Wet Lease Policy Guidance, 61684-61687 [05-21226]

Agencies

• Federal Aviation Administration
• DEPARTMENT OF TRANSPORTATION

[Federal Register Volume 70, Number 205 (Tuesday, October 25, 2005)]
[Notices]
[Pages 61684-61687]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-21226]


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DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

[Docket No. FAA-2005-22765]


Wet Lease Policy Guidance

AGENCY: Federal Aviation Administration (FAA), DOT.

ACTION: Notice; request for comments.

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SUMMARY: It has long been contrary to Federal Aviation Regulations for 
an air carrier to ``wet lease'' an aircraft from an individual or 
entity that is not separately authorized to engage in common carriage. 
By this notice, the Federal Aviation Administration (FAA) seeks comment 
on proposed policy guidance identifying those commercial arrangements 
that would be considered to be unlawful wet lease arrangements under 
these regulations as well as those that would be permissible. 
Additionally, we seek comment on our proposed treatment of certain 
other commercial arrangements between air carriers and aircraft owners 
that--while not amounting to illegal wet leases--could nevertheless 
result in the air carrier impermissibly ceding operational control of 
flight to non-certificated entities.

DATES: Send your comments on or before November 25, 2005.

ADDRESSES: You may send comments [identified by Docket No. FAA-2005-
22765] using any of the following methods:
    DOT Docket Web site: Go to https://dms.dot.gov and follow the 
instructions for sending your comments electronically.
    Government-wide rulemaking Web site: Go to https://
www.regulations.gov and follow the instructions for sending your 
comments electronically.
    Mail: Docket Management Facility; U.S. Department of 
Transportation, 400 Seventh Street, SW., Nassif Building, Room PL-401, 
Washington, DC 20590. Fax: 1-202-493-2251.
    Hand Delivery: Room PL-401 on the plaza level of the Nassif 
Building, 400 Seventh Street, SW., Washington, DC, between 9 a.m. and 5 
p.m., Monday through Friday, except Federal holidays.

FOR FURTHER INFORMATION CONTACT: Kent Stephens, Aviation Safety 
Inspector, Air Transportation Division, Flight Standards Service, Room 
831, 800 Independence Avenue, SW., Washington, DC 20591, telephone: 
(202) 267-8166.

Comments Invited

    The FAA invites interested persons to submit written comments, data 
and views on the draft guidance contained in Section D below. The most 
helpful comments reference a specific portion of the proposed guidance, 
explain the reason for any recommended change, and include supporting 
data. We ask that you send us two copies of written comments.
    We will file in the docket all comments we receive, as well as a 
report summarizing each substantive public contact with FAA personnel 
concerning this proposed policy. The docket is available for public 
inspection before and after the comment closing date. If you wish to 
review the docket in person, go to the address in the ADDRESSES section 
of this notice between 9 a.m. and 5 p.m., Monday through Friday, except 
Federal holidays. You may also review the docket using the Internet at 
the Web address in the ADDRESSES section.
    Privacy Act: Using the search function of our docket Web site, 
anyone can find and read the comments received into any of our dockets, 
including the name of the individual sending the comment (or signing 
the comment on behalf of an association, business, labor union, etc.).
    You may review DOT's complete Privacy Act Statement in the Federal 
Register published on April 11, 2000 (65 FR 19477-78) or you may visit 
https://dms.dot.gov. Before acting on this proposal, we will consider 
all comments we receive on or before the closing date for comments. We 
will consider comments filed late if is possible to do so without 
incurring expense or delay.

[[Page 61685]]

We may change this proposal in light of the comments we receive.
    If you want the FAA to acknowledge receipt of your comments on this 
proposal, include with your comments a pre-addressed, stamped postcard 
on which the docket number appears. We will stamp the date on the 
postcard and mail it to you.

