Meeting: OPS.001 Rulemaking Group Meeting Apr. 24 & 26, 2007 and Non-commercial Operations Sub-group Meeting Apr. 24 & 25, 2007

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1 Subjet: EASA Operations Rulemaking Meeting: OPS.001 Rulemaking Group Meeting Apr. 24 & 26, 2007 and Non-ommerial Operations Sub-group Meeting Apr. 24 & 25, 2007 File: EASA Reported by: Ray Rohr Summary: The OPS.001 Rulemaking Group met on Apr. 24 & 26 to review progress in the subgroups and address open issues. The Group was advised that there was an effort being made to resolve the outstanding issues and approve the EASA Extension of Sope during the German Presideny whih ends June 30, Jörg Liehtfried, Rapporteur of the Parliamentary Committee on Transportation and Tourism, will be meeting with the Presideny on May 8, 2007 to attempt to reah ommon ground on outstanding issues. Two signifiant issues from the business aviation perspetive are the definition of omplex motor-powered airraft and the amendment proposed by the European Parliament to the provision related to the delaration of apability and means to disharge their responsibilities that will be required by operators engaged in the non-ommerial operation of omplex-motor-powered airraft. The Commerial Sub-group reported that all of the aeroplane provisions have been reviewed and final drafting is underway. They reviewed the ommerial balloon requirements at the April meeting and will address the heliopter requirements at the May meeting. The Aerial Work Sub-group advised have onluded that HEMS should be inluded as an appendix to the Commerial Air Transport rules and that SAR will have to be addressed in the future as they expet that they will not be able to omplete all of their work by the end of July. After disussion it was agreed to invite representatives of the European HEMS assoiation to brief the Rulemaking Group on May 24, The Authority & SMS Sub-group reported that they ompleted development of the SMS framework and drafted part of the implementing rules. They are working on development of guidane and AMC material for all management systems and may not be ompleted their all of their work by the end of July. It was agreed that all Sub-groups should work to have the regulatory requirements ompleted by the July meeting and that drafting of the implementing rules ould ontinue over the summer with a Rulemaking Group review in September. At the seventh meeting of the Non-Commerial Operations with Complex Motor- Powered Airraft Sub-group addressed a number of issues. The meeting agenda is linked to this report. The first item of business was a meeting with the Authority & SMS Sub-group to disuss to disuss the delaration for non-ommerial omplex motor-powered airraft operations and ertifiation of management organisations operating omplex motor-powered airraft on behalf of one or several airraft owner. The disussion papers Conditions and Proedures Related to Delarations, drafted by Ray Rohr and Certifiation versus Delaration, drafted by Jaob Pedersen and Geoff Parker were disussed. The subgroups aepted the delaration provisions that were proposed in Ray Rohr s

2 paper for operations that are onduted by the owner of a omplex motor-powered airraft. They also agreed that operational ontrol and responsibility of the management organisation operating on behalf of one or more airraft owner should be further speified and that a management organisation ertifiation may need to be onsidered. It was disussed that suh ertifiation ould take the form similar to management speifiations that are issued for FAR 91 Sub-part K frational ownership programme managers. Ray Rohr will prepare a working paper on the issues for the next subgroup meeting. Subgroup members expressed the importane of harmonisation with FAR 91K. It was also agreed that the ertifiation issue must be subjeted to a regulatory impat assessment. The remainder of the issues on the agenda were ompleted and the material that was reviewed was aepted with minor amendments. The draft minutes of the meeting are linked to this report. The next OPS.001 Rulemaking Group and Non-Commerial Operations Sub-group meetings are on May 15-17, Impliation for Business Aviation: This is a very important ongoing projet with a number of issues that must be resolved. Fortunately progress to date has been positive. Deisions Required: Nil at this time. This report ontains material for the sole information of IBAC Members and no guarantee or undertakings are given, or should be assumed, as to their auray. The ontent is under the opyright of the author and IBAC, and may not be distributed to third parties without speifi agreement of the IBAC Diretor General.

3 European Aviation Safety Ageny TASK OPS.001 SUBGROUP NON-COMMERCIAL OPERATIONS WITH COMPLEX MOTOR-POWERED AIRCRAFT 7TH MEETING 24 April 10:30 hrs 25 April 16:00 hrs, 2007 EASA PREMISES, COLOGNE PROPOSED AGENDA 1. Adoption of Agenda 2. Review of minutes of 13 & 14 Marh 2007 meeting 3. Meeting with Authority Sub-group on Delaration, Certifiation and Regulatory Oversight 4. Review of Issues Requiring More Work a. Draft Cabin Crew rules and AMC/GM material b. Crash axe & rowbars. Operations involving management ompanies d. Additional AMC/GM material e. Maximum approved seating apaity 5. Member States responses to the questionnaire 6. Follow-up ations from meeting with the Authority Sub-group 7. Review of OPS 2 template 8. Work plan and next steps 9. AOB Page 1 of 1

