Business aviation seems to be hitting its economic stride. In the next two years alone, manufacturers expect to deliver almost 2,000 new corporate jets. Yet, with a continuous evolution in regulatory and international law, the business of putting corporate jets in the air and financing them faces new challenges.

On Friday, October 21, 2005, Patton Boggs LLP presented a briefing called, The New Era of Business Aviation II at its Washington, DC office. The firm’s unique Business Aviation Team engaged the audience in succinct, insightful, and interactive discussions of the hottest issues in business aviation. This briefing, the second in a series of such events for the firm, attracted an interesting audience and presenters. This group included two former chief counsels of the Federal Aviation Administration (FAA), a high-ranking representative of the National Business Aviation Association (NBAA) and significant representation of majors players in business aviation manufacturing, finance/leasing, fractional shares, brokering, flight departments and banking.

Rodney E. Slater, former Secretary of Transportation in the Clinton Administration, opened this event for the Patton Boggs Aviation Team. Secretary Slater spoke with eloquence and candor. He suggested to the attendees that the most important challenge in business aviation is choice, specifically, the choice to fly, free of inappropriate regulation, public distrust and limiting political actions. Secretary Slater indicated that a misperception of privilege accompanied the use of corporate jets. He noted that such misperception does not fully consider the value of business jet travel as a business tool. He pointed out the differences between private jet travel and the troubled commercial airline business in the United States. He also observed that, although the two industries have experienced some tension between them, they also interact in a positive way to provide needed transportation to corporate America. He addressed such important questions as: How does business aviation fit into transportation into the next decade? Will political expediency adversely affect the growth in business aviation? Throughout his remarks, Secretary Slater introduced the other topics and speakers of the briefing. In his upbeat and thoughtful remarks, Secretary Slater, who interacts with government officials and provides strategic advice for the Aviation Team, noted that important opportunities exist in the next several years. He reminded the participants that business aviation is becoming increasingly challenging and will require the industry to build on its expertise to enjoy the benefits of the evolving general aviation market.

David G. Mayer, Author of Business Leasing For Dummies, Founder of Business Leasing News and Aviation Briefing Chairman, continued the program with a description of the fundamentals of the forthcoming Cape Town Convention and the related Aircraft Protocol (Cape Town Treaty). He discussed the case for, and the concerns of business aviation about, the Cape Town Treaty, while demonstrating the value of application of its provisions. Toward the end of the briefing, Mr. Mayer presented a workshop on the Cape Town Treaty. Because of the significant concern about how prospective international interests will work in practice, Mr. Mayer spent a session showing how to use prospective international interests correctly and to mitigate the risks of abuse of making early registration on interests in an aircraft object. He continued with a session on structuring proposals and drafting key provisions of financing and leasing documents under the Cape Town Treaty, stressing the "real deal" approach and benefits of the Cape Town Treaty.

The topics and real life approach to the Cape Town Treaty discussed in the briefing by Mr. Mayer will apply to most aircraft and helicopter transactions in the United States and at least seven other countries that have ratified the Cape Town Treaty (subject to aircraft size requirements and other rules).

Stephen McHale, former Deputy Administrator of the U.S. Transportation Security Administration (TSA), spoke on aviation security. Using his sense of humor, he discussed numerous topics regarding the U.S. security establishment, including the apprehension that exists about general aviation. He illustrated the point by discussing the reopening of access to selective aircraft at Reagan International Airport under burdensome security conditions. As one of the drafters of the USA Patriot Act, McHale also talked about money laundering risks in business aviation transactions. He responded to numerous questions about managing security issues in flight departments and structuring business aviation transactions with security issues in mind.

Two other Patton Boggs lawyers joined with the firm’s special guest, Barry Justice, a dean of the general aviation industry and Chairman and CEO of Leading Edge Aviation Solutions, for a panel discussion about personal use of corporate aircraft. Cass Weiland, a senior securities litigation partner in the Dallas Office of Patton Boggs, spoke on the regulatory risks that companies face from the Securities and Exchange Commission (SEC) for personal use and the increasing focus on proper disclosure by corporations for [the personal] use of corporate aircraft. George Schutzer, a senior tax partner and head of the Tax Practice Group of Patton Boggs, provided a very current review and analysis of the tax rules and principles governing the loss of business deductions arising out of personal use of corporate aircraft. He provided real examples of how to understand the complex rules that exist and made predictions about the effort the IRS will exert in issuing regulations governing this topic. Barry Justice demonstrated through case studies that the SEC and IRS efforts have not prevented corporations from acquiring corporate aircraft. However, he noted actual examples where companies have shifted from previous aircraft orders and transactions to other types of transactions, such as fractional shares, and smaller aircraft, under the new rules. The audience asked questions about what is next in this area, and understood that this subject remains volatile and potentially inhibiting on the growth of general aviation.