SUPPLEMENTARY INFORMATION:

A. Background

    Federal Aviation Regulations provide that only entities properly 
certificated by the FAA may maintain operational control of any flight 
conducted for commercial purposes under 14 CFR parts 121 and 135. 
Recent information obtained by the FAA regarding certain arrangements 
in the on-demand air carrier industry has highlighted existing concern 
over whether the air carriers in such arrangements are consistently 
maintaining (as required) operational control of all flights 
purportedly conducted under the authority of their certificates. In 
some cases, air carriers have evidently allowed aircraft owners and 
lessees who hold no commercial certificates to conduct operations under 
the auspices of the air carrier's certificate, and in a few cases, 
falsely holding themselves out to the public as air carriers 
themselves. As a result, some members of the traveling public have paid 
for air transportation by persons that do not hold proper FAA 
certification and, just as important, do not necessarily comply with 
the more demanding safety rules for air carriers and other commercial 
operators.
    The FAA has taken several actions to address this problem. We have 
begun enforcement proceedings to halt the effective franchising of air 
carrier certificates and the conduct of air carrier operations by 
unqualified persons. On June 10, 2005 the FAA's Flight Standards 
Service issued a notice to all inspectors directing them to contact 
each air carrier they oversee to make sure that these carriers 
understand their obligations to maintain operational control of flights 
conducted under their certificates. In addition, the FAA has sent out 
information request to air carriers to ascertain the types of 
arrangements under which they conduct their business so as to assess 
whether those arrangements comply with these obligations.
    The guidance proposed in this notice is intended to assist air 
carriers and others in evaluating whether certain arrangements, 
including aircraft leases and related agreements, are consistent with 
operational control requirements.\1\
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    \1\ This proposed guidance concerns requirements related to 
safety regulation by the FAA. Carriers and others should note that 
it does not address economic regulatory requirements, which are 
separate and under the purview of the Office of the Secretary of the 
Department of Transportation.
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B. Operational Control

    In connection with its safety oversight and investigatory 
responsibilities, the FAA must always be able to identify who is 
accountable for the safety of each flight, whether commercial or not. 
Central to this inquiry is determining which person or entity as a 
factual matter exercise operational control of any particular flight. 
Our regulations provide that operational control means ``with respect 
to a flight, * * * the exercise of authority over initiating, 
conducting or terminating a flight.'' See 14 CFR 1.1. We attempt to 
determine who has ``real-world'' control over an aircraft and its crew 
by evaluating all the facts and circumstances surrounding that flight 
operation. The FAA, the National Transportation Safety Board, the 
courts, and others look beyond the written provisions of contracts and 
other commercial documents and the parties' assertions regarding 
``operational control'' to determine who--as a factual matter--
controlled a flight operation.
    For purposes of this guidance, a ``surrender of operational 
control'' by an air carrier means a situation in which an air carrier 
has inappropriately allowed an uncertificated person or entity to 
engage in air carrier operations under the carrier's name. See e.g., 
Administrator v. Darby Aviation d/b/a Alphajet, Inc., NTSB Order Number 
E-5159 (2005). In FAA Notice N 8400.83 (issued on June 10, 2005), the 
Director of the Flight Standards Service cautioned air carriers and 
other commercial operators who are certificated under part 119, that 
they may not franchise or lease out their authority to engage in part 
135 operations to third parties, as this constitutes a surrender of 
operational control.
    A ``loss of operational control'' or ``inadquate operational 
control'' includes those situations in which the carrier has not 
surrendered control to another person or entity, but has inadequately 
exercised the necessary supervisory actions over the maintenance of 
aircraft listed on its operations specifications or has not adequately 
supervised and directed its own pilots. A carrier has inadequate 
operational control if it lacks either timely knowledge about the 
flight and duty status of its pilots, the means to communicate an order 
to the crew to delay, cancel, or divert a flight, or sufficient 
leverage or authority over its crews to assure compliance with the 
carrier's lawful instructions.\2\
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    \2\ It is not considered a proper exercise of ``operational 
control'' for the carrier to delegate to the pilot in command the 
responsiblity for determining for the carrier whether the pilot in 
command and other flight crewmembers are qualified for the flight 
that day. The safety benefit in the FAA rules of having 
``redundancy''--here, the carrier verifying the qualifications of 
the pilots for the flight--cannot be overstated. The carrier itself 
has to determine, for example, whether the flight crew meets rest 
period requirements and whether the flight crewmember has exceeded 
flight time limits. The safety benefits of having a redundant safety 
duty imposed--on both the carrier and the pilot--is lost if the 
carrier delegates its independent responsibility to the pilot.
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    In each case in which there is a question about operational control 
the FAA also must ultimately make a legal determination as to which 
person should have exercised such control. In some cases the FAA will 
determine that the operational control of a commercial flight was 
actually exercised--unlawfully--by an uncertificated person who did not 
comply with the more demanding safety rules that apply to commercial 
operations. In other cases, a properly certificated air carrier or 
commercial operator has actively participated or acquiesced in 
commercial arrangements that allowed the illegal operator to hold 
itself out to the public as a legitimate air carrier.
    Sometimes unlawful arrangements become apparent only after a review 
of the written contracts between the parties and other evidence reveals 
that the relationship obfuscates which entity or person has 
``operational control'' of a flight and, thus, which entity or 
individual should be held accountable for the overall safety of a 
flight. Where such operations end safely, it has been our experience 
that the carrier and the aircraft owner typically assert that the 
commercial operation was lawfully conducted by the air carrier under 
our regulations. Unfortunately for the public, where such flights 
involve safety violations, the carriers under whose auspices the 
flights were conducted may claim they were unaware that a commercial 
flight occurred under their certificate--even though that aircraft is 
on the part 135 operator's specifications. The carrier may point to the 
fact that it never had legal possession of the aircraft that was 
illegally flown in commercial operations, and thus the carrier will 
disclaim responsibility for the operation. The FAA deems arrangements 
that facilitate such confusion to be wholly at odds with the 
requirement that an air carrier must

