Is Your Aircraft Lease Really Wet?

When utilized properly, aircraft leases are a critical tool to maximize aircraft use, manage risk and tax obligations, make an aircraft available for personal and business uses, and most importantly to comply with Federal Aviation Administration (“FAA”) regulations. There are two main types of aircraft lease agreements, (i) “dry leases,” and (ii) “wet leases.” A dry lease is a lease of an aircraft, in which the lessor provides the aircraft, while the lessee (i) supplies the crewmembers, and (ii) has operational control of the flight. On the other hand, a wet lease is a lease of an aircraft, in which the lessor provides both the aircraft and at least one crew member and retains operational control of the flight.[1] Unless an exemption exists, a wet lease signals the need for an FAA Commercial Operating Certificate (a “Certificate”) and is a normal part of a Part 135[2] operation. Conversely, an aircraft may be shared pursuant to a compliant dry lease under the much less regulatorily burdensome provisions of Part 91.[3] Problems often arise when a dry lease is later determined to be a sham-dry lease–a lease that is actually a wet lease–by the FAA. This can expose the parties to potential liability on a multitude of levels, including for operating a Part 135 operation without a Certificate.

One of the key differences between dry and wet leases, is the person who has operation control for flights performed pursuant to the lease. It is important to note that the person with operational control is exposed to regulatory and tort liability. That is why it is imperative to determine who has operational control, and to develop a structure to limit their liability. Operational control is defined as the “exercise of authority over initiating, conducting and terminating a flight.”[4] When the FAA reviews a leasing arrangement to determine who was in operational control of a certain flight (or series of flights), they review a multitude of factors. These factors help the FAA make a determination as to whether a dry lease is a sham-dry lease. The following are a survey of some of the factors the FAA will review when making such a determination, each of which should be addressed in a well drafted aircraft lease (whether a wet or dry lease):

• Who is responsible for assigning crewmembers, initiating, conducting, and terminating flights (subject to the determination of the pilot in command)?
• Who is responsible for ensuring crewmembers are trained and qualified in accordance with applicable regulations?
• Who is responsible for specifying the conditions under which a flight may be operated?
• Who is responsible for ensuring the aircraft is airworthy and compliant?
• Who is responsible for maintaining the aircraft?
• Who is responsible for insuring the aircraft?

• Who is responsible for determining weather and fuel requirements, and paying for fuel?
• Who is responsible for paying for airport fees, parking/hangar costs, food service, and/or rental cars?

In general, the more times the answer to the above questions is “the lessor,” the more likely it is that the FAA will consider the lease to be a wet lease, opening the parties to that lease up to several (sometimes severe) penalties. The FAA has recently stepped up its enforcement of aircraft leases, and the consequences can be steep.[1] Some of the consequences include:

• Civil Penalties (Usually in the 6-7 Figure Range);
• Certificate Revocation or Suspension;
• Loss of Tax Deductions;
• Unexpected Applicability of Federal Excise Tax;
• Invalidation of Tax Exemptions;
• Invalidation of Insurance Coverage; and
• SEC Compliance Enforcement.

As you can see, the specifics of an aircraft leasing arrangement and structure can be complicated, and the consequences for non-compliance can be steep. To help ensure you do not have to find out about the consequences the hard way, it is critical to have a comprehensive lease in place, comply with the terms of that lease, have a comprehensive tax and regulatory structure in place, and ensure you have all of the proper documentation in order. We are happy to help you navigate these steps and keep you flying high!

[1] 14 C.F.R. § 110.2.

[2] See generally 14 C.F.R. Part 135.

[3] See generally 14 C.F.R. Part 91.

[4] 14 C.F.R. § 1.1

[5] 8900.1 CHG 703 Volume 3, Chapter 13, Section 6: Evaluate an Aircraft Lease Agreement for Regulatory Compliance Under § 91.23.

[6] 14 C.F.R. § 91.23