CJI Insight: Implications for lease agreements of FAA guidelines defining Private and Common Carriage

By: Derek Bloom, partner, Atlantic Aviation Legal Services, LLC

The Federal Aviation Administration (FAA) is currently imposing a civil penalty of $1 million on Weathervane Aviation Services (Weathervane), a Massachusetts company, for allegedly operating illegal charter flights. The Weathervane story serves as a reminder of longstanding FAA guidelines that distinguish between private- and common carriage, impose substantial financial penalties for illegal flights and that, as discussed below, may cause pilots to lose their licenses. About the proposed penalty, see: https://www.faa.gov/news/press_releases/news_story.cfm?newsId=25660.

As background to the Weathervane matter, on April 24, 1986, the FAA issued Advisory Circular 120-12A (AC No. 120-12A”) on the topic: “Private Carriage versus Common Carriage of Persons or Property.” The circular provides general guidelines for determining whether transportation operations by air constitute private- or common carriage. This distinction determines whether an operator needs authorization from the U.S. Department of Transportation as an “air carrier”.

Operations that constitute common carriage are required to be conducted under Federal Aviation Regulations (FAR) Part 135 (Operating Requirements for Commuter and On Demand Operations) or Part 121 (Operating Requirements for Air Carrier Certificates).

Private carriage is to be conducted under FAR Part 91 (Civil Aircraft Certifications) and Subpart D (Special Flight Operations), or FAR Part 125 (Certification and Operation of Airplanes having a seating capacity of 20 or more passengers).

Lease Agreements entered into under Section 91.181(c)(1) of Part 91 are also subject to FAR Section 91.54 “Truth in Leasing” clause requirements to be included in leases and conditional sales contracts. See: https://www.faa.gov/regulations_policies/advisory_circulars/index.cfm/go/document.information/documentID/22647 and see FAA Advisory Circular 91-37B:  https://www.faa.gov/regulations_policies/advisory_circulars/index.cfm/go/document.information/documentID/1028946.

AC No. 120-12A states that a carrier becomes a common carrier when it “holds itself out” to the public, or to a segment of the public, as willing to furnish transportation to any person who wants it. There are four elements in defining a common carrier; (1) a holding out of a willingness to (2) transport persons or property (3) from place to place (4) for compensation.

Carriage for hire which does not involve a “holding out” is private carriage. A carrier flying charters for only one organization may be a common carrier if membership in the organization is in effect open to a significant segment of the public. An air carrier who operates revenue-generating flights will most likely require certification as a common carrier.

In the case of Weathervane, the FAA alleges that, between May 9, 2016 and Aug. 31, 2018, Weathervane conducted approximately 1,400 illegal flights in two, twin-engine Cessna 402C airplanes between New Bedford Regional Airport and Nantucket Memorial Airport. The flights were illegal because Weathervane lacked a required air-carrier certificate and used unqualified pilots, the FAA alleges.

All but 52 of the 1,400 flights occurred after the FAA had notified Weathervane that it required an air-carrier certificate to conduct such operations. Moreover, approximately 455 of the flights occurred after the FAA had alerted Weathervane that the agency was investigating Weathervane for possible illegal operations.

In addition to operating without an air-carrier certificate, the FAA alleges that Weathervane lacked an FAA-approved pilot-training program and procedures and policies manual. Furthermore, the company used pilots who had not passed required written and oral flight checks and instrument proficiency checks. The legal action by the FAA against Weathervane forms part of a larger effort by the FAA to crackdown on illegal charter operations. See: https://www.writingbyvalerie.com/faa-targets-weathervane-aviation-services-proposes-1-million-penalty-against-alleged-illegal-charter-operator/#more-677

Weathervane is supposed to reply to the FAA by the end of February 2021, so we shall soon hear its side of the story. The involved Weathervane aircraft, bearing registration marks N402BK and N406BL, respectively, are not owned by it, but appear to be leased to the company and owned by separate legal entities. See:  https://registry.faa.gov/AircraftInquiry/Search/NNumberResult?nNumberTxt=402BK and https://registry.faa.gov/aircraftinquiry/Search/NNumberResult Presumably, there are two lease agreements between the two owners and Weathervane providing for the operation of the aircraft pursuant to FAR Part 91.