4 Disussion Paper Conditions and Proedures Related to Delarations 1. Aim This paper disusses issues related to operator delarations as presribed in the Essential Requirements for Liensing, Operations and Third Country Airraft as ontained in Regulation (EC) No 1592/2002 revised, and proposed proesses and proedure for the filing, proessing and management of suh delarations. 2. Bakground In their submission to the Counil the COREPER reommend that Artile 6b - Air Operations para 2 of the Essential Requirements for Liensing, Operations and Third Country Airraft speifies that: Unless otherwise determined in the implementing rules, operators engaged in ommerial operations shall demonstrate their apability and means to disharge the responsibilities assoiated with their privileges. These apabilities and means shall be reognised through the issuane of a ertifiate. The privileges granted to the operator and the sope of the operations shall be speified in the ertifiate. 1 They also reommend that para 3 of that Artile states: Unless otherwise determined in the implementing rules, operators engaged in the nonommerial operation of omplex motor-powered airraft shall delare their apability and means to disharge the responsibilities assoiated with the operation of the airraft. 1 They go on to reommend that paras 5(b) and 5(d) speify: 5(b) the onditions for issuing, maintaining, amending, limiting, suspending or revoking the ertifiates referred to in paragraph 2 and the onditions under whih a ertifiate shall be replaed by a delaration of the apability and means of the operator to disharge the responsibilities assoiated with the operation of the airraft; 1 5(d) the onditions and proedures for the delaration by, and for the oversight of, operators referred to in paragraph 3 and the onditions under whih a delaration shall be replaed by a demonstration of apability and means to disharge the responsibilities assoiated with the privileges of the operator reognised by the issuane of a ertifiate; 1 The COREPAR also reommend that Paras 1 and 2 of Artile 7 Oversight and Enforement state: 1. The Member States, the Commission and the Ageny shall ooperate with the aim to ensure that any produt, person or organisation subjet to this Regulation omplies with its provisions and with its implementing rules For the implementation of paragraph 1, Member States shall, in addition to their oversight of ertifiates that they have issued, ondut investigations, inluding ramp inspetions, and shall take any measure, inluding grounding of airraft, to prevent the ontinuation of an infringement. 1 1 Proposal for a Regulation of the European Parliament and the Counil amending Regulation (EC) No 1592/2002 of the European Parliament and the Counil of July 15, 2002 on ommon rules in the field of ivil aviation and establishing a European Aviation Safety Ageny of 30 November 2006 OPS.001 Non-ommerial Sub-group page - 1 Mar. 17, 2007

5 3. Disussion Disussion Paper Conditions and Proedures Related to Delarations 3.1 Essential Requirements Considerations From the foregoing provisions it is lear that the COREPAR and the assoiated agenies see three distint levels of regulatory oversight for airraft operations. The higher level is that assoiated with operators engaged in ommerial operations. As indiated in Artile 6 b para 2, the norm for ommerial operations shall be ertifiation. However, exeptions to the requirement to hold a ertifiate an be made in the implementing rules. The exeption allowed for in para 5(b) of Artile 6b is to replae the ertifiation proess with a delaration of the apability and means of the operator to disharge the responsibilities assoiated with the operation of the airraft. The lowest level of regulatory oversight for airraft operations is that assoiated with the operation of non-omplex motor powered airraft. In those ases there is no requirement for any type of ertifiation or delaration speified. The mid level of regulatory oversight is the delaration referred to in para 3 of Artile 6b, whih is required of the operator of omplex motor powered airraft engaged in non-ommerial operations. In this ase operators must delare their apability and means to disharge the responsibilities assoiated with the operation of the airraft. The differene envisaged between the regulatory oversight assoiated with ertifiation and a delaration is evident in several provisions. While paras 1 and 2 of Artile 7 and Artile 15b deal speifially with ertifiation issues, the delaration proess is left entirely to be developed in the implementing rules. It is also noteworthy that the Essential Requirements make referene to ICAO standards and reommended praties (SARPS) and manuals. 3.2 ICAO Considerations ICAO Annexes 6 Part II International General Aviation Operations Aeroplanes and 6 Part III, Setion III International General Aviation Operations Heliopters, both plae responsibility for adherene to the SARPS on the pilot-in-ommand and have no provisions related to the operator. Consequently, the State s primary regulatory oversight fous to ensure ompliane with the rules is through the pilot (liene) and airraft (airworthiness). The introdution of the onept of omplex motor powered airraft in the Essential Requirements and the reognition of the reality of the operation of suh airraft, logially introdues the role of the operator in these operations. This reality is also refleted in the modernization of Annex 6 Part II whih will soon be distributed by ICAO for State omment. In both ases the role of the operator is to develop and implement systems, programs proedures and doumentation to endure the safe operation of the airraft and the adherene to rules. At this point in time the draft of Annex 6 Part II does not speify any State regulatory oversight requirements related to the operator. While the ICAO Safety Oversight Manual Do 9734 does not deal speifially with non-ommerial air operations it artiulates a number of priniples that would appear to be appliable. The manual states that it is the responsibility of individual States to ensure that the national aviation industry provides a safety level equal to, or better than, that defined in the SARPs 2. The manual also referenes Artile 12 of the Chiago Convention whih states that: Eah ontrating State undertakes to adopt measures to insure that every airraft flying over or maneuvering within its territory and that every airraft arrying its nationality mark, wherever suh airraft maybe, shall omply with the rules and regulations relating to the flight and maneuver of airraft there in fore. Eah ontrating State undertakes to keep its own regulations in these respets uniform, to the greatest possible extent, with those established from time to time under this Convention. 3 2 ICAO Safety Oversight Manual Do 9734 (2006) ICAO, Montréal 3 Chiago Convention on International Civil Aviation Do 7300/9 (2006) ICAO, Montréal OPS.001 Non-ommerial Sub-group page - 2 Mar. 17, 2007

