Amanda Applegate

Over the past two years, the charter market has grown, and more people are flying privately than before the pandemic. One challenge facing charter operators is how to add more aircraft onto their Part 135 certificate in order to accept more charter flights and grow their charter revenue. To overcome this challenge, some charter operators have purchased their own aircraft, started to guarantee or increased the guarantee of charter revenue to aircraft owners and entered into exclusive leases with guaranteed fixed lease rates for multiple years with aircraft owners.

When an aircraft owner is considering allowing their aircraft to be chartered, it is important to realize that the charter operator is responsible for the scheduled and unscheduled maintenance on the aircraft and the appearance of the interior and exterior of the aircraft. This responsibility, however, may cause the charter operator to face competing interests. Specifically, seeking to maximize charter revenue to satisfy and meet the demands of the charter customers while maintaining the aircraft to the highest necessary safety standards.

This conflict can be more pronounced when the charter operator is also responsible for the costs associated with maintenance and/or appearance of the aircraft. If the charter operator has the obligation to pay for all maintenance while the aircraft is being operated by the charter operator, then an unscrupulous charter operator may try to defer certain maintenance obligations to maximize charter revenue. While such deferments are sometimes permissible under the regulations, such deferrals can impact the future condition of the Aircraft and increase the cost and duration of the maintenance events.

Aircraft owners must mitigate the associated risks with the exclusive charter lease by having certain terms in the agreement with the charter operator.

First, the agreement between the aircraft owner and the charter operator should clearly set forth the obligations of the charter operator about maintaining the aircraft. Specifically pertaining to what standards the aircraft must be maintained and if deferred maintenance is allowed. It may also be helpful to require that the aircraft return to the same maintenance facility on a regular basis so that the same technicians can service the aircraft and monitor any reoccurring issues.

For example, an undiscovered water leak or a water leak that is not immediately remedied properly could cause additional damage to the aircraft. As a result, it is important for the charter operator and aircraft owner agree in writing on the amount of time that the aircraft can be operated while deferred maintenance remains open.

Additionally, the owner of the aircraft should have a right to inspect the aircraft and the aircraft documents with reasonable notice on a regular basis. This will allow the owner to hire a technical expert to make sure the aircraft is being maintained in accordance with the terms of the agreement, government regulations and the manufacturer’s guidelines. It is important that the aircraft owner not only has the right to inspect the aircraft but also exercises the right at least annually to avoid any significant surprises related to the condition of the Aircraft.

The aircraft owner must have an expressed right to repossess the aircraft and terminate the agreement if material conditions are breached, including but not limited to, failure by the charter operator to (i) maintain the aircraft, (ii) insure the aircraft, (iii) pay for items required under the agreement or (iv) maintain clear title by allowing liens to attach to the Aircraft.

Most importantly, the aircraft owner should have the right to conduct a return inspection during the last month of the agreement and a corresponding requirement for the charter operator to be responsible to fix any necessary repairs (allowing for any normal wear and tear). At the end of the lease, the aircraft must meet a list of well-defined return conditions that are set forth in the agreement at the expense of the charter operator. The aircraft owner should be able to select the inspection facility at which the return inspection is conducted to ensure the inspection is completed by an independent third party.

With the new charter customers that started flying privately during the pandemic, it is predicted that charter activity is going to remain higher than it was pre-pandemic. As a result, charter operators will continue to create new ways to meet the increased charter demand. Consequently, if an aircraft owner is allowing its aircraft to be chartered through an exclusive lease, then it is important to remember to take the outlined steps required to protect the aircraft so that the charter use does not negatively impact the value of the aircraft.

Aircraft that are enrolled in maintenance and subscription programs, such as those covering airframes, engines, and maintenance tracking, are often more marketable and more valuable, than compared to aircraft that are not covered by such programs and subscriptions. There is real value to an aircraft buyer in having the programs and subscriptions on the aircraft when it is purchased. As a result, it is important that the programs and subscriptions are transferrable as part of the acquisition process.

Each third-party provider differs in how they handle the transfer or assignment of programs and subscriptions. Some providers simply allow the seller to assign the current contract to the buyer, but many require the buyer enter into a new agreement. It is important that the buyer understand the cost of the programs and subscriptions when putting together the budget for the ownership and operation of the aircraft. It is also important that all of the necessary paperwork be handled in a timely manner, keeping in mind that some providers will not send out the transfer paperwork until the purchase of the aircraft has been completed.

