Private aviation in Europe will soon be subject to heightened regulatory standards following the implementation of Regulation (EU) No. 800/2013 (the Regulation). From August 25, 2016, operators of "complex motor-powered aircraft" for noncommercial operations (NCC) must comply with the standards imposed by the Regulation. Financiers of these aircraft have kept a cautious eye on how the Regulation might affect their investment in these aircraft and whether action needs to be taken to mitigate any potential adverse exposure.

The purpose of this article is (i) to provide an explanation of the Regulation and what it means for private aviation, (ii) to analyze how the Regulation will affect aircraft financiers and (iii) to suggest measures to be taken by such financiers to mitigate any potential adverse exposure created by the Regulation.

Background

Aviation regulators have typically afforded greater protection to fare-paying "commercial" passengers than to those willing to undertake the risks associated with "private" flying. In most jurisdictions, operators may operate an aircraft only for the purpose of commercial air transport under an air operator's certificate (AOC); this brings greater regulatory standards and scrutiny than for traditional private operations. While the European Commission has recognized that it is not possible to implement a "one size fits all" approach1 to regulation across private and commercial aviation, there has been a growing appetite among stakeholders to raise the standards of private aviation closer to those required for commercial air transport. As EASA noted in response to industry comment on its initial proposals, "many stakeholders requested that NCC rules should be aligned with commercial rules . . . The Agency acknowledged that such an alignment would be in the interest of safety in particular for such operations that involve commercial and noncommercial flights and this request has been accepted where appropriate".2

The justification for EASA's approach appears to be based on two broad premises. First, that bona fide private aircraft owners who enter into a management relationship with an aircraft operator, where the former has no knowledge of the relevant regulatory standards, should not be subjected to lesser safety standards and regulatory oversight than those who are substantively receiving the same service, albeit falling under the remit of the rules relating to commercial air transport. Second, to those persons who are not passengers voluntarily choosing to be subjected to the risks involved in private flying (i.e., crew members and those on the ground), the distinction between private and commercial air transport is not relevant, and the same inherent risks apply to those persons (and property) whether or not the operation of the aircraft is subject to (a) the heightened rules for commercial air transport or (b) the less-stringent rules relating to private flying.

Applicability: "Complex Motor-Powered Aircraft for Noncommercial Operations"

The Regulation applies to “complex motor-powered aircraft” conducting "noncommercial operations" (together, an NCC Operation), which phrases have distinct meanings:

Complex Motor-Powered Aircraft

A "complex motor-powered aircraft" is an aeroplane: (i) with a maximum certified take-off mass (MTOM) exceeding 5,700 kg, or (ii) certified for a maximum passenger seating configuration of more than 19, or (iii) certified for operation with a minimum crew of at least two pilots or (iv) equipped with (a) turbojet engine(s) or more than one turboprop engine3 (although the European Commission and the EASA Committee recently agreed on a derogation to allow noncommercial operators of twin turboprops with an MTOM of less than 5,700 kg to operate under Part-NCO instead).4 To put this into context, the MTOM of a Bombardier Challenger 605 (a popular mid-range jet aircraft) is 19,500 kg, and even the Eclipse 550 (which is a "very light jet"), which has an MTOM of 2,722 kg and is certified for operation with a single pilot, is classified as an NCC aircraft by virtue of the fact that it is propelled by two turbojet engines. Most aircraft suitable for conventional or typical business or private luxury use are likely to fall into the NCC category.

Noncommercial Operations

Unless a particular flight falls into a special-purpose category such as aerial photography, police or air-ambulance flights, a "noncommercial operation" will generally be a flight which is not a "commercial operation." A commercial operation is "any operation of an aircraft, in return for remuneration or other valuable consideration, which is available to the public or, when not made available to the public, which is performed under a contract between an operator and a customer, where the latter has no control over the operator."5 What constitutes "valuable consideration" for flights made available to the public is generally well understood; it could be a payment in kind and need not involve a direct exchange of money.6

