com-pensation or hire,’ the test applies whether the carriage by air is merely incidental to the person’s other busi-ness or is, in itself, a major enterprise
for profit.” Stated another way: If the person who is exerting operational control over a flight is an “operator”
carrying “persons or property” for “compensation or hire,” then that per-son is acting as a “commercial opera-tor.” But what does that really mean?
When looking at who, exactly, the FAA considers to be the operator of a flight, the starting presumption is the registered owner of the aircraft. If it is not the registered owner, then it should be a person (again, be it a company or an individual) who has
taken over possession and use of the aircraft from that registered owner through some form of lease or operat-ing agreement (which must be in writing if you are dealing with what the FAA defines as a “large aircraft”). At least three misunderstandings
commonly attach to the FAA’s defini-tions regarding aircraft operators.
First, note that you can have multiple legal operators on any aircraft. This does not mean that you can have more than one operator con-ducting a particular flight. What it does mean is that different operators can have access to a specific aircraft
on different days or for different flight segments on any given day. Examples of this range from the pool of aircraft that are owned by flight schools and rented for the purpose of individual flight instruction all the way up to complex business aircraft held in leasing companies that are then “dry leased,” i.e., leased without crewmembers, to differ-ent operators on different days.
Second, pilots are generally notoperators in a business aviation setting. A pilot can be an operator if that pilot owns or leases the aircraft for his or her own purposes. But, when the pilot is hired solely as a professional to serve as the pilot-
in-command for someone else, or when an aircraft manager is engaged solely to provide those individual pilots for someone else, that does not mean—even though the pilot is responsible for insuring the flight is conducted safely—that the pilot or the manager is the legal “operator” of the aircraft (i.e., the person who gets to say where that airplane is going on a given day). That right still rests with the registered owner or a dry lessee
Finally, there is a very big differ-ence between the FAA’s rules and the IRS’s rules regarding the status of aircraft operators. While the IRS recognizes the concept of “disre-garded” or “pass through” entities in certain limited circumstances dealing
with income tax reporting, the FAA does not. Under the FAA’s rules (and in most, if not all, other areas of the law), just because a person (referred to here as “Ms. A” for the purpose of illustration) owns a disregarded- entity limited liability company (referred to as “AirplaneCo, LLC” or simply “AirplaneCo”); and AirplaneCo in turn owns an airplane, that does not mean that Ms. A owns an air-plane—she owns AirplaneCo, and AirplaneCo owns the airplane, and those are very bright and solid lines
of separation under the FAA’s rule
Once you have identified who the operator of the aircraft is on a particular flight, the next question is whether or not that operator is car-rying “persons or property.” Here the person that the FAA is talking about is basically any individual person
other than a required crew member (and in a similar vein, the property component is anything of value other than something belonging to that crewmember) that is being moved from point to point with the aircraft. And, just like the concept of individu-
als who are owners or members of companies that in turn own airplanes, if Ms. A gets on board the aircraft owned by AirplaneCo as a passenger, then Ms. A is no different than any other passenger and this separate “person” element of the commercial
operator definition has been met.
Finally, the last element of this “commercial operator” definition is the “compensation or hire” element. One of the big problems in this area is that most people commonly think of the “or hire” element—where someone is holding out to the public
and making the aircraft available to anyone who wants to pay for the flight—as the only commercial opera-tor circumstance. While that is clearly one kind of commercial operation, what many people miss is that the definition is not “compensation and
hire,” it is “compensation or hire,” and that simply paying some amount of compensation to the operator—in any form, and in any amount (a profit motive is not required!)—can also constitute, in and of itself, a commercial operation of the aircraft.
Common Problem—“Flight Department Companies”
These definitions lead to what is, arguably, one of the most common regulatory violations in the realm of charter and business/personal-use aircraft operations—the use of what the FAA calls “flight department com-panies” to act as Part 91 non-commer-cial aircraft operators. To understand the problems created by the use of flight department companies, it is im-
portant to first know when a person can legally operate solely under Part 91 in general. Keeping in mind the basic rule that a “commercial opera-tor” is defined as an operator carrying persons or property for compensation or hire, where an operator is an indi-vidual person who is paying 100% of the flight costs out of his or her own pocket (whether or not passengers are on board), that operator is not a com-mercial operator because he or she is not receiving any compensation.
Likewise, if the operator is a company that is a business generating enough money to fly the airplane incidental to its business activity without having to get money from someplace else to cover flight expenses (again whether or not passengers are on board), then it is still not a commercial operator because that company is not receiv-ing any compensation. In this second
case, let’s call, for example, such an operator a “WidgetCo,” refer-ring to a company whose primary business (and therefore cash flow) comes from widget manufacturing and that is using the aircraft inci-dental to and within the scope of its widget manufacturing activities. Conversely, where that natural person operator is splitting costs with passengers (setting aside the
separate issue of private pilots be-ing able to split fuel costs in limited circumstances without having to get a commercial pilot certificate), or where a WidgetCo operator is getting funds from someplace else—either from other companies or even from
its own underlying owners, em-ployees, or guests—to help cover its flight costs, that operator has now become a commercial operator.
