Owners and potential aircraft purchasers have for a while told me they want to buy or continue to own an aircraft but intend to share ownership with at least one other person. They recognize the value of freeing up capital from the aircraft purchase price, deploying the cash into their businesses or investments, decreasing ownership costs, and sharing the risk of depreciating aircraft values.
Fundamentals of Aircraft Sharing
How do the parties start their shared aircraft ownership experience? Before all else, they should agree to buy and/or share a mutually acceptable aircraft that accomplishes their respective missions. They should genuinely and confidently trust each other to honor their aircraft arrangements.
To avoid false starts or panic when a prospective buyer understands the true cost of aircraft ownership, each party should model and/or consult professionals to ensure that the economics make sense individually and collectively.
The parties should also address the other major issues entailed in sharing an aircraft. Tax planning and limitation of liability—starting with a request to form a limited liability company (LLC)—often surface first. More broadly, the parties should discuss their respective ideas for buying, owning, managing, operating, maintaining, and improving an aircraft as well as sharing costs.
From a legal standpoint, it is critical to comply with the Federal Aviation Regulations (FARs). As the parties plan risk management, they should promptly confirm that adequate insurance is available to cover their aircraft ownership and operations.
Ownership Structures
Although many nuances exist in overall structuring, multiple-owner deals break down into two basic arrangements. First, two or more parties can co-own an aircraft. A second type of co-ownership called joint ownership exists as an exception to the basic operating rules in FAR Part 91 in which one owner may provide its crew to the other owners.
Although these joint ownership and co-ownership structures may appear interchangeable, they involve distinct legal issues, documentation, and operational differences. Also, they differ from time-sharing or interchange agreements under 14 C.F.R. §§ 9.501(b)(6) and (c)(3).
Real Deal Ownership Structuring
To illustrate how co-ownership and joint ownership work, consider this blended version of a few of my real client transactions. Mr. Owner, a second-time aircraft owner, decides to buy a new aircraft for $12 million. Since he signed the purchase agreement, he has become concerned that the capital he invests and the higher interest rates he must pay on funds he borrows to purchase the aircraft might create a financial burden when combined with rising costs of crew, maintenance, flight operations, fuel, insurance, and repairs. He also worries that he may not fly enough hours to justify owning the aircraft by himself.
Consequently, when a good friend, Ms. Buyer, a first-time purchaser, offers to buy a 50% interest in Mr. Owner’s aircraft for $6 million, Mr. Owner accepts. Ms. Buyer runs a successful commodities business (BuyerCo) but elects to form a limited liability company (Buyer LLC) solely to hold her 50% interest, shield her from personal liability, and enhance her privacy.
Mr. Owner intends to use his major business shipping enterprise (OwnerCo) to buy his interest in the aircraft. OwnerCo already employs a crew that Mr. Owner strongly prefers to fly the new aircraft for Mr. Owner and Ms. Buyer. Ms. Buyer tentatively agrees because she did not want to hire a separate crew, but she and Mr. Owner need to understand the options to be joint owners under the FAR or co-owners.
Option 1: Co-ownership
Co-ownership broadly refers to a form of aircraft sharing in which two or more parties buy and share the use of and responsibility for an aircraft. The parties usually select one of two structures. First, they can form an LLC (Plane LLC), which will hold legal title and be the registered owner at the FAA. Buyer LLC will hold her 50% “membership interest” in Plane LLC, and OwnerCo will hold his 50% interest in Plane LLC.
Significantly, Ms. Buyer believes Plane LLC can operate the aircraft for her friends and herself. However, she learns that Plane LLC cannot “operate” the aircraft or pay its operating expenses without conducting illegal charter operations and becoming a “flight department company” in violation of the FAR. The term "operate" here basically means to use or authorize the use of the aircraft for air navigation, including the piloting. Although Plane LLC could operate that way, Plane LLC would first need to obtain a FAR Part 119 certificate and comply with the FAR Part 135 commercial operating rules—a lengthy and complex process.
To align their structure with the non-commercial rules under FAR Part 91, Plane LLC will enter into separate non-exclusive (two or more) “dry leases” with Ms. Buyer and with BuyerCo. A dry lease is a lease of an aircraft without any crewmember. Each lessee must obtain its own crew and exercise operational control of the aircraft. Operational control refers to exercising “authority over initiating, conducting or terminating a flight”—that is, one person in charge (operator) directs and takes responsibility for the flight.
A second form of co-ownership encompasses two or more owners such as OwnerCo and BuyerCo who register their respective ownership interests at the FAA, hire their own crews, and, at their option, dry lease the aircraft. This structure is more flexible than joint ownership permitted by the FAR.
Option 2: Joint Ownership
Authorized by 14 C.F.R. §§9.501(b)(6) and (c)(3), joint ownership establishes a limited exception to the general operating rules under FAR Part 91 to allow operations that otherwise would be commercial air activity. It is defined as “an arrangement whereby one of the registered joint owners of an airplane employs and furnishes the flight crew for that airplane and each of the registered joint owners pays a share of the charge specified in the [their] agreement.” Neither an individual nor an owner trustee can be a “joint owner.” This arrangement authorizes Mr. Owner to use his crew to provide flight services to Ms. Buyer.
As joint owners, the parties register their respective undivided interests (to the whole aircraft) on the same filing at the FAA. Joint owners must enter an agreement to specify their respective “share of the charge” of the aircraft—costs other than direct flight expenses.
Among its benefits, joint ownership enables practical, cost-efficient, and presumably safe flight operations by using one (not multiple) flight crews to operate the aircraft. It also permits individual federal income tax planning and avoids the federal excise tax (by the owner retaining possession, command, and control).
Joint ownership is not a regulatory-free ride. The FAR also imposes two other notable restrictions on joint owners. First, this rule applies only to large aircraft (12,500 pounds mtow), turbine-power multi-engine, and fractional program aircraft. It extends to piston airplanes, small airplanes, and all helicopters if covered by the NBAA Small Aircraft Exemption. Second, joint owners who are parties to a joint ownership agreement can carry only their officials, employees, and guests.
Joint Owner and Co-owner Agreement
Multiple owners should always enter into appropriate written agreements to govern their relationship and the terms of sharing. Some parties insist that, as “friends,” they can bypass the joint ownership or other agreements, but that is an avoidable mistake and undermines the sharing fundamentals discussed above.
Whether a joint ownership, co-ownership, or LLC structure, each agreement should similarly cover such issues as budgeting, aircraft scheduling, limits on hours flown and periods away from home base, aircraft management, leasing the aircraft to third parties, calculation and allocation of fixed and capital costs (such as 50% each for Mr. Owner and Ms. Buyer), indemnification, aircraft sales, and conflict resolution.
For the LLC structure, the parties—OwnerCo and Buyer LLC—should also enter into an LLC agreement that governs the entity such as member and manager duties and powers, voting rights, membership assignments, sale of memberships, rights of first refusal, taxation, and buyout rights.
Final Thoughts
Joint ownership and co-ownership of aircraft offer viable structures for owning, sharing, and operating private aircraft by more than one person or entity. Although the rules are a bit tricky, the structures can reduce fixed aircraft costs, facilitate separate tax planning, and provide private transportation to more than one person who individually could not or would not undertake whole aircraft ownership.
In our unpredictable economic and geopolitical environment, joint ownership or co-ownership may just fit the bill for new and experienced aircraft owners.
The material in this blog is not intended to be, 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 selection.