New and repeat business aircraft buyers in the U.S. quickly realize when purchasing a business aircraft that the Federal Aviation Regulations (FARs) unavoidably and significantly impact a buyer’s business, tax, structuring, and other major decisions. The FARs even induce some buyers to purchase a different aircraft than they originally envisioned due to limits on flight operations at particular airports.
The key FARs for business aviation—14 CFR Part 91 and 14 CFR Part 135—also affect personal liability; taxes; aircraft operating expenses; employee, risk, and aircraft management; potential charter revenue; and flight support services. In other words, deciding whether to operate under Part 91 and Part 135 represents the takeoff—not the destination—for many essential structuring and planning aspects of aircraft ownership, financing, operations, and management.
A High-altitude View of Part 91 and Part 135
Buyers need to understand the basic concepts of Parts 91 and 135 to appreciate the pervasive impact of them on purchasing and owning business aircraft; this is not just a lawyer’s task.
Think of Part 91 generally as the main rules for the non-commercial—private flight operations where passengers cannot lawfully compensate or reimburse an owner for his/her business and personal flights—with limited exceptions under FAR 91.501. By taking full responsibility for the conduct and expense of flights under Part 91, owners can carry their families, friends, business associates, and others without meeting the more stringent operations and certifications requirements under Part 135.
Under Part 91, one qualified entity or individual acts as the aircraft “operator” and, in that capacity, exercises “operational control” of the flight. Conceptually, operational control applies to Parts 91 and 135. The term refers to the authority of the operator to initiate, conduct, and terminate a flight.
The operator under Part 91 or Part 135 incurs the responsibility and primary personal liability to others for aircraft accidents or other occurrences that cause property damage, personal injury, or death. I often describe these operators as having the liability “target on their back” for claims by third parties.
In certain Part 91 structures, aircraft owners self-manage their aircraft. They can employ pilots, mechanics, and other crewmembers in an active business enterprise or an aviation company affiliated with the owner, each called a “flight department.” The flight department does not own the aircraft. Rather, the owner holds title or forms a single-purpose limited liability company or trust to do so.
Whether the flight department supports one or more aircraft, the flight department arranges for flight operations; performs risk management tasks such as buying insurance; accounts and pays for aircraft expenses on the owner’s account; oversees employee compensation; coordinates aircraft maintenance; complies with the FARs; schedules flights on demand; and interacts with the FAA.
Part 135 regulates the operations of air carriers that provide nonscheduled air charter flights, unlike scheduled flights by airlines. Stated differently, Part 135 governs the business of providing civil air transportation services to the public and owners under various designations such as charter operators, commercial air transportation services, on-demand air carriers, or direct air carriers.
Part 135 operators prepare, and the FAA approves, operation specifications (op specs) that create the framework under which the Part 135 operator conducts its business. A Part 135 operator must “conform” an aircraft to its op specs before using the aircraft in charter operations. The conformity process ideally starts soon after the aircraft acquisition closes and may take several weeks or more to complete partially depending on the FAA’s responsiveness to an approval request.
A qualified aviation company holds an air carrier certificate under FAR Part 119 and operates the aircraft in compliance with Part 135. A Part 135 operator can provide transportation services for compensation to third parties and owners, their employers, friends, business travelers, and others.
To assure the safety of fee-paying passengers and others, Part 135 imposes—and the FAA enforces—additional, detailed, and stricter safety standards than those in Part 91. For example, Part 135 limits crewmember flight, duty, and rest time; requires specific pilot qualifications, medical certifications, extra crew training, and drug and alcohol testing; increases aircraft avionics and safety equipment; restricts flight operations in bad weather; and forbids landing at airports outside of FAA parameters.
Why Part 91 Operations Make Sense to Owners
In contrast to Part 135, Part 91 offers flexibility, potential cost savings, and uninterrupted access to and scheduling of the aircraft free of conflicting charter schedules of third parties. It also eases pilot qualification requirements—a definite plus given the current pilot shortage. However, owners may elect not to charter their aircraft.
Ask pilots why they prefer to fly under Part 91, and they will probably say they like the flexibility to fly almost anywhere, anytime, and for as many hours of duty as it takes to complete the mission of their aircraft owner free of burdensome and unnecessary Part 135 rules.
Despite these Part 91 benefits, choosing to operate under Part 91 involves potentially complex management tasks and substantial financial, tax, personnel, and aircraft maintenance challenges.
Why Part 135 Operations Make Sense to Owners
Part 135 operations may cost more for management than running an in-house flight department under Part 91, in large part because Part 135 operators incur additional safety-oriented compliance costs and charge management fees. Still, new and repeat buyers should analyze the significant value of hiring a Part 135 operator that, as its core business, can largely replace self-management operations.
As a major risk mitigation benefit, a Part 135 operator exercises operational control of the aircraft instead of the owner; that is, the liability target is on the back of the Part 135 operator. A Part 135 operator offers charter services and flight support for Part 91 flight operations. They can account for, and provide customized financial reports on, aircraft/trip expenses and secure fuel discounts.
Tax planning for Part 135 operations in some respects differs from taxation under Part 91. To illustrate, Part 135 may trigger federal excise tax (FET), passive losses from chartering activity, and longer depreciation periods. Part 135 operators can provide charter services to third parties that generate revenue whereas a Part 91 operation cannot legally charter the aircraft and generate charter revenue.
Summary
One of the most important decisions an owner makes other than acquiring the right aircraft is choosing to self-manage an aircraft in their own flight department under Part 91 or selecting a Part 135 commercial charter operator to manage the aircraft. The through-line for both Parts stems from the broad impact of applying Part 91 and Part 135 to virtually every major structuring, tax, risk management, and related business and legal decision. Compliance with these Parts is not optional but working with a knowledgeable aviation team will help owners address the inherent complexities and achieve a positive experience as the owner or lessee of a business aircraft.
This blog is purely informational and reflects the author’s experience and legal practice. It does not, and should not be construed to, provide legal advice of any kind, express or implied, or create a lawyer-client relationship. Persons involved directly or indirectly in any issue covered in this blog should inquire of appropriate aviation counsel, senior executives, brokers, and other trusted advisors on the subject matter above. The opinions expressed in this column are those of the author and not necessarily endorsed by AIN Media Group.