[[Page 61686]]

clearly retain operational control of all its flights, and we will, at 
a minimum, act promptly to remove aircraft used in such arrangements 
from the air carrier's operations specifications.
    Finally, it should be without saying that any air carrier must have 
in place personel who are knowledgeable about aviation, including FAA 
safety regulations, such that they can gather and review relevant 
information about the airworthiness of the aircraft and the condition 
of the crewmembers. If the air carrier does not have knowledgeable 
people in place, it is highly unlikely that the carrier will meet the 
stringent safety standards necessary to satisfy the statutory ``duty * 
* * to provide service with the highest possible degree of safety in 
the public interest.'' See 49 USC Section 44701(d)(1).

C. Affected Commercial Arrangement

    Commercial arrangements between U.S. air carriers and others must 
ensure effective operational control by an air carrier over its 
flights. Beyond avoiding wet leases with non-certificated entities 
(discussed below), a carrier must generally ensure that all business 
arrangements provide its management personnel with not only the 
contractual authority to direct the crewmembers to terminate, delay, 
divert or modify the carrier's flights, but also with effective 
authority by virtue of their relationship with the crewmembers. It is 
not enough simply to assert in a contract that the carrier has 
``operational control'' if other aspects of the parties' agreements 
undermine or otherwise nullify effective means of control by the 
carrier.
1. Wet Leases
    The FAA prohibits ``wet leases'' between a certificate holder under 
part 119 and a foreign air carrier or another foreign person or any 
other person not authorized to engage in common carriage. See 14 CFR 
119.53(b). To understand a ``wet lease,'' one must first understand the 
meaning of a ``dry lease.'' In aviation, a dry lease occurs when legal 
possession of an aircraft transfers from the owner to another person 
(whether that person is the first lessee or a sublessee). A ``wet 
lease,'' under the Federal Aviation Regulations, is any leasing 
arrangement whereby a person agrees to provide an entire aircraft and 
at least one crewmember. See 14 CFR 119.3
    The agency adopted the prohibition on wet leases in Sec.  
119.53(b), in part, because we were concerned that the air carrier 
might not exercise operational control over the crew leased from the 
other (non-certificated) entity, with the result that the entire 
operation would not be under the direction and control of the 
certificated air carrier. In a true dry lease, the lessee is fully 
accountable for the safety of the flight operations it conducts with 
the aircraft in its possession. In contrast to a dry lease situation, 
in a wet leasing arrangement, although the lessee nominally has legal 
possession of the aircraft, the actual control of the aircraft is with 
the entity directing the crewmembers. Where only one of the parties has 
been certificated to engage in common carriage operations, the other's 
agreement to provide the crew raises significant issues as to who 
really has control over the crew: the lessor or the air carrier.
2. Permissible Use of the Aircraft Owner's Crew
    The FAA is well aware that many aircraft owners lease their 
aircraft to part 135 on-demand operators so as to recover overhead 
expenses when the owner does not need to use the aircraft. Nothing in 
this guidance is intended to bar these arrangements or to prohibit any 
air carrier from dry leasing an aircraft from its owners or lessor. The 
FAA has no safety objections to this practice so long as the air 
carrier--and no one else--exercises actual operational control of the 
for-hire flights. To satisfy this requirement, the carrier must have 
