What is in the Flight Department’s Blind Spot?
Avoid Business Changes creating Unnecessary Flight Department Risk
You are successfully managing an active flight department. You have years of flight experience and training, type ratings, and the respect of your peers and subordinates. You are IS-BAO certified. What are you missing?
Critical Business Information
Your focus on the flight department accompanied with the rest of the company’s failure to notify the flight department about business changes which affect the flight department create blind spots.
Business Changes Affect the Flight Department & Create Flight Department Risk
Business changes may include:
- Foreign investment in the company in exchange for an ownership interest in the company
- A new president who is not a US citizen
- A public stock offering
- Merging two entities, with the non-surviving entity being the one which owns or leases the aircraft
- Converting the entity which owns the aircraft into a general partnership or a limited partnership
- Transferring a business unit (that uses the aircraft) from one entity to another entity
- Changing the company’s address (main office or hangar) that is used for the aircraft registrations
The flight department is rarely told about any of the above and if the same individuals continue to fly on the aircraft, the flight department does not have any reason to know about the changes. This lack of information becomes a blind spot for the flight department.
Flight Department Risks Created By Blind Spots
Some business changes may result in the aircraft registration becoming invalid. An invalid aircraft registration invalidates your certificate of airworthiness. In addition to FAA issues, this may create issues with your insurance coverage and probably violates the covenants in any financing on the aircraft.
Other business changes may result in an entity that did have a business purpose and which operated the aircraft, becoming an entity with no business purpose other than operating the aircraft. This type of operation violates the Federal Aviation Regulations (FARs) and could result in FAA civil penalties, additional federal taxes, penalties and interest and possible denial of coverage by your insurance in the case of a claim.
Business changes mean that certain dry leases, timeshare agreements, interchange agreements, aircraft management agreements, jetcards or fractional interests may need to be reviewed and updated or terminated.
How to Identify Business Changes that Create Flight Department Risk
A two-prong approach is best for the flight department to minimize its risk from blind spots.
Educate the Legal Department, Risk Manager and Accounting Department to Avoid Flight Department Risk
First, educate the legal department, the risk management contact and the accounting department on the risks that may be inadvertently introduced if the federal statutes, FAA regulations governing aircraft and the insurance policy requirements are not followed. In June, 2018, the FAA issued a press release proposing a $3.3 million civil penalty against a company for what was supposed to be a Part 91 timeshare flight, but which the FAA alleges were operated as a commercial operation without the appropriate commercial authorizations. At the time of this writing, the parties were facing off in Federal Court. A $3.3 million governmental penalty is a significant risk and also creates a negative reputation for a company. Even if fully vindicated, the time and expense of the process could be avoided by a less expensive and less time-consuming periodic review by experienced aviation counsel.
Legal Department Education
The legal department is an obvious choice to educate about aviation statutes and regulations. This needs to be an ongoing process as there will be personnel changes and you will not know which in-house counsel may work on a business change that affects the aircraft. The flight department can collect a few articles on relevant topics and circulate them to the legal department.
The legal department is likely to know about:
- New foreign ownership in the company
- A new president who is not a US citizen
- A public stock offering
- Merging two entities, with the non-surviving entity being the one which owns or leases the aircraft
- Conversion of the entity which owns the aircraft into a general partnership or a limited partnership
- Transferring a business unit (that uses the aircraft) from one entity to another entity
- Changing the company’s address (main office or hangar) that is used for the aircraft registrations
Risk Manager Education
The risk manager is also an obvious choice to educate about aviation statutes and regulations. This also needs to be calendared so that you periodically remind the risk manager of aviation risks. They deal with other business risks every day, but may only periodically deal with anything involving the flight department. The flight department can collect a few articles on relevant topics and circulate them to the legal department. The risk manager is likely to know about many of the same issues as the legal department. It never hurts to have more people with knowledge that what they are doing may affect whether the flight department and the aircraft operations remain in compliance with FAA statutes and regulations.
Accounting Department Education
The accounting department may not be as obvious a choice for aviation education, however, this department can be more important than you know. At the time the ownership and operating structure of each aircraft were created, the individual in the accounting department was told how to deal with the aviation funds. The initial instructions may include information that:
- FAA regulations require that for a dry lease the lessee must write two separate checks, one for the flight crew and one for the lease of the aircraft
- FAA regulations require a cap on the amount that is paid for a timeshare and that the federal excise tax must be collected and remitted on a timeshare flight
- FAA regulations do not allow an executive to reimburse the company for a personal flight on the company aircraft
Over time, the individual in the accounting department is told to produce more work in less time. They expedite their workflow by combining checks for the aircraft and crew for a dry lease and forget that there is a cap on the amount that a timeshare lessee can be charged for a timeshare. There may be a change in personnel in the accounting department. The flight department is not aware that the new accounting personnel was not informed that FAA regulations require certain payments to be handled a certain way. The new personnel see a way to expedite their workflow by combining checks for the aircraft and crew for a dry lease and never knew that there is a cap on the amount that a timeshare lessee can be charged for a timeshare. A later FAA investigation or an insurance company investigation after a large claim, may produce unfortunate results as a result of this blind spot.
Flight Department Legal Review
To remain in in compliance with FAA statutes and regulations, the flight department can periodically request information from other departments to help the flight department identify business changes that may affect the flight department. Experienced aviation counsel can help the flight department identify questions to ask. Some changes will not have any effect on the flight department or the aircraft. Other changes can be discussed with an aviation attorney to determine if the business change affects compliance with FAA statutes and regulations.
The two-prong approach of education and asking questions, allows the flight department to timely identify changes and address any issues created by the changes.
Taking affirmative action can help the flight department determine if any business changes affect legal and regulatory compliance by the flight department. The use of an attorney experienced in corporate aviation can help reduce costs and help to ensure a positive aircraft ownership and operating experience.
Michelle M. Wade is a partner with the law firm of Jetstream Aviation Law and counsels clients on the acquisition, financing and operation of corporate jets operated under Part 91 and Part 135 of the Federal Aviation Regulations. Jetstream Aviation Law can be found at www.JetstreamLaw.com.
The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.
