Aircraft Purchase, Ownership and Operation: Protecting the Interests of a Family Business Owner – Part 4As noted in Part 1 of this series, owners of private aircraft will often want to share ownership and/or use of their aircraft with others. In most cases the motivation for sharing ownership and/or use of an aircraft is to defray the significant costs and expenses associated with the purchase and maintenance of the aircraft, purchasing or leasing a hanger for storage of the aircraft, employing a pilot or pilots and other crew to operate the aircraft, insuring the aircraft, and other similar costs and expenses. For these and other reasons, it is common for owners of private aircraft to enter in various types of arrangements to share ownership and/or use of their aircraft with others. However, any such arrangements must comply with the Federal Aviation Administration rules for the operation of private aircraft, namely, Part 91 of the Federal Aviation Regulations (FARs), which were discussed in greater detail in Part 3 of this series. The following are the more typical arrangements for sharing ownership and/or use of a private aircraft permitted under the FARs:

Aircraft Dry Lease Agreement

It is common for a small business or individual owner of a private aircraft to make the aircraft available for use by others at times when the owner is not using the aircraft. This is often accomplished by what is referred to as an “aircraft dry lease.” An aircraft dry lease is an arrangement whereby the owner leases the aircraft to another party (lessee) and the lessee is required to provide its own pilot or pilots and pay the costs of fuel and other expenses incidental to the lessee’s operation of the aircraft. The FARs require that the owner and the lessee enter into an aircraft dry lease agreement, which provides, among other things, that the lessee is to have “operational control” of the aircraft at all times that it is operated by the lessee. This means that the lessee, rather than the owner of the aircraft, is deemed to be responsible for the operation and control of the aircraft while it is being used by the lessee, thereby placing primary liability upon the lessee for any accidents or incidents that occur during the lessee’s use of the aircraft. The financial arrangements under an aircraft dry lease vary from one lease to another but generally include an hourly charge for the operation of the aircraft, a flat fee (daily, weekly or monthly) for the lessee’s possession of the aircraft during the lease term, and reimbursement or sharing of certain costs related to maintenance, repairs and/or insurance.

Time Sharing Agreement

In situations where the owner of a private aircraft would like to make the aircraft available for use by others under a lease arrangement, but the owner prefers that the owner’s pilot(s) operate and control the aircraft while it is being used by the lessee, the owner and lessee may enter into a time sharing agreement. A time sharing arrangement differs from an aircraft dry lease arrangement in that the owner is deemed to retain “operational control” of the aircraft even though it is being leased to and used by the lessee. The two arrangements also differ on account of strict limitations imposed by the FARs on the amount that the owner of the aircraft may charge the lessee for its use of the aircraft. The lease charges under a time sharing arrangement are limited to twice the cost of fuel used in the operation of the aircraft plus the following incidental expenses associated with the operation of the aircraft: (i) travel expenses of the crew, including food, lodging and ground transportation; (ii) hangar tie-downs costs; (iii) insurance obtained for the specific flight(s); (iv) landing fees, airport taxes and similar charges; (v) flight food and beverages; and (vi) other limited incidental costs associated with the flight(s). In contrast, there are no limitations on the amount of rental fees and other charges that an owner may charge a lessee under an aircraft dry lease arrangement. Payments by a lessee to an owner under a time sharing agreement are generally subject to a 7.5 percent federal excise tax.

Aircraft Charter Agreement

Another opportunity for the owner of a private aircraft to generate revenue to defray the expenses associated with ownership and maintenance of an aircraft is to make the aircraft available for charter by others. Because most owners of private aircraft are not authorized to provide charter flights under Part 135 of the FARS (see Part 3 of this series for a discussion of Part 135), an owner will typically contract with an aircraft charter services company (charter operator) to place the aircraft on the charter operator’s Part 135 certificate. This makes it possible for the charter operator to provide charter flights using the owner’s aircraft when the owner is not using the aircraft. The charter operator will typically retain between 15 and 20 percent of the net charter flight revenues and remit the balance to the owner. The charter operator is responsible for all aspects of the operation of the aircraft during any charter flights, including providing the pilot(s) and other crew for the flights.

Joint Ownership Agreement

A joint ownership agreement provides for the ownership of a private aircraft by multiple individuals and/or companies who enter into an agreement regarding their respective ownership of the aircraft, the rights of each owner to use the aircraft, and the manner in which the owners will share the costs and expenses of owning, maintaining, insuring and operating the aircraft. In a joint ownership arrangement, a single owner assumes responsibility for employing and providing the pilot(s) and other flight crew to operate the aircraft for the benefit of all of the owners. The salary, benefits and other costs and expenses incurred by the owner employing the pilot(s) and other flight crew are shared among the owners in the manner provided in the joint ownership agreement.