What Aircraft Operations are Permitted by FAR Part 91, as Not Common Carriage?

Section 91.501 of the FAR sets out the rules governing the operation of large airplanes of U.S. registry and turbojet-powered multiengine civil airplanes of U.S. registry in operations not involving common carriage.

Section 91.501(b) provides that permitted operations include:

(1) Ferry or training flights;

(2) Aerial work operations such as aerial photography or survey, or pipeline patrol, but not including firefighting operations;

(3) Flights for the demonstration of an airplane to prospective customers when no charge is made except for those specified in paragraph (d) of this section;

(4) Flights conducted by the operator of an airplane for his personal transportation, or the transportation of his guests when no charge, assessment, or fee is made for the transportation;

(5) Carriage of officials, employees, guests, and property of a company on an airplane operated by that company, or the parent or a subsidiary of the company or a subsidiary of the parent, when the carriage is within the scope of, and incidental to, the business of the company (other than transportation by air) and no charge, assessment or fee is made for the carriage in excess of the cost of owning, operating, and maintaining the airplane, except that no charge of any kind may be made for the carriage of a guest of a company, when the carriage is not within the scope of, and incidental to, the business of that company;

(6) The carriage of company officials, employees, and guests of the company on an airplane operated under a time sharing, interchange, or joint ownership agreement as defined in paragraph (c) of this section;

(7) The carriage of property (other than mail) on an airplane operated by a person in the furtherance of a business or employment (other than transportation by air) when the carriage is within the scope of, and incidental to, that business or employment and no charge, assessment, or fee is made for the carriage other than those specified in paragraph (d) of this section;

(8) The carriage on an airplane of an athletic team, sports group, choral group, or similar group having a common purpose or objective when there is no charge, assessment, or fee of any kind made by any person for that carriage;

(9) The carriage of persons on an airplane operated by a person in the furtherance of a business other than transportation by air for the purpose of selling them land, goods, or property, including franchises or distributorships, when the carriage is within the scope of, and incidental to, that business and no charge, assessment, or fee is made for that carriage; and

(10) Any operation identified in paragraphs (b)(1) through (b)(9) of this section when conducted …by a fractional ownership program manager [including under subpart K]

Section 91.501(c) adds that, as used in this section:

(1) A time-sharing agreement means an arrangement whereby a person leases his airplane with flight crew to another person, and no charge is made for the flights conducted under that arrangement other than those specified in paragraph (d) of this section;

(2) An interchange agreement means an arrangement whereby a person leases his airplane to another person in exchange for equal time, when needed, on the other person’s airplane, and no charge, assessment, or fee is made, except that a charge may be made not to exceed the difference between the cost of owning, operating, and maintaining the two airplanes;

(3) A joint ownership agreement means an arrangement whereby one of the registered joint owners of an airplane employs and furnishes the flight crew for that airplane and each of the registered joint owners pays a share of the charge specified in the agreement.

(d) The following may be charged, as expenses of a specific flight, for transportation as authorized by paragraphs (b) (3) and (7) and (c)(1) of this section:

(1) Fuel, oil, lubricants, and other additives.

(2) Travel expenses of the crew, including food, lodging, and ground transportation.

(3) Hangar and tie-down costs away from the aircraft’s base of operation.

(4) Insurance obtained for the specific flight.

(5) Landing fees, airport taxes, and similar assessments.

(6) Customs, foreign permit, and similar fees directly related to the flight.

(7) In flight food and beverages.

(8) Passenger ground transportation.

(9) Flight planning and weather contract services.

(10) An additional charge equal to 100 percent of the expenses listed in paragraph (d)(1) of this section.

What Are the Additional Requirements for Commercial Operators under FAR Part 135?

