Does the FAA allow your CEO to pilot the plane? Business entities are intertwined and complex. Fortunately, a December 2017 FAA interpretation (Procopio, December 28, 2017) clarifies that if you follow the FAA regulations, the FAA allows the CEO pilot to fly aircraft for the company while you operate your aircraft under Federal Aviation Regulation (FAR) Part 91, even if your operation involves several entities.
–Individual A is a pilot, shareholder of Company B and the CEO of Company
–Company B is a special purpose entity that owns a jet aircraft
–Company C wants to dry lease Company B’s aircraft to use in Company C’s business
–The lease complies with all of the FAR 91.23 truth-in-leasing requirements
–There will be no consideration from Company C to Company B for the lease of the aircraft
–Individual A, in his capacity as CEO of Company C, will fly the aircraft on behalf of Company C
–Individual A will not receive any compensation for his pilot services
–Company C will enter into a management services agreement with an unrelated third party, to provide a second pilot and fuel services
The Regulatory Factors
First the FAA looked at FAR 91.501. Section 91.501(b)(5) allows operations, when common carriage is not involved, including “Carriage of officials, employees, guests, and property of a company on an airplane operated by that company, or the parent or a subsidiary of the company or a subsidiary of the parent, when the carriage is within the scope of, and incidental to, the business of the company (other than transportation by air) and no charge, assessment or fee is made for the carriage in excess of the cost of owning, operating, and maintaining the airplane, except that no charge of any kind may be made for the carriage of a guest of a company, when the carriage is not within the scope of, and incidental to, the business of that company.”
As you can see above, 91.501(b)(5) allows a company to operate an aircraft under Part 91 in furtherance of its own business activities (not related to air transportation), when it either owns or leases the aircraft, as long as the company retains full operational control of the flights.
The FAA clarified in its interpretation that, as a general rule, if an entity does not operate an aircraft, but rather its sole purpose is to own and lease the aircraft, then the entity is not required to become certificated under Part 119 of the FARs.
The lease must:
–Comply with all regulatory requirements, including the FAR 91.23 truth-in-leasing provisions;
–Be duly executed;
–Effectively transfer operational control and related responsibilities to the operator; and
–Conform to applicable law, regulations and formalities of the jurisdiction governing the lease.
Factors FAA Reviews to Avoid “Wet Leases in Disguise”
The FAA performs analysis of each dry lease on a case-by-case basis to determine whether the lease is a proper dry lease and whether the lessee effectively assumed operational control of the aircraft. The FAA’s goal is to prevent “wet leases in disguise”. Accordingly, factors the FAA considers include:
–Lessee’s discretion to procure independent flight crew;
–Any pattern of evidence that the parties “acted in concert” through a combination of transactions or dealings to further a “leasing package” that includes both aircraft and crew;
–Who maintains liability for the operation of the flights;
–Who conducts maintenance; and
–Who dispatches the aircraft.
The Law Applied to the Facts
The relationship of Individual A, the pilot, to the various parties was reviewed. The mere fact that the pilot is concurrently a shareholder of Company B, the aircraft lessor and the CEO of Company C, the lessee and operator of the aircraft, does not, by itself, denote the presence of a wet lease arrangement.
Other facts which the FAA reviewed and which the FAA interpretation states do not suggest the presence of a wet lease in disguise are:
–There is no indication that Individual A, the pilot, flies for, nor has any relationship to Company B, other than as a shareholder.
–Company B, has no employees. Thus, it cannot hire out any employees to provide any kind of flight services to Company C. The sole purpose of Company B is to own and lease the aircraft to third parties.
–Company C appears to have independent discretion in procuring flight crews. It intends to use the services of Individual A, the Pilot, an employee of Lessee and will also contract with an independent third party company to obtain additional flight crew, services and facilities.
–Individual A, the pilot, will fly Company C’s leased aircraft in his capacity as an employee of Company C and will not receive compensation for his services. Individual A’s core responsibility with Lessee is in his capacity as CEO and piloting the aircraft is not a condition for his employment or professional advancement at Company C.
–Company C, as lessee will assume all operational control and related responsibilities and liabilities and will operate the aircraft as if it were Company C’s own aircraft for the term of the lease.
Lease Agreement is a Dry Lease
Based on these factors the FAA interpretation states that the lease agreement described in the facts can be categorized as a dry lease.
This FAA interpretation appears straightforward, but before you use it to support your own aircraft structure, look at some of the important facts. Company B is a sole purpose entity and doesn’t pretend to be anything else. It owns an aircraft, but does not operate the aircraft, it only leases the aircraft. Company B does not have any employees, which makes it easy for Company B to avoid providing pilot services to Company C. Company C employs the pilot and also hires a second pilot from an independent source. Company B does not have control over who Company C uses as its pilot. The aircraft lease from Company B to Company C is also straightforward. Company C assumes all operational control and related responsibilities and liabilities.
Hiring professional advisors with experience in structuring business aircraft can help you avoid time consuming and costly mistakes.
Michelle M. Wade is a Partner with the aviation law firm of Jetstream Aviation Law, P.A. and counsel clients on the acquisition, financing and operation of corporate jets operated under Part 91 and Part 135 of the US Federal Aviation Regulations. Jetstream Aviation Law can be found at www.JetstreamLaw.com.