(Playing Nice – Balancing Costs and Scheduling Priorities)
Buy a plane and control costs by sharing the aircraft with another business owner. Intriguing, but do you work and play well with others?
You recently expanded and now need to visit new plants each located about 3-5 hours driving time from your office. Coincidentally, a local aircraft owner is retiring and selling their one-half of a plane. You are offered the interest, but you only know the remaining owner of the plane by sight from attendance at local business functions. They fly you to visit one of the new plants. What a time-saver! Your lawyer and accountant recommend caution. How do you determine if this particular time-saver is a sound purchase?
What are you Buying
First, determine what is for sale. Is it an interest in the plane itself or an interest in an LLC which owns the plane? This is an important distinction in aviation.
Inspect the Plane
Regardless of the answer to the first question, the plane is what you are paying for. You need to hire an experienced professional to advise you on the condition of the aircraft and to determine that it is airworthy. Do not rely on the pilot to tell you that he has been keeping the aircraft in pristine condition. When you buy a used car from an individual you take it to an independent mechanic. Take the plane to an independent mechanic. Have the records reviewed to confirm they appear to be accurate and complete and reflect that all required work has been performed and that the aircraft is current on its maintenance. An experienced mechanic should also perform a physical inspection of the aircraft. The scope of the inspection will vary by aircraft so obtain a recommendation from the mechanic of what inspections they recommend. The mechanic can provide an estimate of the time and expense involved in both the records review and the physical inspection. You also need to know if any FAA mandated equipment needs to be installed or upgraded on the plane. Costs can add-up fast and if you think you are buying an already upgraded plane, you need confirmation that those upgrades were already installed.
Check the Aircraft Registration
You also need to look at the registration of the aircraft. Do not rely solely on what the current owners tell you about the ownership of the aircraft. You need to know who the FAA records show as the registered owner. If an LLC is the registered owner, obtain a copy of the LLC Statement on file with the FAA. This will tell you who the LLC told the FAA was authorized to sign important documentation, such as a bill of sale selling the aircraft. Does the FAA show any current liens on the airframe or any of the engines? Are all prior liens properly released? A prior lender may have filed a lien against the airframe and engines, but only released its lien from the airframe. You want this addressed before you buy into this time-saving asset. There are FAA-specific title companies who will provide FAA searches with this information. For some aircraft, you also need to obtain a report look at the International Registry, which is also called the Capetown Registry or the “IR”. The FAA title company can tell you if you also need to order an IR report. An experienced aviation attorney can assist you with obtaining and evaluating these reports.
Review Financial Information
Financial information also needs to be reviewed. Ask for any budget projections regarding the operation and maintenance of the aircraft, as well as tax returns for the past few years, and a copy of any ledger along with bank statements for any account associated with the aircraft operations.
Avoid Buying a Liability
Besides making sure you are buying a quality asset, you want to avoid buying into prior liabilities.
Check the Insurance
Insurance is important in the operation of the aircraft. Look at what company issued the policy as well as identifying the hull and liability coverages, the annual premium and ask the current owner about any claims history.
Review Corporate Records
If you are buying an LLC that owns the aircraft, you also need to perform corporate due diligence on the LLC as an entity. At a minimum, obtain copies of the following: (i) operating agreement and any amendments; (ii) certificate of formation; (iii) annual reports filed with the secretary of state’s office; and (iv) any minutes or consents by the members or managers. Have there ever been any employees? Were all governmental filings completed properly and on time? If you buy an ownership interest in the LLC you are buying an interest in any problems that come to light now, even if someone else caused the problem several years ago.
Review Prior Aircraft Operations
Ask how the aircraft has been operated. Who employs the pilots? Who pays the pilots. What companies and individuals use the plane? Who has made any payments for the plane, pilot or flights? Are there any leases, timeshare agreements or interchange agreements? How do they schedule flights? Does anyone have scheduling priority? How do they handle requests from multiple owners to fly on the same day? Will the other owner use the plane primarily for personal fights or for business flights? You are buying into an existing “system” so you need to ask questions to learn that system and determine if it fits your needs. You also need to know if you are buying into potential FAA civil penalties or other potential violations. If the aircraft has been operated in violation of the Federal Aviation Regulations (FARs) in the past, will the remaining owner change and correct any operational deficiencies to comply with the FAA regulations or are they unwilling to change the existing system of operation?
