Under Part 91 of the Federal Aviation Regulations (“FARs”), an aircraft owner generally cannot receive payment when someone uses their aircraft. The regulations state there can be no compensation for hire. That does not just mean cash, but it also includes non-monetary considerations such as tickets to a game, a nice bottle of wine, trades, or any other form of consideration.
When an aircraft is operated under Part 91 rather than a Part 135 charter certificate, the FARs intentionally limit how the aircraft can be used and what compensation can be obtained. As a reminder, the operating rules for Part 91 are much different than Part 135. Part 91 was created for when an owner was flying for their own purpose and not for use by someone else for payment. As a result, Part 91 has fewer safety restrictions. For example, under Part 91 there are no (i) flight time limits or specific rest rules; (ii) mandatory percentage safety buffers for runway calculations and (iii) onsite weather reporting requirements at the destination airport.
Part 135 of the FARs apply to flights when there is compensation for hire. A Part 135 certificate holder can hold itself out to the general public for commercial purposes. As a result, Part 135 requires the operator to meet significantly more stringent safety and operational standards.
A dry lease is one of the ways an aircraft owner can obtain compensation from someone who would like to use the aircraft. The biggest myth of a dry lease is that “dry” means without fuel; rather, it means the aircraft is provided without flight crew. Under Part 91, an aircraft owner can lease an aircraft without any crew members to a person or entity. Compensation is structured as a rental payment from the user (lessee) to the aircraft owner (lessor) usually as an hourly or monthly rate. For the dry lease to be “dry,” the user (lessee) must hire its own crew and pay the crew directly.
By contrast, if an owner provides the aircraft and the crew, the arrangement is considered a “wet lease.” This is generally not allowed unless there is a written time share agreement in place between the parties. Importantly, the amount of compensation under a time share is limited to essentially two times the fuel (See FAR 91.501(d) for full list of items which can be charged under a time share agreement). Because of these financial restrictions, aircraft owners more commonly utilize dry leases.
In addition to sourcing and compensating the flight crew, the user (lessee) has operational control of the aircraft under the dry lease agreement. According to the FARs, operational control means exercising the authority over initiating, conducting, or terminating a flight. This has been interpreted through FAA advisory circulars and interpretation letters that it needs to be clear that the user (lessee) is responsible for crew selection and compensation, insurance, fuel, flight following, and scheduling under the dry lease. These responsibilities can be delegated to another individual or company (like a management company). However, even when responsibilities are delegated, the party in operational control remains the user (lessee) under the dry lease.
For aircraft that has a maximum take-off weight over 12,500 lbs. and also has a dry lease in place, the dry lease must (i) be in writing, (ii) have a truth-in-leasing section, (iii) be carried on board the aircraft, and (iv) require that the user (lessee) provide notice to the responsible flight safety district office at least 48 hours prior to the first flight.
If structured correctly, the user (lessee) will either pay an hourly or monthly rate to the owner (lessor). There are no restrictions on the amounts that can be charged under the FARs. The parties simply need to agree on the business considerations. The user (lessee) will be directly responsible for the crew, maintenance, insurance, and flight variable costs under the dry lease.
A dry lease can be structured as either non-exclusive or exclusive. An exclusive dry lease means that there is one user (lessee) who is the only party that has possession of and operates the aircraft during the term of the dry lease agreement. A non-exclusive dry lease would be used when (i) there are multiple dry leases (ii) when the owner also uses the aircraft or (iii) when the aircraft is also leased to a Part 135 company for charter use.
When setting up a non-exclusive dry lease it is very important that it is clear the user (lessee) hires and pays for the crew, has operational control and that there is a process used to deliver and re-deliver the aircraft between the parties. Non-exclusive dry leases should not be used to circumvent having an aircraft on a Part 135 certificate.
While there is no established number for how many dry leases you can have, if there are numerous unrelated third-party dry leases, it is possible, based on the facts and circumstances, that an illegal charter may be taking place instead of a dry lease. Factors such as (i) operational control, (ii) the number of users, and (iii) the relationship of the parties will be considered to determine if an illegal charter is happening, and not a true dry lease of the aircraft.
A dry lease is commonly used and required if a sole purpose LLC is formed to own an aircraft. A sole purpose LLC formed to own an aircraft cannot legally operate under Part 91 as flight operations would not be incidental to a separate primary business. For that sole purpose LLC, air transportation would be its business and would require a Part 135 certificate. As a result, if the owner of an aircraft is the sole purpose LLC to hold the aircraft, then a dry lease is a required to transfer possession of the aircraft to an entity or person that is legally permitted to operate the aircraft under Part 91.
Dry leases are also used when company aircraft are made available for executive personal use. If a company does not wish to treat personal flights as taxable employee fringe benefits paid by the company, a dry lease allows the employee to lease and operate the aircraft as an individual for personal flights.
Dry leases are also used by aircraft owners who have complex organizations where related companies want to pay for and account directly for certain trips. While there is an exception under Part 91.501(b)(5) for subsidiaries, this exemption only works when the entities are in a parent-child relationship and when the entities are corporations. If both of those factors do not exist, then a dry lease may be a good option depending on how the crew is sourced.
Finally, many states require payment of use tax on either (i) the purchase price of an aircraft or (ii) the lease revenue stream. In this case, a dry lease is required if a sole purpose LLC is formed to own the aircraft for both tax planning purposes and tax strategy.
Although dry leases have recently been a hot topic in the private aviation sector, sometimes with a negative undertone, there are circumstances when, if structured and executed correctly, dry leases are a valid vehicle through which an aircraft can be leased and operated.