Aircraft Use Policy – Who Gets to Fly on the Company Jet

Tony Kioussis (00:33):

Welcome to another Asset Insight podcast, covering the aircraft ownership life cycle. I am Tony Kioussis, president of Asset Insight and your host.

Tony Kioussis (00:43):

Between the increased number of first-time aircraft buyers and companies lifting travel restrictions, we thought an appropriate topic to analyze is, just who gets to fly on aircraft operated by a company? After reading an article authored by David Mayer and published on AIN this past January, we asked David, who is a partner at the law firm of Shackelford, Bowen, McKinley, and Norton, to join us on a podcast where we might further discuss the topic.

Tony Kioussis (01:14):

It’s been about a year since we recorded a podcast with you covering what first-time private aircraft buyers need to know, which was extremely well received by our listeners, by the way. Simply out of curiosity, what prompted you to focus on a company’s aircraft use policy?

David Mayer (01:32):

Well, first of all, Tony, thank you very much for inviting me to do another podcast. This topic really was born out of the health and safety issues associated with COVID. It also came from the need to retain talent as the great shift or the great resignation concepts began to circulate and be executed by people throughout the job market. So the notion that we knew needed to protect and still implement the services that people in corporations provide to their companies, put us in a position where we needed to move them still in personal encounters, other than on the airlines. And so with the COVID restrictions in place, moving them privately became an issue. And then the question is, you can’t move everyone on private aircraft. Of course, that depends on what types you have and the circumstances, but that there needs to be priority and some thought process going into who uses the aircraft and when.

David Mayer (02:42):

And finally, the fact of the matter is, as COVID unfolded and service among the airlines has diminished, particularly in smaller markets, there’s a simple need for people to reach locations where they can and need to do business.

Tony Kioussis (02:59):

Let’s talk about the fundamental purpose for having an aircraft use policy. Why should companies establish such a policy?

David Mayer (03:07):

What’s interesting, Tony, is that some companies don’t establish policies and rely on a single owner or owners to direct who uses the aircraft, or there are circumstances where the owner or owners exclusively use an aircraft. That’s not the circumstance I was envisioning in writing the article and the reason for policies. What you’re looking for is a framework that allows efficient travel by a broader group of employees or non-employees. So you may be looking at the need to move employees to designated markets or to stores over a single day or to various meetings. And those particular duties come with some priority for companies.

David Mayer (03:58):

So what the policy should do is fundamentally establish a framework for moving employees and non-employees, for example, a guest or a friend of an executive whom the company feels is very important. It also is born again out of the circumstances with COVID, where we zoomed a lot, or used other web programs to see people on screen, but not in person. And there simply is no way to replicate the value of personal engagement in business, in my view.

David Mayer (04:33):

The next reason is to protect health and safety and productivity, to the extent people would get on airlines during COVID, and even in times, thankfully, as COVID recedes, the productivity on airplanes and the opportunity to have discussion is fairly limited. Whereas, on private aircraft, in business, both the productivity and interaction can be really quite beneficial to the parties.

David Mayer (05:01):

And finally, the idea that one travels privately is designed to protect the privacy of the people who travel, their security, their health, and their families, so that, both from a personal point of view and from a privacy point of view, they can most effectively in their businesses.

Tony Kioussis (05:25):

Since a company may operate more than one aircraft, perhaps even a fractional share of an aircraft, not to mention that companies often charter aircraft as well, I should think the policy ideally needs to cover all of these scenarios.

David Mayer (05:43):

You’re exactly right on that, Tony. There is an opportunity to use various types of lift for different missions. Oftentimes, people think of travel policies as exclusively for CEOs going long distances or from going to one town to another. But in fact, many companies will have different types of aircraft or even partial interest in aircraft, in order to accomplish the appropriate missions. So you have two criteria, the best and highest use of an aircraft for a particular mission and the right aircraft for the party traveling. So for example, a CEO or a board member may more frequently use a larger cabin aircraft, but for short trips, use a smaller, say, a midsize aircraft to optimize the travel time and efficiency of a short trip. The policy, therefore, reaches every type of plane and you end up with something of a matrix in the planning of who flies which plane and for which missions. So to the question, you absolutely look at every asset, perhaps assets that you may need to acquire to accomplish those missions.

