Aviation entrepreneurs seem increasingly interested in purchasing aircraft charter companies opportunistically from the thousands that exist today. Others who want to enter the aircraft charter business believe the cleanest way to do so is to apply to the FAA for a new air carrier certificate authorizing operations under FAR Part 135.
In most cases, a potential buyer fares better by purchasing the legal entity (Part 135 operator) to which the FAA issued a certificate. That purchase may take several months to close, whereas an applicant may have to devote a year or more to obtaining two separate authorizations—one from the Department of Transportation (DOT) under FAR Part 119 and a related certificate from the FAA.
Although you may have heard or read that a buyer can purchase a 135 certificate itself from a Part 135 operator, the FAR does not allow such a direct purchase. However, using various structures, a buyer can purchase a Part 135 operator with the effect of transferring the certificate to the buyer.
Threshold Assessments
At the outset, a buyer or applicant should determine the type, kind, options, and scope of operations they wish to conduct before starting the acquisition or certification process.
A buyer can purchase all or part of a Part 135 operator that is authorized to conduct operations of four different types. First, the single pilot level allows for one pilot for all Part 135 operations. The pilot must be named in the operations specifications (OpSpecs) of the Part 135 operator.
Second, a single pilot in command (PIC) certificate holder allows a Part 135 operator to operate fewer than five aircraft, generally piston singles or turboprop twins, approved for travel within U.S. territories. Third, a basic certificate allows a Part 135 operator to employ no more than five pilots with an approval to operate in the U.S., Canada, Mexico, the Caribbean, and Central America.
Finally, a standard certificate allows global operations with 10 or more aircraft and pilots. A Part 135 operator can change existing levels.
As a buyer evaluates Part 135 operators, the buyer should understand the thrust of a business to determine whether the operator primarily manages aircraft with a side of supporting charter services or primarily charters aircraft with a necessary side of management services. This inquiry should reveal, among other information, how the target Part 135 operator drives revenue, lands its customers, delivers competitive services, and incurs operating costs.
As you would expect, the purchase price and transaction complexity tend to climb progressively as the buyer considers purchasing a Part 135 operator with a single pilot, single pilot in command, basic, or standard certificate.
Pros and Cons of Buying or Selling a Part 135 Operator
The decision to buy or sell a Part 135 operator demands an informed analysis and a realistic reflection of the pros and cons of transacting with the other party.
Pros to selling: A prospective seller may realize that the air charter management business is complex—and getting more so. Consequently, a seller may welcome a sale of all or part of the business to be relieved of the financial, regulatory, operational, and corporate stress, particularly the frustration in finding and retaining qualified pilots and other skilled labor.
In the post-pandemic period, a seller may worry that charter demand is slowing down just as the business encounters thinning profit margins coincident with rising salaries, benefits, and costs that also shrink the seller’s capital to improve or grow the business.
Cons to selling: A profitable Part 135 operator may prefer to keep the business, especially if it has loyal employees, a successful business model, and a buyer who will not pay the seller’s high asking price.
Pros to purchasing: A buyer likely expects to improve operational efficiencies of the target Part 135 operator to drive higher business revenue, provide needed capital, upgrade reporting and other systems, and recruit talent, which includes replacing the director of operations (DOO), chief pilot (CP), or director of maintenance (DOM). Even though the FAA and the Flight Standards District Office (FSDO) will require certificate amendments reflecting the sale, the buyer will benefit from the target’s existing certification and operations at the closing rather than spooling up a whole new business under a new certificate.
Cons to purchasing: Similar to any purchase of the common stock of a corporation or membership interest of a limited liability company (LLC), the buyer assumes known and unknown liabilities of the Part 135 operator. That risk may be more pronounced if the target Part 135 Operator does not produce standard financial and operations reports. The initial DOO, CP, and/or DOM may not fit the requirements of the buyer’s anticipated needs.
Additionally, a Part 135 operator has responsibility and liability for flight operations when the Part 135 operator exercises operational control of the aircraft during charter flights. Last, the seller’s asking price may be too high to make economic sense for the buyer.
Regulatory Hurdles to Transacting
To expand on the regulatory runway to conducting Part 135 operations, Part 119 prescribes the types of certificates that the FAA issues, including an air carrier certificate and an operating certificate under Part 135. An air carrier must have or obtain two separate authorizations from the DOT: first, the FAA’s safety authority in the form of a Part 135 air carrier certificate with related OpSpecs, and, second, the DOT’s economic authority in the form of a certificate of the Secretary of Transportation authorizing air transportation of passengers and/or cargo.
One of the most common types of commercial operations under a certificate occurs on-demand (as opposed to scheduled), meaning any operation “for compensation or hire” where an operator and the customer negotiate trip dates, costs, and other travel details.
The Part 135 operator must satisfy extensive requirements for certification. They include proving that the Part 135 operator qualifies as a citizen of the U.S.; assuring that, with some exceptions for single-pilot operators, at least two of the key technical personnel—namely the DOO, CP, and DOM—will remain with the new owner for a reasonable period after closing; designating the airport that will serve as its principal base of operations; creating and maintaining operations, flight, and maintenance manuals; and establishing crew training programs. For six continuous months from the certification, the buyer must own or lease one aircraft for exclusive use under the certificate.
Not to be left out, the DOT requires Part 135 operators to institute and implement a drug and alcohol testing program. The Transportation Security Administration mandates that a Part 135 operator establish appropriate security protocols.
Diligence and Purchase Contract Terms
Like all stock or LLC membership purchases, a buyer must conduct thorough due diligence and, on many items, insert corresponding terms in the purchase agreement to confirm or supplement the diligence findings and include business terms such as purchase price and employment arrangements with the seller, the DOM, CP, and DOO.
Also, a buyer should investigate and approve the number, condition, and types of aircraft, owned and non-owned, in the seller’s fleet that have been or will be conformed to the Part 135 firm’s OpSpecs; the creditworthiness of the customers; the terms of contracts with third parties; the debt and other liabilities to be paid or assumed by the buyer; and the number and quality of its pilots.
Also, in the buy or no-buy decision, a buyer should validate crew training programs, the existence of a safety management system (SMS), and any ratings of the Part 135 operator’s business by reputable third-party auditors. In addition the seller’s relationships with the FAA and the FSDO, full regulatory compliance, the aircraft accident or incident history, and the limits on—and terms of—insurance coverage should be considered.
With the shortage of pilots and other skilled talent in the private aviation industry, it is crucial to understand the target Part 135 operator’s culture. Ideally, a buyer will perceive, or expect to create, a positive work environment of acceptance, mutual respect, diversity, accountability, and inclusion of all personnel.
Conclusion
Purchasing an existing Part 135 operator is challenging, but it pales in comparison to applying for a new certificate. Although buyers cannot directly purchase a certificate, a buyer can purchase the entity that owns the certificate.
With robust due diligence and a healthy dose of patience, experienced operators in, or new entrants to, the air charter/management business can take a flight to profitability.
The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. The comments, recommendations, and analysis expressed in this blog are those of the individual author, David G. Mayer, and they may not reflect the opinions of AIN Media Group. Your use of this blog does not create an attorney-client relationship between you and the author or his law firm. If specific legal information is needed, please retain and consult with an attorney of your own selection.