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PART 91 OR PART 135?

October 2011

Category: Business Aircraft Ownership

Author: Dave Higdon

FAR Part 91 vs Part 135:
One’s simple, but one could make ownership easier.

For reasons too varied and innumerable to detail, many an aircraft operator or owner struggles to afford the cost of owning and operating their airplane. Pressing their finances from one end is the seemingly endless upward movement of costs - and particularly fuel. On the other hand, any decline in aircraft use (due to decreased business activities) effectively drives up the hourly figure for fixed-cost items (hangar, hull insurance, flat-rate maintenance programs, aircraft finance costs, and even the cost justification for staff pilots).

“We could not have faced a tougher time to take delivery of our new plane,” one operator confided with World Aircraft Sales Magazine earlier this year. As a long-time position holder on his financial company’s new light jet, he found conditions nowhere near the assumptions used in the buying decision years before when he signed the order.

The market decline arrived about eight months before the delivery date. Canceling the order will have meant losing hundreds of thousands of dollars. Delivery positions were no longer good bets, and the price fetched by his once highly-desirable, economical aircraft came up somewhat short of the market price of just three quarters before.

Similarly, an engineering company owner saw his business hold up well in spite of the downturn, but clients were opting to use new teleconferencing and video-calling for two-thirds of the meetings that once required an actual presence at the client’s project site.

“We still need a turboprop like we always have, but just not as often,” the engineering company owner noted. “We’re not interested in selling, and we don’t need to sell. But since we are needing it less frequently, we figure it can’t hurt to have it generate a little revenue for us.”

TWO DIFFERENT CATALYSTS, ONE COMMON ANSWER
Both individuals mentioned above found FAR Part 135 certificate holders were willing and able to put their individual airplanes on their operating certificates. Of course, putting the company airplane into a charter operation poses a number of questions, and raises a few issues (as you’d expect) - but it holds the potential for the airplane to become a revenue generator, or at least offset some of the costs of owning and operating one.

“Putting your owned aircraft onto someone else’s commercial certificate requires careful planning and compromise,” explained David Wyndham, a vice president and co-owner of Conklin & de Decker (www.conklindd.com). “The arrangement can be good for both sides – but only if both parties compromise, cooperate and communicate.” Is FAR Part 135 a good option for you? This is another one of aviation’s innumerable “it depends” situations...

NEED FAST CASH? LOOK ELSEWHERE…
“Flying under Part 135 imposes greater restrictions on an aircraft and crew than flying under Part 91,” warns Wyndham. The aircraft must conform with more-stringent safety and equipment requirements, and complying with, and documenting compliance costs money up front. The same applies to creating ops manuals and training programs, establishing a drug-testing program and hiring a vendor to test flight crew.

Don’t forget that you’ll need a defined maintenance program for the aircraft. The pilots will need to be trained to standards defined by the operations specifications too. If this is all sounding complicated, that’s because it is. In short, the process requires weeks, months, plenty of money and a wholesale change in the nature of your relationship with airplane, maintainer and crew - and it all has to be done, signed-off and approved by the FAA before you can begin to advertise, let alone charge to carry people or equipment.

Wyndham and our two operators each suggested a more-common alternative: find a FAR 135 certificate-holder interested in adding your plane to the certificate already held.

You could still expect to spend money – mostly on making the airplane conform to the certificate and FAA standards for for-hire flying. There will also be some expense in documentation of your agreement with the charter provider using your airplane (sometimes called “leaseback”). But the total – both in terms of hassles and funds – will be far easier to absorb.

On average you, as the owner of the airplane in charter use, can count on 80 percent to 85 percent of the charter fees generated, Wyndham outlines, and out of that pay all the aircraft-specific costs of the charter – fuel, maintenance, etc.

OPERATIONAL CONTROL
Irrespective of who flies the airplane on the Part 135 charter flight, the airplane owner with the certificate must be able to document and demonstrate operational control – over the aircraft, over the crew and over the missions.

The owner may wish the crew to be employed by the certificate holder, which would change the nature of their employment and payment, but the aircraft owner’s crew can’t just start flying Part 135 operations. “When an aircraft owner’s crew is to fly for the certificate holder, that certificate holder must be able to show it has control over the crew and that the crew has fulfilled its approved training requirements,” outlined Wyndham.

Still, the aircraft owner can continue to fly their own aircraft under Part 91 with the owner’s crew flying as before and the owner covering any and all expenses, as usual. Alternatively the owner can charter the airplane from the certificate holder operating their aircraft under Part 135 – and exercise operational control of the aircraft and crew.

