ORIGINAL ARTICLE FROM AVIATIONWEEK.COM

Much attention has been given to the FAA’s clampdown on illicit charter and “damp” dry leases, two of the main schemes that are used to circumvent the expense and complexity of becoming a certified FAR Part 135 air carrier. Time-sharing, interchange and joint ownership agreements, if not properly structured and administered, also can expose participants to legal liability and financial penalties. And there are insurance implications that can result in “reservation of rights” denials of claims.

In mid-June, BCA held an hour-long webinar on “Illicit Charter: Intentional or Not” with panelists Ryan Waguespack, senior vice president of the National Air Transportation Association (NATA); Operations Inspector Don Riley of the FAA’s Special Emphasis Investigation Team (SEIT); and attorney and BCA contributor Kent Jackson, founder and managing partner of JetLaw LLC.

“Illegal charter has been around for decades,” says Waguespack. “The ‘Uberization’ of our culture exacerbated it.” People involved in illicit charter can be divided into “the careless, the clueless and the criminal,” he says.

The “criminal” element intends “to skirt the regs,” says Waguespack. They’ll flaunt the law until they’re forced to stop by the FAA, an accident investigation, loss of insurance coverage or the rare consumer complaint. They cannot be gently encouraged to change their behaviors.

“We still see all three of those [categories],” posits the FAA’s Riley. He estimates that 50% of the cases the FAA gets are “intentional violations, and that, of course, is troubling.” Those cases lead to FAA enforcement actions.

The NATA therefore is focusing its attention on the “careless,” characterized by their “misunderstanding of the regulations,” and the “clueless,” those who just aren’t aware of the rules and the FAA’s recently stepped-up enforcement activities.

Since 2017, the NATA has embarked on programs to educate both consumers and providers of business aviation services regarding the potential safety risks, legal liability and financial exposure of illicit charters and sham dry leases. “Our focus has been education, education, education,” says Waguespack.

As for the careless and the clueless, the FAA leans more toward “compliance” through education rather than enforcement and punishment. Charter customers often aren’t aware, and some don’t even care, that they’ve booked a trip from a firm that doesn’t have Part 135 credentials. They’re looking for the lowest price, unaware of the risks the trip might entail.

To avoid falling inadvertently into eight of the most common traps, our panel of experts, plus aircraft insurance brokers and tax experts, provide some tips:

(1) Clearly Define Operational Control

Riley says that flight crews typically are the first points of contact during an FAA random ramp check. Outside of verifying the usual pilot and aircraft documents, inspectors ask pilots what kind of flight operation is being conducted. If the crew responds that it’s a Part 135 Air Charter flight, then the inspector may ask to see copies of the firm’s Part 119 Air Carrier Certificate and OpSpecs (Operating Specifications) including D085 listing that authorizes specific aircraft by serial number for use by the air charter, along with the standard aircraft airworthiness certificate, flight dispatch release and FAA-approved general operations manual, among other documents.

The FAA maintains a master database of air-carrier certificate holders, including their D085 approvals, that can be used to crosscheck documents provided by the air charter crews. It doesn’t take long to verify the required Part 135 documents and the charter crew is cleared to leave.

In contrast, if the flight crew says that the trip is a Part 91 flight, then the inspector may ask who has operational control of the aircraft. The FAA is looking for little red flags that potentially indicate non-compliance with all the required elements of a bona fide non-commercial flight.

If the crew is “a little bit fuzzy about operational control,” says Riley, it opens the door for more questions regarding who owns the aircraft, whether it is being flown on behalf of the owner or whether it’s out on a lease or charter. If it’s unclear whether the aircraft owner or the passengers have operational control, then the FAA may probe further to determine if the owner is being reimbursed for use of the aircraft by the passengers.

Notably, passengers don’t have to pay fair market value for the flight for it to be classified as a charter. The least amount changing hands is enough to trigger an investigation. “OK, just buy me lunch,” is sufficient to characterize the flight as “for hire.” The provider needs a Part 135 air carrier certificate if there’s any compensation for the flight.

(2) FAA Queries Passengers

After talking with the pilots, if an FAA inspector begins to suspect that money is being exchanged for air transportation services, “then, most importantly, we talk to the passengers,” says Riley. “Most of these people just want to go from Point A to Point B at the cheapest rate, which is sometimes a problem. And they’re usually going to blurt out, ‘Well, I chartered this flight from some firm.’

“That’s ‘game, set and match,’” he adds. The obvious disconnect between the pilots’ claim that it’s a non-commercial flight and the presumption by the passengers that they’ve chartered the airplane is probable cause for an in-depth investigation of all the details of the agreement.