effective mechanisms in place to make sure the crews will adhere to the 
carrier's instructions. Moreover, the carrier cannot participate in an 
arrangement that allows the aircraft owner to interfere with the 
carrier's ability to make and implement safety decisions needed to 
comply with FAA air carrier safety rules. In particular, we think it 
inappropriate for an aircraft owner or other non-certificated entity to 
determine who will be the pilots assigned to a part 135 flight. Thus, 
the carrier may not enter into any contract by which it agrees directly 
or indirectly to utilize only the aircraft owner's or lessor's pilots 
when conducting part 135 flights.
    By this notice the FAA does not intend to prohibit air carriers 
from using a pilot in part 135 operations simply because that pilot 
also is employed by the owner of the aircraft. A key question in such 
commercial arrangements is whether the carrier is obligated directly or 
indirectly to use the aircraft owner's crew. In this regard, a critical 
factor would be written acknowledgements by the carrier, the aircraft 
owner, and the pilots that the crew serves as the agents of the air 
carrier during all part 135 operations. An acknowledgement that the 
pilots are the carrier's agents (even where the pilots remain the 
employees of the owner, as evidenced, for example, by the owner's 
issuance of IRS Form W-2's) helps reduce any confusion as to which 
party has the authority and the responsibility to conduct a safe for-
hire flight. We believe that such an acknowledgement may cause air 
carriers to exercise greater oversight of aircraft placed on their 
operations specifications and to take whatever steps are necessary to 
ensure the aircraft owners do not hold themselves out as conducting 
commercial flights under the auspices of the air carriers' 
certificates.
3. Other Arrangements
    Operational control issues do not arise solely in the context of 
wet leases to air carriers from people not authorized to engage in 
common carriage. Even in situations where it is legal for a carrier to 
enter into a wet lease (e.g., a U.S. carrier can wet lease from another 
U.S. carrier), operational control issues arise and thus the FAA 
requires that such leases be submitted to the FAA for an assessment as 
to which FAA-certificated carrier has operational control. See 14 CFR 
119.53(a) and 119.53(c). Typically, in such agreements, the wet lessor 
will have operational control instead of the lessee primarily because 
of the former's business relationship with the crew. We permit these 
arrangements because there is an assurance that all the parties know 
that the revenue flights must be flown under part 121 or 135, and both 
parties have been certificated for air carrier operations.

D. Proposed Guidance

    When our Flight Standards Service discovers contractual language or 
other evidence of wet leasing prohibited under section 119.53(b), our 
current policy is to take two actions. First, we will not add aircraft 
to a carrier's operations specifications to the extent such aircraft 
are subject to wet leases. Second, we will begin an investigation as to 
the carrier's use of other aircraft already on its operations 
specifications to ascertain whether they involve an improper wet lease 
under section 119.53(b).
1. Wet Leases
    a. If an air carrier and an aircraft owner (or someone having legal 
possession of the aircraft) enter into an agreement whereby legal 
possession of a specific aircraft is transferred from the owner (or 
first lessee) to the air carrier and if the owner (or first lessee) 
provides a crewmember as part of the lease, then such an arrangement 
constitutes a wet lease.
    b. If an air carrier and an aircraft owner enter into an agreement

[[Page 61687]]

