Pilot Counsel

Private vs. commercial operations

July 1, 2003

Sometimes important law is made or interpreted in decisions of the National Transportation Board. Here is a decision that deals with the often-elusive line between private and commercial air operations.

By way of background, there is an important regulatory difference between "private" and "commercial" operations. The FAA regulates them both for safety, but commercial operators face additional significant and costly regulation. We all can easily recognize the classic private operation — a pilot flying his or her own aircraft (or a rented or borrowed aircraft) for his or her own purposes, which specifically may include carrying passengers. This is within the privileges of a private pilot certificate (and also may be conducted by commercial and ATP pilots exercising the lesser private privileges implicitly included in their certificates). At the other end of the spectrum, we easily recognize the classic commercial operation such as the type conducted by the airlines, air taxi operators, and charter services, that is, by those engaged in the business of carrying persons or property for compensation or hire.

It is what is in between that is not always easily recognizable. The regulations themselves permit some arguably commercial operations to operate "privately." Some familiar examples: A private pilot (or a commercial or ATP pilot exercising private privileges) may, under limited circumstances, 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, as 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. More recently, the whole concept of fractional ownership of aircraft as it is currently practiced is arguably commercial, but allowed by the FAA (see "Pilot Counsel," September 2001 and October 2001 Pilot). So it is not surprising that the distinction between private and commercial operations is sometimes blurred.

In the decision we are considering, the NTSB sustained a violation against a commercial pilot who took great pains to avoid the "commercial operator" label by creating an arrangement he thought was perfectly legal. In the arrangement he separated the piloting services, which he was providing, from the lease of aircraft that were being provided through a company owned by his wife. Under the circumstances of this case, the board said that the two were really not separate, and that a single source for the aircraft and crew is essentially providing air transportation for compensation or hire.

The arrangement was an attempt to create this legal situation. Any person may own or rent an aircraft, whether that person is a pilot or not. That person may also hire a pilot to fly it. Such an operation would be considered private and not commercial. The person doing the owning or renting and hiring is accepting control and responsibility for the operation, which is crucial to the legality of the arrangement. The typical corporation with a flight department falls into this category (though there are increased requirements for the operation of larger and jet "private" aircraft). It is when the aircraft and the pilot (transporting paying third parties) come from the same source that the FAA says the operation is commercial. The FAA says it is commercial because the common source is really engaged in the carriage of persons or property for compensation or hire.

So what factors determine whether the pilot and the aircraft come from the same source? This decision gives us insight into how the FAA and NTSB view some of these factors. The respondent (so named by the NTSB) is a commercial pilot, who is also a mechanic with an inspection authorization, and who is the sole proprietor of a "flying service" based at the local airport. The flying service provides typical fixed-base-operator services such as flight training, aircraft rental, and aircraft maintenance. It has only two other employees, the pilot's wife and his son, also a pilot. His wife performs various administrative and other chores around their office. The wife is also the sole proprietor and only employee of an aircraft leasing company, an entity she formed to generate income from the rental of several single- engine and light twin aircraft. The leasing company and the flying service share the same small office space and phone number, and the leasing company's four or five aircraft are kept in the flying service's hangars and are maintained by the flying service.

For several years before his wife started the aircraft leasing company, the respondent had been flying a local home-building company's personnel from time to time to various locations on company business. After the leasing company was set up, the home-building company signed lease agreements with the leasing company for the aircraft that it had been or would be using. The lease agreements were very careful to place operational control of the aircraft in the home-building company. The home-building company decided what aircraft to use, when and where to go, and picked the crew. On paper at least, the flying service and the leasing company were separately owned. They maintained separate identities. The two businesses had separate records, separate bank accounts, and paid their business taxes separately. The piloting services were separately invoiced by the flying service; the leasing company separately invoiced the aircraft rental.

The routine was that whenever the home-building company personnel needed transportation, a call would be placed to the phone number the leasing company and the flying service shared. The respondent, on learning the details of the requested travel, either directly or from messages relayed by his wife, would make all the necessary arrangements for the trip. He would either pilot the flight himself or arrange for another pilot.

Looking at these facts, the FAA concluded that the respondent was conducting a commercial operation without having an air carrier certificate as required by FAR Part 119 or 135, and without complying with the testing, competency, proficiency, and other requirements of these regulations. The respondent believed that he was in full compliance with the Federal Aviation Regulations. He believed that he was merely being hired as a pilot by the home-building company to fly an aircraft, an aircraft, in fact, that the homebuilding company was renting from a separate and independent leasing company.

At an earlier time he had even shown the proposed lease form to a couple of FAA aviation safety inspectors, who commented on the form. The FAA inspectors told him that he would have to remove himself from operational control. They said that the lessor (the person providing the aircraft) could not provide both the pilot and the aircraft. The lease form was changed. He thought he was in the clear.

But it turns out, he wasn't. The FAA issued an order revoking the respondent's commercial pilot certificate on an emergency basis. The FAA cited a string of regulatory violations, essentially charging him with providing numerous passenger flights for compensation or hire without having the appropriate commercial operating authority.

The respondent appealed the order to the NTSB. A hearing was held before an NTSB administrative law judge. The judge sustained most of the FAA charges, dismissed some others, and reduced the sanction to a 120-day suspension. On the crucial issues, the law judge found that the respondent had operational control and was the common source for both the pilot and the aircraft.

The respondent, not satisfied with the judge's decision, appealed to the full board. He lost there, too. The full board sustained the suspension, making three important legal pronouncements: "The provision of both plane and crew from a single source generally is deemed to be conclusive proof of carriage for compensation or hire," that is, a commercial operation. So, as a matter of law, an arguably "single source" is an important factor in determining the nature of the operation.

On the issue of control, the board said that a written lease provision putting operational control in the lessee doesn't necessarily establish operational control. The board held, as did the law judge, that the respondent exercised complete control, but only over all of the aviation phases and requirements of these operations that required any aviation expertise. If all that is left to the lessee are those decisions normally left to a customer, such as who was to be transported, to and from which points, and at what times, this factor overrides the lease provision.

Finally, the board cast doubt on the validity of the leases. They were not formalized. They were not signed by the leasing company. The leases had no reciprocal promises. The leasing company made no representations concerning the availability of the aircraft. And the building company did not commit to any minimum or maximum use of the aircraft. These technical deficiencies of the leases were considered to be important factors. The board said: "The absence of any clear or mutual benefit to the parties from the existence of these documents lends support for the belief that they were intended simply to create the appearance that separate arrangements for pilot and plane were in effect for flights that were handled no differently from those made before the leases were drafted."

In this decision, law was made and interpreted. It should help aircraft owners and pilots better understand how the FAA and NTSB determine the important difference between a commercial and a private operation.

John S. Yodice