A Primer on Structuring Aircraft Ownership: Avoiding Illegal Flight Department Companies
Many aircraft purchasers fail to adequately consider how the ownership should be structured. A typical approach is to purchase the aircraft in a newly-formed limited liability company wholly-owned by an individual or an operating company that would utilize the aircraft. The principal objective of this ownership arrangement is to shield that individual or operating company and other affiliates from aircraft operations liability. Such an entity is often referred to as a “flight department company” because it provides flight services to its affiliates. While such a structure might appear appealing, it often violates applicable Federal Aviation Regulations (FARs).
To understand why, it is helpful to have a general understanding of the way the FAA regulates flight operations. At its most basic level, the FAA separates those persons or entities that conduct flight operations for themselves and those that conduct flight operations for hire (for example, charter operations). Not surprisingly, the FAA has much stricter rules to assure the safety of flight operations that are conducted for hire. Under the FARs, an entity or individual desiring to operate under the less restrictive rules is generally prohibited from receiving any form of remuneration for providing flight services to another entity or individual. An affiliated group of companies which allocates the actual cost of flight operations incurred by a flight department company among the users of its aircraft can easily run afoul of these rules.
Typically, an aircraft purchaser desiring to avoid being subject to the more restrictive rules applicable to operations for hire will operate its aircraft under Part 91 of the FARs. Part 91 contains an exception to the general “no remuneration” rule for large (certified takeoff weight of 12,500 pounds or more) and turbine-powered (turbojet and turboprop) multiengine aircraft. This exception permits a company which or owns or leases an aircraft (“Operator”) to conduct flight operations for employees and guests of the Operator, the parent or a subsidiary of the Operator, or a subsidiary of the Operator’s parent (i.e., a sister company) when the flight is within the scope of, and incidental to, the business of the Operator (other than the business of providing air transportation services). This exception does not apply to an entity whose sole purpose is conducting flight operations for other affiliated companies. The Operator must therefore have a separate business which requires the use of the aircraft. Under a strict interpretation of the rule, that business must also have some relationship to the businesses of the affiliates using the aircraft. If the requirements of this special rule are satisfied, the costs of owning, operating and maintaining the aircraft can be shared by the affiliated companies using the aircraft. Ideally, the Operator (1) should be as centrally located within the affiliated group structure as possible to comply with the limitations described above on which affiliated companies can share these costs and (2) should not have significant assets which would be potentially available to satisfy a judgment entered against the Operator for damages exceeding the aircraft liability insurance limits. It is worth noting that the ability to rely on this exception is limited to companies that would have a business purposes for operating the aircraft. As a result, aircraft ownership when the aircraft is used for pure personal use is often in the relevant individual’s name. Note there are other liability shielding structures available when aircraft ownership is purely for personal use but they can be relatively complicated.
The consequences of conducting illegal flight operations can be significant. One concern is that conducting such operations could violate the terms of the liability insurance covering the aircraft (which often requires compliance with governmental regulations). Other concerns are the potential for FAA civil penalties (which are assessed for each “illegal” flight) and having the licenses of the Operator’s pilots revoked.