The Plane Is Not Your Sports Car
Although you want to have a pre-owned plane inspected before purchase, like you would if you bought a pre-owned car, it is important to remember that the operation of your plane is subject to more federal regulations than your sports car. You can loan your sports car to a friend for a weekend so he can impress his date. He can drive the sports car himself and pay you for the gas. If you loan your plane and pilot to a friend and ask them to pay you for the fuel, you may owe tax to the IRS, may be subject to FAA civil penalties and may have just voided your insurance.
The Plane Is Not Your Vacation Cabin
The operation of your plane is also subject to more federal regulations than your vacation cabin. You can let your friend use your cabin for a weekend in exchange for tickets to a sporting event. If you loan your plane and pilot to a friend in exchange for any consideration (cash, sports tickets, a weekend at their vacation cabin), you may owe tax to the IRS, may be subject to FAA civil penalties and may have just voided your insurance.
Aviation regulations are based on safety concepts. They are not intuitive, are not located in one easy-to-read website and are frequently misunderstood even by those in the aviation industry. Obtaining the advice of an attorney experienced in working with business planes will help you remain in compliance with the aviation regulations.
Document your Agreement with the Other Owners About Future Operations
It is important that each owner knows how they want to utilize the aircraft and believe that they will be able to share the plane with the other owners. Each person involved must “work and play well with others”. This concept is crucial when sharing an aircraft. If any owner is inflexible, has an uncontrolled temper or flies the plane significantly more than other owners, you want to know this before you spend money to have this person become part of your life. You want a time-saving asset to help run your business. You do not want a headache. An experienced aviation attorney can provide insight on what questions to ask and how to interpret the answers as well as help the parties document their agreement on significant issues.
Future Operation Considerations
You want to ensure you have agreement on the following important issues when you share your aircraft
–What, if any, rules will there be for scheduling the aircraft? This is a significant issue that is often forgotten. A face to face meeting to discuss how each owner wants to utilize the aircraft can be invaluable
–Will there be any limit on the number of flight hours annually for each owner? If flight hours are limited, how will requests for excess hours be handled? Will that owner pay an increased cost for the excess flight hours
–How will repositioning flights be handled? What is an owner flies to their vacation home and stays for a week, but the other owner wants to fly the aircraft on a business trip that week. Who pays for flights from the vacation home to the home base and back? Will these repositioning flight hours count against an owner’s annual allowed flight hours
–Do all owners agree on the insurance policy coverages to be purchased
–How will the owners decide if optional future upgrades will be made to the plane
–Will an owner who fails to pay his share of the costs be allowed to fly the aircraft? Will a defaulting owner be required to sell his interest after repeated defaults? If the other owner defaults and you want to fly the aircraft you will pay all of the expenses and may never be reimbursed
–What will occur if one owner wants to or must sell its interest? Can that owner require the remaining owner to buy them out or will the party who is either defaulting or wants to sell own the interest and pay (or fail to pay) his share of the expenses until a buyer can be located? Will the remaining owner have any approval rights over the new owner?
It is important that the owners agree on significant ownership and operational points. It is best to document the agreement in a written agreement at the time of purchase. Each party will have a different memory of their verbal agreement at the time of a default or accident. You want a plane to save you time, not a headache. An experienced aviation attorney can provide insight on what questions to ask and how to interpret the answers.
Determining whether a shared aircraft is right for you can be difficult. There is a wide variety of information to obtain and evaluate before you decide to share a plane. Obtaining the advice of an attorney experienced in corporate aviation can help reduce costs and help to ensure a positive aircraft ownership experience.
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. Michelle Wade (firstname.lastname@example.org)