When progressing through the aircraft purchase process, the buyer should consider the following:

1. Purchase Agreement Requirements:

a. Prior to the execution of the purchase agreement, request copies of the current maintenance program agreements from the seller. Confirm that the advertised programs are in place at the rates previously provided.

b. If the program provider(s) will not complete the transfers until after closing, make sure the purchase agreement requires the transfer obligations of seller extend beyond the closing.

c. For annual maintenance or subscription payments, make sure the purchase agreement is clear that the payment will be prorated based on the closing date or as otherwise agreed upon between the parties.

d. If the buyer elects not to continue with a program or subscription, make sure the purchase agreement allows the buyer to terminate the program or subscription upon closing and stipulates which party must pay any fees associated with the termination.

2. If the aircraft is being financed, make sure the lender documents allow sufficient time to get the transfers in place. Since the process is controlled by the providers, it is difficult for the buyer to dictate to the providers a timeline put in place by the aircraft lender.

3. If there are minimum flight hour requirements under the program, make sure the minimums can be met by the buyer and if not, see if the program requirements can be revised.

4. During the inspection process, contact each maintenance provider and subscription service and inform them of the pending purchase and request a balance on each of the accounts and what date they have been paid through. Often the maintenance provider or subscription service requires seller’s approval to disclose account information.

5. Confirm with the maintenance or subscription service providers the transfer process and related timeline. Since each provider may have their own process, it is a good idea to create a document that tracks the transfer process for each program and subscription.

6. Closing should only take place after third party confirmation that all programs and subscriptions are paid through closing or otherwise in accordance with the purchase agreement.

7. Once the closing has occurred, promptly send notification of the closing to the program and subscription service providers. Some providers will want a copy of the delivery receipt showing the number of hours on the aircraft/engine(s) at the time of closing. They may also want a copy of the bill of sale and perhaps additional documentation regarding the new owner. Be sure to provide all required documents without delay.

8. Continue to follow up with the providers until the transfer of all applicable programs and subscriptions are complete.

Since there is material value to the aircraft programs and subscriptions associated with the aircraft, it is important that all of the paperwork is completed in a timely manner, so the aircraft remains enrolled on the programs and subscriptions bargained for as part of the aircraft purchase.

When sharing an aircraft, advanced planning and documentation can preserve the relationship of the parties and allow the ownership arrangement to outlive potential disputes.

As I’ve described previously, this is an exceedingly difficult market for those looking to fly privately. One traditional way to avoid long wait times associated with the purchase of a private aircraft had been fractional ownership. However, the market dynamics have shifted such that this avenue now presents its own challenges.

Not only is the waitlist for fractional share ownership pushing into 2024 for some aircraft but starting an interim lease until the fractional purchase share is delivered is no longer an option. Further, some of the jet card membership programs and fractional programs continue to struggle to meet the on-time performance metrics they achieved pre-pandemic. Finally, quality charter options continue to remain scare and significantly more expensive than they were two years ago.

As a result, I am seeing more of my clients look to purchase their own aircraft with one or two associates. This too is also a challenge given the shortage of available pre-owned aircraft. However, it is likely that an aircraft can be sourced and closed in 2022, which presents many with a more desirable option than fractional ownership in 2024.

Once the parties have decided to share an aircraft, the first decision is whether the ownership will be co-ownership or joint ownership. Under a co-ownership structure, multiple companies and/or individuals share in the ownership of the aircraft. Each co-owner operates the aircraft and provides its own crew. The crew can be provided by each co-owner independently or through a management company. Co-owners are not able to charge each other for operating the aircraft. This is the major distinction between co-ownership and joint ownership.

Under joint ownership, which is defined in 14 CFR 91.501(c)(1) of the Federal Aviation Regulations (FAR), one of the joint owners employs and provides the crew and each of the other joint owners pays the amounts defined under the joint ownership agreement. Each joint owner is responsible for its direct operating costs of the aircraft. All joint owners must be on the registration certificate of the aircraft. Joint ownership rules only apply to aircraft that can operate under FAR Part 91, Subpart F, but smaller airplanes and helicopters operated under the NBAA small aircraft exemption can also use the cost reimbursement options under Part 91, Subpart F.

Regardless of whether an aircraft is co-owned or jointly owned, the owners should enter into a user agreement to address, in advance, these potential issues.

1. Scheduling
a) Will the aircraft be reserved on a first-come, first-served basis? Is this fair if one owner has the flexibility to plan further in advance than the other?
b) How far in advance can the aircraft be reserved? For example, can one owner reserve the day after Thanksgiving for the next five years immediately after becoming an owner?
c) Do one or all owners have frequent pop-up trips that could conflict with another owner’s needs?

2. Costs
a) Will fixed costs be shared equally or based on a percentage of the annual usage?
b) If based on usage, can the annual usage be reasonably predicted?

3. Management
a) Will a management company be used to operate the aircraft?
b) If so, how do the owners reach agreement on which management company to hire?

