Helsell Fetterman

Navigating the Skies: Understanding Dry Lease Agreements in Aviation

By Sebastian Toth / February 29, 2024

In the dynamic world of aviation, businesses often seek flexible and cost-effective solutions to meet their aircraft needs. One such arrangement that has gained prominence is the dry lease agreement. This contractual arrangement offers a unique set of benefits and challenges for both lessors and lessees, shaping the way companies approach fleet management. In this blog post, we will explore the ins and outs of dry lease agreements, shedding light on the key aspects that make them a popular choice in the aviation industry.

Understanding Dry Lease Agreements:

A dry lease agreement is a contractual arrangement in which an aircraft lessor provides an aircraft to a lessee without crew, maintenance, or support services. Unlike a wet lease, where the lessor provides a fully operational aircraft with crew and services, a dry lease puts the lessee in charge of managing and operating the aircraft. A dry lease is akin to a vehicle rental agreement whereby an individual may pay the registered owner of the aircraft to operate the aircraft. Lessees can be individuals or business entities that maintain operational control but delegate or rely upon a qualified flight crew to perform the functions of the aircraft (e.g., operation, maintenance, etc.).

Key Features of Dry Lease Agreements:

1. Aircraft Ownership:

• • • • Unlike other lease agreements, a dry lease does not transfer ownership of the aircraft to the lessees. The lessor retains ownership throughout the lease term. The lessees, on the other hand, maintain operational control during the lease term.

      2. Operational Control Considerations:

      • • • • To be a proper dry lease, operational control of the aircraft must pass to one or more lessee. The lessor, therefore, cannot provide crew under a dry lease. The lease agreement should specify that the lessee(s) will provide the crew and there should be no “identicality of interest” linking the lessor to the flight crew.
            • The lessee(s) are responsible for providing crew, maintenance, insurance, and other operational aspects.
            • The parties to the lease should take care to ensure the independence of the flight crew. One way the parties can increase the independence of the flight crew is for the lessor and lessee(s) to use different flight crews. The takeaway is that the lessee(s) are placed in the best position by selecting their own flight crew, independent of the lessor.
            • The FAA considers several extracontractual factors when determining operational control and the classification of a dry lease, including who owns or leases the aircraft, who maintains liability for the flight operation, who selects the pilots, who conducts the maintenance, and who has responsibility for dispatching and following the aircraft.

            3. Maintenance Considerations:

            • • • • Lessee(s) who maintain operational control are responsible for ensuring the airworthiness of the aircraft and paying the costs of maintenance.
                  • Primary authority to conduct maintenance on an aircraft can be an individual or entity other than the lessee(s), but the lessee(s) are still responsible for ensuring the maintenance of the aircraft, therefore, the lessee should ensure detailed records are kept.
                  • The lessee(s) should review maintenance records, perform pre/post flight inspections, document discrepancies, and report to the maintenance provider.
                  • The FAA is less likely to recognize a dry lease if the lessee(s) are not responsible for confirming airworthiness or not responsible for the costs of maintenance.

                  4. Insurance Considerations:

                  • • • • Aircraft and operators usually fall under a singular insurance policy. Each lessee must not obtain their own policy but must be added to the aircraft insurance policy. The insurer should be made aware of the lessee(s) use of the aircraft.
                        • If the lessor pays for the policy directly, the agreement should reflect that lessee(s) will pay their portion through rent.
                        • The insurance policy should indicate that each lessee assumes operational control during their flights.

                        Benefits of Dry Lease Agreements:

                        1. Cost Control:

                        • • • • By taking control of operations, lessees can manage costs more effectively. They can choose maintenance providers, negotiate crew salaries, and select insurance policies, leading to potential cost savings.

                              2. Operational Control:

                              • • • • Lessees have the autonomy to operate the aircraft according to their schedules and requirements, making it a suitable option for businesses with specific operational needs.

                                    Challenges and Considerations:

                                    1. Operational Complexity:

                                    • • • • Managing crew, maintenance, and other operational aspects can be complex and challenging for lessees, especially those without significant experience in aviation.

                                          2. Regulatory Compliance:

                                          • • • • Lessees must ensure compliance with aviation regulations and safety standards, adding an additional layer of responsibility and potential regulatory challenges.

                                                3. Maintenance Costs:

                                                • • • • While lessees have control over maintenance, they also bear the associated costs. Proper budgeting and planning are crucial to avoiding unexpected financial burdens.

                                                      Conclusion:

                                                      Dry lease agreements offer a flexible and customizable solution for businesses seeking to meet their aviation needs. With control over operations and branding, lessees can tailor the aircraft to fit their specific requirements. However, the increased responsibility also comes with challenges, requiring careful consideration and strategic planning. As the aviation industry continues to evolve, dry lease agreements will likely remain a key element in the toolkit of businesses navigating the skies.

                                                      About the Authors

                                                      

                                                      Sebastian Toth

                                                      Sebastian’s practice areas include business and personal transactions along with complex and general litigation.