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September 2006

Operators: Do you have “operational control” on all flights?

There is a saying among lawyers that 'hard facts make bad law.' This phrase came to mind at a recent FAA briefing on the FAA’s initiative to update and enhance compliance and enforcement policy on Part 135 operations using 'managed' aircraft.

There have been a few recent incidents (hard facts) involving aircraft that were being operated- ostensibly- under a Part 135 certificate- but certain factors suggest that the Part 135 certificate holder was not sufficiently in control of the operation- resulting in compromised passenger safety.

As a result of these events and the inference that certificate holders might be misinterpreting their obligations under Federal Aviation Regulations Part 135 and Part 119 (the general certification clause)- the FAA chose to publish an explanatory statement on the issue- giving operators and their Flight Standards District Offices a more detailed roadmap for examining this issue- and perhaps a nudge to step up enforcement by sanctioning transgressions.

Whether or not the 'bad facts' generate 'bad law' will depend on how the FAA’s published statement is interpreted and applied by the many FSDOs in the country. Many industry participants have expressed deep concerns that strict application of this statement by aggressive- literal FSDOs will cause severe dysfunction in the vast and growing industry for managed aircraft. The FAA docket- including the statement and some very thoughtful industry comments.

The lynchpin in all of this is that a certificated carrier (in this case certificated under Part 135) is entrusted with the safety of paying passengers and is given the privilege of collecting money for providing transportation; and as such the Part 135 operator should be directly- exclusively and deeply involved in the key aspects of every flight operated under its certificate. That’s not a new or novel concept.

However- the FAA is going to great lengths to highlight the issue to operators- and to arm its FSDOs with guidelines to assist enforcement. Apparently- the FAA wants the industry to examine itself and to change. The industry now faces the challenge of determining exactly which of its practices are proscribed by FAA’s statement- and how they should change- if at all. The following are the primary areas of concern.

No 'certificate rentals' or 'certificate franchising'
Taking the most egregious example first- the FAA takes a firm stance against any arrangement where the certificate holder simply places another party’s aircraft on its OpSpecs- for a fee- but with little or no associated involvement in the aircraft’s maintenance or Part 135 operations.

This places the non-certificated operator in control of the charter flight- which is wrong- and always has been. It is a large- red flag if the contractual arrangement refers to a 'certificate fee' regardless of the propriety of the underlying arrangement.

Control OF the crew
The FAA recognizes that the flight crew operating Part 135 flights may well be the same crew that the aircraft owner uses for the owner’s Part 91 operations; and it is allowed to be more than a coincidence.

However- when engaged in a Part 135 operation- the FAA statement stresses the need for the Part 135 operator to determine the crew for a flight- and to independently qualify and control that crew. The statement indicates that the FAA will look critically at any arrangement that leaves the non-certificated owner with the ability to determine or unduly influence the selection of pilots on a Part 135 operation.

Obviously- the propriety of the arrangement depends on the wording of the applicable contracts and the context. And the FAA statement indicates that the implementation of this initiative by the FSDOs will involve a request for- and a review of- the paperwork governing the owner/operator relationship.

How do you balance an owner’s reasonable preference for using the owner’s crews with the Part 135 operator’s obligation to independently select and qualify crews? This is- perhaps- the grayest area in the FAA statement. Clearly- the owner cannot specify the crews that will be used on a Part 135 operation. But the FAA goes on to say that the owner may not (depending on circumstances) exercise a right of consent or approval of proposed crew- if the effect of that right is that the owner ends up choosing the crew.

Even a clause that creates a financial incentive to utilize the owner’s crew will be questioned. Presumably- if the owner’s contract with the Part 135 operator include clauses like this- the FAA will examine additional factors- including a look at the actual crew assignments made by the Part 135 operator. It is interesting that the FAA does not appear swayed by the fact that the Part 135 operator could in any event decline to engage in a Part 135 operation if the owner’s designated crew did not meet the operator’s standards.

