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October 1, 2013
By John S. Yodice
A recent legal interpretation by the FAA chief counsel gets into some complexity in dealing with the important regulatory difference between “private” and “commercial” operations. At the most basic level, pilots understand the difference. The FAA regulates both for safety. Commercial operators and air carriers, however, have additional costly and burdensome regulations beyond the general operating and flight rules of FAR Part 91, and other rules. So, there is an understandable and oftentimes creative effort to arrange flight operations to be private to avoid the additional regulation.
At this basic level, we all can easily recognize the classic private operation, which is a pilot flying his or her own aircraft (or a rented or borrowed aircraft) for his or her own purposes, specifically including carrying passengers or property. This is classically one within the privileges of a “private” pilot certificate (and may also 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 and air carrier operations such as those conducted by the airlines, air taxi operators, charter, et cetera, by those engaged in the business of carrying persons or property for compensation or hire.
A scenario presented to the FAA chief counsel in this interpretation involves corporation A1, which manages aircraft that are owned by other entities. A1 also makes the aircraft available to “participants” in a “shareholder/participant agreement.” To become a participant, a party buys $1,000 worth of stock in A1 and then is made a member of A1’s board of directors. The agreement states that the purchase of stock “creates only the opportunity for the participant to receive the services offered by A1 and the benefits available under the aircraft leases.” Participants also pay a monthly management fee and an hourly fee to use the aircraft and a pilot. Corporation A2 provides the aircraft management services for A1 and also provides pilot services to program participants. Sound private so far?
What colors the arrangement are the facts that all A1 participants, although not required, always choose to use A2 pilots, and that official filings with the state authorities indicate that A1 and A2 are registered to the same address and that one individual serves in leadership positions in both corporations.
So the question addressed by the chief counsel is whether the facts presented meet the regulatory definition of a “commercial operator.” A commercial operator by regulatory definition (with apologies for the necessary complexity) is a “person who, for compensation or hire, engages in the carriage by aircraft in air commerce of persons or property, other than as an air carrier or foreign air carrier or under authority of Part 375.” An air carrier means “a person who undertakes directly by lease, or other arrangement, to engage in air transportation.” Air transportation means “interstate, overseas, or foreign air transportation or the carriage of mail by aircraft.” Both commercial operators and air carriers are required to hold FAA Part 119 certificates.
A related question addressed is whether the arrangement is a “dry” or “wet” lease. A dry lease of an aircraft is one in which the lessor provides the aircraft, and the lessee supplies his or her own flight crew and retains operational control of the flight. Clearly private. Under a wet lease, however, the lessor provides both the aircraft and the crew and normally retains operational control of the flight. Whether a lease is wet or dry is determined by the FAA on a case-by-case basis, looking to whether the companies are acting in concert to avoid the determination that it is a wet lease. The practical effect of engaging in a wet lease is that the lessor retains operational control of the operation and may be required to hold an FAA operating certificate because it is providing air transportation.
The FAA chief counsel interpretation concludes: “In summary, with the facts as you have presented them in your letter, it appears that the arrangement between A1, A2, and the program participants is in fact a wet lease because aircraft and pilots are being provided by the same entity. If the arrangement is a wet lease, the company providing the aircraft and crew would need to obtain a Part 119 certificate and operate its aircraft in accordance with Part 135. However, we note that additional facts may indicate that the arrangement is a dry lease.”
Creative arrangements will continue, and we will try to keep you abreast of what the FAA has to say about them.
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