AINsight: Can You Trust an Aircraft Management Company?

Not all aircraft management companies are created equal. Most of them follow the rules while others break them—at your peril. As enterprises for profit, management companies almost always try to win your business, but can they also earn your trust?

What Management Companies Do

Ranging in fleet size from one to more than 300 aircraft, management companies (managers) use different business models, manage a variety of aircraft types, and offer varying scopes of service, all purportedly for your convenience, safety, and comfort. They can earn revenue from management fees and, if permitted, air charter flights.

Perhaps the most important function of managers is selecting, hiring, and/or training crew to fly owner and charter trips. The pilots may develop a unique bond with the owner, which a manager can foster. Managers provide many other services, which include assisting with hangar searches and lease negotiations; administering engine maintenance programs; arranging insurance coverage under their fleet policy; directing maintenance, inspections, and repairs; interacting with the FAA; keeping detailed flight records; preparing budgets; paying vendors; distributing your share of charter revenue; and directing logistics for each trip. 

Regulatory Foundation: The Impact of Selecting a Manager

Managers involved in private aviation operations function mainly in two categories of the Federal Aviation Regulations (FARs)—Part 91 and Part 135.

Part 91 operations. Certain managers oversee aircraft that operate only under Part 91, which generally includes rules for non-commercial private flight operations, under which an owner or operator generally cannot be reimbursed for business or personal flights, with limited exceptions under FAR 91.501. These managers do not operate your aircraft, although they may source pilots. Under Part 91, one qualified entity or individual acts as the aircraft operator and thereby exercises operational control, the authority to “initiate, conduct, and terminate” the flight.

Separately, another strong Part 91 option involves self-managing aircraft for a business enterprise with services dedicated to the enterprise, often called a corporate flight department. Managers may assist companies that have these departments but need an extra lift with their aircraft or fleet needs.

Part 135 operations. In the second category, managers operate under Part 135, which governs the provision of civil air transportation services to the public and owners for compensation or hire, under various designations such as charters or on-demand air carriers. A qualified manager holds an Air Carrier Certificate under Part 119 (listed in the FAA database) and associated operations specifications (OpSpecs) for operating an aircraft in compliance with Part 135. Part 135 imposes, and the FAA enforces, strict safety, operational, training, medical, technology, airport, and other requirements compared to Part 91.

Why are the distinctions between Part 91 and Part 135 important? The distinct features of these FARs may drive your choice of a manager. You (and others) may be able to travel under either of the FARs if your manager holds an air carrier certificate. Part 91 flights may cost less than flights under Part 135, which can include charter fees and other charges. Part 91 flights leave you free of many of the rules and limits imposed on Part 135 carriers. If you plan to charter your aircraft when you do not use it (as often occurs to generate cash flow), a valid Part 135 carrier can charter it to third parties and negotiate a split in charter revenues with you.

Significantly, the operator under Part 91 or Part 135 bears primary responsibility and personal liability to others for aircraft accidents or other occurrences that cause property damage, personal injury, or death. Owners can limit their personal liability risk by shifting operational control to a valid Part 135 carrier. 

Take Five Steps Before Hiring a Management Company

Myriad interrelated issues arise when hiring, conducting due diligence on, and negotiating related contracts with managers. You should treat this effort as if your life depends on it, because it does when you reflect on the responsibilities managers undertake for you on the ground and in the air.

Engage an experienced aviation team. Buying an aircraft is unlike any other deal, and managing an aircraft involves a unique mobile asset; it is not real estate, a tractor fleet, or a factory. I cannot emphasize enough that, to minimize mistakes and buy right, at the outset of an aircraft purchase, you should engage an experienced aviation lawyer who, along with your advisors or others, can lead your diligence; discuss and provide options on interrelated transactional, economic, and operational points; structure the management relationship; assist with financiers (if any); and negotiate contract terms that concern you. Transactions continue to become more complex, unique, and difficult to close. It is a mistake to let transaction fees steer you away from hiring the right team.

Develop a relationship. Your relationship with a manager is vital, whether you are a first-time or experienced owner. Consider the value of a management company that demonstrates integrity, technical capability, personalized customer care, legal compliance, and a sustainable business model. How do you make an informed decision about these attributes?

