We have an incredibly safe air transportation system in the United States, but owning and operating an aircraft is not cheap. Add to this mix the general public's high confidence in this system contrasted with the desire to pay the lowest possible price for such flights, and conditions have become ripe for a significant increase in operations that the Federal Aviation Administration (FAA) considers to be illegal charter in nature — and the FAA has been responding accordingly.

Background:

One of the first mandates on the Department of Transportation (DOT) under the Federal Aviation Act of 1958, as found at 49 U.S.C. §§ 41010 et. seq. (the FA Act), is that in carrying out various certification requirements under the FA Act, the Department must consider "assigning and maintaining safety as the highest priority in air commerce." Similarly, the FA Act also specifically directs the FAA to promote the safe flight of civil aircraft in air commerce by promulgating a broad range of rules touching on every aspect of aviation in the United States  (see FA Act § 44701). Accordingly, while the DOT and FAA address a broad spectrum of issues (such as economic protection of customers, the licensing of airports and commercial space operations, the manufacture of aircraft, and so forth), arguably the largest portion of statutory provisions and related FAA federal aviation regulations (as of found at 14 CFR parts 1-199, commonly referred to as the FAR) deals with the actual operation of U.S. registered aircraft. And with respect to understanding the rules that govern the operation of aircraft, it is important to understand two key definitions found in Section 1.1 of the FAR — "air commerce" and "air transportation."

Air transportation boils down to the transportation of passengers or property by aircraft as a common carrier for compensation. Air commerce is actually broader, including not only compensated operations, but also the operation of an aircraft in furthering a business or vocation, or simply the operation of an aircraft within federal airspace or in a way that directly affects or may endanger the safety of other operations in air commerce (FA Act § 40102; FAR § 1.1).

In short, in understanding the operating rules under the FAR, the key distinction is between (1) an operator who has been granted an air carrier certificate by the FAA to act as a common carrier of passengers or cargo (i.e., someone operating in air transportation), and (2) basically everyone else (i.e., someone operating in air commerce). And while there are arguably many more individual operators of aircraft in air commerce than certificated air carriers in air transportation (the FAA doesn't directly track the former, so it's impossible to say for sure), it is very clear that by simple passenger volume, most U.S. citizens interface with air travel through the air transportation side of this equation. And this leads to the logical result that, as the body of air law in the U.S. has developed over the years, by far the largest emphasis — and therefore the highest number of regulatory requirements — rests on the side of air transportation.

For example, if you are simply operating in air commerce, the rules essentially boil down to following the basic guidelines set out in FAR Part 91 (General Operating and Flight Rules) — basically, fly an airworthy aircraft, use properly trained pilots and obey the applicable air traffic control rules — generally referred to as acting as a "non-commercial operator." Conversely, if you want to do something the FAA considers to be air transportation, i.e., to act as a compensated common carrier, now you have to jump through significantly more hoops. For example, before you can even fly, you first have to get the appropriate air carrier certificate following multiple guidelines set out in FAR Part 119 (Certification: Air Carriers and Commercial Operator). And once you get that air carrier certificate, in addition to following the basic rules found in Part 91, you also have to follow stricter operating rules, generally, FAR Part 121 for large aircraft in scheduled service, and FAR Part 135 for smaller aircraft in on-demand service (the latter being the focus of this article), which essentially impose much higher standards for aircraft maintenance and pilot training, and more limitations on issues such as runway length requirements and crew rest requirements. Only then can you offer flights in air transportation, or act as a "commercial operator."

Arguably this all boils down to the FAA saying, per its statutory mandate, that if you are flying yourself around (meaning you and, on a limited basis, your employees or guests), you are responsible for all aspects of the conduct of that flight (with you facing any regulatory or civil liability for a failing to safely do so), and you are paying for everything out of your own pocket (meaning you aren't even sharing costs with your passengers), then FAR Part 91 is enough — there is enough angst hanging over your head, and insufficient threat to the general public, to warrant you having to comply with all of the additional oversite and requirements that attends to Part 121 and Part 135 operations. Conversely, if you do want to carry other people around and you want them to pay for some portion of that flight — and you are indiscriminate as to who you offer those flights to — then the FA Act mandates that the FAA must step in and impose those additional layers of oversite and requirements for the benefit of those cost-sharing passengers who have no say or clue over how the flight is being operated.

