(Photo: David McIntosh)

What You Need to Know about Business Jet Leases

They can provide notable benefits, but parties on both sides of the transaction have to pay attention to FAA rules, which can be confusing.

Business jet leases can offer significant advantages over aircraft ownership. The most obvious advantage is that, unlike most jet owners, the lessee of an aircraft does not bear the cost of depreciation, except to the extent that it is built into the lease payments. Although the jet market recently experienced a major surge in values, this doesn’t change the fact that business jets are depreciating assets; they accumulate hours and cycles and grow older as their technology becomes increasingly dated. So, it’s worth considering a lease. But what is a business jet lease, anyway?

As my ancient and rather dusty Black’s Law Dictionary points out, when used with reference to tangible personal property (such as an aircraft), the word “lease” means “a contract by which one owning such property grants to another the right to possess, use, and enjoy it for a specified period of time in exchange for periodic payment.” But it is immediately necessary to qualify this statement because the lessor of an aircraft need not be an “owner”; it can also be another lessee (as in the case of a sublease). 

From a regulatory standpoint, the objective of business jet leases is transportation. Enter the Federal Aviation Administration. FAR 91.23(e), which lays down the FAA’s requirements for “truth in leasing,” provides that “for the purpose of this section, a lease means any agreement by a person to furnish an aircraft to another person for compensation or hire, whether with or without flight crew members.” 

According to the FAA, aircraft leases are either wet or dry. FAR 110.2 says that a wet lease is “any arrangement whereby a person agrees to provide an entire aircraft and at least one crew member.” Conversely, according to an FAA Advisory Circular, a dry lease involves the “leasing of an aircraft without the crew.” 

This is a crucial distinction because, in the wet lease, the FAA’s position is that the lessor retains operational control of the aircraft even though it leases it to the lessee, whereas in the dry lease, the lessee must hire its own crew and has operational control of flights. The wet lease, in other words, doesn’t just provide an airplane, it (like an airline) provides transportation, which ordinarily requires an FAA commercial certificate or an exemption. Note that, in the interest of avoiding a wet lease, the lessee can’t simply retain the lessor’s crew under a separate crew services agreement; the FAA would still regard the lease as “wet” even if the lessor provides the crew separately or indirectly.

There is, however, an ambiguity regarding the crew members involved. The FAA definition cited refers to a lease with or without “flight crew members”—the people who fly the aircraft, not the flight attendant or maintenance technician. As quoted earlier, a lease is said to be “wet,” on the other hand, if it includes a “crew member” and “dry” if no “crew” is included. No mention is made in the latter of “flight crew,” so if you lease a business jet to someone and include only a flight attendant, it would be a wet lease and you would retain operational control, even though the lessee must presumably provide the pilots. 

Operational Control Is Key

Thus, the FAA’s interest in distinguishing wet and dry leases is focused more on who has operational control than on the legal niceties of being a lease. A transfer of “possession” should constitute “furnishing” or “providing” the aircraft as in the FAA language cited, but furnishing or providing may not always involve a transfer of actual possession, especially in a wet lease. A classic wet lease is a timesharing agreement, so we can ask: does the timeshare “lessee” really take possession of the aircraft from the timeshare lessor, as in the Black’s Law definition of “lease” quoted earlier? Maybe not. An article on aircraft leasing on the National Business Aviation Association’s website says that “a wet lease is an exception to the simple definition of a lease because it does not involve transferring possession of an aircraft.” 

I doubt most people involved in timeshares regard the timeshare “lessee” as having possession, but it’s not clear. To add further confusion, the General Aviation Dry Leasing Guide available on the FAA website (reviewed by, though not authored by, the FAA) says at one point that both wet and dry leases “involve a transfer of possession of an aircraft,” but two paragraphs later notes that in a wet lease, “the lessor is considered to have retained both possession and control of the aircraft operation because the lessor is providing not only the aircraft but also the crew that will pilot it.” (I can’t help but mention again that, technically, for a lease to be “wet,” it is unnecessary to provide pilots as opposed to other crew members.)

Arguably, the lessor may furnish “constructive possession” of the aircraft even if it doesn’t transfer actual possession, in which case it may be fair to call a timesharing agreement a genuine lease. That’s what the FAA calls timeshares, after all; FAA regulations define a timesharing agreement as “an arrangement whereby a person leases his airplane to another person with flight crew.” “Lease,” however, is not defined here, and the definition in FAR 91.23(e) is technically only “for the purpose of” that section in the regulations (which deals with truth in leasing). Finally, as the General Aviation Dry Leasing Guide points out, it’s not clear why the inclusion of only a cabin crew member should be sufficient to make a lease “wet” and result in a transfer of operational control to the lessee. After all, the FAA has said that a wet lease for air carriers requires “at least one pilot flight crew member.”   

In short, whether a particular “furnishing,” “providing,” or “transferring possession of” a business jet is a lease, and whether that “lease” is wet or dry, may not always be clear. But the metaphysics of leasing is less important than compliance with applicable regulations. The FAA is mainly concerned with who has operational control of the jet and whether compensation is being paid for transportation. Inadvertently turning a dry lease into a wet one, for example, can have unfortunate consequences.

Applicable regulations include truth-in-leasing requirements. Whether wet or dry, business jet leases must be in writing, contain specific provisions, and be filed with the FAA. The lessee must also notify the FAA 48 hours before the first flight under the lease. Further, if the lease is wet, federal transportation excise tax may apply. 

Clearly, you must take care if you are party to transferring, leasing, or furnishing a business jet.