© 1998 By Michael P. Fleming

Although their import varies by user, there are many factors to consider when determining the best structure in any particular case. In this section, I will identify the most common. Reviewing each should facilitate the planning process.

Usage Profile. The starting point for any user should be developing a thorough understanding of its own aircraft usage requirements. Often, this will narrow the range of planning options.

Operational Analysis. Each party involved should carefully review historical and forecast use, determining the flight hours used and their distribution, the city-pairs and airports visited, and typical passenger loads. Newcomers to business aviation should audit their historical commercial airline travel requirements to determine which flights could be replaced by business aviation. This will hasten a determination of the type of aircraft required as well as its likely use and availability for sharing.

Flexibility Requirements. Business aircraft users should also consider their requirements for operating flexibility. The FARs restrict the operational flexibility of Part 135 (air taxi) operators to a much greater degree than they do private, Part 91 operators. For example, Part 135 operators are subject to pilot flight and duty time restrictions, are prohibited from conducting "look see" approaches, have less flexibility in operating out of airports that lack weather reporting stations on the field, and must calculate minimum takeoff and landing distances using stricter rules.

Many of Part 135’s constraints increase the margin of safety and should therefore be followed, but their impact on flexibility cannot be denied. For planning purposes, then, the best solution for private operators often is to create a structure that allows Part 91 operations, while complying with Part 135’s requirements on a voluntary basis. In any case, the user should determine the degree of operational flexibility required before implementing any shared-use structure.

Economic Considerations. Next, consider the financial aspects of sharing use. Operational needs impact the type of aircraft and number of flight hours required. The user then can calculate the expense of acquiring and operating the aircraft, usually with the help of industry experts. If the acquisition cost is too high, consider partners to share the purchase price, provided that usage requirements are complementary and that scheduling and liability concerns can be managed. Alternatively, a fractional share could be considered.

If operating costs exceed budget, examine shared usage options that allow for defraying some of these costs. The FARs limit this ability; certain structures allow only the recovery of actual, direct operating expenses (usually including twice the cost of fuel and oil), while others allow cost recovery on a fully-allocated basis (that is, direct costs plus an allocation for overhead and ownership). Chartering out allows charging third parties on an unlimited "cost-plus" (that is, profit-motivated) basis. Because the need for cost-recovery flexibility often drives the configuration chosen, the precise "charge-back" restrictions for each shared-use arrangement are discussed below.

Degree of Control over the Aircraft. Some users feel strongly about maintaining a high degree of control over the aircraft. For them, structures that cede significant activities to third parties are unacceptable, despite potential cost advantages. The issue often relates to scheduling; certain executives require that "their" aircraft is always waiting, no matter the cost. Consequently, they will have difficulty choosing a suitable sharing mechanism.

Ownership. The intangible benefits of ownership drive some structures. Fractional Programs have succeeded to some degree by offering Program Participants ownership, albeit of only a share. Other parties will go to great lengths to avoid ownership, desiring anonymity for their aircraft operations. Many companies wish to keep the aircraft "off-balance sheet," suggesting an operating lease arrangement. Ownership also entails a host of potential aircraft registration issues, particularly relating to foreign ownership.

Regulatory Status and Risk Profile. An extremely important (and rather complex) factor concerns the desired regulatory status of the operations and the level of related risk the user is willing to bear. As described above, Part 91 offers certain operational flexibility advantages as compared to Part 135, but decreased charging flexibility. Many operators wish to charge at will and enjoy Part 91’s flexibility at the same time, creating an insurmountable regulatory tension. Thus, it is worth examining the regulatory background in which business aviation operations take place.

Traditional Private Operations. From an FAA perspective, Part 91 operations are those private carriage flights where there is no transportation for hire, there is no "holding out" to the public that would constitute "common carriage," and the operation of the corporate aircraft is "incidental to the business of the company." The FAA clearly designed most of Part 91 based upon operations akin to "traditional" internal flight departments using the aircraft for company business.

Accordingly, unless otherwise expressly allowed, any sharing of the aircraft for which compensation of any kind is received could be considered using the aircraft "for hire," mandating a commercial certificate.

Regulatory Pigeonholes. In Subpart "F" of Part 91, though, the FAA has created some limited, specific structures for sharing use and cost recovery. These structures – such as Time Sharing, Interchange, Joint Ownership, demonstration flights, and corporate family flights -- are outlined in §91.501 and discussed in detail below. Many of the activities in question might otherwise be considered providing transportation for hire, requiring a commercial certificate, but for this special exception.

Scope of Subpart "F". Subpart "F" applies to "large [defined elsewhere as those over 12,500 pounds maximum takeoff weight] and of turbo-jet powered multiengine civil airplanes." Pistons, turboprops, single-engine (or very light) jets, and helicopters are not automatically covered, but their operators can seek an individual waiver or take advantage of the blanket exemption the FAA has granted if they are (or become) members of the NBAA. Be aware that Subpart "F" does not provide an exception to the licensing requirements where common carriage is involved or the use of the corporate aircraft is not incidental to the business of the company (more on this last point later).

A Limited Exception. Business aircraft operators engaged in sharing should keep in mind the nature of this activity. Charging for use of the aircraft would simply not be allowed under Part 91 if Subpart "F" did not exist. Section 91.501 contains a relatively narrow range of exceptions to this rule. As a matter of legal interpretation, then, what is not expressly allowed is generally forbidden. Thus, any sharing activity where compensation is involved that does not fit expressly within the types of arrangements provided for in §91.501 carries some degree of FAA enforcement risk. What seems "logical and appropriate" might lead to an enforcement proceeding, a pilot threatened with license revocation, or even an argument by the insurance company to deny coverage under the policy. That said, I should note that the language and structure of this provision tend to be ambiguous and leave room for interpretation. In identifying the degree of risk undertaken, obtain competent advice from aviation regulatory experts familiar with Subpart "F" of Part 91.

Citizenship. Individuals or companies that do not qualify as U.S. citizens must be especially careful when sharing aircraft. The U.S. Department of Transportation (DOT) prohibits "remuneration for hire" of "foreign civil aircraft" absent receipt of DOT economic licensing authority. While it is not clear that business aircraft sharing arrangements lie within the scope of DOT’s authority (to my knowledge, DOT has never asserted its authority in any such case), problems could arise where the aircraft is "owned, controlled or operated" by individuals who are not U.S. citizens.

Further, owners that cannot register the aircraft directly as U.S. citizens under the registration rules normally employ a voting or ownership trust arrangement. These devices can cause complications in complying with Subpart "F" (Joint Ownership, for example, can be thorny) and can sometimes require attention to specific language in the insurance policy. Suffice to say, if non-U.S. citizens are involved, proceed carefully and with sound advice.

Tax Implications. Sharing simply should not be engaged in without examining potentially critical tax implications. These can be divided into three areas: the FET, state taxes, and other federal taxes.

FET. The Federal transportation Excise Tax (FET) applies to "commercial" transportation activities. Anyone providing transportation services that the IRS deems commercial must charge and remit the FET for domestic flights. Unfortunately for operators, the IRS and FAA have contributed to the complexities of business aircraft sharing by defining and applying differing standards for what is deemed to be "commercial," and by ignoring each other’s conclusions. Activities that the FAA deems non-commercial can be (and, in some cases, are) subject to the FET. The FET status of each sharing arrangement is set forth below, so that this factor may be considered in determining the best mechanism to use.     more >>