Why is this all so important to the topic at hand? Because it all boils down to the key question noted above: Is an operator doing something that the FAA considers to be commercial in nature such that the operator has to go get an air carrier certificate and then comply with the additional rules applicable to those air carriers, or can the operator simply stay on the much easier and much cheaper Part 91 side of the ledger? And if you aren't operating under the right bucket of rules (you are flying under Part 91 when you should be certificated and flying under Part 135, for example), what may the FAA do to you if and when they catch you?

Current Industry Activity – Two Flavors of Illegal Charter

To begin to answer question above, it is worth taking several underlying and anecdotal issues into consideration. First, all of the rules outlined above have arguably never been the model of clarity to the casual reader (including the general airplane owner and/or operator). And just by the way the system is designed, the FAA's oversite and emphasis has always been on those operators who have chosen to fly under the air transportation rules as certified air carriers rather than on those who have not. Moreover, due to the economic pressures coming along with the great recession of 2008, a lot of aircraft owners suddenly realized they had expensive aircraft sitting around with high fixed costs and low utilization, and they started looking for ways to mitigate those costs. Finally, we have also arguably become an internet based, "we want the convenience of air travel at a budget price right now" kind of society.

Putting all of that together has led to two phenomena that have generally always been there in some form or fashion, but over the last few years has arguably increased significantly: improper aircraft "dry" leasing, and the unauthorized holding out in air transportation through the internet,  both of which lead to or can be categorized as "illegal charter."

Improper "Dry" Leasing

So what is an aircraft "dry" lease in the first place? That term is actually not defined in the FAR. What is defined is a "wet" lease, with a wet lease meaning "any leasing arrangement whereby a person agrees to provide an entire aircraft and at least one crewmember, " i.e., generally meaning a pilot. But arguably the real key to understanding whether or not a lease is a dry lease or a wet lease deals with who has "operational control" of the aircraft. FAR § 1.1 defines the term "operate" to mean to use, cause to use or authorize to use an aircraft for the purpose of air navigation, and the term "operational control" to include, but not  necessarily be limited to, the exercise of authority over initiating, conducting or terminating a flight.

Additional FAA guidance as found in various FAA orders, chief counsel interpretation letters, advisory circulars, and so forth, further fleshes out the concept of operational control as also including, without limitation, the exclusive and ultimate control over the accountability and responsibility for: (a) ensuring that all aircraft personnel, including all pilots, are trained and qualified in accordance with the applicable regulations and remain in compliance with all applicable flight, duty and rest requirements, including the designation of a pilot-in-command for each flight; (b) ensuring that the aircraft is airworthy and is in compliance with all FAR and any other applicable regulations; and (c) specifying the conditions under which a flight may be operated, such as determining weather minimums, proper aircraft loading, center of gravity limitations, icing conditions, and fuel requirements, as well as handling all monetary and logistical issues associated with the aircraft and the aircraft personnel (see, e.g., FAA Advisory Circular 91-37B, Truth in Leasing, Section 4.6). This does not mean that the person in operational control has to actually turn the wrenches or manipulate the controls, but that person is ultimately responsible to ensure the wrench was turned, and the controls were manipulated, correctly.

In pulling this all together, if an aircraft lessor has retained operational control (that is, it is providing the pilots and retaining responsibility for all of the obligations noted above) in exchange for some form of compensation or reimbursement (in any amount), then that lease is a "wet" lease and the lessor is acting in air transportation and, generally speaking, should have and operate under an air carrier certificate and, for the purposes of this article, under Part 135. Conversely, if the lessee has assumed operational control (i.e., it is providing its own pilots and has assumed all of the responsibilities noted above), that doesn't mean you are done, it just pushes the analysis down one rung of the ladder – is the lessee now conducting a flight for compensation, or is it merely conducting its own flights and paying for everything out of its own pockets? If it is receiving compensation, then the general rule is that it is back in the realm of air transportation (i.e., it should be operating under an air carrier certificate and Part 135, and if it is not, that is illegal charter), but if it is paying for everything out of its own pocket, then it can fly in air commerce under Part 91 as a noncommercial operator.

