A growing issue in the general and business aviation community is the conduct of illegal charters. Two common causes are improper aircraft leasing structures and the misapplication of certain commercial-operation exemptions found under the federal aviation regulations (the “FAR,” as found at 14 C.F.R. parts 1-199, with the “Sections” and “Parts” noted below referring to these rules). The Federal Aviation Administration is increasing its oversight of this issue, in some cases proposing significant civil penalties. So when does an illegal charter occur and what may happen as a result?

The operator of an aircraft is generally either the aircraft's registered owner or a lessee of that aircraft from the owner. The key question regarding leases is who has operational control of the aircraft? If the owner has retained operational control (with the primary test being whether that lessor is providing both an airplane and pilots, either directly or indirectly), then the FAA considers the lease to be a “wet lease.” If the lease is a mere equipment lease and the lessee has assumed operational control, then it is a “dry lease.”

Section 1.1 of the FAR defines a commercial aircraft operator as one who carries passengers or cargo for compensation or hire. So if the owner/operator or lessee/operator is carrying passengers and receiving any form and amount of compensation for the conduct of that flight (which can simply be cost-sharing with private individuals, or even capital contributions if the aircraft is operated through a sole-purpose entity as a liability shield—but that's a topic for another day), then that operator is a commercial operator.

A wet lease, by definition, is a commercial operation because the party with operational control—the lessor—is receiving a lease payment to carry passengers or cargo. On the other hand, a dry lease simply pushes the question down one rung of the ladder, with an analysis then needed as to whether the dry lessee itself is acting as a commercial or noncommercial operator.

Noncommercial operators can generally operate under Part 91 with no further certification required. If, however, compensation is occurring, the next question is whether one of the few and narrowly tailored exemptions from the requirement to obtain commercial certification that the FAA has crafted for certain business operations might apply.

For example, under Section 91.501(b)(6), an operator that usually acts as a noncommercial operator can enter into the occasional written “time sharing” agreement that, if set up properly, allows for limited cost reimbursement to occur (meaning a time share is a wet lease), thus becoming a commercial operator that is not forced to obtain additional certification from the FAA for those flights. But if compensation is occurring and one of these exemptions does not apply (or is being improperly applied), then the operator must obtain an air carrier certificate and comply with the additional rules that apply to the type of aircraft and operation involved—typically Part 135 for these smaller aircraft. The biggest impediment here is that obtaining Part 135 certification is very time-consuming and expensive, and flights conducted under Part 135 tend to cost more, and are less flexible, than Part 91 operations due to the increased training, maintenance and operational requirements imposed under Part 135.

The current issue is that (a) because of these major impediments, there is great incentive to conduct flights that are easier, more flexible and less expensive under Part 91, but (b) many aircraft owners want to benefit from some kind of cost sharing due to the expense of owning and operating an airplane, leading to (c) structures that are purported to be valid noncommercial leases or exempted operations when, in fact, they are not—and those flights are illegal charter operations. This is where the FAA has significant sway, primarily in the form of civil penalties that can be accessed against that operator, which currently start at approximately $33,300 per violation.

Because of a growing consensus within the business and charter aviation communities that more and more illegal charter is occurring, major industry groups such as the National Air Transportation Association and National Business Aviation Association have increased their efforts to highlight the issue and educate the flying public to the safety concerns these operations raise (see, e.g., NATA's website dedicated to illegal charter issues: and NBAA's various articles addressing the issue as well).

The FAA has also responded to this issue (and the dialogue with these associations) by assessing significant proposed civil penalties against such operators. For example, in December 2018 the FAA issued a proposed civil penalty of $624,000 arising out of improper dry-leasing operations (see, e.g., “FAA Proposes Penalty Against Steele for Illegal Charter,”), and even more shocking to the industry, in June 2018 it issued a proposed civil penalty of $3.3 million arising out of improperly conducted time-sharing flights (see, e.g., “FAA $3.3M Civil Penalty Catalyst for Warning”).

Noncommercial leasing and Section 91.501 exemptions are incredibly useful tools to general aviation, but the misapplication of these tools—whether intentional or not—has triggered a significant response from the FAA. A detailed analysis of when an operation—especially one involving a lease—is or is not commercial is beyond the scope of this article, but the FAA has a number of resources helpful to this analysis (see, e.g., FAA Order 8900.1, Vol. 3., Ch. 13, Lease and Interchange Agreements; as well as FAA Advisory Circular AC 91-37B—Truth in Leasing). It is incumbent on counsel who serve airplane operators to use such resources to help them make sure they are not conducting what amounts to be an illegal charter.

David T. Norton is a partner and head of the aviation practice at Shackelford, Bowen, McKinley & Norton, a former chairman of the Aviation Section of the State Bar of Texas, an airline transport pilot and certified flight instructor who is very active in multiple business aviation groups such as the National Air Transportation Association and the National Business Aviation Association, and a frequent speaker and author on various issues impacting the business aviation community.