The information contained in this notice is intended for the general education and knowledge of our readers. It is not intended to be the only source of information in the analysis and solution of a legal problem and should not be used as such. In addition, the laws of each jurisdiction are different and constantly evolving. If you have specific questions about a particular situation, we strongly recommend that you consult a competent lawyer. Regulatory concepts are important in structuring aircraft ownership, including who has “operational control” of the aircraft for certain flights. In a pure management agreement, the owner may hire the manager to provide pilots, but the owner retains operational control of the aircraft for the owner`s private flights (which will be operated under FAR 91). In a pure charter management agreement, the charter manager (which must be a certified air taxi operator) will lease or otherwise have contractual ownership and operational control of the aircraft for all flights (operated as commercial flights under FAR 135). The most common is a combined agreement where flights are operated for the owner under the owner`s “operational control” under Far Part 91 and third party flights are operated by the charter manager as commercial flights under FAR Part 135. There are tax, operational and other factors that go into determining the best structure, including the following: Many disputes between owners and charter managers arise from misconceptions about costs and mark-ups that have not been disclosed or understood by owners, especially if they create a potential conflict of interest. For example, charter managers typically charge a handling/surcharge fee for parts and materials, which is often a percentage of the cost of parts/materials. This supplement creates a negative incentive to find the solution at the lowest price for repairs/repair parts. Charter managers can charge labor costs for maintenance monitoring in addition to the actual time spent on maintenance and repair.
In addition, charter managers often keep their management fees low, but take advantage of fuel, hangar rentals and other ancillary services. None of these fees are necessarily a “red flag”, but they should be discussed in advance and addressed in the administrative agreement so that there are no misunderstandings. Depending on the details of the agreement, a charter management agreement may have tax implications and your accountant or tax advisor should be part of the planning. For example, in some states, the predominant use in the charter may entitle the aircraft to an exemption from the state`s sales and use tax. However, the federal income tax issues associated with charter management agreements are complex and uncertain. For example, the IRS may be of the view that a charter management contract should be characterized as the lease of the aircraft to the manager rather than the services of the manager to the owner. The use of the charter may affect the applicable depreciation method, but third-party charters may be useful if there is significant personal use of the aircraft. When the owner or its affiliates charter the aircraft, this triggers, among other things, a 7.5% federal excise tax (FET) on air traffic on charter payments, which is generally not applicable to most FAR Part 91 flights. In recent years, the IRS has lobbied to charge FET for virtually all payments to a charter manager in some common charter management scenarios.
(The IRS is of the view that, regardless of how the FAA views “operational control,” a unit that provides an aircraft and crew to another entity for compensation provides taxable air travel.) While this IRS policy is currently suspended and challenged by industry groups, owners should be aware of these potential tax implications. Managing, operating and maintaining a business jet is a complex and expensive undertaking. While some aircraft owners may be able to hire experienced pilots and mechanics, a good charter manager brings additional resources associated with maintenance monitoring, logistics, and flight planning. As a charter manager client, an owner can often take advantage of the purchasing power of the charter manager, which comes with overheads such as fuel and insurance. FAA-certified charter managers can generate additional revenue for the owner by chartering the aircraft to third parties, and often allow an owner to charter other aircraft in the fleet at a discount. When reviewing a charter management agreement, aircraft owners should carefully analyze the type of charter management agreement and the charter manager who will operate the aircraft. FAA regulation, revenue generation, tax implications, and insurance coverage are some of the very important elements of the analysis. It is particularly important to identify any surcharges or surcharges imposed by the charter manager that may not be easily apparent.
The aircraft owner should inquire about these issues with appropriate legal and accounting advice in order to have productive discussions and negotiations with the charter manager candidates. An owner often benefits from putting his aircraft in the fleet insurance of a charter manager. The manager may have higher limits of liability and lower premiums than the owner alone could receive. However, it is essential that the management contract and insurance endorsements that add the owner to the policy fully cover the owner and all affiliates that will operate the aircraft and meet the requirements of a financier who has a safety interest in the aircraft. As discussed above, under a lease, the owner or affiliate will often have “operational control” of private flights for the company operating under Far Part 91. However, it is not uncommon for the owner and/or member to be registered as an “additional insured” and held solely responsible for the operation of the aircraft by the “designated insured” (i.e., the charter manager). Therefore, the owner cannot be insured for his own operation of the aircraft. There are other coverages that an insurance broker can add – free of charge – to the insurance note and certificate to ensure that the business is fully covered by this policy. Charter management agreements range from “turnkey” management of all of an owner`s flight operations, including the provision of pilots, hangars and insurance, to more limited arrangements. In a typical agreement, the owner pays all costs of owning and operating the aircraft, including pilot salaries and benefits (even if they are employed by the manager). .