The final key point is that the FAA won't necessarily look just at what the documents say, but instead at what is actually happening and what the participants — especially a passenger in the back — understands is happening. For example, if the passenger simply understood he or she would  pay some money to the lessor, or even just the pilot or a management company, and in exchange would be flown from point A to point B, and didn't read the Part 91 "dry" lease he or she was asked to sign right before the flight, and/or did not understand the ramifications of having operational control over that flight, then the FAA will likely determine that the lessor – or possibly  the pilot and/or the management company even when on paper they were not part of the transaction – was in fact operating under a wet lease (lessor or the pilot or management company had actually retained operational control) that should have been operated under the authority of an air carrier certificate and Part 135 rather than Part 91, i.e., it was an illegal charter  (see, i.e., Administrator v. Peter John DeCruz, NTSB Order No. EA-5827, Sep. 7, 2017).

There are two related but important side notes to the concept of dry leasing that can also lead to illegal charter operations. The first is the concept of what the FAA calls a "flight department company." Many people want to enlarge the concept of a "disregarded entity" as found under federal tax law to apply to general civil and FAA rules as well (i.e., if I own the company and the company owns an airplane, then I really own the airplane). This generally arises under the "I want to have my cake and eat it too" syndrome, i.e., "before the crash I want to be treated as the operator for cash flow, regulatory oversite and tax purposes, but after the crash I want the FAA, or the civil courts, to go after the company, not me." However, the FAA has made very clear since at least the early 1970's that just because a company is a disregarded affiliate of another person or company, that does not mean that the company can be ignored for the purpose of analyzing who has operational control of the aircraft. In other words, if Mr. A owns My Airplane, LLC, and My Airplane, LLC buys an aircraft, even though My Airplane, LLC might be a disregarded entity under federal tax law, that does not mean that Mr. A owns the aircraft — he owns the company, and the company owns the aircraft. If Mr. A now contributes funds into My Airplane, LLC so that it can operate the aircraft — especially if the purpose is to provide a liability shield to Mr. A vis-à-vis his passengers — that is the very definition of an air transportation service, i.e., a company whose primary purpose is to fly other people around (even its underlying owner) in exchange for some reimbursement of compensation (see, e.g., FAR § 91.501(b)(5) and related chief counsel interpretation letters).

The second side note arises from certain exceptions to the requirement to obtain an air carrier certificate and fly under one of the commercial parts such as Part 135 that can apply very narrowly to certain business aircraft operators and are found at FAR § 91.501. This rule is where you find the concepts such demonstration flights, time sharing flights, and interchange flights, and they can be enormously useful when applied correctly. But these rules are applied extremely narrowly by the FAA and are often very misunderstood by industry. And because they essentially create some narrow situations that involve what amounts to wet leases operating under Part 91, when they are misunderstood and misapplied it can lead to significant illegal charter operations as well — as discussed in more detail below.

In summary – if a real operating business or a person assumes operational control over an aircraft (is providing its own pilots and has assumed responsibly for the safe conduct of the flight as evidenced by being ultimately responsible for the maintenance, pilots, fuel, insurance and so forth), then you have created a valid dry lease. Conversely, if you are operating through a flight department company, or if you are misapplying the exceptions found at FAR § 91.501, or if the lessee has no clue and no understanding about accepting operational control but instead thinks its purchasing an air transportation service, then it's not a valid dry lease and some lessor (be it either the registered owner or the management company who set it all up) is conducting a wet lease and better have an air carrier certificate be operating under Part 135.

"Holding Out"

A slightly different vein of activity that can lead to the same result deals with the concept of "holding out," i.e., acting as a common carrier, which under the definitions noted above, puts you in the sphere of air transportation, and therefore requires an air carrier certificate. This seems to be currently occurring in two broad categories.

The first arises when companies use the internet to connect passengers with aircraft owners and/or pilots where the passengers cannot or do not fully understand the nature of the operations (such as who is really in operational control) and the offer is indiscriminate to the general public.

The second arises when companies wish to make aircraft available for dry leasing and advertise that availability on the internet in a way that would appear to be, to the "reasonable passenger," an offering of air transportation.

