Timeshare troubles

Business jet owners and their attorneys spend plenty of time trying to figure out how to charge for flights on their aircraft. Solutions include (a) meticulous compliance with FAA requirements; (b) good-faith efforts riddled with negligent or inadvertent mistakes; and (c) flagrant and intentional violations. If the FAA had the resources and authority to audit how business aircraft owners and operators are charging their passengers, we might be surprised to find how common (b) and (c) are.

In theory, the problem is easy to fix: get your own air carrier (charter) certificate under FAR Part 119 so you can charge whatever you want. But you and your aircraft must satisfy the requirements to obtain a certificate and operate under the Part 135 charter rules; and obtaining a certificate is a time-consuming process that few jet owners have the patience to pursue. Start the process today and you might get a certificate by 2021.

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The alternative is to add your jet to someone else’s certificate. You might be able to do that in a month if the aircraft is equipped for FAA Part 135 operations, the local FAA office (the “FSDO”) is cooperative, and the certificate holder pulls out all the stops. But operating under a charter certificate is no picnic. First, you won’t be operating the aircraft; the certificate holder will, and it won’t be doing it for free. It will also be charging (or is supposed to be charging) the 7.5 percent federal transportation excise tax on all amounts paid by the passengers. And all the flights will have to comply with more regulations and more stringent operational restrictions.

Wouldn’t it be great if you could just charge people to fly on your aircraft without having to put up with all the rigmarole of Part 135? Actually, you can, but that’s where all the figuring starts.

The options aren’t voluminous, and except for special provisions like the private-pilot exception and carriage of elected officials, they are mostly found in FAR 91.501. Even this regulation has some pretty esoteric applications, however, like aerial photography and carriage of choral groups. When you come down to it, if you just want to charge a third party to use your aircraft, the principal option is a time-sharing agreement.

Time-sharing an aircraft isn’t like time-sharing a condo in Bermuda. Rather than being based on calendar time like a condo timeshare, the agreement could be for specific flights or provide that the lessee can request flights from the lessor, subject to aircraft and crew availability. Though the FAA views a timeshare as a “wet” lease—that is, a lease where the lessor provides the pilots and operates the aircraft for the flight—time-sharing agreements are typically not much like a lease, either. A lease is a transfer of possession of the aircraft from lessor to the lessee, but a time-sharing agreement provides a service, like what you get when you buy an airline ticket.

The big advantage of a timeshare is that you can charge for it, even though the FAA places limits on the amounts. Basically, you can charge the “timesharee” two times actual fuel expense, plus certain specified additional charges set forth in FAR 91.501(d), such as crew travel expenses. Further, for reasons best known to itself, the FAA has consistently maintained that the party recovering the costs—the lessor or “timesharer”—must be a corporation or “company.”

Two times fuel expense is a far cry from what you can charge for a charter—namely, whatever you can get. But as fuel prices have risen, the perception that you might make some money time-sharing your aircraft has increased along with them. In fact, using estimated hourly variable costs for the Hawker 900XP from Conklin & de Decker, and backing out specific expenses that can be passed on to the timesharee like catering, you could make about $400 per flight hour by time-sharing the aircraft, assuming a fuel price of $4.50 per gallon. Want to make more? Find a place to buy more expensive gas, since you’re entitled to charge double your actual fuel cost.

Note the word “actual.” All time-share charges are supposed to be reimbursements for the actual expenses incurred by the timesharer—not estimates or industry averages like the Conklin numbers I just cited—except that you can multiply the cost of “fuel, oil, lubricants, and other additives” times two.

The FAA recently sent a message that it means business when enforcing these requirements. The Hinman Company of Kalamazoo, Michigan carried passengers aboard its two business jets for approximately 850 flights over three years pursuant to six time-sharing agreements. An FAA investigation revealed that, on top of the charges permitted in its regulations, Hinman billed for payments to Honeywell’s MSP program and for de-icing and anti-icing. Hinman apparently also failed to itemize the expenses separately for each flight leg, as required by the regulations. Finally, the FAA claimed that in two cases Hinman charged for the same trip twice and for two trips for separate customers supposedly conducted at the same time. “The aircraft could not have conducted both trips in the same day,” noted the FAA, choosing not to view the discrepancy as a simple typo.

In a letter to the agency, Hinman admitted its mistake in billing for MSP, arguing (as in case (b) above) that the deviation was unintentional and did not involve flight-safety issues, which was probably true, and stating that it had refunded the charges to the timesharees. The company also provided specific charges for each leg. Note that the FAA never alleged that Hinman had charged for crew services, a big no-no for the agency, which could have argued in that case that Hinman had forfeited operational control of the time-share flights.

None of this seems to have bought any favors for Hinman with the FAA, however. In a letter delivered to the company last June, the agency concluded that Hinman conducted the time-share flights “for profit” and operated them under the Part 135 charter rules without authority to do so. Before taking further action, the FAA gave Hinman 30 days to accept a proposed $3.3 million settlement.

Clearly, time-sharing agreements can be useful—but only if you follow all the rules.