6 Artile12 goes on to states that: Disussion Paper Conditions and Proedures Related to Delarations Eah ontrating State undertakes to insure the proseution of all persons violating the regulations appliable. The Safety Oversight Manual then artiulates a number of priniples whih are appliable to all oversight ativities. These inlude: Adoption of safety management systems by the ivil aviation authority in the funtional areas of regulation as well as in the operation and servie provision, Conduting safety oversight in a manner whih inludes: o A systemati approah, o Use of risk management strategies, o Coordinating with other agenies were jurisditions overlap or interfae, and o Requiring and enouraging industry to adopt systemati philosophies as part of an SMS. The Manual ontinues on to desribe how these priniples should be applied to pilots through the liensing requirements and oversight and to airraft through the airworthiness requirements and oversight. It disussed the use of inspetions, analysis of operations, identifiation of safety defiienies, granting, suspending or revoking lienes, ertifiates or approvals for all aviation ativities as well as air operator ertifiates. All of this would appear to indiate that it is expeted that all general aviation operations, inluding pilots, airraft and non-ommerial operators, should be subjet to a similar level of safety oversight. 3.3 Delaration Bakground When JAR OPS 2 was developed part of the motivation was to ensure an equivalent level of safety for person arried on large and turbojet airraft engaged in non-ommerial operations that were registered in third ountries as was being presribed for those airraft that were registered in EU ountries and subjet to the JARs. The onept that was developed to ahieve this objetive was the requirement for all large and turbojet airraft based in an EU ountry to file a registration with the ivil aviation authority that inluded: 1. The offiial name and business name, address and mailing address of the appliant; 2. A desription of the proposed operation, the loation of operating bases and, the prinipal operating base; 3. A desription of the management organisation; 4. The name of the aountable manager; In respet of the airraft operator s maintenane system only, the following information must be inluded in the initial appliation for Registration. 1. The airraft operator s airraft maintenane programme(s); 2. The airraft tehnial log; 3. Where appropriate, the tehnial speifiation(s) of the maintenane ontrat(s) between the airraft operator and any approved maintenane organisation; and 4. Type(s) [and lass(es)] of airraft and MAPSC if appliable. 4 It was the opinion of the AWGAS that these provisions would play an important role in ensuring that all airraft operators effeted by JAR OPS 2 were aware of the assoiated requirements and the operator s aountabilities. The draft JAR-OPS 2 also inluded in the general rules for registration the requirements that the airraft operator must: 1. Have a management organisation apable of exerising operational ontrol and supervision over any flight operated under the terms of its Registration, 4 JAR-OPS 2 Subpart C (draft of August 2004) JAA Aerial Work and General Aviation Sub-Group, Hoofdorp OPS.001 Non-ommerial Sub-group page - 3 Mar. 17, 2007

7 Disussion Paper Conditions and Proedures Related to Delarations 2. Have appointed an aountable manager who must be advised by ompetent persons, unless he has ompetene himself, for ensuring that all operations and maintenane ativities an be finaned and arried out to an aeptable standard, 3. Ensure that every flight is onduted in aordane with the provisions of the Operations Manual, 4. Ensure that its airraft are equipped and its rews are qualified, as required for the area and type of operation, and 5. Comply with the maintenane requirements, for all airraft operated under the terms of its Registration. The draft also ontained the provision that for the Registration to remain valid the operator must: 1. Operated airraft that have a standard Certifiate of Airworthiness issued in aordane with ICAO Annex 8; 2. Maintain the ability to: a. Establish and maintain an adequate organisation, b. Establish and maintain a safety management system,. Comply with speified training programmes, d. Comply with maintenane requirements, onsistent with the nature and extent of the operations speified, and e. Comply with the general rules for Registration, and 3. Communiate to the Authority any hanges to the submitted information. While the implementing material for the draft rule was not developed, it was the opinion of the AWGAS that the Registration would not involve an audit proess but that the National Authorities (NAs) would inlude the requirements of JAR OPS 2 in their general aviation safety oversight program. Also, there was agreement within the AWGAS that if the operator was registered to be in onformane with a reognized industry standard or ode of pratie, that fat would be reognized in the NA safety oversight program. In reahing this onlusion the AWGAS were influened by: the very good safety reord of the business aviation ommunity, the appliation of risk management strategies, the reognition that the operators of large and turbojet airraft would be required to develop safety management systems. and the role that industry standards, suh as the IS-BAO an International Standards for Business Airraft Operations, ould play. It was also understood that the Registration proess would not reate any hange in the proesses and proedures related to operating authorities suh as RVSM, RNP and CAT II or CAT approvals. 4. Proposed Delaration Provisions Based on the foregoing, it is proposed that the provisions in the OPS Implementing Rules related to a delaration by an airraft operator of their apability and means to disharge the responsibilities assoiated with the operation of the airraft, should follow the following priniples: 1. The general rules for delarations should inlude the requirement that the airraft operator must: a. Have a management organisation apable of exerising operational ontrol and supervision over any flight operated under the terms of its Delaration, b. Have appointed an aountable manager who must be advised by ompetent persons, unless he has ompetene himself, for ensuring that all operations and maintenane ativities an be finaned and arried out to an aeptable standard,. Ensure that every flight is onduted in aordane with the provisions of the Operations Manual and any operating approval from the NA, OPS.001 Non-ommerial Sub-group page - 4 Mar. 17, 2007

