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Liability Protection Planning Issues:
Flight Department Subsidiaries.
Prior to buying a business aircraft- members of the Board of Directors of the acquiring corporation should become familiar with- and consider the potential liability risks associated with aircraft ownership and operations. Keith Swirsky and Troy Rolf highlight this with a discussion and case study of Flight Department Subsidiaries.

Business Aviation today offers corporations a very safe and effective mode of executive transportation. However- no mode of transportation is 100% safe- and liabilities associated with an aircraft accident or incident can be severe. Board Members must therefore carefully weigh the risks and benefits of use of Business Aviation.

Soon after a corporation makes a decision to purchase a business aircraft- the corporation must decide how to structure ownership and operations of the aircraft. Faced with this decision- Executives and Boards often decide to form a flight department subsidiary for the sole purpose of owning and operating the aircraft on behalf of the parent corporation.

Typically- flight operations are conducted by such flight department subsidiaries under the general operating rules of Part 91 of the Federal Aviation Regulations (FAR)- and the costs of those flight operations are funded by the parent corporation- either by direct payments to the flight department company as reimbursements for expenses- or by capital contributions to the flight department company.

The prime motivation for selecting an ownership structure of this kind usually is the desire to protect the assets of the parent corporation from potential liabilities that may result- should the aircraft be involved in an accident or incident. The legal theory behind such a structure is that a potential plaintiff will only be entitled to recover damages from the subsidiary- and that the statutory liability shield under which the subsidiary operates will protect the assets of the parent company from the claims of the plaintiffs.

FLAWED THEORY
Unfortunately- this legal theory is seriously flawed. The flaw arises from the fact that operations of aircraft under such a flight department subsidiary structure are considered to be on-demand commercial charter operations under the FAR and may not lawfully be conducted without an air carrier certificate.

Due to the time and expense involved in obtaining an air carrier certificate- few flight department subsidiaries attempt to obtain such a certificate. Absent such certification however- all operations of the aircraft under such ownership and operating structure could be held to be in violation of the FAR- potentially resulting in civil penalties and/or limitations on insurance coverage.

In order for a corporation or other business entity to operate a business jet aircraft under Part 91 of the FAR- the operations of the aircraft must be within the scope of- and incidental to- the business of the company (other than transportation by air). This essentially means that the aircraft must support some other business of the company. For example- if a widget manufacturer uses a business aircraft to transport its executives- engineers and sales staff between its own offices- manufacturing plants- distribution centers and customer locations- the aircraft could be said to be operating “within the scope of- and incidental to” the widget manufacturing business.

However- in applying the “within the scope of- and incidental to” test- one must look solely within the four walls of the company that operates the aircraft; business activities of other related entities - even a parent corporation - are not considered.

Thus- when looking within the four walls of the widget manufacturer above- the “within the scope of- and incidental to” test is satisfied. Yet- if the widget manufacturer formed a flight department subsidiary for the sole purpose of owning and operating the aircraft on behalf of the parent widget manufacturing company- no business other than transportation by air would exist within the four walls of the flight department subsidiary.

Consequently- the flight department subsidiary would be deemed to be in the business of providing on-demand charter air transportation- and would be required to possess an air carrier certificate. The fact that the sole “charter customer” of the flight department subsidiary is its own parent corporation would not be relevant under the FAR. It is hoped from the above discussion that the necessity for Board members to understand potential liability risks associated with aircraft ownership and operations has been outlined.

We’ll continue our discussion in this subject area next month with a focus on the tradeoffs (benefits and costs) of hiring a professional aviation company to manage your aviation activities.

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editorial@avbuyer.com


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