The Problem of Illegal Charter Continued from page 27 The first question is: Just what, exactly, is a lease? At its most basic level, an aircraft lease is simply an agreement under which one party— called the “lessor”—provides an airplane to another party—called the “lessee”—in exchange for some kind of payment. As a quick aside, many states typically recognize that any lease can be either verbal or written. The FAR, however, compels parties to use written leases for “large” aircraft (i.e. aircraft with maximum certifi- cated takeoff weights of over 12,500 pounds) due to the truth-in-leasing notice provisions found at 14 C.F.R. Section 91.23. And, even though you do not technically need a written lease for “small” aircraft, it is still a very good idea to have one because it can be very difficult to establish that a verbal lease was really in place after the fact, especially if the flight is being reviewed by the FAA or some taxing authority long after it took place. Once you have identified a situa- tion where you have a lessor provid- ing an airplane to a lessee in exchange for some payment, the next question is: Who is actually conducting the flight (i.e. who really has operational control of the aircraft) under that lease? Why this question? Because, as the FAA Chief Counsel has repeated on many occasions over the years, the FAA recognizes two general types of aircraft leases—dry leases and wet leases. The dry lease of an aircraft is one in which the lessor provides the aircraft, and the les- see supplies its own flight crew and assumes operational control of the flight. Conversely, under a wet lease, the lessor provides both the aircraft and the crew and normally retains Aviation Business Journal | 1st Quarter 2018 operational control of the flight, in which event the flight is consid- ered to be commercial in nature and, except in a few very limited circumstances, must be operated under the authority of an air carrier certificate and under the applicable commercial rules, such as Part 135. While that makes sense on an initial reading, how can you actually tell if the lease in question is dry or wet in real life? Sometimes it is very clear. A charter agreement between a certificated air carrier and some third-party passenger that says the charter operator will take the pas- senger from point A to point B and all the passenger has to do is show up at the appointed time and pay a charter fee, is very clearly a wet lease. On the other end of the spectrum, when the lessor is a bank that purchases an aircraft on behalf of a borrower, and that bank/lessor then leases the aircraft to the borrower as the lessee, who must take full responsibility for all aspects of maintaining and operat- ing aircraft as if that borrower/lessee were the owner of the aircraft in the first place, that lease is very clearly a dry lease. The problem is, quite often, leasing is conducted between these two extremes and the ques- tion of whether or not those leases are dry or wet is not quite so clear. How do you decide in these in- between situations? As the FAA Chief Counsel has also repeated on many occasions, whether a lease is dry or wet is determined on a case-by-case basis and the FAA will look at mul- tiple factors to determine whether a lease that the parties are calling “dry” is in fact “wet.” First and foremost, the FAA will look at who is providing the pilots. As 14 C.F.R. Section 110.2 states, the very definition of a wet lease is “the lease of an aircraft plus any one crew member.” So, if the lease in question specifically provides both the airplane and the pilots, then the matter is clear—that is a wet lease. But beware—even in situations where a purported dry lease is entered into by the parties and it appears on the surface that airplane and aircrew are coming from separate places, but a review of the actual underlying facts shows that the plane and pilots are really being offered as a package deal, the FAA may find that the par- ties have really entered into a “sham dry lease”—a wet lease in disguise. A review of applicable FAR sec- tions; various provisions from FAA Order 8900.1 (Flight Standards Information Management System) such as the guidance to aviation safety inspectors contained in Vol. 3, General Technical Administration, Ch. 13, Lease and Interchange Agreements; various advisory cir- culars such as AC 91-37B, Truth in Leasing; and multiple Chief Counsel Interpretation Letters addressing this issue over the years all show that the key question in determining whether a lease is truly a dry lease is the analysis of whether opera- tional control has been assumed by the lessee under that lease. These resources also describe various “operational functions” the FAA will look at to determine if the lessee has really assumed operational control of the aircraft. Examples of these functions include, among other things, a review of which party: Continued on page 31 29
