Introduction
With global markets come the need for larger and more mission capable aircraft, and often the need to transport a larger contingent of staff regularly and/or over longer distances. Many U.S. Corporate flight departments may find themselves tasked with determining the best approach relative to managing and maintaining a larger aircraft addition to the corporate fleet.
Most often, these aircraft reside on a Part 125 certificate, a certification reserved for the private (noncommercial) operation of aircraft with a capacity of 20 or more seats or a maximum payload capacity of 6,000 pounds or more. This document explores the efficacy of Part 125 certification and the regulatory framework therewith versus a hosted aircraft approach via a Part 121 certificate holder.
Part 125 Air Charter Operational Benefits & Cost Savings
Part 125 regulations were promulgated to provide a uniform set of rules for the air charter of large aircraft having a seating capacity of 20 or more passengers or a maximum payload of 6,000 pounds or more when these aircraft are being operated for non-common carriage purposes. This regulatory framework enabled corporations to utilize these larger aircraft for private purposes, thereby significantly reducing the costs associated with operating the same aircraft under the commercial airline standards of Part 121.
By way of example, Part 125 operations do not require a formal training program for crew members given that these crew members will not be engaged in common carriage. The absence of such a program significantly reduces record keeping requirements and training costs associated with the formal crew member training programs required under Part 121 operations. Other costs savings are realized via the less restrictive Part 125 framework relative to maintenance, security, and crew utilization.
The rationale for this less restrictive set of regulations is that they are not necessary for what are essentially private air charter flights for the ownership entity, thus allowing the aircraft owner to avoid the significantly higher cost burden associated with Part 121 operations. In other words, the private operator has much more latitude because they would not be potentially placing others at risk under the less restrictive regulatory oversight of Part 125 regulations. Accordingly, this is the most economical approach for these types of private air charter carriage scenarios.
Prohibitions Against Part 125 Common Carriage Operations
The simplicity and savings derived via Part 125 operations comes with a trade-off, which is the prohibition against marketing or “holding out” services to engage in the common carriage of persons, as well as engaging in common carriage in its own right. The U.S. DOT Advisory Circular AC 125-1A states “Part 125 provides for the operation of large airplanes that are not conducting operations in common carriage.” The advisory defines common carriage as “A person is considered to be engaged in common carriage when holding out to the general public or to a segment of the public as willing to furnish transportation within the limits of its facilities to any person who wants it.” (U.S. Department of Transportation Federal Aviation Administration, 2016).
In brief, Part 125 certification is intended for private carriage, such as air charter for large groups. This includes private jet charters for a sports team with an ownership interest in the aircraft. It does not permit the expansion of business relationships for deriving profit. The Department of Transportation (DOT) applies the following test to determine if a certificate holder is engaging in common carriage: “Where it is doubtful that an operation is for “compensation or hire,” the test applied is whether the carriage by air is merely incidental to the person’s other business or is, in itself, a major enterprise for profit” (USDOT, 2016).
Note that DOT makes a clear distinction between incidental carriage and carriage that is engaged in for the purpose of generating revenue.
DOT Enforcement Action Against Part 125 Certificate Holders
Several Part 125 operators have sought to benefit from the savings derived from Part 125 operations while simultaneously deriving revenue from common carriage activities. In virtually every case DOT has taken enforcement action against these entities. The action taken by DOT against Part 125 Operator Sky King is instructive.
Sky King was issued a consent order in 2002 in relation to the operation of charter flights on behalf of other professional sports teams. Initially, the Sacramento Kings’ ownership sought to utilize the 737 aircraft to transport their player and coaching personnel to away games, giving the team complete control over aircraft interior design as well as their team transportation. Invariably, other teams showed interest in the aircraft. Sky King subsequently began operating charter flights for numerous professional teams. In a 2002 Consent Order issued by DOT, the Department found that Sky King was engaging in commercial carriage:
The primary issue in this case, is whether the carrier is “holding out” or providing service to the public. Although Sky King apparently did not engage in any direct advertising of its services to the general public, it has engaged in common carriage by availing itself of the services of various “aviation consultants” and brokers who solicited business for it, and by operating under contracts for an air carrier which held out service to the public. In so doing, it gained a reputation for a willingness to provide transportation by air to at least a class or segment of the public while operating without an effective certificate issued under 49 U.S.C. § 41101. The Office of Aviation Enforcement and Proceedings (AEP) therefore, believes that Sky King has engaged in common carriage without the appropriate economic authority. Holding out service without requisite authority is also an unfair and deceptive business practice and unfair method of competition prohibited by 49 U.S.C. § 41712 (U.S. Department of Transportation Aviation Enforcement Division, 2002).