The reference to operations "not made available to the public . . . where the latter has no control over the operator" is troublesome because the term "control" is not defined in the regulatory framework. It does, however, serve as a useful guide to carve out those instances in which a customer does have some control over the operator, such as in a typical owner/manager/operator scenario, and would also likely cover fractional ownership schemes. EASA has provided the following guidance:

the legislator has not further specified the term "control". It is therefore EASA's view that it should be understood in a wider sense, i.e. the term is not limited to operational control. In this sense, control could for example also encompass financial control, control of management decisions etc. This notion of the definition is for example particularly valid for managed operations or fractional ownership. These are operations where an aircraft is owned by one or several persons who contract a management company to manage operations and continuing airworthiness. It then depends on the specific contract between the owner(s) and the management company how much control the owner(s) still have over the operation.7

It is therefore clear that most aircraft that are suitable for conventional or typical business or private luxury use and which are operated privately will be affected by the Regulation.

Who Is the "Operator"?

It is critical to establish who the "operator" is for the purpose of the Regulation because the operator is the accountable party that needs to be compliant with the Regulation. However, the Regulation is not particularly helpful for the purposes of definitively establishing the identity of the operator.

The operator is "any legal or natural person, operating or proposing to operate one or more aircraft."8 To see why this is troublesome, let's take an ordinary private jet management scenario as an example: Wealthy Person, a high-net-worth individual (who knows nothing about aircraft), is the beneficial owner of an aircraft which is subject to a finance lease from Big Bank. Wealthy Person (or Wealthy Person's special-purpose company) has entered into a management agreement for the aircraft with Experienced Manager, which provides all of the services required to operate the aircraft, except that certain dispatch services are subcontracted to Dispatching Agent. Wealthy Person uses that aircraft for private business and family use only. This is, therefore, an NCC Operation.

Who is the operator? Is it Wealthy Person, Big Bank, Experienced Manager or Dispatching Agent? At the outset, we can say that Big Bank is not the operator (even though it is the legal owner pursuant to the finance lease), as the financier could not be said to be "operating or proposing to operate" the aircraft.9

We might assume that Experienced Manager is the operator, as that entity would normally employ the pilots and have the ultimate operational oversight for the aircraft. The definition of "noncommercial operations" similarly makes a natural distinction in a management agreement–style relationship between the customer and the operator.

But what if, for structuring or personal reasons, Wealthy Person employs the pilots, Experienced Manager employs the remaining crew and provides scheduling support, and Dispatching Agent provides dispatch, airworthiness management and maintenance services. Which entity is "operating or proposing to operate" the aircraft? The Regulation leaves this open. While any of these parties could be the operator under the Regulation, only one party is permitted to be the operator under the Regulation. If Experienced Manager is an AOC holder but is acting in a private capacity, then it would be logical (but not necessary) to assume that the Regulation would treat Experienced Manager as the operator, as certain exceptions are made for AOC holders under the Regulation, and they would necessarily already have many of the systems and manuals in place to comply with the Regulation.10 But there is nothing stopping Wealthy Person from insisting that he is the operator and making the declaration to the relevant aviation authority that he is so. Indeed, at a domestic level in the UK, it is commonplace for AOC holders to state that the owner is the "operator" for a given flight to allow them to "flip-flop" between commercial and private operations and remain in compliance with domestic operations rules.11 The consequences of this characterization are crucial.

Key Changes, Increase in Standards and Aircraft Managed by AOC Holders

While this article does not seek to explore the increased technical standards imposed by the Regulation in any great detail, a basic grasp of some of the other fundamental changes is important:12

Management System: The operator must have in place a management system which sets out, among other things: (i) channels of responsibility and accountability (including designating an "accountable manager"); (ii) the overarching philosophies relating to safety; (iii) identification of hazards; (iv) how personnel are made aware of their duties; and (v) compliance monitoring.13 Generally, the Regulation requires that "the management system shall correspond to the size . . . nature . . . and complexity of [the operator's] activities,"14 meaning that it should be a bespoke—and not an "off-the-shelf"—system.