8 Disussion Paper Conditions and Proedures Related to Delarations d. Ensure that its airraft are equipped and its rews are qualified, as required for the area and type of operation, and e. Comply with the maintenane requirements, for all airraft operated under the terms of its Delaration. 2. The delaration should inlude the requirement for the airraft operator to: a. Provide the offiial name and mailing address of the business and the loation of the base of operation, b. Provide a desription of the nature of the operation and the type, number and registration details of the airraft involved,. Provide a desription of the management organization and the name of the aountable manager, d. Delare that they have developed and implemented a safety management system that inludes proedures for demonstrating ompliane with the requirements of the relevant OPS and Maintenane Parts and that they have developed and implemented the required systems, programs, proedures and manuals, and e. If they have implemented and demonstrated onformane to an industry standard, the name of the standards and the date of the last audit of their onformane. 3. The assoiated rules should ontain the requirement that for the delaration to remain valid the airraft operator must: a. Maintain the ability to: i. Establish and maintain an adequate organisation, ii. Establish and maintain a safety management system, iii. Comply with speified training programmes, iv. Comply with maintenane requirements, onsistent with the nature and extent of the operations speified, and v. Comply with the general rules for Delarations, and b. Communiate to the NA any hanges to the submitted information. 4. EASA and the NAs should establish a system to reord filed delarations that failitates sharing of the delaration information with ESA and EU member NAs. 5. When delarations are filed, the NA would reeive them as information and inlude the operator in the safety oversight program that they apply to all general aviation operations. 6. The NA safety oversight program should inlude: a. Systems and proedures to ollet safety information inluding a onfidential reporting system for inidents and aviation system hazards and assoiated investigations, b. The provision of safety information, inluding aident and inident data, to pilots and airraft operators,. Conduting ramp inspetions and where indiations of safety problems are deteted, investigation of the indiated safety problem, and d. Where the airraft operator is not registered to be in onformane with a reognized industry standard, periodi evaluations of the operator s SMS. 7. The NAs are not expeted to establish programs to audit airraft operators who are required to file delarations. 8. One issue that must be addressed is the ation that may/shall be taken by a NA should it be determined that an operator has filed a false delaration or is found to be unable to omply with the requirements of the relevant OPS and Maintenane Parts and/or have not developed and implemented the required systems, programs, proedures and manuals. OPS.001 Non-ommerial Sub-group page - 5 Mar. 17, 2007

9 Disussion paper on ertifiation versus delaration for operations with non-ommerial omplex airraft Bakground The final ounil version of the proposal to extend the sope of EC regulation 1592/2002 has slightly modified the wording of the requirement for a delaration for nonommerial operations with omplex airraft. Artile 6b paragraph 3 now states: Unless otherwise determined in the implementing rules, operators engaged in the nonommerial operation of omplex motor-powered airraft shall delare their apability and means to disharge the responsibilities assoiated with the operation of the airraft. The paragraph has been amended by the Counil by adding the underlined phrase. In paragraph 5 it is further stated The Commission shall adopt, in aordane with the proedure laid down in Artile 54(3), the rules for the implementation of this Artile. In doing so, it shall speify in partiular: [ ] the onditions and proedures for the delaration by, and for the oversight of, operators referred to in paragraph 3 and the onditions under whih a delaration shall be replaed by a demonstration of apability and means to disharge the responsibilities assoiated with the privileges of the operator reognised by the issuane of a ertifiate; As suh the hange suggested by the Counil implies that some non-ommerial operations with omplex airraft may require the issuane of a ertifiate, whereas the general ase is that a delaration will suffie. It should further be mentioned that the hange to paragraph 3 stems from a onern that frational ownership operations are onsidered non-ommerial, but should be subjet to the higher level of oversight assoiated with a ertifiation requirement. Disussion The onept of frational ownership is developed in the US and has no diret ounterpart in Community regulation. Also it is doubtful if the US definition of a frational operator an be diretly transferred to a European framework. In the US the frational ownership setup is a system that guarantees the operator that his operation is onsidered to be nonommerial if he omplies a number of items in part 91 subpart k. If he only omplies with some of the frational requirement the operator may fae the risk that his operation

