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The Dilemma of Single Purpose Entities

Background

Because of the flexibility given to operators under Part 91 of the Federal Aviation Regulations (“FARs”), most corporate “flight departments” choose this route as opposed to the more restrictive and certainly more costly air carrier certificate “charter” operations under Part 135.  A Part 91 operator is generally not permitted to receive compensation in exchange for the provision of transportation unless it falls under the list of exceptions identified in Part 91.501.  This regulation applies to large civil aircraft (i.e. a maximum certificated takeoff weight over 12,500 pounds) and turbojet-powered aircraft.  Under Part 91.501, an eligible Part 91 operator may receive certain limited reimbursements as long as they are pursuant to an appropriate time-sharing agreement or in the context of an affiliated entity chargeback.

Use of Part 91.501 presumes that the operator is eligible to operate the aircraft under Part 91.  The provision of an aircraft and crew together for compensation otherwise requires the operator to obtain a 135 charter certificate and the operation of the aircraft is then subject to a variety of restrictive rules under Part 135 of the FARs. The FAA’s primary concern is safety, and it believes that when there is compensation, including mere reimbursement of expenses, operators will focus on compensation at the expense of proper safety precautions.

The Dilemma of Single Purpose Entities

The threshold question for determining if an aircraft operator is eligible to operate under Part 91 is whether the operation of the aircraft is incidental to the primary business of the operator.  An entity that is formed solely to operate an aircraft (i.e., provide aircraft and crew) to carry persons or property, also known as a “flight department company,” would not meet the test for operating an aircraft “incidental” to a primary business because, by definition, the single purpose entity, often a single member LLC, has no other business (other than transportation).  At least four FAA  interpretations confirm this interpretation.

Practically, when an aircraft is operated by a single purpose entity that owns or leases the aircraft and provides the crew (directly or indirectly), the FAA views such an operation as operating for “compensation,” regardless of whether the entity is carrying its owners or any other party and, accordingly, requires the operator to hold a 135 charter certificate.  The FAA and Department of Transportation construe “compensation” broadly.  For example, because the entity engages in no other business, capital contributions from the operating entity’s owner to cover the cost of the operation of the aircraft could be deemed payment in exchange for the provision of transportation to the owner or to any other party.  Therefore, under current FAA published interpretations, single purpose entities are not eligible to operate aircraft under Part 91.

Our attorneys are experienced with helping clients navigate the often counter-intuitive rules of the FAA and other regulatory authorities with respect to the operation of their aircraft.

About Stewart H. Lapayowker, P.A.

Based in Fort Lauderdale, Fla., the law firm of Stewart H. Lapayowker, P.A. focuses its practice on private and corporate aviation transactions worldwide, including throughout the United States, South America, the European Union, Asia and the Middle East. The firm regularly assists clients with a variety of issues related to aviation, including the sale, purchase, regulatory analyses, financing and management of corporate aircraft.

 
 
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