Owners may find this oppressive- particularly when the owner itself is the passenger on the Part 135 flight- and simply wants 'their' crew to operate 'their' flight. However- it is vital to grasp the distinction between a Part 91 operation where the owner is in sole operational control and required to select pilots- and a Part 135 operation where the owner has no greater rights over flight operations than any other charter passenger. By electing to fly under Part 135- the owner cannot expect the operator to deviate from Part 135 requirements.

The FAA statement also questions the common contractual practice of declaring the crew to be 'independent contractors' and not employees. This clause is inserted to prevent unwanted tax consequences; but the FAA is uncomfortable with a clause that suggests that the crew is 'independent' of the Part 135 operator. So- do you delete the text (and risk the tax consequences)- or perhaps expand it to make it clear that the term 'independent' does not detract from the Part 135 operator’s control of the crew member?

At this point- there is no clear answer; however- the FAA would take great comfort if the Part 135 operator had a written understanding with each available crew member that- notwithstanding any other agreement- written or verbal- when that person was acting as crew on a Part 135 flight- that person is acting as agent for the Part 135 certificate holder. This language confirms that the Part 135 operator has responsibility for the crew.

Other contract clauses limiting control or responsibility
If you end up under FAA investigation- you may be required to turn over a fairly broad variety of contracts that relate to the aircraft- including not just your leases- management agreements and Part 135 possessory agreements- but also your financing and insurance documents.

In any agreement between the Part 135 operator and the owner- the FAA will be critical of clauses that absolve the Part 135 operator for liability or responsibility for actions or omissions- or of clauses that limit that liability. The FAA feels that these clauses are inconsistent with the operator’s obligations to the public under Part 135. This should not rule out any indemnities or limitations of liability- unless those indemnities relate to operational incidents and other matters under the Part 135 operator’s control.

The FAA has indicated that it will look at financing and insurance documents to make certain that those documents permit the owner to place the aircraft into commercial operations. Arguably- if the aircraft’s financing documents are breached by Part 135 operations- then a third party (bank) has contractual rights to repossession or detention.

A much more valid concern is insurance coverage- which may not be available to protect the interests of passengers and third parties during a commercial operation of the aircraft.

Special focus on air ambulance services
A particular hotspot for this enforcement will be air ambulance services. On July 31- 2006 the FAA announced an extraordinary enforcement action against a certificate holder and an air ambulance firm that was operating aircraft under that certificate. The action included revocation of the Part 135 certificate of American Flight Group- Inc.- and a $1-000-000 civil penalty against Medway Air Ambulance- Inc. for operating as an air carrier without appropriate authority.

Among the factors cited by the FAA as a basis for the action was that Medway was paying a monthly fee for use of AFG’s certificate- and that Medway retained substantial control over the flights- including designation of crew and the initiation of Part 135 flights. Clearly- the FAA will expect the certificate-holder to have a direct and continuous role in the Part 135 flights.

Closing thoughts
The FAA’s notice specifically suggests that Part 135 operators review their relationships and contracts and make changes as necessary. The Medway action must be examined- but the Medway case would appear to be a clear example of non-compliance- and not very instructive to many owner/operators. A typical owner-manager arrangement is quite unlike the Medway arrangement; and yet the net that is cast to catch the Medways may well catch others. It is not clear at this point how deeply the FAA will delve into traditional owner-manager relationships.

An aircraft management firm may need to go back to aircraft owners and ask for amendments- and your legal basis for doing so would be that your existing contracts may be inconsistent with applicable law. Owners should offer little if any resistance to such a change.

It will be a matter of business judgment as to how closely you adhere to the FAA’s positions- and how willing you are to justify arrangements that are in gray areas. For very large operators- the compliance burden may be substantial- and in that case- a pre-emptive sit-down with the FSDO to review documents and practices may be more efficient. In closing- this current initiative is likely to result in enhanced ramp checks- which inevitably result in the exposure of other deficiencies in regulatory compliance. This would be a good time to have documentation in order.

Greg Cirillo is a partner with the Washington- D.C. law firm Wiley Rein & Fielding LLP- representing private and commercial aircraft operators- lessors and financiers in structuring the sale- acquisition- ownership and operation of aircraft. Greg can be contacted at Tel: +1 703 905 2800. More information from www.wrf.com


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