The briefing covered numerous other topics and underscored the importance of having increasingly experienced experts to help complete business aviation transactions. As the title of the briefing indicated, the participants clearly could see, by the end of the day, that they had moved into a new era of business aviation.

The devastation caused by Hurricane Katrina may have a bright side for federal contractors. The federal government will grant contracts for the repair and rebuilding of communities pounded by Hurricanes Katrina and Rita and, most recently, Hurricane Wilma. Contractors who receive federal contracts for those purposes need more help than ever to meet the schedules for rebuilding the affected areas.

A little known provision in the Federal Acquisition Regulation (FAR) may assist small business and large contractors to fulfill the important work of rebuilding. FAR Subpart 9.6 provides for teaming arrangements and subcontracting relationships to satisfy the requirements of federal contracts.

Contractor team arrangements appear in several forms. In the case of the Hurricane relief contracts, one large "prime contractor" may bid for a federal contract and then subcontract the work to various specialized companies that team with the prime contractor to meet the contract terms. Other contractors may, by agreement, combine skills, personnel, business facilities, and financial capabilities to bid for and perform a federal contract. Others may create a partnership between two complementary capabilities, such as engineering and construction. One of the most active places to team is in IT sales, where one team member is the seller and the other is a service provider or lessor of the cash flow stream derived from a government lease. See  Teaming to Win Government IT Sales, by Richard White, federalmarket.com (undated). A subcontractor arrangement should contain common elements of subcontracts including:

• Define project scope, performance time and completion, and how additions/deletions will occur;

• State whether the subcontractor can participate in competitors’ bids or perform under multiple contracts in the same affected geographic area (i.e., settle on exclusivity or non-competition);

• Establish any other restrictions on activities, such as limitations on using the prime contractor’s intellectual property or hiring the prime contractor’s employees;

• Confirm that payments will be made to the subcontractor by the prime contractor (the federal government only recognizes the prime contractor but may interface with a subcontractor);

• Incorporate all federal contract terms that are required to "flow down" to the subcontractor;

• Ensure that federal government decisions to change or terminate work requirements apply to the subcontractor;

• Determine whether the subcontractor can have contact with the federal government; and

• Create a dispute settlement mechanism both for performance problems by either party and to "sponsor" subcontractor claims to the federal government.

See Teaming for Large Federal Contracts, by Richard White, federalmarket.com (undated) (which includes sources to find teaming opportunities).

Not to be left out of the fray, lessors can also engage in this process. For example, when one of the prime contractors wins a federal contract, a business model has developed in which the contractor leases equipment it needs to perform its work. The prime contractor passes along some of the unique federal risks to the equipment lessor even though the lessor enters the lease with a private contractor. In structuring these transactions, the lessor is not entering into a contractor team arrangement, but is supporting the prime contractor with private funding.

The government will accept contractor team arrangements either before the parties make an offer to the government or after contract award. The essential element of acceptance is full identification and disclosure of the arrangement and the company relationships in an offer, or, for arrangements entered into after submission of an offer, before the arrangement becomes effective.

Teaming provides several benefits for the contractors, especially after the tremendous losses from the Hurricanes. Teaming (1) enables smaller businesses to participate in and profit from large projects; (2) provides new jobs to complete the work; (3) assists the prime contractor in delivering specialized labor, materials, or services; (4) develops the experience of new subcontractors to later engage in federal projects as the prime contractor; and (5) distributes the billions of dollars of federal spending to locations in need of economic development.

Despite their tragic impact, the Hurricanes of 2005 will provide billions of dollars in contracting opportunities for those who use federal team arrangements. Lessors can also benefit by leasing equipment and other property to contractors and subcontractors. These opportunities for companies to perform relief efforts will generate substantial revenue and initiate the important work of renewing the infrastructure of the region.

