Shared Aircraft Ownership: The Liabilities & Risks

Having previously discussed ways to establish whether shared aircraft ownership is a suitable solution for you, we highlighted how shared aircraft ownership is an important structure, providing yet another step on the ladder between aircraft ad hoc charter, jet cards, fractional ownership, and whole aircraft ownership.

If you have a need to fly between 100 to 150 hours per year, for example, while it is difficult to justify whole aircraft ownership, shared ownership allows you to split the costs with another/other co-owner(s).

It may be that you’ve done your homework and concluded that shared aircraft ownership is the right way to go. You may even be discussing the idea with a potential co-owner. Now is the time to identify the possible problems that could arise from a shared ownership arrangement and consider how to protect yourself as far as possible.

Irrespective of how well you know your prospective co-owner, even in the case of a business associate the agreement should be entered into like any other business venture. That includes building remedies into the contract relating to any perceivable problem that could crop up, and agreeing on arbitration to help you navigate through the contract draft discussions to reach a consensus with the co-owner(s).

The idea is to protect yourself from liabilities, but also to help pave the way to a smooth transition from the initial aircraft purchase, through to placing it in operation.

There are several legal structures used for shared- ownership arrangements. Forming a Limited Liability Corporation (LLC) is one such structure, and LLCs are especially popular when aircraft expense is under one or more business entities. Nevertheless, LLCs can also be used for individuals if they prefer.

Clarifying the Ground Rules

When drawing up the agreement, involve your aviation lawyers in the process as early as possible to help guarantee that each share owner’s rights and responsibilities are clearly established. This helps avoid common misunderstandings and gray areas from emerging in the future.

Even before an aviation lawyer is hired, time should be given to discussing potential areas for ambiguity. Clarify the responsibilities between shared owner(s) relating to aircraft ownership and costs. For example:

• What should the cleaning procedures be after each flight?
• What are the acceptable standards for preventative maintenance before, during and after flights?
• Who pays for light damage to the aircraft (e.g., spillages that stain the interior)?
• Should the aircraft be enrolled on an engine maintenance program?
• Where will the aircraft be based?
• What will the pilots’ salaries/daily allowance be?
• What is the annual planned budget?
• How and when will aircraft upgrades be paid for?
• Who pays for supplemental lift if more than one co-owner needs the aircraft at the same time?
• What happens if a co-owner experiences a change in circumstances forcing the sale of the asset?
• What is the agreed exit strategy if a co-owner wishes to terminate their part of the agreement early?

While only representing a few of the scenarios/potential areas for ambiguity, the above list highlights there’s much to be discussed and agreed in writing before the co-owners enter into a formal agreement, or worse, buy an aircraft together.

It seems obvious to say, but it’s vital to only proceed with a shared ownership agreement if a co-owner is well aligned with your needs and motivations. If agreement over the finer, and even the more basic, points of shared ownership cannot be found, you should walk away and seek a more compatible co-owner(s).

Getting Started

There are five key areas to focus on when analyzing how good a fit a prospective flying partner will be. These are...

1) Aircraft Scheduling: More than half of the problems occurring in shared aircraft ownership stems from aircraft availability and scheduling conflicts. According to AOPA, and depending on your aircraft utilization, it may be necessary to create a formal system for scheduling the aircraft.

A cloud-based scheduling software that all parties can access may suffice. But a degree of flexibility from the shared owners will always be crucial when scheduling conflicts arise and must be discussed and define clearly in the agreement.

2) Fixed and Variable Costs: Co-owners with similar annual flight utilization may agree to split the costs 50/50. Other owners may prefer to pay costs based on monthly and individual utilization. Costs such as insurance should be split 50/50, regardless of utilization. Other fees, such as tie-down fees, will be more open to discussion.

Fuel, oil, and maintenance costs (where the aircraft is not enrolled on an hourly maintenance program) generally increase with aircraft usage. These could be split in proportion to the hours flown by each co-owner. Once again, having clear language regarding how these costs will be paid, and by whom, is the key to maintaining a win-win relationship with co-owners.

3) Timely Payments: Approximately a quarter of complains in shared ownership agreements result from slow payments from co-owners. The success of a shared aircraft ownership relationship depends significantly on the diligence of all parties involved, including meeting their agreed financial obligations.

Specific deadlines for payment should be set within the agreement, with penalties (including interest charges) for overdue payments.

4) Building Reserves: Planning in advance whether to set up a fund for items such as cabin refurbishments or avionics upgrades makes business, budgetary and financial sense.

Discuss with your co-owner(s) how much should be paid into that budget monthly. Will it be a 50/50 contribution from each co-owner? Will one co-owner pay more accruing towards an upgrade they need more than another co-owner does?

Language should be drafted into the contract if a new co-owner joins the partnership, or an old one leaves, that clearly stipulates what portion should be contributed to the fund.

5) Maintaining Airworthiness & Part 135 Ops: The aircraft will be operated under Federal Aviation Regulations (FARs), so all co-owners will need to contribute to maintaining the aircraft’s airworthiness certificate.

In the case of owners agreeing that Part 135 charter revenue will help defray some of the fixed cost of aircraft ownership, it is important to build related language into the agreement highlighting what the owners’ contributions (both financially and in terms of meeting Part 135 requirements and aircraft inspections) should be.

In Summary...

If you want a shared ownership relationship to prosper in the future, don’t be afraid to candidly discuss the points above. But be aware there will be plenty more to talk through and build into your tailored agreement, including the minimum agreement term (usually two to three years with penalties for early or sudden contract termination).

In addition, aircraft booking procedures and advanced booking notice, travel on peak days, guaranteed aircraft availability dates, pilot vacation, and where the aircraft is allowed to operate are all other critical matters to agree before entering more deeply into an agreement.

If you’ve prepared a compelling case for a shared ownership arrangement and have agreed on a robust contract that protects you as well as your flying partner(s), you will be in a strong position to enjoy your aircraft and the many benefits Business Aviation offers.

Next time, we will consider how to work two (or more) mission requirements together in one aircraft under a shared ownership arrangement. Stay tuned!

Read other articles in this series:

Shares Aircraft Ownership: Building the Business Case