In contrast, if the passengers say they’ve “dry leased” the aircraft, they must prove they have four-way operational control: (1) arms-length lease agreement for the aircraft, (2) own full-time or contract crews, (3) assumption of responsibility for aircraft maintenance and airworthiness and (4) covering the aircraft with appropriate insurance. That’s “aircraft, crew, maintenance and insurance” or ACMI, for short, in leasing parlance.

“Most of these individuals or entities truly have no idea what operational control looks like. The insurance, dispatch, how the airplane’s being operated, the crew training and currency, has the airplane been maintained properly,” says Waguespack. In essence, the lessees must form their own flight department or hire a third party to handle all the responsibilities.

Operational control includes “taking on liability for the operation” and exposure to enforcement risk, says Jackson. “It would be good [for] the people [who] get into these programs that are on the wrong side of the line [to] really understand the risks.”

One of the most frequent violations of the ACMI dry lease is what Waguespack calls a “damp lease,” an arrangement by which the aircraft owner leases out an aircraft for Part 91 use and also provides at least one crewmember. In accordance with Title 14 Code of Federal Regulations §110.2, such an agreement actually is a “wet lease,” and it requires the lessor to have an air carrier certificate. Legitimate Part 135 charter operators, for instance, often wet lease aircraft from other Part 135 air-carrier certificate holders to provide supplemental lift.

But Part 135 operators cannot simply borrow or occasionally lease additional aircraft without going through the rigors of earning formal D085 OpSpec approval for each aircraft they’ll be using in air carrier service.

When a Part 135 operator subcontracts with another Part 135 operator, full ACMI operational control for the charter flight transfers to the outside certificated air carrier, says Waguespack. It’s very clear that the passengers are paying for transportation to a Part 135 air-carrier certificate holder and not leasing an aircraft for Part 91 operations.

(3) Dry Lease Gets Soggier

If passengers or the crew tell FAA inspectors that the aircraft is being “dry leased,” there must be a copy of the lease aboard the aircraft. “If we ask to see the lease and there isn’t one on board, or if there’s a stack, a book with 20 to 30 ‘dry leases,’ that’s going to be good indications that there might be something awry with this flight,” says Riley.

Multiple, short-term lease agreements invite scrutiny. “We’re going to look at the big things and take that information back to the office, analyze it and then make follow-up phone calls to passengers, owners and pilots,” says Riley. Jackson recommends minimum one-year lease agreements. “Long-term commitment definitely is an indication of operational control,” he says.

“There’s really no hard and fast rule to how long a lease should last, but I can tell you, if you have a day lease, a trip lease, a ticket lease, whatever adjective you want to use for one trip or even a series of trips, that’s just a huge red flag,” Riley explains. “They’re [the lessees are] just in it for the air transportation and the lessor is doing everything.”

“For years, the biggest problem for FAA enforcement has been when people combine legitimate agreements into an illegal package,” says Jackson. So-called “transportation packages” might include “perfectly legitimate pilot services and dry lease agreements.” He continues, “But the person offering both services says, ‘Sign here, sign here and away you go!’ That’s the illegal transportation package. It’s hard for the FAA to go after that, because the paper [document] is correct. It’s how that paper came to be that’s the problem.”

To meet dry lease requirements, there needs to be arm’s length separation between the aircraft lessor and the entity providing crew services. It’s difficult for the crew to prove third-party independence if they work principally for a firm that leases an aircraft and also part time as contract pilots for the same firm’s lessees.

“You really fail the sniff test when you see multiple users, each of whom is supposed to have operational control, and yet somehow they’re all using the same crew,” says Jackson.

Even if the lessee hires legitimately independent contract pilots, if the lessor packages the lease with maintenance or insurance, a dry lease can get soggy enough to become an illegal transportation package in violation of non-commercial restrictions wrapped into Part 91.

(4) Insurance Company Denies Coverage

Lance Toland, president of the Atlanta-based insurance brokerage firm that bears his name, says that aircraft insurance policies are very specific as to the types of flight operations that are covered. Policies are designed to protect people from “ordinary liability,” also known as “ordinary negligence,” resulting from unintentional acts. Injuries suffered by a passenger who gets tossed about the cabin in unforeseen severe clear-air turbulence, damaging a winglet by hitting an unseen fence post while maneuvering on a ramp in tight quarters, and blowing a tire during a takeoff run because of FOD on the runway are examples of unintentional events that typically would be covered.

If injuries or damages are sustained during a flight for which compensation is received, the air transportation provider must have a policy that covers certificated air-carrier operations. If your insurance company suspects you’ve been providing illegal charter services while operating under Part 91, then you may get the dreaded “reservation of rights letter” declaring that your claim may not be covered. If your policy only covers non-commercial operations, the insurance carrier most likely will declare the policy holder has breached the warranties of the policy and “walk away” from the claim, Toland says. That leaves the operator completely liable.