4. Extended trips
a) How often does one owner need the aircraft for multi-day trips that keep the aircraft inaccessible for the other owners?
b) What obligation does an owner have to return the aircraft to its home base if it’s not going to be used for several days between stops on an extended trip?

5. Shared Usage
a) Do the owners travel to the same areas of the country and would sharing the aircraft for those flights be desirable for all owners?

6. Charter
a) When the owners are not using the aircraft, will it be placed on a Part 135 certificate for charter?
b) If so, if a charter flight is booked, can an owner reservation trump the charter flight?

7. Allowable Activities
a) Will smoking be allowed on the aircraft?
b) Will large or small pets be permitted and, if so, under what conditions?

8. Upgrades
a) Do the owners have similar views on safety upgrades that may not be mandatory?
b) What about amenities such as wifi and upgraded avionics?

9. Dispute resolution
a) If and when conflicts arise, is there a procedure in place for resolving conflicts in a very specific and cost-effective manner?

10. Termination – at some point, an owner will no longer want to own the aircraft
a) Will the non-selling owner be entitled to a right of first refusal?
b) If one owner wants to sell and the other does not, will a sale of the aircraft be required?
c) What will be the terms of the sale, including the mechanism for pricing the aircraft?

Sharing an aircraft can lead to conflict. It should never be assumed that just because the owners are associates that they will be able to work issues out as they arise. The best way to avoid future conflicts is to create a user agreement which is very specific and thorough and anticipates as many of these friction points as possible. A well-drafted user agreement, signed when the aircraft is purchased, can act as the non-biased document that all owners look to for guidance. The more answers found in the user agreement, the less likely it is that the conflict will escalate.

Since not every possible conflict can be contemplated in advance, the user agreement must contain a specific dispute resolution provision and a termination provision. Additionally, if the owners no longer wish to own the aircraft together, an unwinding process should be documented that is satisfactory to the parties.

As the war in Ukraine continues, Russian sanctions appear to be something that will be part of the international economic stage for the foreseeable future. These sanctions seem to make it more likely we will see private aircraft owned or operated in Russia become available for sale. Given that most private aircraft used in Russia are not on the Russian aircraft registry, understanding who the ultimate owner is and being able to show that a real effort was made to conduct due diligence related to any buy/sell transaction is critical.

These sanctions remind us that buyers should make sure they are doing everything possible to “Know Your Customer.” The due diligence necessary on aviation transactions has become more important in recent weeks, and this will continue. It is not enough to depend on a lender, or an escrow agent involved in the transaction to handle the due diligence process. Additionally, it is not advisable to only rely on a contractual provision. As a buyer, you need to make sure you are not negotiating with (and buying from) a sanctioned person, and as a seller ensure there is not an intent to export the aircraft to Russia or any other sanctioned country.

In today’s private aviation market where charter availability is becoming more scarce, pre-owned inventory is at a historic low, and fractional and card programs have slowed down their sales; I am getting an increased number of questions related to how someone can legally share in the use of their friend’s aircraft. The first piece of information to understand when answering this question is if the aircraft is on a FAR Part 135 charter operating certificate. If the aircraft is on a FAR Part 135 charter certificate, then it is easy to charter your friend’s aircraft through the charter company. If the aircraft is not on a charter certificate and is only eligible to be flown under FAR Part 91, then the use of the aircraft is limited. Since most charter aircraft today are very busy with charter, we will assume that the friend’s aircraft is not on a Part 135 charter certificate for the purpose of this article.

If your friend wants to allow you to use the aircraft as an invited guest, even if the friend is not on the aircraft, this is permissive if no compensation is being paid for the flight. However, if there is any type of compensation for the flight, then it is not allowed under the regulations unless one of the exceptions detailed below. These exceptions include a dry lease, time share or interchange.

Before I describe each of these exceptions in more detail, it is important to understand two critical points. First, compensation does not only mean cash but also means things like an exchange of services, use of boat or house, or an expensive present like a watch given in consideration for the use of the aircraft. Second, if the arrangement you make to use your friend’s aircraft under Part 91 is not allowed under FAA regulations, then an illegal charter flight has occurred. The number of enforcement cases for illegal charter flights has grown significantly in recent years and continues to be a top enforcement priority for the FAA.

The most common way to use a friends aircraft is under a written dry lease agreement. A dry lease means your friend is providing (leasing) the aircraft to you without crew. It is then up to the user/lessee to hire and pay for the crew for the flight. Also, and, most significantly, under a dry lease, the user/lessee is in operational control of the aircraft and needs to understand what that means from a regulatory and liability standpoint.

