Finding partners to share the private jet
Owning a private aircraft is a wonderful time-saver and can be an effective business tool, but the cost of ownership can be significant or even prohibitive. Broadly speaking, aircraft costs can be categorized as either fixed or variable.
Navigating Federal Aviation Regulations to find partners to share the significant costs of owning a private jet
Owning a private aircraft is a wonderful time-saver and can be an effective business tool, but the cost of ownership can be significant or even prohibitive. Broadly speaking, aircraft costs can be categorized as either fixed or variable. Fixed costs are those that will be incurred regardless of the level of aircraft utilization, such as costs for hull and liability insurance, hangar space, maintenance tracking software and ad valorem property taxes, as well as periodic costs, such as engine overhauls and hot section inspections, airframe repainting, interior refurbishment and cabin upgrades. Variable costs are those that tend to vary depending upon use, such as fuel and oil costs, catering expenses and airport fees.
When evaluating an aircraft purchase, buyers typically consider, among other things, an aircraft’s projected total fixed cost per hour of operation, the hourly rate of which is determined by dividing the projected annual fixed costs by the number of flight hours the buyer expects to accumulate on the aircraft during the year. For many buyers, this expected level of annual utilization is an important factor in deciding whether to purchase an aircraft. And for many owners, after the aircraft is acquired this usage number plays a key factor in deciding whether to retain the aircraft. One rule of thumb is that purchasing an aircraft generally makes economic sense if the annual utilization is at or around 400 hours, or roughly 30 hours per month. If the anticipated usage is well short of those levels, a prospective purchaser might lean toward chartering or “dry leasing” (i.e., without fuel or flight crew) an aircraft from an existing operator, or perhaps participating in a fractional program.
For those determined to own, an alternative might be to “partner” with one or more other persons to share fixed and other costs so as to achieve a combined total usage that keeps the “total fixed cost per hour” at a reasonable amount per partner. An existing owner whose aircraft usage is declining, either suddenly or gradually over time, may similarly find itself looking for a partner.
The Federal Aviation Regulations (the “FARS”) accommodate those who want to increase cash flows by bringing in other owners or operators. Still, there are limits on one’s choices.
FAA Restrictions and Limitations
One primary concept to bear in mind whenever considering multiple owners or operators is that, as a general rule, only FAA-certificated air carriers may receive compensation in exchanges providing both the aircraft and any crewmember to another person. Thus, whenever a person who is not a certificated carrier (that is, a “Part 91 Operator”) provides both aircraft and crew to others for compensation (which, by the way, includes expense reimbursements relating to a flight), the flight operation will likely be illegal and may result in FAA penalties and, worse, the loss of insurance coverage. However, so long as nothing is charged for the transportation, under FAA regulations a Part 91 Operator may lawfully provide its aircraft and crew to transport, for example: (i) “guests” aboard its aircraft; (ii) an “athletic team, sports group, choral group, or similar group having a common purpose”; and (iii) persons in furtherance of a business, for “the purpose of selling them land, goods, or property.”
There are several exceptions to this rule, but the exceptions limit the compensation that one may charge for the transportation and, as such, are not very helpful to those wanting to find a “full paying partner.” Consequently, whenever one wants to generate cash by increasing aircraft utilization, it may not simply charter its aircraft to others, either directly or indirectly. Instead, in such situations, most Part 91 Operators will turn to joint aircraft ownership and/or multiple dry leases as possible solutions.
Sale of Interests in the Aircraft
The regulations allow two or more persons to own undivided interests in an aircraft pursuant to a “joint ownership agreement” so long as each joint owner is registered with the FAA. Thus, if you were to examine the FAA registry of a jointly owned aircraft, the name of each joint owner would appear. From a legal perspective, joint owners own the aircraft as tenants-in-common, and not as partners or joint venturers. Joint ownership offers two distinct benefits to an owner looking to generate cash and increase aircraft utilization. First, undivided interests in the aircraft may be sold at fair market value as determined by the parties, without any dollar limitations imposed by the FAA. Second, the current owner may use its crew to operate the aircraft for the other joint owners. Being able to provide the pilots ensures crew consistency and helps to avoid duplicative pilot costs. This structure requires that the joint owners share the charges associated with the aircraft as set forth in a joint ownership agreement. Typically, this is a fairly detailed document that sets out the various agreements of the parties relating to the ownership and management of the aircraft, including cost-sharing, scheduling and usage, pilots, “operational control” of the aircraft, insurance, hangarage, and, importantly, procedures for selling or otherwise disposing of the aircraft and/ or the individual joint interests. A joint ownership structure, however, does not come without some “costs.” For instance, from a tax perspective, the sale of undivided interests will be a taxable event for the seller, which may result in taxable income, especially if the aircraft has been heavily depreciated for tax purposes. Another concern is the potential for state sales and similar transfer taxes, which may be material (and unavoidable) depending on the tax rate of the applicable jurisdiction and the price of the interests. Moreover, from a liability perspective, a joint owner that provides its crew to the others could have exposure for thirdparty liability resulting from the crew’s negligence. Although the risk is insurable, a joint owner that furnishes the crew could have liability exposure if the insurers have a successful defense to honoring a claim or the loss exceeds the applicable policy limits. Lastly, from an operational perspective, a joint owner may be unable to use the aircraft under a time-sharing agreement or an interchange agreement. Nevertheless, if these costs or disadvantages do not pose significant obstacles for the parties in a particular transaction, a joint ownership arrangement is worth close consideration.