Damages or injuries associated with illegal charter expose the operator to “strict liability” in the event of an accident. And even if the sham charter provider only is partially responsible for the mishap, he or she can be deemed legally [and fully] responsible for the entire consequences of an accident, potentially leaving them facing claims that can be in the millions of dollars.

If the accident results in serious injuries or fatalities, “You’re very far up a creek that we don’t want to name,” says Toland. The plaintiffs’ bar will have a field day. “That’s the black and white of it.”

(5) Flight Crews’ Legal Liability

An insurance company “gives you proxy,” says Toland, providing both (1) representation for accident investigation along with defense during litigation, and (2) financial protection up to the dollar limits of the policy.

But the policy won’t cover pilots involved in illegal charter or sham dry-lease flight operations, he cautions. If damages or injuries occur on a trip, “You’ll be named in the suit. You’ll be out of pocket for hefty legal expenses,” he warns.

Even if the flight crews financially survive a civil lawsuit, the FAA is likely to revoke all their certificates permanently.

(6) Time-Share Snags

There are a lot of ways people can legally avoid the complexities of dry leasing and the expense of air charter, including time sharing. “These issues have been around for as far back you want to go. The time-sharing rule originally was written in 1972. And, primarily, it was a compromise between the NATA and the NBAA. Time sharing, properly done, is a wet lease of the aircraft with crew. But it’s limited in what you can charge to essentially two times the cost of fuel, plus some very specific flight related expenses,” says Jackson.

Part 91.501 applies to aircraft that have MTOWs in excess of 12,500 lb., have multiengine turbofan power or are part of fractional ownership programs. Section 91.501(d) essentially limits time-share expenses to two times the fuel cost, crew travel expenses, hangar and/or tie down at destination landing facilities, insurance for the specific flight, landing fees, customs and handling charges, catering and beverages, ground transportation for passengers and flight planning/weather service fees. Doubling the fuel expense won’t pay for debt service, depreciation, maintenance, insurance and crew salaries, among other sizable fixed costs, let alone aircraft and engine maintenance.

“Anybody who is making money doing time sharing, they are doing it wrong,” says Jackson. “Time sharing is designed to lose money for the operator to keep the line between charter and legitimate business use.”

“If you see a counter that says, ‘Time Share R Us,’” he warns, “walk away. Don’t go there.”

Jackson further cautions that time-sharing agreements are leases, so participants must adhere to the FAA’s Truth in Leasing requirements in accordance with Part 91.23 and detailed in Advisory Circular 91-37B. He adds that while time-share trips are operated under Part 91, they are subject to Federal Excise Tax (FET).

Interchange agreements enable two or more people to lease out their aircraft in exchange for equal time on another person’s airplane. Part 91.501(c) allows one party to charge another party the difference in the cost of owning, operating and maintaining the aircraft being shared. Jackson says that interchange agreements require both Truth in Leasing compliance and payment of FET.

Joint ownership is another way people can share use of an aircraft, one that eliminates the Truth in Leasing and FET requirements. Jackson says that each of the owners must be on the aircraft registration.

Having a multi-member, limited liability corporation own the aircraft doesn’t meet the FAA’s definition of joint ownership, for “good reason,” according to Jackson. “It would be too easy to buy and sell memberships, quickly and quietly. And maybe, even for one flight.”

(7) NBAA Exemption Snag

The long-standing FAA Exemption 7897 enables NBAA members who operate piston airplanes, small airplanes and helicopters to use Part 91.501 time-sharing, interchange and joint-ownership agreements. The current version, 7897K, contains a new provision that reflects the FAA’s renewed crackdown on illegal charter.

Users of Exemption 7897K now must electronically file a Notice of Joinder, including the name, physical and email address, and NBAA member number, plus contact phone number of the person submitting the notice. The applicant must attest that he or she will comply with all conditions and limitation of the exemption. And if the applicant ceases to be an NBAA member, the exemption eligibility ceases.

“No person may operate an aircraft under this Exemption unless the appropriate Flight Standards Office [FSDO] has been (a) notified that the operation will be conducted under the terms of this Exemption; and (b) provided with a copy of the time-sharing, interchange or joint ownership agreement under which each aircraft is being operated, if appropriate,” writes the FAA’s Robert Carty in an authorization letter to the NBAA.

Aircraft logbook entries, maintenance inspections and requirements apply. So, it’s highly advisable for members to contact the NBAA to assure they’re complying with all exemption details to steer clear of FAA enforcement actions. “That’s going to be a trap for the unwary,” cautions Jackson.

(8) Illegal Aircraft Sharing by Owner-Pilots

Advisory Circular 61-142 explains how and under what circumstances pilots may share expenses with passengers in accordance with Parts 61.113(c), 61.101 and 61.315. To avoid having a flight being characterized as a commercial operation, the FAA interprets Part 61.113(c) to mean that the pilot has a “common purpose” for the flight with the passengers, for the pilot to have his or her own reason for flying to the destination.