The forgoing is a general overview of the more common arrangements for the owner of a private aircraft to “share” the aircraft with others and receive compensation for doing so. There are a variety of other arrangements for sharing ownership and/or use of aircraft, including co-ownership, fractional ownership, and interchange arrangements. All such arrangements are governed by and must be conducted in strict accordance with the FARs. The owner of a private aircraft should consult with experienced aviation counsel before entering into any arrangement whereby the owner makes the aircraft available for use by others in exchange for any compensation, reimbursement or other remuneration.

Transitions in Family-Owned BusinessesAs we enter what is expected to be the peak decade of baby boomer retirement, the recent 2018 Insights into Family-Owned Business published by the Birmingham Business Journal focused on transitions happening, and expected to happen, in family-owned businesses.  The most significant expectation appears to be that many family-owned firms will be sold during this wave of baby boomer retirement.  This is not an unreasonable forecast based on the number of family-owned businesses in the U.S. and the troubling reality that many owners have not planned adequately for the succession or transition of their business.  Certainly, many family-owned businesses will be sold as part of a well-thought-out plan.  I expect more will be sold as a result of inadequate planning.

I had the opportunity to participate in the Table of Experts for the 2018 Insights issue. We focused much of our discussion on the importance of planning for transition in a family-owned business and challenges faced by families seeking to continue ownership through generations.  If you want the “CliffsNotes” version of the 2018 Insights, I would summarize the key points as follows:  Successful transition, whether that means succession to the next generation, moving to professional management under family ownership or a sale of the business for the maximum return, requires total commitment, continuous planning, unwavering focus and excellent communication.  Easy enough, right?  We also recommend outside help from knowledgeable, experienced, trusted advisors (which should come as no surprise).

I hope you find the 2018 Insights into Family-Owned Business helpful.   Please contact any of the attorneys on our team if you need additional guidance on preparing for the transition of your business.

Aircraft Purchase, Ownership and Operation: Protecting the Interests of a Family Business Owner – Part 3As noted in Part 1 of this series, Federal Aviation Administration (FAA) rules govern the ownership, operation and use of private aircraft. Most private aircraft are operated under Part 91 or Part 135 of the Federal Aviation Regulations. For reasons discussed below, it is imperative for the family business owner of a private aircraft to determine whether the Part 91 or Part 135 rules govern the owner’s operation of the aircraft and to strictly comply with such rules at all times.

The Part 91 rules govern the operation of a private aircraft for non-commercial purposes. Examples of Part 91 operation of a private aircraft would be flights taken by employees on aircraft owned by their employer for business purposes; personal flights taken by the owner of the aircraft; flights taken by the owner’s family members or friends; and other similar flights that do not involve any charge or fee paid by the passengers for the value or costs associated with the flight. The Part 91 rules are generally less restrictive and less costly from a compliance standpoint than the Part 135 rules, which are discussed below. In most cases, the owner of a private aircraft will structure the ownership, operation and use of the aircraft to fall within the Part 91 rules.

The Part 135 rules govern the operation of a private aircraft for “compensation or for hire.” For example, if the owner of a private aircraft takes a group of friends on a ski trip and charges each passenger a proportionate share of the value or costs associated with the flight, the flight is considered as one for compensation or hire and the owner must comply with the Part 135 rules. Similarly, if the business owner of an aircraft makes the aircraft and pilot(s) available to other businesses to use, for a fee or charge, the business owner must comply with the Part 135 rules with certain very limited exceptions. Charter operations involving a private aircraft are governed by the Part 135 rules.

The Part 135 rules for operating a private aircraft are more stringent than the Part 91 rules, involve additional expense for compliance, maintenance and pilot training and certification, and require that the owner-operator of the aircraft hold a Part 135 certificate issued by the FAA. Obtaining a Part 135 certificate involves significant expense and can take six months or longer. The operation of a private aircraft under Part 135 also requires that the operator report and pay the Federal Excise Tax of 7.5 percent on the amount of compensation received by the owner for any flight operated under Part 135.

The failure to comply with the Part 91 or Part 135 rules, as applicable, can have catastrophic consequences for the owner of a private aircraft. For example, if the owner mistakenly believes that the operation of the aircraft is governed under the Part 91 rules when in fact the Part 135 rules apply to the owner’s operation of the aircraft, the insurance coverage for the aircraft may be voided and the owner may be subject to civil penalties of up to $25,000 for each violation of the applicable rules. For these and other reasons, an owner of private aircraft should consult with legal counsel experienced with the Federal Aviation Regulations governing the ownership, operation and use of private aircraft.