On demand operation of aircraft for compensation, that does not fall within FAR Part 91, is required to be conducted pursuant to FAR Part 135. Part 135 sets out a series of requirements for significant investment on an initial, and an ongoing basis. It is to avoid these start-up and ongoing expenses that some operators of aircraft that are intended to be operated pursuant to Part 91 according to their lease agreements are tempted to use the aircraft to compete with commercial operators who satisfy the investment and operational requirements of Part 135. Such unauthorized competition for Part 135 operators is illegal, unfair to law-abiding commercial operators, and likely to be unsafe due to non-compliance with the safety requirements applicable to Part 135 operators.

The requirements of Part 135 include:

Subpart A – General (§§ 135.1 – 135.43)

Subpart B – Flight Operations (§§ 135.61 – 135.129)

Subpart C – Aircraft and Equipment (§§ 135.141 – 135.185)

Subpart D – VFR/IFR Operating Limitations and Weather Requirements (§§ 135.201 – 135.229)

Subpart E – Flight Crewmember Requirements (§§ 135.241 – 135.249-135.255)

Subpart F – Crewmember Flight Time and Duty Period Limitations and Rest Requirements (§§ 135.261 – 135.273)

Subpart G – Crewmember Testing Requirements (§§ 135.291 – 135.301)

Subpart H – Training (§§ 135.321 – 135.353)

Subpart I – Airplane Performance Operating Limitations (§§ 135.361 – 135.399)

Subpart J – Maintenance, Preventive Maintenance, and Alterations (§§ 135.411 – 135.443)

Subpart K – Hazardous Materials Training Program (§§ 135.501 – 135.507)

Subpart L – Helicopter Air Ambulance Equipment, Operations, and Training Requirements (§§ 135.601 – 135.621)

SUBPART

Appendix A to Part 135 – Additional Airworthiness Standards for 10 or More Passenger Airplanes

Appendix B to Part 135 – Airplane Flight Recorder Specifications

Appendix C to Part 135 – Helicopter Flight Recorder Specifications

Appendix D to Part 135 – Airplane Flight Recorder Specification

Appendix E to Part 135 – Helicopter Flight Recorder Specifications

Appendix F to Part 135 – Airplane Flight Recorder Specification

Appendix G to Part 135 – Extended Operations (ETOPS)

Two Examples of Law Enforcement Against Prohibited Operations

United States v. Brassington

In this case, decided on August 8, 2011 by the United States District Court for the District of New Jersey, Crim. No. 09-CR-45 (DMC), the defendants, brothers Paul and Michael Brassington, were charged with various offenses relating to their operation of Platinum Jet Management (“PJM”), a luxury charter airline service. The charges included 2 counts of conspiracy, 23 counts of making false statements, and 1 count of endangering the safety of an aircraft. The case involved two aircrafts bearing registration marks PJM N370V (which was the subject of a crash at Teterboro Airport in 2005 that had triggered the investigation into PJM) and PJM N60S.

Defendants pled not guilty to all counts, and the case was tried to a jury. At the close of the case, Defendants moved for judgment of acquittal pursuant to Rule 29. This Court denied Michael Brassington’s motion, and reserved judgment as to Paul Brassington. After four days of deliberations, the jury returned a verdict on November 15, 2010. As to Michael Brassington, the jury found the Defendant guilty on Counts 1 (conspiracy), 2- 7 (false statements), 20 (endangering the safety of an aircraft), and 21 (false statement), and found him not guilty on all other charges. As to Paul Brassington, the jury found the Defendant guilty on Count 1 (conspiracy) and found him not guilty on all other charges. In response to a special interrogatory for Count 1, the jury found Michael Brassington guilty of conspiracy to defraud the United States, but not guilty of conspiracy to commit wire fraud, and found Paul Brassington guilty of conspiracy to commit wire fraud, but not guilty of a conspiracy to defraud the United States. Following the jury’s verdict, this Court denied Paul Brassington’s Rule 29 motion.

Paul Brassington conceded that there are two acts that involve “alleged” misrepresentations to charter brokers which occurred within the statutory period but argues that neither is sufficient to sustain a conviction for conspiracy. First, Paul Brassington argues that an October 1, 2004 vendor terms and conditions form, which contained “boilerplate” language stating PJM was Part 135 compliant, he signed and faxed to Regal Aviation cannot be evidence of a scheme to defraud the charter broker because there was no evidence that Paul Brassington knew the flight log for that trip would be falsified. Second, Paul Brassington argues that a January 19, 2005 terms and condition contract Joseph Singh, a co-conspirator, faxed to Regal Aviation for a charter flight flown by an unqualified pilot cannot be the basis for Paul Brassington’s conviction because there was no evidence that he was personally involved in this flight or was aware unqualified pilots were dispatched.

