The FAA is Watching – And You Need to Look as Well.
In May of 2020, the FAA sent an information letter to pilots reminding them that it is illegal to provide transportation for compensation or hire to passengers when operating aircraft under Part 91 of the Federal Aviation Regulations (FARs). At the same time, the FAA has recently engaged in several high-profile investigations, proposing large fines against operators who allegedly flew for-hire operations without having a FAR Part 135 charter certificate. Among others, on August 21, 2020, the FAA proposed a fine of $576,400 against Bluefin Aviation Services out of Opa-Locka, Florida. On April 3, 2020, the FAA announced a proposed fine against B E L Aviation of Odessa, Texas.
Some private pilots might take some personal comfort in these reports, believing the operators to be purposely organized for-profit efforts to flaunt FAA rules. But that comfort should only go so far. The fact is there are many ways that aircraft owners, operators, and private pilots can inadvertently violate FAA rules and operate what the FAA considers an illegal charter. This can result in FAA fines for every flight operated illegally (which can add up quickly), revocation of pilot licenses, and significant liability exposure if an accident or incident occurs during an illegal charter operation.
Below are three danger areas in which private aircraft pilots, owners, and operators must pay attention to avoid the potentially significant repercussions of operating an illegal charter.
Danger Area No. 1: Shared Usage of an Aircraft when Money Changes Hands
Many aircraft owners and operators decide that they may not need full-time use of their aircraft, so they explore the possibility of sharing use of their aircraft with friends and acquaintances. Frequently this involves paying rent or sharing costs of a flight. While there are ways that this can be accomplished legally, there are many ways that this can go awry.
Any time an aircraft owner or operator accepts money or compensation for use of an aircraft you must ask the question: How would the FAA view the situation? The answer often comes down to who has “operational control” over the aircraft. “Operational control” is defined in the FARs as “the exercise of authority over initiating, conducting, or terminating a flight (refer to 14 CFR part 1). The FAA position is basically this: If one person pays any sort of compensation to another person for use of an aircraft and the person being paid is in operational control, it is likely an illegal charter. Consider some common scenarios:
- An aircraft owner rents his aircraft to a friend. The friend pilots the plane herself or hires a crew and bears all the costs of the flight and directs the crew. This is what is commonly known as a “dry lease” and is permissible because the friend arguably has control over the actual use of the aircraft, which the FAA would consider operational control.
- Change it up. An aircraft owner rents their aircraft to a friend. But the owner also employs a pilot and provides pilot services to the friend along with the aircraft. (This is commonly referred to as a “wet lease.”) The FAA would say that the owner controls the crew and the aircraft and therefore has control over the operations. Absent a charter certificate or another type of exemption, the FAA would consider this an illegal charter.
- One more example with the same facts as the second example, but the friend’s company decides to employ the owner’s pilots as well, so the pilots are now employees of both companies. Does that solve the problem? No, according to the FAA. When this has come up in practice, the FAA views it as a sham and an attempt to cover up an illegal transportation for hire scheme.
In most cases, the parties in examples like the ones above do not intend to flaunt the law and are instead simply trying to find practical solutions to reduce the cost of aircraft ownership. To avoid these mistakes, some critical planning and thought in advance can go a long way towards unknowingly operating an illegal charter.
Danger Area No. 2: The Flight Company Trap
Consider two more examples:
- A business owner wants to buy her own aircraft but she’s concerned about the potential liability if she has a crash and whether it could result in her losing her business or cost her family their home. A lawyer friend suggests that she should own and operate the aircraft out of a limited liability company so that she will never have any liability.
- A public company wants to buy its first aircraft, a G550. When the board meets, they recommend creating a separate flight management company to buy the aircraft, employ the pilots, and manage the flight operations for all four business divisions of the company. They want the business divisions to then reimburse the flight company for its costs and also like isolating the potential liabilities from the rest of the operations.
What do these scenarios have in common? First, they both involve special purpose companies that are apparently in the business of operating aircraft. Second, they are both illegal operations according to the FAA.