Thanks to Michael Guiffre, a member of Patton Boggs Federal Finance & Leasing Team, for editing this article.

Serious accidents that attract national media attention also tend to draw reactions from the U.S. Government and its regulators. Following the crash of a Challenger 600 aircraft at Teterboro Airport on February 2, 2005, the Federal Aviation Administration (FAA) has clamped down on certain business arrangements between charter companies and corporate jet owners. See After Teterboro Crash, FAA Increases Scrutiny of Aircraft Charter Arrangements, Business Leasing News (Oct. 2005).

Reacting to the conduct and accident in New Jersey, the Department of Transportation also entered into a Consent Order with BlueStarJets, LLC, the air charter broker that arranged for the transportation of one of the passengers on the Challenger that crashed in Teterboro. See BlueStarJets, LLC, Violations of 49 U.S.C. 41101 and 41712 and 14 CFR Part 399.80, Order 2005-10-24, Docket OST 2005-20077 (Oct. 24, 2005).

On October 24, 2005, the FAA published a proposed policy document entitled Wet Lease Policy Guidance. See 70 Fed. Reg. 61684 (Oct. 25, 2005).  While issued as a proposal, the Guidance reflects the FAA’s longstanding concern about arrangements in which an aircraft owner or lessee provides the aircraft to an air taxi operator certificated under Part 135 of the Federal Aviation Regulations to operate the aircraft to generate revenue when the owner/lessee is not using the aircraft. The FAA confirmed that it is not concerned if the aircraft owner/lessee enters into a dry lease with the air taxi operator and plays no further role in the air taxi’s operation of the aircraft. By contrast, the Guidance reiterates the FAA’s concern if the aircraft owner/lessee provides one or more of the pilots to the air taxi operator under an agreement in which the air taxi operator is obligated to use the owner/lessee’s crew for its charter operations. The Guidance finds that such arrangements may constitute an unlawful wet lease, under 14 C.F.R. 119.53(b), where the owner/lessee retains operational control of the charter operations without holding an FAA certificate. It cites the FAA’s order suspending the air carrier certificate of Darby Aviation d/b/a AlphaJet, Inc., and FAA Notice 8400.83, both highlighted in last month’s BLN article.

In publishing the Guidance, the FAA stated that it believes

it inappropriate for an aircraft owner or other non-certificated entity to determine who will be the pilots assigned to a part 135 flight. Thus, the carrier may not enter into any contract by which it agrees directly or indirectly to utilize only the aircraft owner’s or lessor’s pilots when conducting part 135 flights. [The FAA] does not intend to prohibit air carriers from using a pilot in part 135 operations simply because that pilot also is employed by the owner of the aircraft. A key question in such commercial arrangements is whether the carrier is obligated directly or indirectly to use the aircraft owner’s crew.

The Guidance provides that a written acknowledgment that the pilots are the air carrier’s agents and under complete control of the air carrier will help reduce any confusion as to whom has operational control of the flight. Yet the discussion in the Guidance of various factual situations suggests that an acknowledgment may not be sufficient.

The FAA believes that an air carrier does not have operational control if a person other than the air carrier can (1) determine who the pilots of the aircraft will be, (2) exercise control over those pilots, or (3) effectively veto the carrier’s proposed pilot assignments, where those pilots are otherwise qualified, certificated, and trained to conduct carrier flights.

The FAA has fired a shot across the bow of the general aviation industry by issuing this proposed Guidance.

The FAA has significantly increased its willingness to reign in the use of corporate aircraft by owners and lessors that violate the fundamental tenants of safe aviation. For those who operate aircraft under charter, the FAA has served a reminder that safety trumps business arrangements, however long-standing and widespread.

In the DOT Consent Order entered into with BlueStarJets, LLC, DOT determined that BlueStar held itself out as a common carrier without having received authority from DOT as a direct or indirect air carrier, and misrepresented to its customers the quality of air service and safety record of companies with which it arranged charter service. DOT explained that air charter brokers that do not have DOT authority may not, as principals, enter into contracts with direct air carriers for air transportation and then re-sell that transportation pursuant to separate agreements with charter customers. Whether charter brokers act ultimately as agents of direct air carriers, agents of charter customers, or as "ticket agents," they may not at any time create the false impression that they are direct air carriers. BlueStar’s website referred to "our fleet" and "BlueStarJets’ aircraft" and provided business cards to direct air carriers that read "BlueStarJets –Any Jet—Any Time—Any Place" and that identified the bearer as a member of "BlueStar’s ‘flight crew.’"