It was part of the conspiracy that defendants Michael Brassington, Paul Brassington, and others, in exchange for compensation, would deceive charter flight brokers and customers by, among other things, signing and sending via facsimile across state lines a “terms and conditions” contract which falsely represented that Platinum Jet was in compliance with Part 135’s federal safety regulations.

One of the overt acts charged in the Superseding Indictment involved a falsified flight log for an October 4, 2004 flight. Since the flight log was falsified, PJM was not in compliance with Part 135 regulations. However, as noted above, in relation to this flight, Paul Brassington faxed a terms and conditions contract to Regal Aviation on October 1, 2004, falsely representing that PJM was in compliance with Part 135. Accordingly, Paul Brassington’s motion for a judgment of acquittal is denied.

Michael Brassington was convicted under Count 21 of making a false statement on the February 7, 2005 NTSB accident report for listing the February 2, 2005 flight (“crash flight”) as a Part 91 rather than a Part 135 flight in violation of 18 U.S.C. § 1001. Under 18 U.S.C. § 1001, whoever knowingly and willfully “makes any materially false, fictitious, or fraudulent statement or representation” shall be fined or imprisoned or both.

Woolsey v. National Transp. Safety Board

The case of Woolsey v. National Transp. Safety Board was decided by the United States Court of Appeals for the Fifth Circuit as of June 23, 1993, 993 F.2d 516. In this case, a commercial pilot sought review of an order from respondent National Transportation Safety Board (NTSB) which had affirmed the FAA’s revocation of his commercial pilot’s certification due to his failure to comply with Part 135 of the FAR.

The commercial pilot operated a small air carrier and marketed the carrier’s services to rock musicians and other performers, resulting in a contract to transport a country singer Reba McEntire and her entourage. When an airplane that was carrying her entourage crashed, Ms. McEntire ceased doing business with the carrier. Shortly thereafter, the FAA issued an order revoking the pilot’s commercial pilot certificate due to his alleged violation of 14 C.F.R. § 91.13(a). The NTSB affirmed an administrative law judge’s decision, which had affirmed the action of the FAA. The Fifth Circuit court affirmed the order of NTSB, holding that petitioner was a “common carrier” within the definition of that term as provided in FAA Advisory Circular No. 120-12A. The court rejected petitioner’s argument that he had time sharing agreements with Reba McEntire which were governed by 14 C.F.R. § 91, which had less restrictive safety requirements than does 14 C.F.R. § 135. The court concluded that the objective conduct of petitioner, holding out his services to the music industry, and serving scores of different musicians, made his operations subject to § 135. The court affirmed the order from respondent NTSB which affirmed the revocation of petitioner’s commercial pilot certification because he was a “commercial carrier” under the definition of that term in FAA advisory circulars.

Specifically, the court cited FAA Advisory Circular No. 120-12A which defines a “common carrier” as one which holds itself out to the public as being willing to transport persons or property for compensation, to the extent that its facilities permit. A charter carrier may limit its operations solely to charter flights and still be a “common carrier.” A charter carrier can qualify as a “common carrier” even if it does not offer to every member of the public every available seat on its aircraft but, instead, offers various package deals to members of a defined segment of the public.

FAA Advisory Circular No. 120-12A underscores that the crucial determination in assessing the status of a carrier is whether the carrier has held itself out to the public, or to a definable segment of the public, as being willing to transport for hire, indiscriminately. The test is an objective one, relying upon what the carrier actually does, rather than upon the label which the carrier attaches to its activity or the purpose which motivates it.

The absence of tariffs or rate schedules, the provision of transportation only pursuant to separately negotiated contracts, or the making of occasional refusals to transport, are not conclusive proof that a carrier is not a common carrier. See FAA Advisory Circular No. 120-12A. Similarly, the mere existence of a contract negotiated for a special price, without more, does not suffice to make the carrier a private carrier.

