The Plane Truth: Beware The Growing, But Murky, Gray Market

Covid-19 has boosted the business aviation market as more executives look for transportation alternatives to decimated commercial airlines. Legitimate charter operations are booming—but so is the market’s illegitimate underbelly: so-called gray-market “dry leases.”

Dry leases occur when an owner agrees to rent a business aircraft to someone and give them complete operational control of the plane for the extent of the lease, whether it’s for one trip or for a year; in a “wet lease,” the owner also provides a crew and possibly services, such as maintenance.

They can be perfectly legal and executed flawlessly. Unfortunately, however, parties to a dry lease often don’t fully understand their obligations under the deal—and outright unethical or even illegal arrangements can involve huge safety, liability and legal risks, including significant government penalties.

The growing problem has come onto the radar of federal regulators and industry associations. The Federal Aviation Administration even went to the extent of issuing a special letter last spring and conducting a webinar on dry leasing. “It’s taking business from legitimate air carriers who are following the rules,” says Paul D’Allura, assistant manager for a task force of the Federal Aviation Administration that is cracking down on illegal charters and educating the business community about them. “And the second and biggest factor is the safety implications: There’s not the same amount of oversight on individuals operating dry-lease programs in terms of pilot qualifications and maintaining the aircraft.”

Safety first

The National Air Transportation Association, which represents charter operators, launched an illegal charter task force two years ago because of the “Uberization of the culture and gross assumptions people make” about traveling, says Ryan Waguespack, senior vice president of the group. Covid-19 has “had a tremendous additional impact.” Meanwhile, the National Business Aviation Association, which represents business-aircraft owners, has been warning members about the ins and outs of dry leasing.

The growing gray market is a logical response to new obstacles being faced by parties on both sides of these transactions. Airline routes have dwindled, forcing business travelers in a recovering economy to seek new paths to their destinations. At the same time, more business-aircraft owners have sought to monetize planes and capacity idled by the slump. “If you’re the aircraft owner, you’re basically getting your maintenance paid, and if you have a note on the aircraft, you’re getting that aid on someone else’s nickel,” says David Nolletti, a managing director for Conway Mackenzie’s aviation practice. “So, it turns out to be a pretty good deal.”

On the other side: Circles are small in business aviation, D’Allura says. “CEOs may have a friend who’s been using dry leases and they figure that idea will fit their needs. And, oh, by the way, it’s quite a bit cheaper than using so-and-so charter company.”

But as the two sides have gotten together more often, essentially what they’ve been doing is creating de facto, but unauthorized, charter operations. Most corporate aircraft are operated under Part 91 of the Federal Aviation Regulations and aren’t permitted to be operated for compensation or hire.

To do the latter, a Part 135 certificate is required—the same certification issued to many airlines and charter operators, with extensive regulatory and operational requirements, including pilot-training and ongoing-maintenance standards. Maintaining charter certification adds about 40 percent to costs, NATA estimates. Airlines require an even more demanding approval that’s known as a Part 121 certificate. “There’s been a pretty significant increase in improper dry leases that don’t really meet the requirements and philosophy behind this mechanism and are essentially charter operations without the charter certification to do that,” says aviation lawyer David Norton.

Mark Dombroff, partner in the aviation practice at the Fox Rothschild law firm, adds that “most corporate flight departments don’t have an operating certificate, either 135 or especially 121: They’re simply operating airplanes as part of their business, not unlike how the company operates a computer or a copy machine. So their operations aren’t regulated or surveilled in the same way.”

In “sham dry leases, there might be less training of the flight crew, and no drug or alcohol testing,” says Gregory Lander, an FAA attorney. “Maybe the operator doesn’t replace certain engine parts regularly because they’re not covered” by regulations.

What to watch

Here are some tips for avoiding trouble:

Understand what it is: Dry leases “can be a legitimate and valuable tool because you can transfer possession and use of the aircraft to someone else,” Norton, a partner in the Shackelford, Bowen, McKinley & Norton law firm, explains. When a bank buys a CEO’s airplane and leases it to him on an exclusive basis, for example, that’s “a classic dry lease. Operation and control are transferred to the lessee. But even some corporate flight departments don’t understand the nuances because, while “they know how to buy and sell and lease planes for their use,” Dombroff says, “there’s no reason for them to have this experience with Part 135 regulations.”

Be wary: You can’t use the owner’s crew because the customer must have full operational control of the aircraft in a dry lease. So, is the crew you’re hiring properly trained for this aircraft? “If you’re in an Uber and the driver is speeding through red lights, you say, ‘Stop and let me out,’” says Ryan Waguespack, senior vice president of NATA. “In an aircraft, you have no idea what’s going on up front and, even if you felt that something was wrong, you can’t say, ‘Pull over and let me out.’”

Key on the contract: If you’re going to become party to a dry lease, research contract language from fractional-jet companies that know what they’re doing. “That typically doesn’t raise red flags,” says Wally DeVasier, owner of DeVasi Air, a company-aircraft operations outfit in Fairfield, Iowa. “The FAA has certain trigger things they’re looking for,” such as ambiguity iabout who is the actual operator or controller of the aircraft.

Expect FAA monitoring: The agency can “ramp” planes at airports based on random inspections or investigation of specific aircraft after complaints of dry leasing. “There are criminal statutes involved,” Landers says.

This fall, thousands of laid-off airline pilots may add to the sham-lease problem. They’ll be “looking for jobs,” Waguespack says. “What better way to [get one] than say, ‘I have experience in these light jets. Sure, I’ll fly you where you want to go.’”