Now consider the example intro-duced above where Ms. A creates AirplaneCo to buy an airplane. If Ms. A does not cause AirplaneCo, whose sole business activity is to hold title to an airplane, to then lease that airplane to some other person
(which could be to Ms. A herself, or perhaps to a certificated charter operator that will then fly the aircraft under Part 135), but instead treats AirplaneCo as the person who is the actual operator of the aircraft and she simply makes either capital contribu- tions or payments to AirplaneCo to cover the flight costs, then AirplaneCo has become a commercial operator.
AirplaneCo is the separate “person” who is the “operator;” and, as the operator, it is carrying other persons (even if it’s only Ms. A) for “compen-sation” (in the form of the capital con-tributions or cost reimbursements) for the flight. Another common
variant of this is a company that has been set up as a Part 91 management company to provide pilot and man-agement services, either to its under-lying owners or to separate aircraft owners, as its main or sole source of business activity, and that assumes operational control of the aircraft for the benefit of those owners or cus-tomers. In either event, these types of companies—mere holding or mere management companies whose sole purpose is to fly passengers around and be reimbursed by other persons or companies to do it—are called flight department companies by the FAA, and the FAA considers them to be per se commercial operators.
In summary, if you are an in- dividual or a company that oper-ates and pays for your own flights out of your own pocket, then you are a non-commercial operator. Conversely, if you are a person or a company that receives any amount of compensation, in any form or fashion, to help cover the costs of a passenger-carrying flight, then you are a commercial operator.
So You Are a Commercial Operator—Now What?
Now that you have a grasp of what the FAA considers to be a commercialoperator, you can start the analysis of which operational rules you can fly under—just Part 91, or does the flight need to be operated under Part 135 instead? Keep in mind that this
analysis needs to be conducted on a flight-by-flight basis, and, again, starts with the simple test: Who is the “operator” of the flight, and is that operator carrying “persons or property” for “compensation or hire?” If you are a person or a company such as the WidgetCo, using theaircraft for your own personal or business use and paying all of the flight costs out your own pocket, then the answer to the question is ‘No,’ you are not a commercial operator and can fly under Part 91.
If the answer is that you are usually a non-commercial opera-tor, but you would like to do a little cost sharing on occasion, then the next question is whether or not you can fit into one of the exemptions crafted by the FAA to allow for some limited reimbursement arising from the use of the aircraft when you are not doing so as a way to indirectly hold out to the general public. These exemptions are primarily found at 14 C.F.R. Section 91.501, and include concepts such as time sharing agree-
ments, demonstration flights, joint- registered ownership agreements, and interchange agreements. All of these exemptions are actually quite narrow and can be very tricky to do properly (and a further discussion of them is well beyond the scope of
this article); but the main point here is that these exemptions cannot, on their face, be used by operators that are certificated charter companies or that are flight department companies.
In both of those instances, the FAA has made it very clear for some 40 years that such operators are per se commercial in nature and must have Part 135 certification—and oper-ate each flight under Part 135—in order to conduct passenger flights.
Stated another way, if you are a flight department company and you want to carry passengers and get reimbursed for it, then you must obtain your own Part 135 certificate. If you don’t want to do that, then your only option becomes leasing or transferring operational control of the aircraft to some person who is a legal Part 91 operator as set out above, or to someone else who holds a Part 135 air carrier certificate. And, if you are a company whose primary business is holding such an air carrier certificate to get paid to carry passengers around, then you can only operate (i.e., assume and exercise operational control
over) such passenger flights under Part 135—a key to the next common problem facing charter operators.
Other Common Problems for Charter Operators—“Part 91 Owner Flights” and Part 91 Authorizations
Many charter operators lease aircraft from registered owners on a non-exclusive basis, with the un-derstanding that when the charter operator is conducting third-party charter flights, those flights will be conducted under Part 135, and when the charter operator has the aircraft owners, members, employees or their guests on board, those flights will be conducted as non-commercial
operations under Part 91—commonly referred to as “Part 91 owner flights.” What is really going on here is that when the flights have charter pas-sengers on board, then the lease acts to transfer operational control of the aircraft to the charter operator, who then has the certification to act as the commercial operator of those flights and be paid to do so. Conversely, when the aircraft owner wants to conduct its own flights under Part 91, then the owner retains opera-tional control of the aircraft and the charter company becomes a “mere Part 91 management company” that is no longer exerting operational control over the aircraft but instead is simply assisting the aircraft owner in its own operation of the aircraft (keeping in mind that a certificated
air carrier can basically never retain operational control of an aircraft and carry passengers under Part 91).
