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Liability Protection Planning Issues:
Professional Aviation Management Companies.
Having opened discussion last month on the need for the Board of Directors to understand and consider the potential liability risks associated with aircraft ownership and operations- this month Keith Swirsky and Troy Rolf look at the tradeoffs of hiring a professional aviation company to manage aviation activities.

A common means of attempting to protect the assets of a corporation from potential liabilities is to contract with an Aircraft Management Company (AMC) for the provision of all services necessary to the operation of the aircraft. This includes pilots and mechanics. Commonly known as turn-key aircraft management agreements- such contracts generally require that the AMC maintain- schedule- and dispatch the aircraft- furnish hangar and shop space- employ and train all pilots and mechanics- and obtain all insurance- fuel- spare parts and other supplies necessary to operate the aircraft.

In most cases- the only responsibilities left to the aircraft owner are to determine when and where it wants to fly the aircraft- and to pay for all costs incurred by the AMC in connection with the operation of the aircraft.

An aircraft ownership and operating structure that includes an aircraft management agreement with an AMC often (but not always) is used in conjunction with the flight department subsidiary structure (see World Aircraft Sales Magazine- December issue- page 64). Many Executives and Directors believe that by entering into an aircraft management agreement- the potential liabilities associated with operating an aircraft will be shifted to the AMC.

This often is not the case- however. If the aircraft is operated under Part 91 of the FAR- contracting with an AMC for such turn-key services does NOT shift potential liabilities because the contracting party (be it a parent corporation or a flight department company) continues to be considered the “operator” of the aircraft for regulatory purposes- and may be held liable for regulatory violations or damages arising from the operation of the aircraft.

By entering into a turn-key aircraft management agreement- the contracting party may delegate to the AMC the performance of virtually every task required to operate the aircraft- but the contracting party remains legally responsible for the operation of the aircraft- so no liability protection has been achieved.

Furthermore- where a flight department subsidiary is used- entering into a contract with an AMC does nothing to resolve the regulatory problems discussed in this and last month’s article- because the flight department subsidiary would still be considered the operator of the aircraft.

While legal responsibility cannot be shifted to an AMC for flight operations conducted under Part 91 of the FAR- legal responsibility can be shifted to the AMC if flight operations are conducted under the commercial charter regulations of Part 135 of the FAR.

When flights are conducted under Part 135- the AMC is legally considered to be the “operator” of the aircraft- and would become legally responsible for the operation of the aircraft. Such shifting involves a variety of trade-offs- however- including increased operating expenses and a loss of a certain amount of flexibility in aircraft operations arising from more stringent operating regulations- and an increased tax burden arising from the fact that flights conducted under Part 135 will be subject to Federal Excise Taxes on air transportation (currently at 7.5% of amounts paid- plus de minimis segment fees).

Additionally- aircraft used predominantly in Part 135 operations have longer tax depreciation schedules than aircraft used predominantly under Part 91 (7-year MACRS/12-year ADS for Part 135 vs. 6- year MACRS/7-year ADS for Part 91). As this- and last month’s articles illustrate- managing risks associated with aircraft operations is not as simple as shunting the aircraft off to a subsidiary.

The 135 option provides one of the few legitimate opportunities for a corporation to shift some potential liabilities away from itself- but such shifting involves a variety of trade-offs- as discussed above.

Given the regulatory hurdles to managing potential liabilities associated with business aircraft- the first line of defense for a Board of Directors to protect its corporation from potential liabilities should always be to acquire sufficient insurance to cover the worst case scenario. Depending on the size of the aircraft and the size of the corporation- liability insurance policies with limits of one to five hundred million dollars are common.

The second line of defense is to ensure that the Board consults with an attorney who is knowledgeable and experienced in planning business aircraft ownership and operations structures.

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