captioned as a ``dry lease'' of an aircraft from the owner to the air 
carrier, and in a separate document the same parties agree that the 
owner will provide a crewmember to the carrier, such an arrangement 
would still constitute a wet lease. The FAA would evaluate the two 
documents together. Such an arrangement (assuming the owner is not a 
certified air carrier) also would be contrary to section 119.53(b). An 
air carrier does not have actual operational control of the carrier 
flight operations if a person other than the air carrier can determine 
who the pilots of the aircraft will be or can exercise control over 
those pilots.
    c. If an air carrier and an aircraft owner enter into an 
arrangement labeled as a ``dry lease'' of an aircraft from the owner to 
the carrier but in a separate document the parties give the owner the 
right to consent to or approve of the selection of crew, then such an 
arrangement might be treated as a wet lease depending on the particular 
circumstances. If in practice only the owner's pilots would be approved 
(as shown, for example, by evidence that all other pilots had been 
vetoed for use by the owner), the FAA would deem this leasing 
arrangement to be a ``wet lease'' in contravention of Sec.  119.53(b). 
A carrier cannot be said to enjoy actual operational control of its 
flight operations if an aircraft owner (non-carrier) can effectively 
veto the carrier's proposed pilot assignments, where those pilots are 
otherwise qualified and appropriately certificated and trained to 
conduct carrier flights.
    d. The following example would be considered a wet lease by the 
FAA. Although the carrier is not formally obligated to use the owner's 
pilots, it is clear from that business arrangement between the carrier 
and the aircraft owner that the aircraft owner's pilots are provided 
with the aircraft. Certain aircraft leases contain penalty clauses that 
provide that if the aircraft owner's pilots are not available to fly 
the aircraft for the part 135 carrier, then the aircraft owner must 
compensate the part 135 carrier for any costs the carrier incurs in 
getting other pilots to fly the aircraft. Because the parties 
contemplated that the owner would provide both the aircraft and crew, 
this too constitutes a wet lease, even though the carrier ultimately 
may use pilots who did not come from the aircraft owner. This type of 
arrangement is contrary to the provisions of section 119.53(b) of the 
Federal Aviation Regulations.
2. Other Arrangements Raising Serious Concern as to Operational Control 
of Flight
    a. Operational control issues may arise in situations where there 
are no leases whatsoever. On occasion an air carrier may make 
arrangements with an aircraft owner to use its aircraft without 
entering into a real lease, and thus, the carrier never gets legal 
possession of the aircraft. This sort of informal arrangement will 
raise significant legal concerns over inadequate operational control 
when the carrier has no contractual arrangements with the crew, does 
not directly pay the crew for their service in air carrier operations, 
and receives no direct compensation by the customers for transporting 
passengers or property.
    b. Another arrangement raising serious legal concern arises when a 
certificated air carrier receives a flat ``certificate use'' fee from 
the aircraft owner regardless of the number of commercial flights 
conducted per month, and the transportation customer pays the aircraft 
owner directly. Absent evidence to the contrary showing that the air 
carrier exercised actual and legal operational control of all flights, 
such arrangements constitute an inappropriate franchising of an air 
carrier certificate.
    c. Some air carriers only occasionally lease aircraft from 
particular owners, who may enter into similar arrangements with 
multiple carriers. Although our rules do not forbid this practice, each 
carrier must ensure in all of its leasing arrangements that there are 
mechanisms in place to avoid confusion over who is using the aircraft 
and when. Similarly, the carrier must have procedures that ensure that 
the crewmembers adhere to the instructions of the carrier, not the 
aircraft owner.

E. Conclusion: Recommended Carrier Review of Existing Leasing 
Arrangements

    The foregoing discussion is intended to provide the public, 
including air carriers and aircraft owners, with a better understanding 
of the FAA's concerns about the key safety issues linked to operational 
control of flights made under the authority of FAA certificates. The 
discussion is also intended to encourage air carriers to closely 
consider whether their business arrangements comport with the 
requirements for maintaining operational control. The FAA urges all air 
carriers to review the leasing and other arrangements they have with 
aircraft owners to ensure compliance with the regulations. In this 
regard, the FAA encourages carriers to consider whether they have 
sufficient controls in place that they have timely knowledge to answer 
the following questions:
    1. What is the actual location of each aircraft listed on the 
carrier's operations specifications?
    2. Who has the carrier authorized to fly the aircraft?
    3. Does the carrier have mechanisms in place to prevent 
unauthorized use of the aircraft?
    4. Who or what is being transported on the aircraft?
    5. Is a given flight for compensation or hire?
    6. If the flight is for compensation or hire, are the crewmembers 
properly certificated and trained?
    7. Are the crewmembers loyal to the air carrier (as opposed to the 
aircraft owner or some other entity) so that they will adhere to the 
carrier's instructions not to fly or to delay a flight or to divert a 
flight?
    8. What procedures and mechanisms are in place so that the carrier 
can fulfill its duty to ensure that the aircraft is airworthy and meets 
all of the carrier's maintenance programs?

    Issued in Washington, DC on October 19, 2005.
James J. Ballough,
Director, Flight Standards Service.
Andrew B. Steinberg,
Chief Counsel.
[FR Doc. 05-21226 Filed 10-19-05; 3:13 pm]
BILLING CODE 4910-13-M