What you need to know about Aircraft Management Agreements

Business aircraft buyers face an important choice regarding the operation of their new aircraft: they can hire their own flight service and “manage” the aircraft themselves, or they can hire a management company to do it for them. A large corporation may not mind creating its own flight service, but an individual’s perspective when purchasing a business jet for the first time is likely to be, “Thank God I can I hire someone to take care of it for me.”

A good management company handles most aspects of owning and operating a business jet, including planning, refueling and flight operations; hiring, training and employment of crew; and hangar, insurance and aircraft maintenance. Of course, these services aren’t free, but a management company can still save you money by offering deep discounts on fuel, maintenance, and insurance. It can also provide side benefits, like finding space in its hangar for your plane in a crowded airport.

What a management company doesn’t usually do, at least when operating the aircraft for you, is take operational control of your jet. When you engage the company, the FAA considers you (or your operating entity) to have operational control of non-revenue flights; the management company just helps you with that. Ultimate liability, and corresponding liability, associated with flight operations generally rests with you, assuming the management company does not act negligently or recklessly or outside of its jurisdiction, although your use of such company gives to an injured party someone else to sue. (In case this responsibility is unpleasant for you, many management companies have a solution: “we lease the aircraft and we will add it to our Air Operator’s Certificate and take operational control.” Basically, you would charter your own airmail, and you might be charged for it, but usually at a significant discount to what third parties would pay.)

First steps

There are a lot of things to consider when deciding to keep a management company and choosing the right one, but let’s assume you’ve gone through the process and decided on the company you want to work with. This needs to be done well before your aircraft is received, so the first question to ask is: what will the management company do before there is an aircraft to manage and what will they charge for this initial work?

A “management” or “services” agreement specifies the duties and responsibilities of the management company. However, before sending a draft of this agreement for consideration, the management company is likely to provide a proposed letter of agreement covering various “start-up” issues, including the hiring of crew members, with “start-up costs”. Many management companies also charge a “compliance fee” to verify that the aircraft complies with FAA regulations and the management company’s own requirements, particularly if it is to be listed on the aircraft’s charter certificate. the society. If a used aircraft is purchased, the management company is often retained to oversee the pre-purchase inspection and assist with delivery, and in the case of a new aircraft, the company may oversee completion and perform an inspection of acceptance. The management company will often charge separate fees and travel expenses for these services.

Paying monthly management fees on top of these start-up costs when there is no aircraft to manage should be unnecessary; management fees should start when (or almost when) there is an aircraft to manage. The rate is subject to negotiation. For a heavy jet, monthly fees at larger management companies start around $10,000 to $12,000. The best way to see what is possible is to have your acquisition consultant solicit proposals from several companies; fees can vary a lot.

Terms of cancelation

Once the aircraft has been acquired and entered into service, the management contract is generally for a period of one year renewable (often automatically unless a party wishes), the management fee being subject to an increase based on the CPI each calendar year. Some management companies are reluctant to let the owner terminate the contract for any length of time, or perhaps only for the first year, which is understandable; they don’t want to spend a few months grooming customers with a plane and crew only to have them pull the plug and go it alone to save management costs.

Nevertheless, it is important to try to negotiate the right to cancel the agreement with 30 to 90 days’ notice, or immediately if, for example, the management company’s charter certificate is revoked or if a government agency takes significant action against the company. Of course, it should also be possible for one party to cancel the agreement if the other party defaults or goes bankrupt or if the aircraft is seriously damaged, destroyed or sold. In the event of termination, the agreement shall prevent the management company from holding a jet aircraft hostage and require it to return the aircraft’s logs and records, manuals and bulk equipment to the owner . It should also require the company to fly the plane home and not leave it parked on the tarmac in a distant town.

Management companies also have termination problems. Although the owner has the option of doing this himself, the management company usually employs the crew. The outgoing owner’s plan usually includes accompanying their flight crew, either to operate in-house or with another management company. Making this difficult helps deter the owner from leaving, and for crew members employed by the management company, at a minimum, the agreement will generally require the owner to pay accrued vacation and any compensation the employees are entitled to if the arrangement ends.

Key protections

Although the management company should be required to consult with the owner on certain matters, such as making improvements to the jet, they generally have the ball regarding the “management” of the aircraft. The agreement should protect the owner from unauthorized use of the aircraft by the company or the use of crew members to fly or work on other managed aircraft without the owner’s consent, but it should allow the management company to provide a replacement crew for the owner’s flights insofar as the owner’s crew is not available.

Since it’s usually the management company’s job to retain service providers to do everything from cleaning the plane to performing a ten-year inspection, they have the ability to mark up the fees to third parties. when passing on the costs to the owner. Some management companies are taking advantage of this opportunity. Instead, however, they should use their leverage to negotiate discounts from third-party vendors, and the agreement should oblige them to pass on all discounts, rebates, etc. to the owner. The owner should never pay more for third-party services than the management company itself.

As we have seen, accountability is a key issue. Management liability arrangements tend to rely heavily on the owner carrying adequate insurance, with the owner and management company accepting insurance proceeds to cover injury, death or property damage in framework of actions against each other. Each party may nevertheless acknowledge liability for damages due to its gross negligence and willful misconduct, while both parties may decline all liability for consequential damages, lost profits, etc.

The agreement should specify that the management company is responsible for FAA, DOT and, to the extent required, foreign regulatory compliance and filings for the aircraft, flights and crew. The owner, on the other hand, generally wants to approve all additions and improvements to the aircraft, and many agreements require the owner’s approval of all expenditures over a given amount (eg, $10,000). But the owner will be responsible for creating and replenishing a fund of money (an “operating expense fund”) with the management company (best held in a separate account) for the payment of incurred expenses.

Management agreements can seem complex, although they are not as complicated as managing the aircraft. However, don’t wait until the last minute to negotiate yours.

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