David Mayer (07:04):

And finally, the highest and best use of the talent in a company needs to be deployed. And business aviation is an excellent way to help them achieve their missions for the benefit of their companies.

Tony Kioussis (07:17):

Who normally decides who may use a company’s aircraft and under what conditions is such use permitted?

David Mayer (07:26):

As I mentioned earlier, Tony, if you have a model where an owner has a large cabin aircraft, for example, it’s likely that the owner will decide who flies on the plane, or there will be times when the owner will, if legally applicable, will let other people use the aircraft with the owner’s permission. That’s not really so much the focus of these policies. Rather, you look at different companies’ board of directors, a committee of the board of directors, an administrative organization of the board will make the decisions, fundamentally, about the framework of the policy itself. From there, the implementation, the details, if you will, will shift to other people in the company who are trusted to make reasonable decisions and accomplish the missions of the company. Generally, that is going to be a senior officer and most frequently, what I’ve seen, will be the Chief Financial Officer or general counsel. They interpret, implement and approve trips consistent with the framework of the policy itself.

Tony Kioussis (08:41):

Let’s talk about a very current and somewhat related topic, the Russia sanctions imposed by the US and others, how do you ensure an aircraft you are chartering or an individual chartering your aircraft is not an entity that is sanctioned?

David Mayer (09:02):

Tony, this is probably one of the most complex areas in development in real-time that I can imagine in our business right now. The sanctions are complicated, not only in the US, but in the UK, in the EU and really, around the world among countries that are focused on the Russia war and the plight of the country of Ukraine. It’s a daily topic, really. We’re trying to figure out now whether transactions are possible and you may have seen in my latest blog, I talked about this in some detail, the transactions to transfer ownership of Russian aircraft, where there’s Russian content, if you will, may be feasible. And that was one of the premises of the blog.

David Mayer (09:55):

But in fact, as companies take on personal responsibility for servicing any aircraft that has anything to do with Russia, whether or not it’s a sanctioned person that’s involved, what we find is that parts are not being provided, insurance may be terminated, the flight crews are not appropriate, OEMs are pulling back on what support they will provide, and MROs refuse to work on the planes, making it just that much harder to determine whether a plane can even be considered for purchase. And if it is, whether it can make its way through a pre-buy with the approval or assistance of all of these people. So this is not just a matter of government sanctions, this is a self-implementing set of rules to minimize the benefit of Russian content aircraft. And when I use the term Russian content, I mean that in the broad sense that there are people who are specifically sanctioned, that is, they have limitations on any transaction or movement such as the so-called Oligarchs. But also other Russians who may not be sanctioned, but yet create concern for various people.

David Mayer (11:12):

And in our business and generally, what’s happening therefore, is that the level of diligence in determining whether these transactions can be accomplished, is broader than I have ever seen, probably more comprehensive than I’ve generally proposed and frankly, more expensive to try to accomplish.

David Mayer (11:32):

There is one other aspect of the sanctions quite apart from the details, and that is that companies need to consider the reputation risk associated with assisting in any purchase. As I learned from my years in big law, you don’t want to have a front page of the Washington Post or the New York Times telling people that X company acquired and paid a Russian person for the acquisition of a private aircraft. It just doesn’t sound good in the current environment. And it probably is not good for most people in this current state of affairs. So the sanctions should be embedded in policies and understood and implemented by those who are in charge of the policies, to avoid really, any questionable contact or use of a Russian content aircraft.

Tony Kioussis (12:29):

I suspect that a lot of this is changing so quickly, David, that some people are going to learn through the school of hard knocks, not because they didn’t try to do it right, but because they ran afoul of the regs unintentionally. It’s going to be interesting to see how this plays out going forward.