10 is lassified as an illegal ommerial operation. In the US a frational-like operator therefore has a strong inentive to omply fully with subpart 91 K, sine it serves as his guarantee that his operation will not be lassified as ommerial. In Europe, the proposed definition of a ommerial operation would not give a similar inentive, sine any operation whih is not available to the publi and where the ustomer DOES have ontrol over the operator by definition is not a ommerial operation, aording to the proposed artile 3 (i): "ommerial operation" means any operation of an airraft, against remuneration or other valuable onsideration, whih is available to the publi or, when not made available to the publi, whih is performed under a ontrat between an operator and a ustomer, where the latter has no ontrol over the operator; Even if one were to introdue a onept similar to the US frational ownership, an operator ould hoose not to omply with the regulation and still laim to be nonommerial as long as he an prove that the ustomer has ontrol over the operator and the flight is not available to the publi. One therefore annot diretly opy the US frational regulation to a European framework. In order to address the ounils onerns that frational-like operations be subjet to ertifiation, the task of the OPS working group is therefore to propose a definition whih aptures the essene of the US frational ownership onept, but at the same time will work under the proposed European definition of ommerial operation. Some of the main aspets haraterizing frational operations are the use of a management ompany (program manager) the ustomer owns a fration of one airraft but has aess to all airraft under the frational program and assoiated programs and therefore in pratie will generally not fly on the airraft in whih he has ownership the ustomer aepts a legal responsibility for the operation but in pratie has very little diret operational ontrol sine that is generally left to the program manager For a disussion of the last item, see the attahed doument on Frational Ownership Liability whih disusses the very speial legal onstrution that a frational owner with no aviation expertise aepts legal responsibility for ompliane with aviation law. In ontrast to frational operations, the typial aspets haraterizing traditional nonommerial orporate and business aviation are: the operator owns an airraft or fration thereof and/or employs the pilots who fly the airraft

11 the operator will generally own a larger fration of the airraft than is the ase for frational ownership and will generally utilize the airraft whih he atually owns. the operator has some form of in-house aviation expertise, is diretly involved in the operation and exerises genuine and diret operational ontrol. Generally speaking the main differenes between frational ownership and traditional business and orporate aviation are therefore related to the degree of the operators involvement in the operation and his ability to exerise diret operation ontrol. If the operator has no aviation insight and no ability to effetively oversee the operation but is ompletely relying on another business to provide the aviation expertise it would seem reasonable that this other business was subjet to some sort of ertifiation (though not neessarily an AOC). This would offer the ompany that does not have any aviation expertise the extra level of ertainty that operations are undertaken safely. On the other hand the operator that does have in-house aviation insight will not need the assurane provided by ertifiation, sine he is effetively able to oversee the operation himself. If this distintion is used, we have a well justified ertifiation requirement, whih athes the essential differene between frational operations and traditional business and orporate operations. Legal Text The question that remains is how the onept desribed above ould be transformed into a legal text. One approah would be to make it a part of the requirement of the delaration, sine it is already stated that the operators must delare their apability and means to disharge the responsibilities assoiated with the operation of the airraft. The requirements of the delaration ould state: 1) The operator must delare that he aepts full operational responsibility and that he possesses within his organization the aviation expertise to effetively exerise the operational ontrol. The responsible person must be named and a summary of this person s qualifiations enlosed with the delaration. 2) If the operator does not have within his organization the aviation expertise to exerise effetive operational ontrol the ompany providing the aviation expertise must be ertified. The intention with this wording is to still allow a orporate operator to outsoure ertain funtions as long as he maintains the overall operational responsibility AND has the in-house expertise to oversee that the operation is onduted safely.

12 Frational Ownership Liability May 24, 2002 Copyright Phillip J. Kolzynski and Valerie Dunbar Jones (o-author's Bio at end of artile) All rights reserved. A new FAA rule, already written and waiting to be issued, will have a major impat on business aviation. Part 91 of the Federal Aviation Regulations (FAR) will be amended to add the new "Subpart K." Subpart K will distinguish frational ownership programs from other traditional business airraft ownership arrangements. The new rule will not affet the pre-existing requirements under FAR Â et seq. regarding traditional orporate flight departments, flying lubs and various forms of Setion ownership. One key element of the new rule for frational ownership programs is that frational owners (fra-owners) will be in operational ontrol of any program flight requested by the fra-owner. Of ourse, the fra-owner will be able to depend on the program manager for aviation expertise. But the fra-owner will be required to sign an agreement promising not only to aept operational ontrol responsibility for the FAA, but also aknowledging that "The owner may be exposed to signifiant liability risk in the event of a flight-related ourrene that auses personal injury or property damage." FAR (a)(1)(iii). Management, ownership and interhange agreements have ustomarily ontained lauses suggesting some level of operational ontrol on the part of a frational owner. The new FAA rule larifies the broad-based responsibilities of fra-owners. The new responsibilities and resultant exposure are signifiant when ompared to traditional forms of airraft ownership. Normally, passive owners who were not atually piloting the airraft or performing maintenane on it would have little or no liability exposure ompared to the operator or owner-pilot. This artile will explain airraft-owner liability under state laws. Then, we will ompare the new obligations and liability exposure of frational ownership. We will also disuss the various types of exposure of fra-owners after the new rule, inluding air rash liability, FAA santions, employment issues and insurane. Throughout, we examine ways in whih fra-owners and program managers an protet their interests in fraownership. Note: federal and state tax onsiderations assoiated with frational ownership are signifiant and extensive, and we have eleted not to address them within the sope of this artile. Expert tax advie, in addition to the other ounsel we reommend in this paper, should definitely be sought prior to entering into any airraft ownership obligation. Airraft Ownership Liability Laws Traditionally, there has been an important distintion in liability law between an "owneroperator" and a "non-operator owner." If an owner-operator (owner who pilots his airraft) is negligent and that negligene auses damage or injury, that owner-operator is liable. This is also true when the owner is the pilot's employer. An employer is normally

