Dry Lease Overview

The FAA is tightening the enforcement of Aircraft Leasing as a result of illegally Chartered Aircraft. This affects Leasing a Cessna 150, up to an A380 with varying degrees of visibility in the oversight.

A Legitimate lease is needed for:

1. Financing
2. Tax Planning
3. An Individual or Entity (with a named Individual), to possess and control the Aircraft
4. Pilot Training
5. Air Charter Operators, to gain access to added Aircraft for their fleet
6. Individuals or Entities to optimize their ownership under non-commercial rules
7. Your protection, and that of the public

Part 91 Operations:

       Flying under Part 91 therefore assumes, in part, that:

1. the aircraft is being properly maintained;
2. the pilots are qualified;
3. reasonably knowledgeable passengers have some basic understanding of who is operating the flight;
4. the passengers are not being asked to contribute to the cost of the flight; and
5. the passengers will have some form of redress if those obligations are not being followed.

Operational Control:

With respect to a flight, means the exercise of authority over initiating, conducting or terminating a flight. A party in operational control is not required to manipulate the aircraft controls personally or perform the other functions of an operator directly but may delegate to another individual or company with aviation expertise such as a management company to assist the operator in performing such functions. However, the party in Operational Control (lessee) remains ultimately responsible for these functions even if delegated.

Types of Leases:

Fundamentally, a “wet lease” is specifically defined in the FAR as a lease of an aircraft with at least one crewmember. The prototypical example of an appropriate wet lease is the charter of an aircraft to a passenger by a properly certificated charter operator under FAR Part 135.

Conversely, a “dry lease” is therefore the lease of an aircraft without any crew members. Under a dry lease, the compensation being paid is typically in the form of a rental payment, identified in the lease, in exchange for the lessee’s own use, whether the lessee will personally pilot the Aircraft or a be a passenger who has hired a pilot of the equipment being rented. Analogous to obtaining a rental car for one’s ground transportation needs. A properly constructed dry lease may allow a user of the aircraft other than the registered owner to conduct its own flights of the aircraft under FAR Part 91. The maintenance cost could be covered by maintenance reserves paid by each of the lessees to the lessor as part of the lease. The cost of crew employment, benefits, or training should never be included in the lease.

1. Exclusive Dry Leases – Used for an individual who will fly themselves or contract for pilot, maintenance, scheduling, fuel, flight following, and insurance. There is rarely an issue arising with respect to whether or not operational control has been properly transferred to the lessee under an exclusive dry lease. This, of course restricts the ability to lease to other individuals or entities, including Part 135 Operators.
2. Non-Exclusive Dry Leases – In cases where multiple leases will be used, only one Individual or Entity (with a named Individual) may have possession of, and Operational Control over the Aircraft at any given time.
   1. Short Term Rentals to Pilots – Example – Rental to Pilot of Aircraft by FBO/Flying Club
   1. Non-Exclusive Related Party Leases – Aircraft Holding Entity wishes to lease to Primary Business, Company A and its affiliates. A Lease must be created between Holding Entity and any end user to establish possession, use and Operational Control over the Aircraft. Each affiliate and Company A must have its own Agreement for Aircraft and Piot Services with a reputable provider or Management Company.
   1. Non-Exclusive Leases to Third-Parties – Company A may lease the Aircraft from the Holding Entity to an unrelated Company B. Company B must establish its own Agreement with a reputable Management Company. This will show responsibility for assuring proper piloting and maintenance is established while Company B is in possession of the Aircraft and they have assumed Operational Control during their use.

Truth in Leasing Requirements: – For Aircraft exceeding 12,500 lbs MTOW

1. the lease must be in writing;
2. the lease must contain certain specific truth-in-leasing language
3. the lease must be carried on board; and
4. the parties must comply with certain requirements to notify the FAA.

Use of the Same Pilots by Multiple Lessees:

If a lessee also wants to obtain crew services from the same Management Company, is the lessee paying separately for such services? If it does not, the independence of that relationship would be undercut, leading to questions about proper transfer of Operational Control. For the lessee to be able to prove that it has Operational Control of the leased aircraft, it is strongly recommended that the lessee have written agreements for the crew members that it directly employs or that it engages and uses through sources other than the lessor (or anyone owned or controlled by the lessor). Each leasing entity should have their own separate Pilot Services Agreement.

Maintenance:

It is vital that maintenance and inspections be readily tracked and monitored. Each lessee maintains their responsibility, directly, or delegated in:

1. reviewing the records to confirm that the aircraft is in the required condition and that all open items have been properly closed out,
2. performing all pre- and post-flight inspections,
3. documenting any and all discrepancies and airworthiness or maintenance issues that are identified during flight or during the checks, and
4. reporting the information and providing the documentation to the party designated as maintenance coordinator.

The lessee maintains Operational Control, and responsibility for acceptance of proper maintenance, since it is making the ultimate airworthiness determination before the flight, even if the lessor or lessor’s management company is the maintenance coordinator.

Can our Single Purpose Entity (owning the Aircraft ) operate passenger flights and be reimbursed by its parent?

The general rule is that an aircraft special-purpose subsidiary may not accept any amount or kind of compensation, including capital contributions, from others (even a related company) to carry passengers. If that special-purpose entity’s sole function is to provide transportation for its affiliates, then the FAA would consider the entity to be a “flight department company” and would require it to obtain commercial certification to conduct those flights.

Can the lessee, operating on Part 91, charge for a flight occupied by its officials, employees, guests, or property?

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. 91.501(b)(5).