Operations Manual: Distinct from the management system, the operator must have in place an operations manual which sets out all necessary instructions, information and procedures for all aircraft to be operated and for operations personnel to perform their duties (so, for example, limitations relating to flight time, flight duty periods and rest periods for crew would be set out in the operations manual).15

Minimum Equipment List (MEL): The operator must establish an MEL, which is effectively a list of instruments and technical functions without which the aircraft could not be safely operated. The MEL will identify whether a flight could be safely performed or not if any instrument or function is inoperative at the commencement of such flight (and what is to occur in the event of an inoperative instrument or function).16

Declaration: Prior to commencing an NCC Operation for a given aircraft, the accountable manager of the operator must make a declaration (the Declaration) to the relevant aviation authority that it has complied with the requirements of the Regulation. The form of this declaration is quite simple and is set out in Annex II to the Regulation. The Declaration need be made only once.

Operators of aircraft that previously did not have any of items numbered 1 to 3 above in place will now need to implement these items and inform their national aviation authority that they have done so and that they are compliant with the Regulation by submitting the Declaration. AOC holders that are performing private operations are not required by the Regulation to submit a Declaration, as they are already deemed to be compliant by virtue of the fact that they are required to comply with the minimum standards imposed upon an AOC holder.17

The Effect on Industry as a Whole

While it remains to be seen, it is most likely that the Regulation will affect two categories of operators significantly:

  • (1) small aircraft management firms that do not hold an AOC and
  • (2) in-house aircraft management departments of organizations that manage a fleet of jets for that organization alone (though this type of department is less common). The Regulation represents a genuine and significant change to the way in which these entities are managed, and the cost of implementing the changes accorded by the Regulation may be significant. AOC holders will likely not suffer the same implementation costs, since they will already (largely) be compliant with the Regulation.

As a result, these categories of operators may be affected in the following manner:

  • small aircraft management firms may consolidate in order to compete;
  • more organizations that own and manage their own jets may engage third-party operators to manage their aircraft; and
  • AOC holders may see more aircraft placed under their management and take advantage of economies of scale, whether by virtue of consolidation with smaller operators or where aircraft owners decide to relocate their aircraft elsewhere.

The Effect on Financiers

While it has been suggested that financiers will be directly affected by the introduction of the Regulation, it is implausible to suggest that a financier (whether as a lender or a finance-lessor) that is carrying on conventional business could have any direct liability under the Regulation as a matter of European law.

That being said, the Regulation will have an indirect impact on financiers. Firstly, a financier will need to do its due diligence on the aircraft manager in any given transaction to ensure that the manager is capable of meeting its obligations under the Regulation. If the managers are established AOC holders, then the level of scrutiny might be less than that of a non-AOC holder that has implemented its operations manual and management system for the first time as a result of the Regulation; financiers need to be comfortable that the operator is operating the aircraft in compliance with all applicable laws. The consequences of a failure to do so could be wide ranging, including (i) invalidity of insurance coverage (for the operator at least, even though the financier should benefit from a breach-of-warranty endorsement), (ii) competent authorities placing preferential liens over the aircraft as a matter of domestic law and (iii) the negative publicity that might ensue.

Secondly, the financier should be fundamentally clear as to who the operator is and, consequently, who is providing the Declaration pursuant to the Regulation. It may therefore be sensible, where a third-party manager is not an AOC holder, to oblige that entity in the relevant tri-partite agreement to submit the Declaration and declare itself the operator and to include a covenant not to alter that position without the prior consent of the financier. At the very least, in this sort of scenario, the financier should request to see a copy of the Declaration and make it a condition of the finance document to do so.

Lastly, financiers should continue to ensure that they insist on adequate insurance protection (usually in the form of an AVN67B endorsement) so that any breach of the Regulation by the operator (or insured if different) is covered by the breach-of-warranty protection afforded to financiers therein. It is important that any financier is actively aware of who the operator is and if such operator is capable of complying with the Regulation (and acting on it appropriately if not).

Conclusion

There is general consensus that a harmonization of standards across private and commercial aviation is a welcome step, if not unwanted from some operators. The manner in which EASA has done so has caused issues; aside from being uncertain in a number of areas, it will likely cause economic impact to industry. Financiers, however, should not be alarmed by the Regulation or its impact. They should, however, continue to remain diligent and aware of who in their ownership and management structures is doing what, and when.