13 viariously liable for the ats of an employee who negligently operates or maintains airworthiness of the airraft for the owner. Where airraft ownership is purely passive â that is, the entity that holds title to the airraft is not involved in piloting, maintenane or any form of operational ontrol â there should be no liability. Under the modern laws of most jurisditions, non-operator owners are not held liable for pilot negligene, or enjoy very limited liability. However, a warning is in order: some states have enated speifi airraft-owner liability statutes or have old ase law on the books purporting to make suh passive owners liable for airraft aidents. These old-fashioned laws are based on the notion that airraft are hazardous flying ontraptions. Some legislatures simply desire to make the owners pay when their airraft ause damages regardless of ontrol over the wrongdoing. One example of suh a provision is New York's General Business Law  251, whih renders owners viariously liable for the negligene of an operator where the airraft is being used or operated for more than 30 days, with the express or implied permission of the owner. Liability attahes even if the operating pilot is not an employee of the owner and the owner has no ontrol over the flight. Other states have limitations of liability, so that a passive owner with no atual ontrol over the pilot or airraft at the time of the aident will have limited liability exposure. In California, a passive owner an be held liable for the permitted use of its airraft but damages are limited to $15, per injury or death, with a maximum of $30,000.00, and punitive damages are barred entirely. Nevertheless, in the majority of jurisditions and in the absene of a speial statute imposing liability on airraft owners, a passive owner who simply lends, rents or leases an airraft to another party is usually not held liable for the negligene of that party. Most laws do not usually impute liability to airraft owners unless they have been personally negligent or are the employers of parties who were personally negligent. Those folks who spend their Saturday evenings urled up with the FAR may point to a provision in the Federal Aviation At, 49 U.S. Code  44112, whih seems to suggest that passive owners an be held liable even when they are not operating the airraft. However, this statute has been interpreted by many ourts as not reating a ause of ation for viarious liability on the part of the airraft owner for air rashes. e.g., Malone v. Capital Corretional Resoures, In. (Supreme Court of Mississippi, 2001). In many jurisditions, "non-operator" airraft owners may usually avoid liability for airraft aidents as long as: The owner had no knowledge of any dangerous ondition or defet in the airraft when it is transferred to the ontrol of another; The owner is not the employer of the operator of the airraft; The owner was not the employer of the maintenane professional who signed off on the airworthiness of the airraft; The owner was not in ontrol of the maintenane or operation of the airraft at the relevant times when the problem developed whih lead to the aident; The owner did not negligently entrust the airraft to an inompetent operator; The appliable state law does not impose viarious liability on owners who grant permission to others to operate the airraft;

14 The owner does not assume liability for the operation of the airraft by signing a ontrat aepting joint responsibility for operational ontrol or airworthiness. The last item on the list is an issue under the new Subpart K of Part 91. The new rule require fra-owners to sign a ontrat aknowledging operational ontrol for their flights and aepting responsibility for airworthiness on their flights. Frational Ownership Programs In simplest terms, frational ownership an be thought of as the aviation industry's answer to time-share ondominiums. It is the fastest growing and at the moment, quite possibly the only growing area of general aviation. Although the attak on Ameria through the hijaking of airraft on September 11 has damaged many setors of the aviation industry, the frational ownership programs have prospered. For well under $1 million, depending on the type of airraft, a business or person an purhase as little as a 1/16th share of a business lass jet airraft or a 1/32nd share of a personal transport heliopter. The frational owner an send its employees, lients, and guests for trips on its frationally owned airraft or any airraft in the frational ownership program. This an be done for a small portion of what it would ost to own the same size orporate airraft outright. A fra-owner's passengers may avoid many travel delays that are now endemi with airline trips. They enjoy expedited (though still thorough) seurity heks, and have muh greater flexibility with regard to shedule ontrol, itinerary, hoie of destination airports, and in-flight amenities. Frational flying is onduted under FAR Part 91, the same rule appliable to private and orporate airraft operations. The safety standards imposed by Part 91 are high, but not as stringent as those of FAR Parts 135 (air taxi and ommuters) and 121 (larger sheduled air arriers). Some ritis have voied onern that frational flying was insuffiiently regulated. In reality, most frational programs have been well run. Proponents of frational programs an point to exellent safety reords, whih even some of the airlines may envy. The FAA has simply been trying to ath up with the explosion of business flying in this area, and address its poliy mandate to protet the flying publi. The new FAA rule will restrit frational programs above and beyond the existing Part 91 standards to some degree, by introduing management, flight ontrol, training, and operational restritions. However, the new rule will also amend Part 135 to permit on-demand harter flights to operate under the same airport landing riteria, weather reporting requirements and departure standards as frational program flights, updating the 1940s-vintage provisions of Part 135 to reflet the improved tehnologial apability of modern business airraft. Operational Control The New Rule on Frational Ownership In July 2001, the FAA issued a Notie of Proposed Rule Making (NPRM) proposing to add a new Subpart K to Part 91 to regulate frational airraft ownership programs. The omment period was extended to November 16, 2001, and is now losed. FAA soures have not ommitted on a release date. The rule likely would have been finalized earlier but for seurity priorities taxing the FAA sine September 11. The following setions will