These types of situations have anecdotally been increasing in volume, and have drawn responses from the FAA accordingly.

FAA Response – Two Flavors of Approach

Through a combination its own cognizance and aviation industry pressure, the FAA has realized that there has been a significant increase in the various types of improper operations described above and that the agency should be more aggressive in addressing the situation. Moreover, in analyzing the situation, the FAA has generally categorized their view of this activity as a combination of the "clueless, careless, and criminal." In other words, some people have no idea what they are doing is wrong and have no intent to break the rules.  Some people should know better but still break the rules. And some operators know exactly what they are doing and break the rules intentionally.

In light of this recognition, the FAA has generally taken two different approaches to address these concerns — compliance orientation and educational efforts for the first two categories, and enforcement efforts against the third.

Increased Education Efforts

On the educational and compliance-orientation side of the house, the FAA, both individually and in conjunction with key industry players such as the National Air Transportation Association (NATA) and the National Business Aviation Association (NBAA), has taken multiple steps to better educate the traveling customer as to the problems with illegal charter. For example, the FAA in conjunction with NATA has reinvigorated an "Illegal Charter Hotline" (see, e.g., https://www.faa.gov/about/initiatives/safe_charter_operations/ and  http://www.avoidillegalcharter.com/) and is providing a wealth of material on the subject. Likewise, NBAA has also provided multiple resources to address the illegal charter problem (see, e.g., https://nbaa.org/?s=illegal+charter). All of these resources address illegal charter in general, but are primarily focused on the issue of improper dry leasing. The FAA has also recently sought to better explain the issue of cost sharing with pilots by issuing new Advisory Circular 61-142, "Sharing Aircraft Expenses in Accordance with 14 CFR § 61.113(b)." And finally, in a chief counsel letter of interpretation bordering between education and enforcement, the FAA also recently issued a detailed opinion on when the holding out of flight availability through the internet is in fact a commercial operation rather than mere cost sharing as permitted under Part 91 (see Legal Interpretation to Roy Goldberg, Esq., from Naomi Tsuda, Assistant Chief Counsel for Enforcement (December 17, 2019)). Some FAA Flight Standards Offices have also become very active in having "aviation hometown events" that include FAA and industry speakers to brief both safety inspectors and industry participates on the proper guidelines (see, e.g., Business Aviation, "FAA Steps Up Illegal Charter Clampdown," March 5, 2020, at https://www.ainonline.com/aviation-news/business-aviation/2020-03-05/faa-steps-illegal-charter-clampdown).

Increased Enforcement Activity

In addition to these educational efforts, the FAA has also been considerably more active in seeking both significant civil penalties as well as certificate actions against air charter operations. For example, in one case involving improper application of the narrow FAR § 91.501 exceptions to the general requirement to obtain commercial certification when conducting a wet lease, the FAA recently sought to impose a $3.3M civil penalty against a company that it asserted was abusing the concept of aircraft time sharing. The matter eventually settled for a cash payment of $500,000, with a deferred penalty of $1.5M and two years of oversight (United States v. The Hinman Company, Case # 1:18-cv-01140-PLM-PJG, Western District of Michigan). Finally, in addition to several significant civil penalty cases and stern civil interpretation letters such as noted above, the FAA has also sought actions against certificate holding persons or entities that have strayed into the area of illegal charter (see, e.g., Administrator v. Peter John DeCruz, NTSB Order No. EA-5827, Sep. 7, 2017; FAA Press Release, March 11, 2020, "FAA Revokes Operating Certificate of Paradigm Air Operators for Alleged Illegal Charter Flights," at https://www.faa.gov/news/press_releases/news_story.cfm?newsId=24737).

Conclusion

To some extent, we in the aviation industry have created this problem ourselves — we have set the standard and expectation of incredibly safe aircraft operations at very low prices. Unfortunately, this mix has created the situation where some who are perhaps clueless, careless or possibly even criminal are offering to the general public operations that clearly violate the regulatory regime the FAA has crafted over the last 60 years, which could lead to a very bad day for those operators when they are caught.

David T. Norton is a partner and head of the aviation practice at Shackelford, Bowen, McKinley & Norton LLP, a former Chair 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.