The FAA Steps Up Its Response to Illegal Charters

One or more corporate aviation bees regularly invade the FAA’s bonnet. The noisiest bee lately has been illegal charters, as reflected in the proposed penalties the agency has been issuing. Last August, it targeted five companies with proposed penalties totaling over $1.2 million, and two months later, it proposed a $1.38 million civil penalty against Campbell Oil Company and Executive Aircraft Services, in each case for running illegal charters. 

Basically, unless an exception applies, it is illegal to charge or receive compensation for transporting passengers or property without having an air carrier certificate issued by the FAA. Such a flight would technically also be illegal if a charter certificate holder didn’t comply with FAR Part 135 and other applicable requirements and regulations (including the need to use commercial or air transport pilots, depending on the circumstances, as opposed to private pilots). But the term “illegal charter” usually refers to commercial flights by an operator who doesn’t have a certificate at all.

Illegal charters can be hard to spot, but the buzzing bee has kept the agency working to improve the training for front-line inspectors charged with identifying them. Training aircraft owners and operators not to concoct illegal charter schemes, on the other hand, has proved to be more difficult, so last May the FAA tried a different approach. You can’t fly illegal charters without pilots, so the agency sent a letter to 471,000 certified pilots, warning them about participating in flights that run afoul of FAA charter rules. Putting pilots on the lookout for illegal charters makes sense; pilots can get into hot water themselves for flying such charters, and they can also concoct their own illegal charter schemes even if they have commercial ratings.

Related Article

Illegal Charter Reports Spike as Market Heats Up

Some of the activity results from cluelessness or carelessness but some is simply criminal.

Unlike airline and other commercial pilots, private pilots are not permitted to transport passengers for compensation or hire. However, FAA regulations do allow them to share the costs of a flight with passengers (“flight sharing”), assuming certain conditions are met. First, the trip must happen primarily because the pilot wants or needs to fly to the destination, not because the passengers want to go there and the pilot agrees to take them. In other words, travel to the destination must be the common purpose of the pilot and passenger. Second, in the FAA’s view, illegal “compensation” can include the passenger paying a larger share of flight expenses than the pilot; the regulations accordingly provide that “a private pilot may not pay less than the pro-rata share of the operating expenses of a flight with passengers.” And the expenses that can be shared are limited to “fuel, oil, airport expenditures, or rental fees.” Pilots often bend these rules, whether intentionally or not.

Creative businesspeople have tried with little success to concoct businesses based on FAA flight-sharing rules. Suppose, for example, that pilots posted on a website the date when they would be flying to a specific destination. If other people with access to the website were willing to pay a pro-rata share of flight expenses to go along for the ride, this would reduce the pilot’s cost for the trip. But to do this, the pilot’s website posting would effectively be “holding out” a willingness to transport passengers, and the FAA’s view is that flights on that basis would be “common carriage” requiring a charter certificate and (at a minimum) a commercial license for the pilots. 

Another way to run illegal charters is to piggyback on legitimate contracts such as dry leases. A dry lease is a transfer of possession of an aircraft to another party. What makes it “dry” is that the leased aircraft comes without pilots; the lessee, as the operator, is supposed to provide its own pilots, because leasing an aircraft with pilots amounts to providing the lessee with a complete transportation service—a wet lease. But lessees interested in illegal charters are unlikely to have any qualified pilots and accordingly may merely arrange to hire the lessor’s pilots pursuant to a services agreement that is separate from the lease. The FAA, however, doesn’t care whether you obtain the aircraft and its crew under separate agreements; the lease is still “wet” if the lessor’s pilots are in the cockpit, and commercial rules accordingly apply unless there’s an applicable exemption from the FAA. 

The FAA does offer specific exemptions for flights under arrangements the agency regards as wet leases—trips where passengers can be charged even though the flight is not operated under a commercial operating certificate. In addition to providing flexibility and relief from charter rules, these exemptions provide opportunities for operators who don’t have a certificate to portray a de facto charter flight as operated pursuant to an exemption.

For example, FAA regulations permit charges for “flights for the demonstration of an airplane to prospective customers”—that is, people interested in buying it. Permissible charges are restricted to two times the actual cost of fuel for the flights plus certain specific incidental expenses (such as landing fees and crew travel expenses). Expensive fuel and creative accounting—not to mention bogus claims of the possible purchase and sale of the aircraft—can create opportunities to make money on supposed demo flights.

Time-sharing agreements, which are supposed to be charged on the same basis as demo flights (two times fuel plus incidental expenses), offer similar opportunities for creative accounting. Here, however, there is no need for any pretense of an aircraft being demonstrated for sale. In the FAA’s view, however, time-sharing flights must be operated by “companies,” not individuals. Further, under a joint-ownership agreement, as defined in FAA regulations, one registered joint owner can charge other registered owners for operating flights, and charges are not limited to two times fuel. 

Here, again, aircraft owners concoct clever schemes to circumvent the rules—why not sell your friends a 1 percent interest in your aircraft so you can make money charging them for flights? As a result, the FAA is on the lookout for de minimis “joint owners.” A joint-ownership arrangement between a 90 percent owner/operator and 10 owners of 1 percent each will obviously raise red flags for the agency, but anyone who doesn’t own enough of the aircraft to look like a bona fide owner (as opposed to an illegal charter customer) is likely to raise a red flag for the FAA. Any joint-ownership arrangement should accordingly be reviewed in advance by aviation counsel.

Ferreting out illegal charter schemes can be challenging, but people in the cockpit are in a relatively good place to do so. And the FAA isn’t the only source of complaints about illegal charters. Legitimate charter operators are concerned about illegal competition and charter customers are concerned about safety. After all, there’s a reason the FAA has higher standards for commercial operators and pilots.

You can report suspected illegal charters on a hotline sponsored by the Air Charter Safety Foundation.