Aircraft dry leases are popular in the world of private aviation. They are used successfully for many purposes, including as a way to maximize the use of a business jet by multiple related entities or as a way for aircraft owners to offset the ownership costs of an underutilized aircraft. Generally however, dry lease arrangements are not well understood by business aircraft owners.
Most aircraft owners are aware of dry leases and that the Federal Aviation Association (the “FAA”) regulates aircraft leasing arrangements. Many owners have heard stories of FAA and IRS fines due to aircraft dry leasing run amok. As a result, when aircraft owners consider dry leasing their aircraft they often ask: “How many is too many dry leases?” They mistakenly think that limiting the number of leases will avoid all problems. Unfortunately, it is not that simple. The FAA does not state an absolute acceptable number of dry leases. Although some FAA inspectors will make an initial presumption of devious intentions if there are a multitude of dry leases, the number of dry leases that individual inspectors considers excessive varies by inspector and the presumption should not be determinative if facts of proper compliance by all parties are presented. The FAA is ultimately much more interested in the content of each lease and the operational facts of the flights made under the leases than it is in the total number of leases on any business or pleasure aircraft.
“How many dry leases can we have?” is not the question the FAA wants aircraft owners and operators to ask. As it states in its Advisory Circular 91-37B, dated February 10, 2016 (“AC 91-37B”), the FAA wants them, and every party to an aircraft lease, to ask questions along the lines of, “Do all parties to this lease understand the meaning of operational control?” and “Is operational control clearly maintained by the appropriate party?” Properly structured leasing arrangements and compliance with the Federal Aviation Regulations (“FARs”) in the operation of the aircraft based on these questions are highlighted in AC 91-37B. In this Advisory Circular the FAA expresses concern that some aircraft owners may try to evade compliance with the applicable certification and operating rules of 14 CFR parts 121 and 135 which govern air carriers and commercial operators by entering into “devious leases.” As described in AC 91-37B, devious leases are aircraft dry leases which attempt to contractually shift who is responsible for the safety on flights and can put people at risk both physically and legally.
In AC 91-37B the FAA highlights the importance of who has legal control of the operation of the aircraft, or Operational Control, for every flight in every leasing situation. The FARs define Operational Control as “the exercise of authority over initiating, conducting or terminating a flight” which involves control over three basic areas: aircrew, aircraft, and flight management. Because Operational Control involves responsibility for the operation and safety of the flight, the party with Operational Control holds most of the legal liability for the flight too.
So who has Operational Control in a leasing situation? Generally, if the lease is only for the use of the aircraft, with no crew included, Operational Control is held by the lessee. This type of lease is called a “dry lease” and is essentially just an equipment lease. A true dry lease transfers possession of the aircraft to the lessee and the lessee is then responsible for hiring crew and operating the aircraft for its flights.
If the lease includes at least one crew member with the aircraft, possession and control including Operational Control of the aircraft is generally considered to stay with the lessor. This type of arrangement is referred to as a “wet lease.” Under a wet lease the lessor is considered by the FAA to be providing air transportation, not just the aircraft, to the lessee. With a wet lease, the lessor has (1) Operational Control, (2) is responsible for the safety and operation of the aircraft, and (3) unless the operations fall under an FARs exception such as those found in Part 91.501(b), the lessor is subject to the operating rules of 14 CFR parts 121 and 135 which govern air carriers and commercial operators.
In some cases the language of the lease and related agreements leaves some question as to whether the arrangement is a wet lease or a dry lease. In other situations, the actions of those involved do not correspond with the language in the written leasing documents. Therefore, in addition to looking at the documents to see for whom the crew is working, there are other factors that the FAA considers to determine who has Operational Control of flights flown under an unclear or questionable leasing arrangement. These factors include who: has legal possession of the aircraft, assigns the crew for flights, determines where and when flights are conducted, decides when and by whom maintenance and repairs are made, ensures the aircraft, the crew, and the flight comply with the FARs prior to departure of each flight under the lease, and pays for fuel, landing fees, and hangarage.
In conducting its analysis, the FAA considers if the lessor, i.e., the party supplying the aircraft, is “acting in concert” with the entity or person supplying the pilots. See Legal Interpretation to Joseph D. Fabian, from Rebecca B. MacPherson, Assistant Chief Counsel, Regulations Division (Sept. 10, 2007). If they are acting in concert, the FAA will consider the aircraft and crew as being provided by a single source and the arrangement a wet lease. The FAA determination of whether the crew is truly acquired independently from the aircraft, i.e., a dry lease, is fact specific and done on a case-by-case examination of the situation as a whole.
All of the factors mentioned above can influence who has operational control and therefore responsibilities in all areas should be clearly addressed and properly assigned in all leases. Most importantly, once the proper assignments have been made, the parties must follow the operational structure and assignments established in the lease documents. Parties acting in concert even when the contracts say they are independent are likely to be seen as devious by the FAA and are likely to be determined to be wet leases in disguise entered to avoid FARs certification and the related FAA oversight.
Properly drafted and implemented leasing structures will clearly assign Operational Control and its related components to the appropriate party in compliance with the FARs, and thus should discourage and stand up to FAA scrutiny. Every party to a lease should know who has Operational Control of the flights under the lease and the party with Operational Control should understand what it is and be qualified to properly handle the responsibility it entails. Additionally, when the party with operational control is the lessor and the arrangement doesn’t qualify for any of the exceptions found in the FARs, the lessor must have a valid commercial certificate from the FAA in order to legally take payment from the lessee for the flights.
Business jet and all other private aircraft owners must confirm that the leasing arrangements they enter are properly structured to avoid operational and legal risks. Aircraft owners shouldn’t focus on the number of dry leases but rather the content of each aircraft lease to ensure the party with Operational Control has the knowledge and experience (and if necessary, the proper FAA certificate) to appropriately and safely exercise Operational Control over the flights under the lease. Careful advanced planning can help ensure safe and legal flights for lessors and leases alike.
For more information on setting up the operational leasing structure for your aircraft or an aircraft you would like to lease, please contact us at 720-979-0922 or by email: Sue Carriere at firstname.lastname@example.org or Ty Little at email@example.com.