Then, the liability for the charter flight rests with the certificate holder - a possible plus if the aircraft owner wants to reduce aircraft liability. Regardless of what the aircraft owner and charter certificate-holder agree to, the FARs require that the charter-holder exercise and show operational control for any and all for-hire flights – even when flown for the aircraft’s owner.

REVENUE RICH, PLANE POOR?
Let’s imagine that you have found a charter-certificate holder who needed an airplane like yours on the certificate as a way to get more business. That’s great! More revenue… except, it’s terrible! More wear-and-tear… It is possible to strike a balance that matches your needs. How you achieve that balance is an individual choice. One of our charter-alternate business owners restricts how much his aircraft is flown for charter by the Part 135 operator with the airplane on its certificate.

“The percentage we get from charter fees is just over 80 percent – pretty typical,” said the owner of the light jet dealing with a downturn in business use and revenue. “But we don’t want this to become such a revenue generator that it adds significantly to our taxable income.

“If it kicks us up a notch in liability, it defeats some of the purpose of doing this – and it means the airplane itself is experiencing more wear-and-tear. Therefore we try to keep down the hours flown for the charter folks.”

The engineering-company owner with the turboprop saw these issues differently: “We fly a workhorse… it’s one with a nice interior, but it’s a workhorse. We like making money from it because we’re banking that taxable income to reinvest in tax-deductible upgrades to the airplane – upgrades that are beyond required maintenance and inspections.

“Of course the added wear is a shame - but the revenue lets us offset that by renewing parts of the airplane with the income.” (So in essence, the wear-and-renewal processes complement one another.)

“When all is said and done, it’s not wholly revenue neutral – not quite,” noted the engineering company owner. “But it makes it far less painful to write the tax check knowing we self-financed some needed upgrades and had to pay taxes only on what we didn’t spend of the charter income.”

Naturally each company will face its own distinct, unique circumstances as Brian Foley Associates principal Brian Foley has reminded us periodically. “Every operator has to take into account their own situation, whether it’s deciding on putting the airplane into a charter, or sticking with chartering rather than buying,” he said.

A TAXING SITUATION
Said Wyndham, “As the aircraft owner is not actively in the charter business, the IRS sees the charter income as passive income, much like rental income; that makes tax-planning for the aircraft owner more complicated. So, the smart aircraft owner needs a careful review with an aviation tax expert.”

Wyndham also noted other tax issues with for-hire flights. For example, the charter income incurs a Federal Excise Tax - something that is generally handled by the charter operator. Additionally, putting an airplane into charter even part-time, instead of sticking with Part 91, can change the tax depreciation status of the aircraft.

“In general, an airplane in not-for-hire business use may qualify for an accelerated five-year depreciation schedule,” Wyndham noted. Make the predominant use commercial- for-hire-and the IRS sets the airplane depreciation schedule at seven years.

SO, WHERE DO YOU STAND?
Of the more than a dozen active turbine-aircraft operators surveyed for this article, only about one-third affirmed that a charter program was their choice, and only a couple of those would talk on the record – but not for attribution. “Competition reads, you know,” said the financial-company owner.

Among the balance that weighed-up and rejected taking the airplane into Part 135, mission needs outweighed income needs for more than half. For that half, the decision ultimately came down to aircraft availability. According to one of those surveyed (a real-estate developer with projects in several states), “We looked at what another company was doing, talked to a couple of potential charter partners, but ultimately realized how much it would complicate our travel every time we needed the airplane on short-notice and it was already gone.

“The charter companies always offered service guarantees for us, even if it meant letting us use a different airplane, but in a business where being first with the most is often the deciding factor, a guarantee of lift within four or six hours is three-to-five hours too late for us. We opted to pass.”

Clearly - Wyndham stressed - the answer will vary by the operator, the aircraft and the circumstances. Not every charter certificate-holder will want, or need any airplane offered; after all, adding an airplane to the fleet costs that company too. But for those who perform the due diligence, find a worthy partner and agree to a balanced arrangement, even sharing the airplane can be enough of a financial boost to make keeping it an easier decision.

Where you fit into the Part 91/Part 135 equation will depend on what you fly, what you need and how much you’re willing to work with a partner for access to your own airplane.

Do you have any questions or opinions on the above topic? Get them answered/published in World Aircraft Sales Magazine. Email feedback to: editorial@avbuyer.com

 

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