15 disuss some key areas of exposure for frational owners under the new rule, and provide suggestions of how these issues an be resolved. Under the new FAA rule, fra-owners without aviation expertise will have operational ontrol and safety responsibilities that may reate liability exposure of whih they were not previously aware. Fra-owners' duties will inlude: Operational ontrol whenever the fra-owner has requested that any program airraft (not neessarily the one in whih the share is owned) arry passengers or property designated by the owner, regardless of whether the owner is on board. FAR Operational ontrol whenever the fra-owner's designated passengers are arried aboard an affiliated program airraft, even though it is neither owned nor part of the same frational ownership program. Thus, a frational owner an be in operational ontrol of a non-program airraft. The FAA must be satisfied there is a suffiient relationship between the owner's program manager and the affiliated program manager (a)(2), (e)(8), (e)(9). Examples of affiliate programs may inlude frational ownership operations reated under the regulations of foreign ountries. Responsibility for ompliane with the FAA-approved management speifiations of the frational program for any flight arrying the frational owner's passengers. This duty exists even though the frational owner learly depends on the projet manager for ompliane with the management speifiations. NPRM Preamble. The right/duty to inspet and audit the praties of the program manager onerning the operational safety, reord keeping and maintenane of the program airraft. Arguably, with responsibilities for operational ontrol and airworthiness, and given the wording of the regulation, the right to audit may be onsidered a duty (a)(1); (b). A non-delegable obligation to omply with every regulation in the new Subpart K for every flight arrying their passengers Thus, frational owners are responsible even if they delegate the authority to the program manager to arry out various tasks in the program. Air Crash Liability of Frational Owners Under Subpart K, fra-owners will soon be responsible for omplying with safety rules imposed on them by the FAA. This is unusual, beause the FAA normally only imposes operational safety and airworthiness rules on FAA ertifiate holders who have aviation expertise. Will violations of these safety rules reate liability on the part of the frational owner? Typially, in an air rash, a plaintiff must prove that a defendant had a safety duty, breahed that duty and that the breah aused the aident, resulting in damages. Most rashes involve pilot errors while under operational ontrol, or airworthiness problems. The new Subpart K rules appear to reate federal duties on fra-owners in these areas. The new regulations may reate a bountiful fishing ground for plaintiffs' attorneys after a frational airraft rash.

16 Attorneys may look to state laws to find a legal laim, on the basis that the fra-owners violated federal safety rules. If defense lawyers suggest that the rules were for regulatory purposes only, the plaintiffs an show that the fra-owner assumed liability risks for any aident when its representatives signed agreements prepared by the program manager. The new FAA rule requires not only that the fra-owner sign agreements to aknowledge that it has operational ontrol, but further requires that fra-owners aknowledge that "[t]he owner may be exposed to signifiant liability risk in the event of a flight-related ourrene that auses personal injury or property damage." (a)(1)(iii). How Many Frational Owners Can be Sued? If a major air rash ours involving a frational ownership airraft after the new rules are implemented, one an expet that the program manager will be sued. The frational owner in operational ontrol, who has direted that his employees, guests or lients are arried on the flight, will also be sued. What about the other frational owners who were not using the airraft on the ill-fated trip? Some plaintiffs' attorneys use the shotgun approah to litigation by suing all relevant deep pokets after a disaster. The newspapers usually emphasize the deep poket part â they forget to explain that the parties who had no safety duties related to the ause of the aident are soon dismissed from the lawsuits by lawyer's motions. The FAA rule only plaes responsibility for operational ontrol and frational program regulations on the frational owner for its flight. But, one the frational owner's flight has ended, has its liability exposure for a subsequent rash abated? What if a subsequent rash ours involving a frational program airraft that is not due to ontemporaneous operational pilot error? For example, what if the subsequent rash results from prior maintenane malpratie, or an airworthiness defiieny? If that defiieny arose at the time when the previous fra-owner was in operational ontrol and had the duty for ompliane with all appliable regulations â would it be liable? There is an expression in the naval servie that if it happens on your "wath," you may be responsible for the onsequenes. This may beome the template for fra-owner liability exposure. Is Frational Airraft Ownership a Passive Investment? The new rule larifies that frational owners are not simply enjoying a heap alternative to airline transportation or harter travel. Some advoates who failitate the sale of frational shares have reommended that, after owners sign on the dotted line, they should take a hands-off approah and "let the program manager do the managing." While it is never wise to interfere with expert management, fra-owners an no longer, in light of the new rules, be passive investors and business travelers. With the benefits, onveniene, eonomy and flexibility of frational flying ome the burdens of operational ontrol and safety rule ompliane. These burdens an be arried by exerising the right â arguably, the duty â of inspeting and auditing the program. The Right/Duty to Audit Program Management