This concept works great where the registered owner of the aircraft is a legal Part 91 operator as described above, e.g., a natural person operating the aircraft for his own purposes and at his own expense, or a WidgetCo using the airplane incidental to its widget manufacturing. But big problems arise when such an aircraft owner is a flight department com-pany. As noted above, flight depart-ment companies cannot conduct their own Part 91 flights because the FAA considers them to be per se com-mercial operators. What does this all mean? It means that if the charter operator views itself as the “operator” and is carrying passengers around on those flights—regardless of how those individuals are related to the flight department company that is
the lessor of the aircraft—then those flights must be conducted under Part 135, not Part 91. Conversely, if the charter operator does under-stand that operational control rests with the flight department company instead of it during such flights, then this means that the flight depart-ment company is now acting as an uncertificated, and therefore illegal, commercial operator. In short, when an aircraft owner and lessor ask a certificate holder to assist in conduct-ing Part 91 flights for that lessor’s
benefit, it really behooves the certifi-cate holder to make absolutely sure that the lessor is not a flight depart-ment company, but instead is a legal Part 91 operator in its own right.
Another problem that commonly arises with respect to Part 91 owner flights deals with the various Part 91 letters of authorization (LOAs) that are required for those flights. It is entirely possible and permitted under the FAA’s rules for there to be multiple permitted operators for a given aircraft for different flights. It is critical to understand that Part 91 LOAs are just that — specific authorizations that are issued to specific Part 91 operators for the conduct of certain specific types of operations by those operators. Using Reduced Vertical Separation Minima (RVSM) operations as an example, the rules are very clear that each individual operator of an aircraft must have its own authoriza-tion to conduct operations in RVSM airspace. That authorization for Part 135 air carriers comes in the form of Part 135 operations specifications or OpSpecs. Just because the Part 135 operator has its own RVSM OpSpecs authorization does not mean that a different Part 91 operator of that aircraft can use the charter opera-tor’s authorization. A Part 91 flight conducted by a different operator—maybe WidgetCo or another lessee of the aircraft—cannot simply use the charter operator’s RVSM OpSpecs authorization, but each must instead obtain its own authorization in the form of separate RVSM LOAs. And this same concept applies to any other special authorization that is
issued in the name of the operator.
Ramifications?
So what are the possible results that arise from all of these confus-ing issues? In short, if the proposed operator is a flight department company, then that company may become subject to significant civil penalties for conducting its per se commercial flights under Part 91. If a certificated air carrier is conduct-ing operations for that flight depart-ment company and agrees to fly the aircraft under Part 91, then it may be subject to an FAA action against its own certificate. If operators are conducting flights that require special authorizations they don’t individually hold, then that can lead to civil penal-ties as well. And all of these issues don’t touch on separate certificate actions the FAA could take against the pilots individually, as well as
significant denial-of-coverage issues that could arise with respect to the operator’s insurance. Finally, it is also important to note: if you are conduct-ing, what the FAA considers to be, a commercial operation (even when you don’t realize it), then you very likely may be conducting an operation the IRS considers to be commercial in nature as well, and therefore could be subject to federal excise taxes for that flight—but that is an issue for another article on a different day.
Conclusion
These rules can admittedly be very confusing, and noncompliance is rampant, but the fact that non-compliance is common won’t save you if you are the operator that has come to the FAA’s attention. So what is someone to do? The short answer is that for each, separate flight of an aircraft, the parties need to go through the following analysis:
First, identify who is the opera-tor of the aircraft. Is it the registered owner, or is it a party such as an individual or an air carrier that has assumed operational control of the aircraft under a dry lease?
Second, ask if that operator is receiving any form of reimburse-ment compensation or value in exchange for conducting the flight. If the answer is no—the operator is an individual covering the costs herself, or is a company using the airplane incidental to its underlying business with no reimbursements being sought or paid in either case—then go forth and fly under Part 91. If the answer is yes and the opera-tor is the certificate holder who is being paid to carry passengers under Part 135, then that analysis is easy—go conduct the flight as permitted under its Part 135 certificate. If it is a company that is using the aircraft incidental for its business use, then further analyze the situation to see if any of the 91.501 exemptions ap-ply. If they don’t, then either don’t accept any reimbursements or find a way to have the flight conducted under Part 135. And finally, if the proposed operator is a flight depart-ment company—don’t do it! Don’t become an operator under “Part 134
½”. Either have the flight conducted under Part 135 by the air carrier or look at some other option, such as dry leasing the aircraft to parties that can act as their own Part 91 operators.
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
