Hundreds of articles have been written about dry leases and their potential pitfalls with respect to operational control and FAA regulatory compliance, but are dry leases of aircraft truly always bad? Since this article is written by a lawyer, the answer is, of course, “it depends”. Obviously, dry leases that are thinly veiled attempts to conduct illegal air charter are problematic, but there are numerous situations where a dry lease is the appropriate answer. Insurance companies and loan officers have read enough articles warning about dry leases that there is a nearly instinctual reaction to deny even valid dry leases. However, today, let’s discuss some appropriate uses of dry leases.
Simply put, dry leases transfer possession of an aircraft without pilot services. These can be extremely useful documents for a wide variety of aircraft structuring situations.
Since many corporate aircraft are owned by single-purpose entities (usually LLCs), dry leases are critical to transfer possession of an aircraft to an entity that the FAA will allow to operate an aircraft. This could be to a valid Part 135 certificated air carrier, or for Part 91 operations either to an individual or a business entity with business other than conducting air transportation.[1] In fact, where an aircraft is owned by a sole purpose entity, to comply with Part 91, we would be concerned if there wasn’t a dry lease in place!
Similarly, aircraft that are owned in trust, for either tax, privacy, or citizenship requirements, will also require a dry lease, typically to the beneficiary of the trust, which enables that individual or business to either operate the aircraft themselves, or dry lease the aircraft on to other parties.
Finally, some dry leases to unrelated third parties may actually be acceptable to the FAA. Typically, leases where possession of the aircraft is genuinely transferred to a third party, and that third party maintains complete authority for the operation are acceptable. A lease where possession is exclusively transferred to an operator for a period of months, and where that operator independently locates pilots to operate the aircraft, and takes responsibility for maintenance, insurance, and storage, will likely not be objectionable to the FAA. Similarly, a dry lease (occasionally unwritten) is used to transfer possession of an aircraft to a pilot that rents an airplane from an FBO or flight school.
In conclusion, there are numerous circumstances where dry leases are not only acceptable to FAA regulators, but actually required to comply with the regulations. As always, we suggest that you seek advice from competent aviation counsel before setting up a dry lease.
The information in this article is intended to highlight potential issues with aircraft ownership and operations and is therefore general in nature. Please feel free to contact one of our experienced aviation attorneys directly to discuss your specific business/personal needs.
[1] This is due to an FAA restriction on sole-purpose entities operating aircraft. Known as the “flight department company trap” this restriction prevents anyone without an air carrier from operating an aircraft unless they are either an individual, or a business with other, valid business beyond owning or operating an airplane.