What You Need to Know about Aircraft Management Agreements

Business jet buyers face an important choice about operating their new aircraft: they can hire their own flight department and “manage” the aircraft themselves, or they can hire a management company to do it for them. A big corporation might not balk at creating its own flight department, but an individual’s view when buying a business jet for the first time will probably be: “thank God I can hire somebody to take care of this for me.”

What Aircraft Management Companies Do

A good management company handles most aspects of owning and operating a business jet, including scheduling, fueling, and operating flights; hiring, training, and employing crew; and hangaring, insuring, and maintaining the aircraft. Of course, these services aren’t free, but a management company can nevertheless save you money by offering significant discounts on fuel, maintenance, and insurance. It may also offer side benefits, like finding room in its hangar for your aircraft at a crowded airport.

What Aircraft Management Companies Don't Do

What a management company doesn’t ordinarily do, at least when operating the aircraft for you, is take operational control of your jet. When you hire the company, the FAA regards you (or your operating entity) as having operational control of non-commercial flights; the management firm merely helps you with that. The ultimate responsibility, and corresponding liability, associated with aircraft operations generally resides with you, assuming the management company isn’t acting negligently or recklessly or outside its purview, though your use of such a company does give an injured party someone else to sue. (In case this responsibility might be unpalatable to you, many management companies have a solution: “lease the aircraft to us and we’ll add it to our air carrier certificate and take operational control.” Basically, you would be chartering your own aircraft, and you might be charged for that, though usually at a significant discount from what third parties would pay.)  

First Steps

There are many things to consider in deciding whether to retain a management company and in selecting the right one, but let’s assume you’ve been through the process and have picked the outfit you want to work with. This should be accomplished well in advance of taking delivery of your aircraft, so the first question that needs to be addressed is: What will the management company do before there is an aircraft to manage and what will it charge for this initial work?

A “management” or “services” agreement addresses the duties and responsibilities of the management company. However, before sending a draft of this agreement for review, the management company is likely to provide a proposed letter of agreement covering various “start-up” matters, including hiring crew members, with a “start-up fee.” Many management companies also charge a “conformity fee” for verifying that the aircraft complies with FAA regulations and the management company’s own requirements, especially if it is to be placed on the company’s charter certificate. If a preowned aircraft is being purchased, the management company is often retained to monitor the prebuy inspection and assist with the delivery, and in the case of a factory-new aircraft, the company can monitor the completion and conduct an acceptance inspection. The management company will often charge separate fees and travel expenses for these services. 

Paying a monthly management fee on top of these start-up costs when there is no aircraft to manage should be unnecessary; the management fee should commence when (or close to when) there’s an aircraft to manage. The fee is subject to negotiation. For a heavy jet, the monthly charge at major management companies starts around $10,000 to $12,000. The best way to see what’s possible is to ask your acquisition consultant to solicit proposals from several companies; the fees can vary a lot. 

Cancellation Terms

Once the aircraft is acquired and in service, the management agreement typically has a one-year term that’s renewable (often automatically unless one party wants out), with the management fee subject to a CPI-based increase each calendar year. Some management companies are reluctant to let the owner cancel the agreement during any term, or perhaps only during that first year, which is understandable; they don’t want to spend a couple of months getting clients all set up with an airplane and crew only to have them pull the plug and go it alone to save the management fee.

Nevertheless, it’s important to try to negotiate the right to cancel the agreement on 30 to 90 days’ notice, or immediately if, for example, the management company’s charter certificate is revoked, or a government agency takes significant action against the company. Of course, it should also be possible for a party to cancel the agreement if the other party defaults or goes bankrupt or if the aircraft is badly damaged, destroyed, or sold. Upon termination, the agreement should prevent the management company from holding a jet hostage and require it to turn over the aircraft’s logs and records, manuals, and loose equipment to the owner. It should also require the company to bring the aircraft home and not leave it parked on the ramp in some far-off city.

Management companies have termination concerns as well. Though the owner has the option to do so itself, the management company usually employs the crew. The terminating owner’s plan typically includes taking its flight crew along, either to operate in-house or with another management company. Making that difficult helps dissuade the owner from leaving, and for crew members employed by the management company, at a minimum, the agreement will generally require the owner to pay for accrued vacation and any severance the employees are entitled to if the arrangement terminates.

Key Protections

Though the management company should be required to consult with the owner on certain issues, like making improvements to the jet, it generally has the ball regarding “managing” the aircraft. The agreement should protect the owner from the company’s unauthorized use of the aircraft or from using crew members to fly or work on other managed aircraft without the owner’s consent, but it should allow the management company to provide alternative crew for the owner’s flights to the extent that the owner’s crew is unavailable. 

Since it’s usually the management company’s job to retain service providers to do everything from cleaning the aircraft to conducting a 10-year inspection, it has the ability to mark up fees to third parties when passing charges on to the owner. Some management companies take advantage of this opportunity. Instead, though, they should use their leverage to negotiate discounts from third-party providers, and the agreement should require them to pass all discounts, rebates, and the like on to the owner. The owner should never pay more for third-party services than the management company itself.

As we have seen, liability is a key issue. Management liability arrangements tend to rely heavily on the owner purchasing adequate insurance, with both the owner and the management company accepting the insurance proceeds to cover injuries, death, or property damage in actions against each other. Each party may nevertheless acknowledge its responsibilities for damages based on its gross negligence and willful misconduct, while both parties may disclaim liabilities for consequential damages, lost profits, and the like. 

The agreement should make clear that the management company is responsible for FAA, DOT, and to the extent required, foreign regulatory compliance and filings for the aircraft, flights, and crew. The owner, on the other hand, usually wants to approve any additions and improvements to the aircraft, and many agreements require owner approval of all expenses exceeding a given dollar amount (say, $10,000). But the owner will be responsible for creating and replenishing a fund of money (an “operating expense fund”) at the management company (best held in a separate account) for payment of expenses as incurred.

Management agreements can seem complex, though they’re not as complicated as managing the aircraft. Still, don’t wait until the last minute to negotiate yours.