A time share arrangement, which is allowed under 14 CFR § 91.501(b)(6), can be put in place to allow a friend to use your aircraft and your crew. Specifically, under FAR 91.501(c)), a time share agreement “means an arrangement whereby a person leases his airplane with flight crew to another person, and no charge is made for the flights conducted under that arrangement other than those specified.” In this case, the friend can receive payments for the specific items as defined in 14 CFR § 91.501(d), which is two times the cost of the fuel plus some other specific expenses. It does not, however, allow the friend to capture reimbursement for the capital expenses involved in owning/operating an aircraft.

Another option under FAR Part 91.501(b)(6), is an interchange agreement. The interchange agreement as defined by FAR Par 91.501(c) is “an arrangement whereby a person leases his airplane to another person in exchange for equal time, when needed, on the other person’s airplane, and no charge, assessment, or fee is made, except that a charge may be made not to exceed the difference between the cost of owning, operating, and maintaining the two airplanes.”  If both you and your friend have an aircraft and you want to share the aircraft when one or the other aircraft is down for repairs or otherwise unavailable this is allowable as long as there is a written interchange agreement in place. If the aircraft are two different types, there can be an exchange rate included in the agreement. However, there cannot be a true up if the hours utilization is not balanced.

Whether a dry lease, time share or interchange agreement is selected, the agreement must be in writing, kept on the aircraft when in use, and if truth-in-leasing requirements are applicable, then certain language regarding operational control must be included. Additionally, the agreement must be filed with the FAA for truth-in-leasing purposes and at least 48 hours before the first flight. Finally, notice of the first flight must be provided to the local flight standard district office.  Additional considerations include any applicable tax that may be due and the number of agreements in place with regard to an aircraft.  Specifically, if there are a number of agreements (dry lease, time share and/or interchange) for the same aircraft, this could be interpreted by the FAA that the aircraft owner is using such agreements as a sham and is actually conducting an illegal charter operation.

In general, while it is far simpler to find an aircraft on a Part 135 certificate or a generous friend who is not worried about being paid for the use of the aircraft, this might not be possible. An aviation attorney well versed in FAA regulations should be consulted before there are any payments made for flights under the FAR Part 91 exceptions outlined here. A good alternative to the above scenarios may be to purchase an ownership interest in the aircraft. We will discuss this option in an upcoming article.

 

 

The challenge of historically low aircraft inventory is affecting many of my clients.  First time buyers are beyond frustrated that each time they identify an aircraft to purchase it is already under contract or there are no aircraft listed for sale that meet their purchasing requirements. Current aircraft owners seeking to replace an existing aircraft are struggling with how to time the sale of their current aircraft and purchase a replacement because as soon as good quality aircraft are listed, there are several offers and if they sell too soon, they will be left without an aircraft.  The speed of selling an aircraft has increased significantly and acquiring an aircraft has become progressively difficult in this market.

Adding to the frustration of buyers, is the bold positions many sellers are taking in this unbalanced market, including limiting the amount of time and scope of a pre-purchase inspection, capping the amount sellers will pay to remedy discrepancies and, in some cases, requiring significant, non-refundable deposits before a visual inspection.

The key to navigating this difficult market is creativity, experience and, for a certain aircraft type, global reach. When searching for an aircraft in today’s market, a buyer needs to have someone on their buying team with comprehensive and real-time knowledge of the aircraft market for their target aircraft. As with any difficult market, it often becomes more about who you know and timing.

The buyer’s team must understand how to anticipate or obtain inside knowledge regarding aircraft that are going to be listed for sale and/or that are not listed (off market) but would be sold for the right price.  Finally, the buyer’s team may need global reach, most often for large cabin aircraft, as there may be more international availability.

Additionally, the buyer’s team needs to be prepared to act with urgency when an aircraft is identified.  This team should include an aviation attorney, broker/consultant, escrow agent, insurance provider, management company and lender, if applicable.  The buyer should have a letter of intent already in draft form, deposit in escrow or ready to go to escrow, financing approved, and ownership structure ready to implement.

Finally, and most importantly, the buyer needs to be flexible but not reckless.  Buyers may have to settle on a different aircraft to purchase in the short-term as they seek out their most desirable choice.  Furthermore, buyers may need to concede on certain deal points.

An important caveat in today’s market – a buyer should not give on any items that would compromise safety.  For example, if a seller is unwilling to authorize certain inspections to get a deal done, then the buyer may make a business decision to skip those inspections.  However, buyers may consider doing additional inspections after closing.  Completing inspections after closing exposes the buyer to financial risk but completing the inspections after closing would allow the buyer to have peace of mind knowing the aircraft is in a safe condition.

In today’s market, buyers may need to play by the rules set by the seller, but with creativity, planning, patience, team knowledge, and insider expertise, finding a needle, or an aircraft, is possible.