Only those carriers who affirmatively hold themselves out to the public, either by advertising or by a course of conduct evincing a willingness to serve members of the general public or a segment thereof indiscriminately, so long as they are willing to pay the fee of the carrier, will qualify as common carriers.

14 C.F.R. § 91.501(b)(6) states that operations that may be conducted under the rules in this subpart instead of those in parts 121, 129, 135, and 137 of this chapter when common carriage is not involved, include the carriage of company officials, employees, and guests of the company on an airplane operated under a “time sharing agreement.” The term “time sharing agreement” is defined in 14 C.F.R. § 91.501(c)(1) as an arrangement whereby a person leases his airplane with flight crew to another person, and no charge is made for the flights conducted under that arrangement other than those specified in paragraph (d) of this section.

The subjective intentions of a petitioner are not controlling. It is his objective conduct which brings his actions under 14 C.F.R. § 135. A carrier cannot divest itself of its common-carrier status by the simple expedient of entering into an agreement with its customers purporting to relieve itself of its normal liability. The Federal Aviation Regulations are primarily designed to protect the public safety, and not the private contractual aspirations of given parties.

Sample Lease and Loan Agreement Provisions Concerning Aircraft Leases

Banks and aircraft finance companies, depending on their market positioning and credit committee approvals, are, generally speaking, equally willing to finance aircraft to be used pursuant to Part 91 or Part 135. What creditors do not want is for an aircraft to be used illegally or not in compliance with applicable maintenance and other requirements as any such deviation alters the risks to which the aircraft and its financier are exposed.

A typical loan agreement to the legal entity that owns an aircraft may provide that, so long as no default is then existing, the borrower may enter into an agreement with a third party to use the aircraft, provided, among other things, that the third party shall have and maintain a valid Part 135 Certificate evidencing its authority to conduct such operations, list the aircraft on its operations specifications, and comply with all Applicable Standards pertaining to such charter operations. Any operation of the aircraft pursuant to any such agreement shall be limited to (A) if by the owner, any time sharing agreements (as defined in Section 91.501(c)(1)) complying with Part 91 of the FARs and all other applicable standards, (B) if by a charter operator, pursuant to and in full compliance with the requirements of Part 135 of the FARs and all other applicable standards, or (C) if such third-party agreement is a “dry lease” providing for operation by such lessee complying with Part 91 and any other applicable provision of the FARs and the provisions of the loan documents pertinent to the operation of the aircraft. If a lease of an aircraft to a Part 135 operator is intended, the lender shall have received a copy of any Part 135 certificate and related documentation.

Some lenders are very flexible and provide that the owner shall use, operate, maintain, and store the aircraft, and every part thereof, carefully and in compliance with all applicable statutes, ordinances, and regulations of all jurisdictions in which the aircraft is used, and with all applicable insurance policies, manufacturer’s recommendations and operating and maintenance manuals, including, without limitation, FAR 91, 121, or 135, as applicable, and all applicable maintenance, service, repair and overhaul manuals and service bulletins published by manufacturers of the aircraft or of the accessories, equipment and parts installed in the aircraft.

A Part 91 Operational Structure for Shared Use of Multiple Aircraft

It is possible for owners of multiple aircraft to share their aircraft with one another and to use one operator to coordinate their shared use. Such an arrangement would involve an Aircraft Management Agreement between each aircraft-owning legal entity and a single management company; a non-exclusive aircraft lease agreement between each aircraft-owning legal entity and an operating company that would not be required to operate aircraft pursuant to FAR Part 135, an aircraft pilot services agreement between each aircraft-owning legal entity and a pilot services company. The agreements could be straightforward and provide that each participant may use the other participants’ aircraft for an agreed number of hours, yet the arrangement would not be required to comply with all the detailed requirements of a fractional ownership programme.

Meanwhile, read more about the FAA’s proposed $1,001,000 fine against Weathervane Aviation Services for allegedly conducting about 1,400 illegal charter flights here.

Derek Bloom, partner, Atlantic Aviation Legal Services, LLC.