This ruling is consistent with subsequent enforcement action taken by DOT relative to Part 125 operators offering and engaging in common carriage. Note that the very act of solicitation by the certificate holder or any other entity is a violation of DOT regulation. This includes solicitation via email, phone, and/or attending trade shows, meetings, and or events with the goal of securing air charter business from third parties. These activities create a reputation (a demonstrated willingness to engage in carriage for third-parties) of holding out. Holding out via reputation has resulted in enforcement action in previous cases. While one might assume that the risk resides solely with the certificate holder, DOT enforcement actions have often targeted other entities that would benefit from such a transaction, including parent companies or other related parties.
It is also worth noting that DOT has consistently used the term of art “unfair and deceptive business practice” to describe these types of Part 125 air charter violations. This indicates their understanding that Part 121 operators are denied revenue opportunities and are forced to compete against Part 125 operators for air charter clients with much lower costs structures when these operators compete for common carriage charter business. Part 121 operators monitor the market closely for these types of activities.
Should Your Flight Department Consider Part 125 Operations?
When considering Part 125 operations, a baseline assumption is that the flight department has a very high degree of confidence in the personnel charged with operating and maintaining the aircraft for private use and that they are a well-qualified group of professionals. Part 125 operations can in fact voluntarily comply with many of the Part 121 standards and regulations to achieve a higher level of operational proficiency and safety than is required for private operations. If a flight department can ensure that these private standards are robust enough for their needs and internal compliance standards, operation under the aegis of a Part 125 certificate can be an effective strategy. Where many such operations run afoul with regulators is when they attempt to defray the prohibitive cost of operating larger and more expensive aircraft by engaging in revenue-generating private jet air charter activities. This approach is not recommended for two primary reasons. The first concern is grounded in the belief that while very economical, Part 125 is a less robust regulatory framework than Part 121. Understanding again that the certificate holder has the latitude to voluntarily comply with some of the very high standards of Part 121, the question becomes whether that in and of itself indicates a recognition that Part 125 standards are lacking. Accordingly, our advice to owners of Part 125 aircraft is to not arrange air charter transportation on behalf of of third parties regardless of whether it could be achieved legally or not.
While there has been some guidance to enable Part 125 certificate holders under certain circumstances to operate air charter flights for a subset of unrelated entities, this has historically been limited to no more than three. Such operations fall squarely into the industry’s grayest of gray areas. Sometimes they are approved and sometimes not. This however ignores a much more critical issue – while a private entity can decide to utilize the less robust regulatory standards of Part 125 to transport its own passengers via private jet, it is our view that all other passengers assume and expect that they are being transported with the same level of safety derived from a commercial Part 121 airline and not the less restrictive standards of Part 125. We also believe that they should benefit from the highest degree of aviation safety and operational standards possible, the same standards under which U.S. scheduled service airlines operate. Our second concern is the possibility of DOT and or FAA enforcement action along with the reputational damage to the aircraft owner’s brand. Part 125 operations can continue to be a cost-saving and savvy solution for many organizations, but we recommend against engaging in carriage of any third parties.
Incidental Operations Versus For-Profit Operations
Enforcement action has most often occurred when, in the parlance of DOT, carriage of another entity is not “merely incidental” to the aircraft owner’s operations. Accordingly, offering the aircraft legally to the largest market possible necessitates operation under Part 121, which is the set of regulations that governs air carriers engaging in common carriage. While the significantly higher costs associated with Part 121 certification could be offset to some degree by commercial carriage, it is a rare event that commercial revenue can turn an aircraft into a profit center given that the aircraft is most often engaged in its primary mission of corporate air charter transport.
Conclusion
Is there a possibility that an aircraft owner of a large aircraft can offset all the costs associated with Part 121 operations? That may be possible in some years but unlikely every year. Several market factors and opportunities would have to be aligned to make a given year profitable. Notwithstanding, we believe that there is still considerable value in operating under Part 121 versus Part125. It is a reasonable assumption that with time revenue will increase thereby reducing the overall cost to the aircraft owner. That however comes with the financial risks associated with Part 121 operations, as well as losses in the near term. Ultimately, ownership must decide if the more robust 121 standards are worth the cost. In most cases, despite being able to generate offset revenue via air charter operations, Part 121 will mean higher costs, not lower.
For those flight departments that elect to operate aircraft under Part 125, our recommendation is to avoid pursuing revenue to offset costs. Part 121 commercial airline certification is the premier safety and operating standard worldwide. On balance, we believe that the benefits of Part 121 operations do outweigh the costs. We are however mindful of the financial investment associated with this strategy. Ultimately it will depend on each flight department as well as ownership’s unique set of circumstances.
References
U.S. Department of Transportation Aviation Enforcement Division. (2002). Consent Order Sky King Inc. Violations of 49 USC Section 41101 and 41712. Washington, D.C.: U.S. Department of Transportation.
U.S. Department of Transportation Federal Aviation Administration. (2016). Operations of Large Airplanes Subject to 14 CFR Part 125. Washington, D.C.: USDOT.