17 To date, program managers have an enviable reord of safety in the aviation industry. The FAA has reognized that many program managers in the frational ownership field have been onduting their operations aording to the industry's "best praties." The new FAA rule imposes joint ompliane and operational ontrol responsibility on both program managers and fra-owners. It is inumbent upon fra-owners to ensure that the best praties are being followed. Before signing the agreements, upon renewal, and on a spot-hek basis, owners may wish to inspet and audit the safety aspets of the program. Owners may use tehnial onsultants, if neessary, to audit the operational and airworthiness matters, but the results may be disoverable in litigation. Attorneys with suffiient aviation experiene an do suh audits and inspetions with onfidentiality under the attorney-lient privilege. Knowledgeable aviation attorneys should also be able to audit the various lauses in the operating ontrats (purhase, management, ownership and interhange agreements) under the governing state law. They an also evaluate the ritial insurane overage upon whih fra-owners must rely to protet against liability exposure. Notwithstanding large overage limits in the fleet poliies to over foreseeable aidents, the risks to the fra-owner inlude the denial of overage or the appliation of an exlusion to the ourrene, partiularly where regulations may have been violated. Even if insurane overage is provided, there are questions of orporate aountability and adverse business onsequenes to fra-owners whih an result from FAA santions, liability litigation, dislosure of ourt reords and adverse publiity that may result if a frational owner is aused of violating safety rules after a major air rash or even a survivable aident. When frational owners audit and inspet their programs, they must fous on flight rew qualifiations, staffing, drug eduation, the initial and reurrent training of pilots and maintenane personnel, airraft sheduling, passenger briefings, reord keeping, vendor standards, and a host of other fators. The FAA stipulates that the new rules do not require any undue invasion of the manager's finanial reords or those reords pertaining to the onfidential movements of other owners. Insurane A fra-owner has exposure any time it is using its own shared airraft, whenever it is using another airraft in its program, and even when it is using an airraft from some other program that is affiliated with the owner's program. That additional insurane is needed to protet against all foreseeable risks for all these flights is even more evident beause of the new rule. Fra-owners should arefully analyze the terms of their operating agreements and verify that their insurane overage is onsistent with the agreements. While a major aident learly ould reate substantial liability exposure, a minor aident or inident ould result in diminution in value, loss of use, and other damages not overed by insurane. Under many agreements, program managers may use the airraft for Part 135 harter operations, signifiantly inreasing the utilization, exposure to damage, and ordinary wear and tear. Will the value of the investment be proteted?

18 Management agreements may ontain provisions whereby the manager will proure "ombined single-limit liability" overage in amounts up to $200 million. Suh insurane may be suffiient to over air rashes unless there is another atastrophe of the magnitude of September 11. The protetion from suh overage limits is reassuring â as long as the insurane arrier atually provides the expeted overage. A duly diligent fra-owner will audit the speifi requirements for insurane overage by omparison to the use of airraft by the other fra-owners and the program manager. Even if there is no violation of the FAA regulations, unauthorized usage, invalidating ats or exluded ourrenes ould result in a denial of overage. Some issues that should be examined when evaluating the strength of overage inlude: Does the insurane poliy obtained by the program manager provide overage for "war risk, hijaking and other perils [terrorism]?" Is there a fore majeure lause in the agreement or insurane poliy? Insurers are onerned about their exposure from a atastrophi ourrene like September 11. The wording of any exlusion for suh events must be arefully analyzed. It must be lear that the overage provided is for both "hull" and "liability" and for all airraft used for fraowner flights. Most fra-owners have previously relied on the program managers to make sure that the frational program funtioned under the umbrella of the insurane. It is ritial that the fra-owner is not deprived of overage if the program manager is negligent and does something that might invalidate overage. The management agreement might ontain a lause that requires the insurane ompany to designate the manager as a "first named insured." The insurer should promise that the "named insured" overage or "additional named insured" overage for the fra-owners will not be invalidated by the negligene of the first named insured. Further, the program manager or its agents (rews, mehanis, et.) may impair subrogation rights by signing vendors' hold harmless agreements, thereby voiding the overage; again, the prudent fra-owner should take steps to prevent this eventuality. Improper use of a frational program airraft by one of the fra-owners ould result in the denial of overage by the insurane ompany. The resulting exposure would be substantial, and the appliable agreements among the owners may be unenforeable due to bankrupty or other fators. Thus, eah fra-owner must insure against breah of the owner agreements to the extent possible, and audit the non-onfidential use of program and affiliate airraft to ensure ompliane with the terms of the insurane ontrat. Exlusions in Frational Program Insurane Poliies Commerial airraft operators are forbidden by the Department of Transportation to arry less than the minimum required overage under Federal regulations. Thus, exlusions or warranties providing limitations annot be implemented for ommerial flights without approval by the Department of Transportation. 14 CFR Â 205. A frational ownership program is a general aviation operation ontrolled by Part 91. Federal regulations do not prohibit the use of exlusions in general aviation poliies. Exlusions an be invoked to deny overage (indemnifiation money) and allow the insurer to avoid