- Finally, after going through these steps, if the operator is not acting as a direct air carrier or mere commercial operator in that it is not holding out to the public or receiving any compensation related to carrying persons or property, then it is acting as a noncommercial operator and must simply comply with the basic operating rules found at FAR Part 91. Under these operations, no certificate is required as there is no such thing as a “FAR Part 91 certificate,” although the operator may need to obtain certain “letters of authorization” (LOAs) for specific types of operations, such as an LOA permitting operations in “reduced vertical separation minimum airspace” outside of the continental United States.
Improper Dry Leasing and Other Flavors of Illegal Charter
Each time the wheels roll on an airplane for the purpose of flight, the aircraft operator should walk through the flowchart described above to determine which operating rules it is obligated to comply with. Nevertheless, a significant number of operators fail to do so and end up conducting what amounts to illegal charter, i.e., they are flying uncertificated and under FAR Part 91 when, based on what they are doing, they should both have an appropriate certificate and be operating under FAR Part 135.
Improper, or “Sham,” Aircraft Dry Leasing
One of the largest areas of noncompliance with these rules is the improper use of aircraft “dry” leases—sometimes referred to as “sham dry leases”—to raise revenue from the use of the airplane.
In general, a lease is any agreement by a person to furnish an aircraft to another person for compensation, regardless of the size or type of aircraft. Once an aircraft lease has been created, the FAA will then characterize that lease as either a “wet” lease or a “dry” lease.
Fundamentally, a “wet lease” is specifically defined in FAR Part 110 as a lease of an aircraft with at least one crew member. The FAA will assume that the wet lessor retains operational control and therefore acts as a commercial operator, requiring certification and operations under FAR Part 135 (unless a valid exception as noted above applies). The prototypical example of an appropriate wet lease is the charter of an aircraft to a passenger by a properly certificated charter operator under FAR Part 135. Under a wet lease, the compensation being paid for the lease is the charter payment for the air transportation service being provided, similar to paying for riding in a taxicab.
Conversely, a “dry lease” is the lease of an aircraft without any crew member and under which operational control of the aircraft has transferred from the lessor to the lessee. Types of dry leases include traditional small-aircraft rental agreements to private pilots and, in aircraft trust arrangements, aircraft operating agreements. Under a dry lease, the compensation being paid is typically in the form of a rental payment in exchange for the lessee’s use of the equipment being rented (whether the lessee is a pilot or a passenger who has separately hired a pilot) and is analogous to obtaining a rental car for one’s own ground transportation needs. The determination that a lease is a dry lease does not automatically mean that the flight can be operated under FAR Part 91; rather, all it does is push the analysis down one rung of the ladder to then ask if the lessee operator is in turn conducting a wet lease or in fact is acting as a legal FAR Part 91 operator in the operator’s own right as described in the four-step analysis provided above.
The fundamental distinction between a dry lease and a wet lease is the answer to one question: Who is the operator? Put another way, who is exercising operational control? This analysis must be conducted by looking to various standards and background information that authorities, including Congress, the FAA, and applicable case law, have developed over the years. Examples of these standards are (a) the basic regulatory definition of “wet lease,” i.e., whether the lease provides both an aircraft and flight crew; (b) the basic regulatory definitions for terms such as “operational control” as found in FAR § 1.1 (as discussed above); (c) the requirements regarding who must hold what types of air carrier or operating certificates as found in FAR Part 119 (as discussed above); (d) fundamental FAA guidance to safety inspectors on whether a lease is a wet lease or a dry lease as set forth in various parts of the Flight Standards Information Management System (FSIMS); and (e) various FAA advisory circulars and other FAA guidance materials such as policy statements and FAA chief counsel interpretation letters that have been published over many years.
To summarize all of the law and guidance material available from these sources, whether a lease is in fact a dry lease and operational control has been properly transferred to the lessee boils down to (1) determining who is providing the flight crew and (2) then assessing certain other factors that the FAA has enumerated over time to assist in making this determination.
With respect to the question of the flight crew, if the terms on the face of the lease clearly provide that the lessor will either provide flight crew or that the lessee is obligated to utilize some specific flight crew (beyond the crew being properly trained and qualified), then the lease is a wet lease. As noted above, in such a case, the FAA will automatically presume that operational control has been retained by the lessor, and the lessor must either be able to comply with one of the exceptions noted above, or it must operate under FAR Part 135.
Where the lease is silent on which party is to provide the crew, or where the lease indicates that the lessee will provide the flight crew, then making a final determination as to whether the lessee is in fact independently obtaining its own flight crew as opposed to the lessor actually providing crew requires consideration of numerous factors beyond the language in the lease itself. Consideration must also be given as to whether the crew is truly independent or if, for example, there is an identicality of interest between the lessor and the entity providing the pilots. If the result of this analysis is that the aircraft and crew are in fact being furnished as a package, then it is a wet lease and the results noted above will apply.
However, even if it appears that the lessee is actually obtaining its own flight crew, the analysis is not over. In addition to the crew analysis, numerous other factors have been identified by the FAA that might lead it to determine that a purported dry lease is actually a “wet lease in disguise.” These factors are essentially an operational control analysis and can include questions such as:
- Who makes the decision with respect to accepting flight requests and initiating, conducting, and terminating flights?