There is no substitute for personally devoting sufficient time, along with your trusted advisors, to meet with the manager’s relevant team members, tour their facilities, and learn about the organization onsite. Look for signs of a company with a culture of safety, built on mutual respect and a genuine multidisciplinary team approach to serving you. Management fees count, as does the organization’s fleet size and type, but those factors should inform, not determine, your choice of a manager.

Conduct thorough due diligence. You or your team should conduct additional due diligence beyond proving up the earlier points with an emphasis on these three areas:

• Safety practices/SMS. The FAA’s mission involves maintaining safety in the national aviation system. As part of its responsibilities, the FAA has mandated in 14 CFR § 5.9 that, by May 28, 2027, each valid Part 135 carrier, among others, must develop and implement a safety management system (SMS). SMS provides an organization-wide approach to identifying safety hazards, managing safety risk, and assuring safety risk controls. By inquiring about a manager’s SMS program, you learn about the manager’s dedication to safety.
• Illegal flight operations. Regulatory compliance underpins aviation safety. Few FARs seem so strictly structured to maintain safe flight operations as rules on illegal charter operations and/or the prohibition on the use of a “flight department company.” Rogue operators who conduct illegal charter operations may undercut charter rates to win travel customers by offering prices that compliant Part 135 managers/operators, due to their compliance and other costs, cannot match. The profit motive seems to override legal compliance in this space. The FAA targets these violators with enforcement tools. If you validate the existence of illegal operations, walk away.
• Other essential diligence items. Your aviation team should help review the following additional diligence items: First, if you consider hiring a Part 135 carrier to manage your aircraft, ask your team to verify that the manager holds a valid air carrier certificate. Second, ask whether independent auditors have certified that the Part 135 carrier meets or exceeds the minimum safety, operational, and maintenance standards and practices. Third, request an overview of client, employee, and pilot retention over the past few years (as an indicator of service quality, talent acquisition, and turnover). Fourth, inquire about any accident or incident, litigation, and insurance claims history. Lastly, be skeptical if a manager claims you will profit from chartering your aircraft; profits rarely materialize.

Assess operational, regulatory, and financial transparency. Managing a private aircraft is a high-stakes endeavor. Use caution in hiring a manager who resists full disclosure in financial, operational, and regulatory matters. It helps if the manager offers a confidential online portal where you can view data about your aircraft.

Managers know that prospective customers compare the costs of their services with those of other managers, but can you be sure that the manager will pass through (and not pad) your actual costs and expenses? Ensure you receive a realistic budget as one way to evaluate cost competitiveness, assess other diligence findings, and expand cost/revenue transparency. Intuit (or, if in doubt, ask) whether the manager has the financial wherewithal to fulfill its obligations to you and in other parts of its business.

Enter contract negotiations. Management contracts are often part of a highly structured transaction and entail financial, operational, and legal complexity. You can assume that most managers will be willing to negotiate competitive business terms in a term sheet/proposal you sign. However, a trend is developing in which managers and hangar landlords strongly resist reducing their liability protections or refuse to negotiate substantial parts of their “boilerplate” forms. Your aviation lawyer can lead the negotiation with the prospective manager.

Departing Thoughts

No management company relationship will be perfect, but you can and should personally interact with appropriate individuals at a prospective management company, supported by your trusted advisors, to build a potentially lasting bond formed in large part on the manager’s culture of safety, mutual respect and trust, along with the manager’s clear ethos of delivering high-quality service. Although making a choice of a manager takes time, it is worth the investment because, if these positive attributes align with your expectations and diligence, you are likely to enjoy a positive aircraft management experience.

This blog is purely informational and reflects the author’s experience and legal practice. It does not, and should not be construed to, provide advice of any kind, express or implied, create a lawyer-client relationship, or, in using the word “should” or the like, suggest a course of action to take without expert guidance. Each person involved directly or indirectly in any issue, transaction, or other matter covered in this blog should inquire of, and rely on, his or her own aviation professionals and other trusted advisors. The opinions expressed in this column are those of the author and are not necessarily endorsed by AIN Media Group.