These scenarios both fall under the aptly named “flight company trap”. In the eyes of the FAA, a company created to provide transportation for hire in the United States requires an FAA-issued charter certificate. Whether or not money actually changes hands between the company and the owner or related companies, the FAA takes the position that the company that operates the aircraft (the “flight company”) was created for an illegal purpose.
Are there ways to handle these situations correctly? Absolutely. In the first scenario, owning an aircraft in a special purpose company is not illegal, but the operations from it are. If the owner treated the company as a leasing company, leasing the aircraft to herself or her business, it would be perfectly acceptable. The same rule would be true in the second scenario, but there are other possibilities as well. For instance, owning the aircraft in a company with another business (other than air transportation) might not limit liability, but it is legal and it might have favorable tax advantages such as accelerated depreciation. So again, pre-planning and an understanding of the FAA rules and regulations can help ensure you don’t unknowingly create an illegal charter operation.
Danger Area No. 3: Private Pilots and Cost Sharing on Flights
Frequently pilots like to seek out ways to defray the costs of flying, whether on their own aircraft or one they rent or lease. As a result, they may agree to transport friends or acquaintances that will often gladly chip in toward the costs of such flights. And, further, there is common wisdom among pilots that the FAA is okay with sharing costs. And they are not wrong – for the most part.
The fact is, the FAA has a specific rule on this practice, outlined in FAR § 61.113(c). The problem with this, however, is that the rule is very narrowly interpreted and only works in specific circumstances. For one thing, it only allows sharing of limited expenses (specifically, fuel, oil, airport expenditures, and aircraft rental fees) and it requires that the pilot must pay a pro-rata share of such expenses along with all other passengers on the particular flight. Further, there is an extra requirement that is not found in the regulation, as spelled out in an FAA chief counsel opinion: the pilot and passengers must have a “common purpose” for the flight. To illustrate:
- A pilot and his three college buddies want to fly to South Bend, Indiana to watch a Notre Dame football game. His friends each pay the pilot 25% of the cost of the fuel. Result: all four people want to go to South Bend, Indiana to watch a Notre Dame football game, so they have a common purpose. This is acceptable to the FAA.
- Same facts as above, but with a twist. The aircraft owner and his three college buddies want to go to another Notre Dame football game but the owner is not a pilot. The owner fuels the aircraft, engages his usual pilot, and they all fly to Indiana. His friends each pay the owner 25% of the cost of the fuel and buy his ticket to the game. Result: while all four people have a common purpose, the owner is not the pilot but is hiring pilot services. The cost sharing is illegal because he does not fit under the regulation rules. (Query whether the ticket is a violation too? Perhaps.)
- A pilot is working on building flight hours so he can reduce his insurance costs in the coming year. Two of his friends want to go on a fishing trip to Canada and he is happy to get the hours so offers to fly them. They each pay a third of the costs of the flight on arrival and head off fishing while the pilot heads off to the hotel. Result: the pilot and passengers have two different reasons for the flight and no common purpose. The FAA could impose fines and potentially suspend or revoke the pilot’s license, among other actions.
As illustrated above, changing just one fact or not having a firm grasp of the cost-sharing rule can result in unknowingly operating an illegal charter.
Wrapping Up
There are undoubtedly some sharp operators out there who are trying to run an aviation business while cutting corners and knowingly ignoring FAA rules and regulations. As the danger areas discussed above show, however, there are many situations where an aircraft pilot, owner, or operator may be unknowingly operating an illegal charter while being completely oblivious to what they are doing wrong. What is a well-intending aircraft owner or operator to do?
If you are buying an aircraft, consider carefully how you intend to own and operate that aircraft and whether you are complying with FAA regulations. Such a review should also include tax planning and potential liability considerations. If you have owned an aircraft for years and never considered these factors, you might also consider reviewing your structure now to see if you are operating within the law. At FMJ we frequently advise pilots, aircraft owners, and other operators on how to properly structure their flight operations and implement that structure in practice to avoid illegal charters and the corresponding liability exposure.
If you have questions about illegal charters or your aviation structure, please contact Kevin Johnson at kevin.johnson@fmjlaw.com.
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