- Who ensures that the crew members are trained and qualified in accordance with the applicable regulations?
- Who specifies the conditions under which a flight may be operated?
- Who determines weather and fuel requirements, and who directly pays for the fuel?
- Who directly pays for the airport fees, parking and hangar costs, food service, and rental cars?
- Prior to departure, who ensures that the flight, aircraft, and crew comply with regulations?
- Who ensures that the aircraft is airworthy and in compliance with applicable regulations?
- Who maintains the aircraft, and where is it maintained?
- Who decides when/where maintenance is accomplished, and who directly pays for the maintenance?
The FAA also notes that the lease should state that functions such as flight following, dispatch, communications, weather, and fueling are to be performed by the lessee.
It is important to note that a key question in reviewing these factors is not necessarily who physically performs each function but who is ultimately responsible for ensuring that the functions have been properly performed. For example, the executives of companies that are proper FAR Part 91 operators are not expected to do the maintenance, check the weather, and fly the airplane themselves, but they are expected to conduct enough appropriate due diligence to ensure that all of those things are properly done.
It is also important to note that once the source of the air crew is identified, the factors listed above are not regulatory and binding on operators. They evolved from FAA advisory circulars and orders, which, of course, do not carry the same authoritative weight as regulations but do provide clear insight as to how the FAA will apply regulations that are binding. (Keep in mind that adjudicators such as the National Transportation Safety Board (NTSB) and the federal courts will give great weight to the FAA’s interpretation of its own rules.)
Additionally, note that no single factor listed above is dispositive. It is possible that all of the factors listed above could appear on paper to align as a proper dry lease while the actions of the parties clearly indicate that it is not. Conversely, it is also possible that all of the factors noted above could appear to align as what would be considered, at first blush, a wet lease when, in fact, the lease is a true dry lease where operational control has been transferred to and maintained by an appropriate and legal FAR Part 91 operator.
Once a full analysis of all of the requirements and factors noted above are complete, where (1) a lease that purports to be a dry lease is in fact a wet lease, (2) the operations do not comply with an exception under the FAR, and (3) the parties are operating under FAR Part 91 instead of obtaining the appropriate certification and operating under FAR Part 135, then illegal charter is occurring. Under these circumstances, the operator is subject to a range of significant civil penalties by the FAA, in addition to confronting other civil risk management issues and potentially even criminal sanctions that could arguably arise from such activity.
Additional Flavors of Illegal Charter
In addition to improper dry leasing, the FAA has also recently focused on several other areas of problematic illegal charter. Arguably, one of the most common, least understood, and hardest to discern is the use of “flight department companies” to own and operate aircraft for the benefit of their parent companies or individual members. While not specifically defined in the FAR, this type of entity is indirectly recognized in FAR § 91.501(b)(5), in conjunction with the FAR definition of a “commercial operator.” As noted above, that definition (and multiple FAA chief counsel interpretations discussing that definition) provides that a company whose “major enterprise for profit” is the operation of aircraft cannot receive compensation, even in the form of the occasional capital contribution, with respect to flights operated under FAR Part 91 for its owners or other affiliates. Such flight department companies are per se commercial operators and must obtain an appropriate certificate and operate under FAR Part 135. The inappropriate use of such a structure under FAR Part 91 constitutes illegal charter.
Related to this failure to comply with the FAR § 91.501(b)(5) exception are failures to stay within the confines of the other exceptions found in FAR §§ 91.501, 91.321, and 119.2(e). For example, one such exception is a “time sharing agreement” under FAR § 91.501(b)(6). When the narrow guidelines for the exceptions are not followed, the FAA can enforce, and recently has very aggressively enforced, the certificate requirement against operators that misuse such exceptions and essentially conduct illegal charter.
Another form of illegal charter arises when an aircraft management company or individual manager effectively coordinates all aspects of the flight of an aircraft for the benefit of both the owner or lessor of the aircraft, on the one hand, and the lessee (or effective charter customer) of the aircraft, on the other. Even if it appears on the surface to be set up with appropriate documentation, if the facts and circumstances establish that the aircraft manager is exercising operational control of the aircraft and getting paid to provide that service, then the FAA will enforce the certificate requirement and Part 135 operating rules against that pilot or manager accordingly.
Finally, perhaps the most commonly addressed form of illegal charter—largely because it tends to be the easiest for the FAA to find—occurs where an existing FAR Part 135 air carrier certificate holder is conducting operations outside the scope of that operator’s FAA-issued operations specifications. An example might be where the air carrier has certain aircraft listed as authorized aircraft under its operations specifications but is also utilizing aircraft that have not been conformed and added to its certificate for the purpose of conducting passenger-carrying revenue flights. In those situations, the certificate holder is very likely facing a suspension or even revocation of its hard-earned air carrier certificate.
Conclusion
Improper dry leasing and the other forms of illegal charter occurring within the business and general aviation community are difficult to detect. Perhaps this is largely due to the fact that there are so few routine interactions between the FAA and operators who are conducting their flights under FAR Part 91 only. In any event, it is an issue that the FAA is making a concerted effort to address. Hopefully, the information and steps outlined above will provide some useful tools for practitioners who wants to help their clients stay within the proper lane for FAR Part 91 operations.