David Mayer (12:45):

Well, it’s playing out in real-time now, Tony. It’s a discussion that I’m having almost every day about whether transactions can be accomplished and taking a look at how we might do it. I haven’t foreclosed the idea of accomplishing one of these transactions, but they’re going to be more moving parts, if you will, in accomplishing them than in the past, even when there are complicated structures involved, such as our noncitizen trusts or the multi-company level ways that owners try to essentially hide themselves. If that can be taken apart, understood, reassembled properly and we consult with the authorities, such as the folks in the federal government, with those consultations, I think will learn our way through, but this is quite complicated.

Tony Kioussis (13:40):

Yeah. And I suspect the people that could get themselves into trouble are the first-time buyers. Unless they’re getting some decent advice and some are not, I can see issues arising with a first-time buyer.

David Mayer (13:55):

The idea here that is absolutely at the core of doing any of these transactions, whether it’s a first-time buyer or a repeat buyer, is to get competent advice from people who understand or can learn what the parameters of the sanctions are, as well as all the other related regulations that we deal with day-to-day in these transactions. So yes, first-time buyers may not be aware of how the sanctions could be levied on and against them. The potential penalties can be criminal and civil. So it’s absolutely essential to have a broadly knowledgeable council involved from inception.

Tony Kioussis (14:42):

No doubt this is going to get interesting. Let’s get into the topic of tax implications associated with use of the company aircraft for personal or even business mixed with personal travel. I assume a company’s policy should cover this whole issue in detail.

David Mayer (15:00):

Yes, you’re absolutely right. There’s not a clean bifurcation between personal use and company use. There are shades of gray involved there. And then within a single trip, there can be legs of the trip that are personal and where legs of the trip are business, or there can be some mixture which a company should address and anticipate because it will relate to some of the tax treatment for the employee, whether it’s a senior executive or someone who might be a middle-level executive of a company. So the tax aspects are absolutely at the core. What’s interesting is, and I said this in the article you referred to, that brevity might be a good idea when it comes to tax because of its complexity, but some companies do like to take on the detail and to layout categories of use and how they’ll be treated. And it goes something like this, where the company is traveling for business and that’s it. Then there isn’t really a personal use element.

David Mayer (16:12):

So if, Tony, you’re traveling for your company, you’re going on business for purposes of inspecting a fleet of aircraft, you’re going to do the inspection and you’re going to then return home on that aircraft, you have a different situation where that is probably not a subject of concern about personal use as if you went to inspect that same fleet of aircraft in San Francisco and decided to stay a couple days and then fly down to Los Angeles to see family and back home. Each of those legs creates different circumstances for tax for the employee, as well as for the company. Some companies do like to take on these issues with brevity and others create fairly detailed categories to explain what the tax implications are, which really is helpful in implementing the plans if that works for you.

David Mayer (17:09):

Fundamentally, the tax implications start with the section 162 of the code, “The travel must be ordinary and necessary incurred in the trade of business.” That’s the starting place. And then personal use policies will come from that. Sometimes personal use and policies merge where there’s security concerns for executive, and that creates another layer of complexity. But this, like any policy, is highly individualized to the company and what level of detail makes sense for them?

Tony Kioussis (17:46):

How do the Federal Aviation Regulations come into this? What does the policy need to consider in this regard?

David Mayer (17:54):

To put this in perspective, I think we look at the FARs as being the foundation for almost everything we build in transactions and how we structure transactions. And so, the policy is a few stories up from this base. The FARs will establish how the plane will be used by the executive, whether the plane is leased, whether there are the notion of timeshares where a company under 91.501C of the Federal Aviation Regulations can timeshare the aircraft. None of the structures will work or be optimized or even be structured without reference to the FARs. So it is a starting point. Fundamentally, the FARs will dictate how flights are flown privately under part 91, which is subject to fewer regulations than its brother, which is part 135, and that is the transportation for hire or compensation. Either of those areas can be used and implemented. Each one is structured fundamentally with the FARs and to just harken back to tax, tax and the FARs become a juggling act to make all of these pieces work together.