Misrepresentations as to the quality of the air transportation or the safety record or certification of the direct air carriers violate DOT policies in 14 CFR 399.80 and 49 U.S.C. 41712. DOT found also that BlueStar "failed to exercise due diligence" in contracting for charter air service on behalf of its customers on numerous occasions with Platinum Jet Management, Inc. (Platinum), a company that had no authority to operate as an air carrier.

Without admitting any violation, BlueStar agreed to cease and desist from holding out as an air carrier and from engaging in any unfair or deceptive business practice. DOT assessed a civil penalty of $100,000, half of which will be forgiven if BlueStar observes the terms of the Consent Order for a period of one year without violation.

Thanks to Greg Walden, a former Chief Counsel of the FAA and a member of the Patton Boggs Aviation Team, for contributing this article.

A "surety" refers to one or more parties who enter a contractual arrangement to accept liability for the performance or payment of an obligation by another party. A guarantor, for example, is a surety because that party agrees to assume liability for a borrower or lessee that fails to pay debt service or rents or otherwise perform its obligations. A surety may also be referred to as a "secondary obligor." The obligation supported by a surety may be called the principal obligation. You can remember that term because the principal person or entity incurs the original obligation. A party that pledges collateral or co-signs a note is also a type of surety. A note, guaranty or pledge agreement may be a suretyship instrument.

One of the most important aspects of suretyship to know in lending and leasing relates to the suretyship defenses. A party benefited by a surety’s support must avoid taking actions that could discharge of the surety (that is, given the surety a legal out from a deal). Changes in a transaction may let a surety terminate its liability typically for the period after the change occurs. These changes include (but are not limited to):

• releasing or discharging the primary obligor, such as terminating the lessee’s obligations under a lease, presenting the guarantor with liability before debtor or its assets respond (which may be necessary in a guaranty of collection where the creditor pursues collection first against debtor before pursuing the surety); or

• impairing the collateral rights of the creditor, which could occur by allowing UCC perfection to lapse, subjecting the guarantor to greater or more immediate potential liability for lack of collateral rights originally anticipated by the creditor; or

• modifying obligations in the main deal, such as giving more time for repayment by the debtor or changing payment amounts, in each case leaving the guarantor exposed to liability for a longer period and/or in potentially greater amounts than originally agreed; or

• failing to enforce rights before the expiration of the applicable statute of limitations.

In United Airlines, Inc. v. HSBC Bank USA, N.A., Case Nos. 04-4209, 04-4315 & 04-4321 (7th Cir. 2005) the appellate court, on July 26, 2005, reversed the lower court finding that a "true lease" existed. It reversed because, in substance, the transaction created a secured transaction.

BACKGROUND: United Airlines, Inc. (United) leased a maintenance base from an airport. United enter into a sublease and used the base lease as collateral to obtain a loan in the form of a payment in advance for a stream of sublease rental payments.

ISSUE: Did United enter a lease in the form of the sublease?

OUTCOME/DECISION: No. Even though the document United signed was labeled a lease, the court decided that United entered into a secured transaction only (not a lease). United did not acquire a right of use of the base under the sublease because it already had the rights under a base lease from the airport. The advance constituted a secured transaction, secured by the sublease, and not a true lease of real property in the form of an airport lease.

LAW OF CASE: The characteristics of the transaction fit the mold of a secured loan rather than a lease, including the factors (on page 14) that: (1) the creditors determined "rent" based on a money advance by the creditors in respect of the stream of sublease payments; (2) the property reverted to United at the end of the lease in 2013 without additional consideration; (3) the structure included a balloon payment obligation similar to a loan deal (but unlike a lease); and (4) United had a prepayment right by which it could immediately terminate the sublease transaction.

