Pilot Counsel

Fractional ownership, Part 1

September 1, 2001

The fractional ownership of an aircraft is an evolving legal concept that has developed over the last 10 to 15 years, mostly at the high end of general aviation. Industry sources tell us that fractional ownership programs now manage some 625 aircraft, mostly business jets — with another 1,000 on order — on behalf of about 3,050 owners holding some 4,100 shares. New providers continue to enter the fractional market.

To most of us who are used to the more conventional aircraft ownerships — such as a single individual or corporate owner, a small group of co-owners or partners, or a flying club — the term fractional ownership is a mysterious one. Let's see if we can demystify it, and see whether, and how, this new concept might affect our flying. This month we will explain the regulatory background against which fractionals have developed. Next month we will explain the recently released FAA rulemaking on fractional ownership.

The key to understanding this new concept is realizing that there are two levels of safety regulation, one for commercial aviation and one for private aviation. Commercial aviation is required to provide the "highest standard of care," while private aviation requires a "reasonable standard of care." We can see this reflected in the operational rules. Part 91 of the Federal Aviation Regulations contains the general operating and flight rules which govern the operation of both private and commercial aircraft. Part 91 imposes "reasonable" standards. Added to these "reasonable" standards are the higher requirements imposed on the airlines, charter operators, and other commercial operators by such regulations as FAR parts 119, 121, 125 and 135. In this way we wind up with two levels of safety regulation.

The theory behind two levels of regulation is that airline and charter passengers, for example, exercise no, or very little, control over the operation and airworthiness of the aircraft in which they fly. They are entitled to a higher standard of care. On the other hand, pilots who operate aircraft they own, lease, or rent for their own personal or business use exercise full control over the operation and airworthiness of their aircraft and can accept more responsibility. In that situation, a reasonable standard of care is sufficient.

While this statement is generally true, nothing is ever that simple and clear-cut. The regulations themselves permit some arguably commercial operations under Part 91, without any further requirements. These are arguably commercial operations because they involve the operation of an aircraft for what the FAA would consider to be "compensation or hire." For example: A private pilot may share the expenses of a flight with his passengers (the pilot is technically receiving compensation even though it is only the passengers' pro rata share of direct operating costs). A private pilot may carry passengers in a charitable airlift (the passengers are technically paying "compensation," but to a charity). So, too, a businessman or employee may carry passengers and cargo, even though he or she is technically receiving compensation, so long as the flight is merely incidental to the business or employment. Each one of these flights could be deemed to fall within the technical definition of a commercial operation.

So too does FAR Part 119, the regulation that governs the certification of air carriers and commercial operators, contain exceptions for such operations as student instruction, sightseeing flights, crop dusting, aerial photography, etc. — clearly commercial operations.

Aircraft owned and operated in a business fit into this same big picture. If the aircraft is used in a commercial operation — for example, an airline — then it must meet the higher certification and operational rules governing commercial operations. But, if it is operated in a business other than air transportation, then it may be operated under Part 91. It may carry persons or property in the aircraft incidental to that business. No problem. We see it all the time in the traditional corporate flight department.

The problem, rather, is that business aircraft (typically employing paid professional crews) are so expensive to operate that a business owner often would like to share the use with another business to help defray the costs. Yet, if the owner gets any compensation at all for sharing the aircraft, it would be considered a commercial operation, subject to the more rigorous requirements of the regulations. Many business aircraft operators would like to avoid being considered commercial because of the more stringent operational rules imposed on Part 135 operators. Some examples of the flexibility business aircraft operators would lose operating under Part 135 involve such things as additional minimum runway length requirements for landing (the so-called "60-percent rule"); the ability to make instrument approaches at airports without weather reporting (many airports used by general aviation do not have on-field weather reporting facilities); the requirements for the selection of pilots, flight time limitations, and rest requirements; drug and alcohol testing requirements; fire-blocking aircraft interiors; maintenance programs; and more.

The FAA does provide some relief to business owners of "large and turbine-powered multiengine airplanes" by permitting so-called "time sharing," "interchange," and "joint ownership" agreements under Subpart F of Part 91. But, these provisions are restrictive. In the case of an "interchange" agreement, there must be an exchange of equal time on each of the owners' aircraft, which is ot always practical. In the case of "time sharing" the permitted charges for the use of the aircraft are so limited as to be frequently uneconomical (twice the cost of fuel plus some direct charges). In the case of a "joint ownership" agreement, one of the joint owners employs and furnishes the flight crew for all owner-users, and each of the joint owners pays a share of the charge as they may agree.

To overcome these restrictions, fractional ownership of business aircraft was developed under the current provisions of FAR Part 91. The fractional ownership concept is not now specifically defined or identified in Part 91, but it has certain identifiable characteristics. It always has an ownership of an interest in an aircraft, generally one-eighth or one-fourth but sometimes as little as one-sixteenth. There are always several agreements that the fractional owner enters into, including a joint ownership (really co-ownership) agreement, an interchange (dry-lease) agreement, and management agreements. One of the most valuable aspects of many of these programs is that when the co-owner's aircraft is not available, the co-owner is provided with another aircraft in the program (in which the co-owner has no ownership interest) as a result of the interchange agreement. A management company, under a management agreement, provides for crew, maintenance, insurance, etc., and administers the interchange. These characterize today's typical fractional ownership program.

To put this in terms of the theory behind the two levels of regulation, the fractional owner has operational control of the aircraft being used at the time, regardless of whether the owner has an ownership interest in such aircraft or the aircraft comes from the interchange pool.

At the present time, the greatest number of fractional programs is conducted under Part 91, although some are conducted under Part 135. But the FAA has found that even the Part 91 fractional programs follow the "best practices" of corporate aviation and have a very good safety record, which accounts for their success so far — and the FAA's willingness to recognize them in a specific regulation.

So, this is the background against which fractional ownership programs developed. As they grew, the FAA became concerned about how to regulate them. Next month, we will explain how the FAA addressed this concern.

John S. Yodice