Be Careful With Your Corporate Airplane, It May Be A Charter Airline…

Ownership of a corporate aircraft provides numerous benefits to a company and with the new class of very light jets, ownership of a corporate jet is becoming increasingly affordable. The benefits of aircraft ownership, however, come with the risk of a costly aviation accident. Companies that own risky assets commonly segregate the risky assets in entities separate from their primary business. However, by placing your aircraft in an entity whose sole business is air transportation (a "flight company"), you may create a charter operator and be subject to additional regulations and federal transportation excise taxes. Furthermore, failure to operate the aircraft in accordance with the proper regulations may invalidate your aircraft insurance policy, subject you to civil penalties, and increase, rather than minimize, the legal risks of aircraft operations.

The Federal Aviation Regulations ("FAR") regulate aircraft operations based on type of use. Most companies prefer to operate their corporate aircraft under the general aviation provisions of the FAR because general aviation operations are subject to the least regulation and provide the greatest operational flexibility. However, an aircraft owner generally can not receive compensation for its general aviation flight operations. The Federal Aviation Administration ("FAA") broadly interprets "compensation" and considers it to include the transfer of anything of value, including reimbursement of actual expenses, occasional infusions of capital or a quid pro quo. Because it is virtually impossible for a separate flight company to operate an aircraft without receiving some form of compensation, whether in the form of capital infusions or payment of expenses, a flight company would receive "compensation." Thus, the FAA would consider a flight company a charter operator, subject to more stringent regulations, including increased pilot and equipment requirements and limits on use of certain airports.

As a charter operator, the flight company may also be subject to additional transportation taxes. For domestic flights, the tax may include a 7.5% excise tax on amounts paid for domestic flights and a $3.30 segment fee. For international flights, the tax is $14.50 per person or $7.30 per person for departures from Alaska and Hawaii

A company has several options to minimize its risk and operate its aircraft in accordance with the FAR. First, the company could either obtain a charter certificate or contract with a third party to operate under the third party's charter certificate. Alternatively, the FAA established several limited exemptions permitting compensation for general aviation operations. These exemptions include:

· timesharing agreements (permits compensation for operating costs only),

· interchange agreements (permits an exchange of time between two aircraft owners),

· joint ownership agreements (permits sharing of costs in accordance with the agreement), and

· providing services within a limited group of related entities (permits sharing of all costs, but the owning entity's sole business may not be air transportation).

Proper structuring of aircraft ownership and flight operations is important to ensure that, if needed, your insurance coverage will be in effect and to avoid federal transportation excise taxes. At the same time, the exemptions provided by the FAA provide companies with flexibility to mitigate the risk of aircraft operations. For further information, please contact Anthony P. Aaron.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.