Tony Kioussis (19:20):

If the aircraft operator is a public company, are there any disclosure requirements?

David Mayer (19:25):

Yes. With all public companies who are, quote-unquote, registrants, there are disclosure requirements to inform shareholders and the public of important and required disposable items of their businesses. In the case of airplanes, the disclosure about them is expected and is required. The rules around the disclosure are complicated and you might think of them just very generally in three categories. For executives, directors, executive officers, as it’s called, there’s a category and it seems like an endless number of charts about, quote-unquote, other compensation. This is a category where the SCC rules are quite complicated. It’s essential to have SCC trained council involved to determine how to complete that particular chart, there are many, for other compensation by interpreting the rules related to SCC types of disclosures.

David Mayer (20:35):

The second one, which seems to be particularly concerning for a lot of companies is related party transactions. So for example, if an executive owned an aircraft and leased it to the public company, the compensation paid to the executives by way of rent or other compensation, would have to be disclosed after a very, very small amount of compensation has been paid or is payable. So those are related party transactions. And again, these are general categories, certainly not everything by any means, on disclosures.

David Mayer (21:13):

And finally, there are perquisites, the fancy word for perks that executives receive at companies, which are absolutely normal and appropriate for them to use the aircraft for personal use or for other types of use that require some recording of compensation to them or where they would negotiate an employment contract, a certain amount of use of aircraft during their time of actively working with the company and even in retirement. So. All of these particular areas are extremely important along with others. And there is a fair amount of sensitivity about disclosure, which tends to create discipline on the use and cost of aircraft travel.

Tony Kioussis (22:09):

Who is responsible for administering the company’s aircraft use policy?

David Mayer (22:15):

As I mentioned a little bit earlier, this is probably a three-level process. Most of the time I see boards of directors become active in at least the major parts of the fleet. Then giving authority for certain other parts of the company to implement or to interpret the policies. Now, the board may give overall approval and then ask a compensation or other committee to handle the more granular parts of the policy itself. But all ultimately, the implementation of the policy, for example, who will fly, when they’ll fly, who has priority, what parts will be considered personal use, how the income associated with personal use will be imputed to an employee and what the fleet use will look like in the future, may read down to the general council, the CFO, and other responsible people.

David Mayer (23:19):

And it’s very important to realize that the flight department is absolutely critical in the administration and implementation of the policy because they understand the aircraft, they understand their availability, they understand how particular executives like to travel, what the cost benefit analysis of the aircraft. So you can really look at the flight department or their senior personnel and even pilots on the selective basis who are trusted by the company, to directly participate in this decision process, or at least guide the use of various aircraft.

Tony Kioussis (23:58):

Thanks for some great guidance, David. I should think that when it comes to a company devising or perhaps revising its aircraft use policy, this is an area where your expertise allows you to help.

David Mayer (24:13):

It does. I really like this area because it incorporates so much of what I do every day with purchase and sale and financing, regulatory analysis, risk management, which is huge, with the company policy and other aspects of what we do. And it wraps it up in a sensible way for the company’s everyday use of the business aircraft. So yes, it’s an area I like because of that. It’s an area that helps companies be quite constructive and effective in how they use a business aircraft. And at the same time, it’s an area where a little oversight from outside council or internal council, if capable in the aviation area, is helpful to stay, if you will, on course on how these aircraft are used.

David Mayer (25:04):

So this is pretty much a daily issue, even if the policy itself is not in a drafting process. And I enjoy working on those and all the parts that underpin it.

Tony Kioussis (25:16):

This has been another Asset Insight podcast covering the aircraft ownership life cycle. Please visit our ever-growing podcast library at assetinsightpodcast.com and select from any number of topics discussed with business aviation industry experts. This is Tony Kioussis and as always, thank you for listening.