As an example, if the pilot intends to fly the aircraft to a scenic airport for the stereotypical $100 hamburger and asks friends if they want to accompany him or her and share appropriate expenses, the flight meets the FAA’s test for “common purpose.”

In contrast, if a friend contacts a pilot and says he or she needs transportation to visit a parent who has only a few hours to live at a hospice 400 mi. away, the pilot cannot share expenses with the passenger as there is no “common purpose” for the trip. Even personal emergency or charitable flights don’t meet the “common purpose” test.

“Unfortunately, sometimes bad facts make bad law,” says Jackson. He recalled a 1992 event in which “a friend calls the pilot in the middle of the night and asks, ‘Can you fly me to see my dying father?’ And the pilot says, ‘Sure.’ There’s a discussion of sharing expenses.

“Now how it came to the FAA’s attention is an interesting question to which we don’t really know the answer. But what we do know is it did come to the FAA’s attention and it initially revoked the pilot’s certificate. That was later reduced to a suspension by the NTSB. But because there was no ‘common purpose,’ because it wasn’t the pilot’s father, it didn’t fit the sharing expenses case law. If you just look at the [Part 61] sharing expense rule, it doesn’t explain this ‘common purpose’ requirement. That’s only in the case law,” as well as in the Advisory Circular, Jackson explains. “A lot of pilots simply look at the reg and don’t see the problem.”

Even if there is no exchange of money, a Part 61 or Part 91 flight can be characterized as a commercial operation, says Riley. “It might even be a promise of future business. Compensation comes in a lot of different ways. It doesn’t have to be monetary. We really have to look into these things and that’s going to take some time to see what exactly is happening,” he cautions.

Waguespack says that discussions on the topic are “critically important.” Education, dissemination of accurate information, is “absolutely paramount.”

“Smart charter customers ask a lot of questions,” Jackson notes. That also applies to pilots, time-sharing participants, lessors and lessees. Waguespack points out that the NATA provides plenty of information at its website (http://www.nata.aero).

The FAA remains focused on shutting down illicit charters and clamping down on sham dry leases; moreover, the problem is acute in the transatlantic air transportation market. Waguespack estimates that 15% to 20% of charter flights between Europe and the U.S. are illegal. “It’s been pretty alarming. Customs and Border Protection is getting heavily involved on the Florida coastline, as they realize that’s a tremendous issue with illegal ops on the international side.”

Jackson adds that the FAA doesn’t have to prove an operator is “holding out” air transportation services, as “common carriage” is defined by Advisory Circular 120-12A to take enforcement action.

The European Union Aviation Safety Agency also has ramped up illegal charter enforcement activities in the wake of a fatal accident in an N-registered Piper PA-46 Malibu that claimed the life of footballer Emiliano Sala in January 2019. Both the pilot and passenger probably were incapacitated due to carbon monoxide poisoning, the U.K. Air Accidents Investigation Branch concluded. Its report also states that the pilot didn’t have the required certificates, and the aircraft wasn’t approved for air charter operations.

The Sala crash refocused the FAA’s efforts on stopping illegal charters overseas, Waguespack says. “There are numerous N-registered aircraft around the world and the FAA is looking at how to deal with the issue.”

Riley says there are several safety risks associated with illegal charter: “No [Part 135] pilot training, no required maintenance, no [operating] manual system, no required [management] personnel, no flight duty and rest periods for pilots, no drug and alcohol testing, no FAA oversight and accountability, no proper insurance — it goes on and on and on.”

The FAA just finished one enforcement action, Riley says, involving a revenue flight in a Hawker 800 in which the pilot in command had a private pilot certificate and no aircraft type rating. The second in command in the right seat was a student pilot with fewer than 50 hr. logged time. Said Riley: “That’s one of the most unsafe things we’ve ever seen. This stuff goes on. It’s not made up. People say ‘You gotta be kidding me.’”

“The general flying public makes a lot of gross assumptions,” Waguespack says. “They assume when that pilot shows up in that pretty aircraft, and he’s wearing a white shirt, it’s creased, and it has epaulets, so he’s gotta be trained, he’s gotta be qualified. That airplane is too pretty to not be well maintained. And we all know, that’s just not the case.”

As the Sala accident clearly demonstrates, there’s a lot more risk associated with illicit charter than just financial and legal liability. People looking for the lowest cost private aircraft transportation have to ask themselves if it’s really worth it.

Airborne ride-sharing, time sharing and pilot cost-sharing may look like attractive short-term air transportation solutions. But depending upon how the agreements are structured, the long-term consequences can be personally and financially destructive.