Sale of Equity Interests in the Company that Owns the Aircraft
If the joint ownership structure is unworkable, another option that might be considered is the sale of equity interests of the company that owns the aircraft (“HoldCo”), assuming that, at the time of sale, the sole or primary asset of HoldCo is the aircraft. Under this approach, HoldCo would then dry lease the aircraft to each of the equity owners (or their respective affiliates) under nonexclusive dry lease agreements, and each lessee would hire or engage pilots to operate the aircraft on its flights. This option involves a change in the ownership of HoldCo, and not a change in the ownership of the aircraft. As such, there would be no change in the registered ownership of the aircraft and no need to file bills of sale or registration applications with the FAA. In terms of generating cash, the owner of HoldCo may charge fair market value for the equity interests of the company it sells. And as for the sharing of aircraft costs and other matters relating to the aircraft, typically the parties will set out their agreements in the company’s operating agreement or in a separate written agreement. With this structure, each lessee must employ or engage the pilots on its flights. Careful planning with respect to pilot services is important to avoid being viewed by the FAA and others as a potential illegal charter operation.
Dry Leasing to Other Part 91 Operators
Depending upon an owner’s desired financial results, it may not be necessary to sell interests in the aircraft or the entity that owns the aircraft. Instead, because fair market rents may be charged under a dry lease, additional rental income alone may be enough to meet the owner’s needs. If that is the case, having one or two additional nonexclusive dry leases in place with others is possible, with a few caveats. First, one can have “too many” leases such that the leasing structure begins to take on the appearance of a disguised charter operation. While there is no bright-line test, many advisors recommend a limit of three or four leases with unrelated parties. Second, it is imperative that each lessee employ or engage the pilots who will operate its flights, and that the lessor not designate or furnish the pilots, either directly or indirectly, to the lessee. Lastly, each lessee needs to know that, in connection with its flights, it will have exclusive operational control of the aircraft and understand the legal implications of having that control. Aside from these FAA considerations, in most jurisdictions dry leasing may trigger an obligation on the part of the lessor to register as a dealer for sales or use tax purposes, and to collect and remit such taxes attributable to the rents received under the leases.
Dry Leasing to a Part 135 Air Carrier
Another option sometimes considered to generate cash without selling interests in the aircraft or the company that owns the aircraft is to dry lease the plane to a Part 135 air carrier for use in its charters operations. These arrangements can be structured in a couple of different ways. For example, under some agreements, the Part 135 air carrier is the only person entitled to use the aircraft during the lease term. In those instances, an owner may elect to fly on the aircraft as a charter customer of the air carrier. Under other agreements, the owner and the air carrier will share the use of the aircraft during the lease term, with the owner operating the aircraft on its flights under Part 91 and the air carrier using the aircraft on its charter flights under Part 135. Although the economics of these air carrier agreements vary, it is common to see the owner and the air carrier splitting the flight revenue resulting from the air carrier’s use of the aircraft on an 85/15 basis. Typically, the owner will receive, as additional revenue, 100% of any fuel surcharges charged to the charter customer and will be responsible for 100% of all aircraft and pilot costs (other than those passed on to the charter customer). This approach should result in increased utilization of the aircraft and generate additional cash for the owner, but a detailed budget is needed to evaluate the projected expense side of the equation. For example, the owner may need to add or replace certain equipment to conform the aircraft to the “higher” equipment safety standards of Part 135. In addition, under Part 135, pilot recurrent training is required every six months, as opposed to every 12 months under Part 91, so greater pilot training costs should be expected. The Part 135 alternative may have two other advantages. First, if properly documented and implemented, the Part 135 air carrier, and not the owner, will have exclusive operational control of the aircraft on its charter flights and the adverse legal consequences that may arise from that control. Second, in many states, including Georgia, there may be certain sales and use tax advantages when leasing an aircraft to an FAAcertificated air carrier. On the other hand, fuel and insurance costs may be lower when purchased through the air carrier. In any event, all of these factors, along with the cost of additional wear and tear on the aircraft, need to be evaluated in deciding whether the Part 135 option will meet the financial expectations of the owner or prospective owner. Conclusion In sum, FAA regulations are broad enough to provide an owner or prospective owner with a few options when attempting to find partners to utilize, and pay for, available time on an aircraft. However, advance planning is needed to help stay within the bounds of the rules and, at the same time, find a tax-efficient solution. All of this planning, of course, will be for naught if the “right” partner cannot be found, meaning not only someone who is credible, trustworthy, etc., but also someone whose flight missions, expected travel days and required hours of usage are compatible with the other joint owners or co-users of the aircraft. Although the search might be time consuming, it is achievable and something that, based on recent experience, is becoming more common in the market.