Patton Boggs LLP is a law firm of more than 400 lawyers located in five offices in the United States and internationally in Doha, Qatar. The firm has extensive capabilities in four major practice areas: Business Transactions, Intellectual Property, Public Policy and Litigation. I am a member of the Business Transactions Group. This group includes over 100 lawyers with a broad array of skills in equipment leasing and finance, corporate finance, secured transactions, syndications, wind power and other project finance, oil and gas transactions, mezzanine financing, hedge fund work and related creditors rights/bankruptcy, real estate and technology law. We regularly work in cost-effective teams to meet our clients' needs.

Our leasing and equipment finance work entails a full range of transactions. We help our clients buy, sell, finance and lease real and personal property, including business and commercial aircraft, energy assets, facilities, vehicles, production equipment, technology hardware and software and health care equipment. We have teams specifically for aviation, infrastructure/power, health care, federal leasing/finance/marketing, municipal leasing/finance and more.

We work with our clients from the "front-end" to the "back-end" of a variety of transactions. For example, we can assist in the development, construction and financing of infrastructure and power projects, structure and close securitizations, syndications and asset sales, and complete large asset-based company financings. We also restructure troubled credits, appear in court on complex bankruptcies, and act for our clients in such routine matters as repossessions, lift stay actions, true lease contests, workouts and forbearance arrangements. We provide extensive litigation resources with a record of proven success.

We do not live in a simple world, and we often face challenges that defy simplicity. But simplicity sells, and significant companies know it, practice it, and inspire it.

Can you think of a business with more technical complexity than Google with all the features, functionality and power that its search engine offers? Google’s search engine solves equations with 500 million variables to rank eight billion web pages by importance in fractions of a second. Have you paused to look at Google’s home page? It’s simple, uncluttered, effective and attractive. Marissa Mayer, the director of consumer web products at Google (and no relation to me), guards the gate on simplicity. As she said recently, "I have to say no to a lot of people." See: the beauty of simplicity, by Linda Tischer, Fast Company, (Nov. 2005), at 53, 54.

Google is not alone in the drive for simplicity. Royal Philips Electronics transformed itself from a "slow-footed behemoth" to a dynamic contender in the global marketplace. It found that consumers felt overwhelmed by the complexity of its technology. Philips began a "Sense and Simplicity" campaign to take technologically complex products and make them user-friendly. Sales rose 35 percent in the first half of 2005. Intuit found out the hard way that it had to make its accounting program called "Simple Start" easy to use. The first product flopped, but taking simplicity seriously, Intuit worked hard to develop and market a far easier version of Simple Start, even though it still packed the product with sophisticated code developed over the pasty fifteen years. It sold 100,000 units in the first year on the market.

Ever since I wrote my book, Business Leasing For Dummies, I realized (thanks to the "For Dummies" guys) that even the most complex concepts can be presented simply. Almost no one in business wants to be drowned in detail. We work hard to keep BLN simple for you. That does not mean we take on simple topics. We don’t. It means we accept the challenge that complex topics must be presented simply, in a useful and understandable manner.

By understanding even the most complex challenges and subjects thoroughly, you can turn them into useful elements of good decision-making. You can then execute plans and strategies based on sound decisions, and with a bit of luck, you will enjoy some success in a manner illustrated by Google, Philips and Intuit. As Milton Glaser, the eminent designer, said: "Less isn’t more; just enough is more." Fast Company at 56.

The next time a task or topic seems complex to you, take the challenge of really studying its underlying aspects, translating them into basic elements, and explaining them simply. Then, solve for the right approach, plan or strategy based on your explanation and understanding. I would venture that you will get a good response from your markets, however you define them, and profit from your efforts.

Have a wonderful and safe Thanksgiving Holiday, and thanks for reading Business Leasing News.

I would like to thank BLN’s editors at Patton Boggs LLP, including J. Atwood Jeter, a senior associate in the firm’s real estate and wind energy groups, and Patton Boggs staff editors Paul Dumansky and Adrian Nicole McCoy, as well as our lead designer, Winston Jackson. Claire Campbell, our Chief Librarian in Dallas, keeps BLN going with much appreciated research assistance. Thanks also to Douglas C. Boggs, a Business Transactions/Securities partner and website reviewer for BLN and our Marketing Chief, Mary Kimber, for assisting BLN through our firm’s editing, design and posting process.