Exemption No. 10141

UNITED STATES OF AMERICA

DEPARTMENT OF TRANSPORTATION

FEDERAL AVIATION ADMINISTRATION WASHINGTON, DC 20591

In the matter of the petition of

CITATIONSHARES MANAGEMENT, LLC Regulatory Docket No. FAA-2009-0083

for an exemption from §§ 91.1001 and 91.23 of Title 14, Code of Federal Regulations

DENIAL OF EXEMPTION

By letter dated January 26, 2009, Mr. Gary B. Garofalo, Garofalo Goerlich Hainbach PC,

1200 New Ham pshire Avenue, NW., Suite 800, Washington, D.C. 20036-6802, petitioned the Federal Aviation Administration (FAA) on behalf of CitationShares Management, LLC (CM) for an exemption from §§ 91.1001 and 91.23 of Title 14, Code of Federal Regulations (14 CFR). The proposed exemption, if granted, would permit CM to implement its proposed “Fractional Program Trust Structure.”

The petitioner requests relief from the following regulation[s]:

Section 91.1001(b)(2)-(4) which prescribes that:

(2) A dry-lease aircraft exchange means an arrangement, documented by the written program agreements, under which the program aircraft are available, on an as needed basis without crew, to each fractional owner.

(3) A fractional owner or owner means an individual or entity that possesses a minimum fractional ownership interest in a program aircraft and that has entered into the applicable program agreements; provided, however, that in the case of the flight operations described in paragraph (b)(6)(ii) of this section, and solely for purposes of requirements pertaining to those flight operations, the fractional owner operating the

AFS-09-131-E2

aircraft will be deemed to be a fractional owner in the program managed by the

affiliate.

(4) A fractional ownership interest means the ownership of an interest or holding of a multi-year leasehold interest and/or a multi-year leasehold interest that is convertible into an ownership interest in a program aircraft.

Section 91.23 which prescribes, in pertinent part, that the parties to a lease or contract of conditional sale involving a U.S.-registered large civil aircraft and entered into after January 2, 1973, shall execute a written lease or contract and include therein a written truth-in-leasing clause as a concluding paragraph in large print, immediately preceding the space for the signature of the parties, which contains the following with respect to

each such aircraft:

(1) Identification of the Federal Aviation Regulations under which the aircraft has been maintained and inspected during the 12 months preceding the execution of the lease or contract of conditional sale, and certification by the parties thereto regarding the aircraft’s status of compliance with applicable maintenance and inspection requirements in this part for the operation to be conducted under the lease or contract

of conditional sale.

(2) The name and address (printed or typed) and the signature of the person responsible for operational control of the aircraft under the lease or contract of conditional sale, and certification that each person understands that person’s responsibilities for compliance with applicable Federal Aviation Regulations.

(3) A statement that an explanation of factors bearing on operational control and pertinent Federal Aviation Regulations can be obtained from the nearest FAA Flight

Standards District Office.

The petitioner supports its request with the following information:

CM, a fractional program manager and certificated air carrier, has petitioned the FAA to provide an exemption from the following regulations pertaining to part 91 subpart K fractional ownership operations:

(1) CM requests an exemption from § 91.1001 to the extent necessary to clarify that “fractional owner or owner,” and “fractional ownership interest,” as defined in § 91.1001(b)(3) and (b)(4) of subpart K, are not limited to FAA-registered owners but may

include a beneficial owner or beneficial owne rship interest arising under a single Delaware statutory trust structure outlined in the CM Fractional Program Trust Structure;

(2) CM requests an exemption from § 91.1001 to the extent necessary to clarify that “drylease aircraft exchange,” as defined in § 91.1001(b)(2) of subpart K, may include the3

arrangement for exchange of aircraft arising under the CM Fractional Program Trust Structure; and

(3) CM requests an exemption from § 91.23 to the extent necessary to confirm that the arrangements among and between the fractional owners and CM, in its capacity as a part 135 certificate holder, do not require further compliance with that section.

The purpose of the exemption would be to permit CM to implement a Fractional Program Trust Structure for ownership, registration, a nd operation of fractional ownership program aircraft. A key feature of the proposed structur e is that participating fractional owners would no longer hold legal title to a fractional share of a program aircraft. Instead, a Delaware statutory trust would hold the legal titles of all the aircraft in the fractional program, and fractional ownership program participants would be beneficial owners of a series in the trust relating to specific aircraft in the fractiona l program. CM would act as the fractional ownership program manager, would administer the statutory trust, and would continue operating program aircraft as a part 135 certifi cate holder. The CM Fractional Program Trust Structure would continue to follow the operational control provisions as set forth in §§ 91.1009–91.1013 of subpart K.

Additionally, CM seeks an exemption from § 91.1001 pertaining to dry-lease aircraft exchanges. Under the CM Fractional Program Trust Structure, there would not be a dry-lease aircraft exchange arrangement among all of the fractional owners. Instead, CM would hold a lease to the program aircraft entered into a st atutory trust, and fractional owners would have access to all of the program aircraft, without crew, on an as needed basis through a sublease directly from CM.

Finally, CM requests an exemption from § 91.23, the truth-in-leasing requirements in leases and conditional sales contracts, to confirm that those requirements would not be applicable to the dry-lease exchange component of the CM Fractional Program Trust Structure because CM is a part 135 certificate holder.

CM identified several reasons why the requested exemption will be in the public interest. It

states that the current model of fractional ow nership creates inefficiencies and burdens for fractional owners, fractional ownership program managers, the FAA Civil Aviation Registry (Registry), and other users of the Registry. CM notes that its proposed trust structure would alleviate the administrative burden resulting fr om the frequent re-registration of program aircraft that is required upon any change in the ow nership of the aircraft. CM states that the proposed program trust structure would also result in fewer filings of powers of attorney, bills of sale, and registration applications because each program aircraft will only be registered once upon its purchase and placement into the Delaware statutory trust. Likewise, CM states that there would potentially be only one declaration of international operations for the aircraft, rather than 16 declarations and request for expedited registration. CM also states that its proposal would reduce the need to monitor which program aircraft involved in a recent sale are operating on “pink copy” temporary authority and, therefore, would be ineligible for4

international flights. CM further states that the burden on CM to return the “white copy” of the certificate of registration to the FAA upon a change of ownership, and the corresponding burden on the Registry to review these submissions, would be eliminated.

CM further asserts that its program would not affect the FAA’s ability to identify each holder of a Fractional Ownership Beneficial Interest for informational or security purposes. It states that § 91.1015(b), which requires fractional program managers to maintain a list of all fractional owners at its principle place of business and make the list of owners available to the FAA for inspection, would still apply to its program. CM notes that it would provide the necessary safeguard as it currently does for fractional owners who do not register their interest in their names, qualifying for participation in fractional programs through multi-year leasehold interests, or as beneficial owners of individual trusts. CM states that the internal operating costs associated with its proposal would lead to cost reductions and greater

efficiencies for fractional owners.

CM also states that its proposed trust structur e would not adversely affect safety and would provide an equivalent level of safety to the current regulation. It states that its management specifications, associated with its part 91K operations and its operations specifications associated with its part 135 operations, would remain the same if this exemption is granted. CM also states that its maintenance of the program aircraft would not change if this exemption were granted. Furthermore, CM states that fractional ownership beneficial owners would continue to receive operational control briefings and sign acknowledgment of operational control, as is current practice for fractional owners and required by regulation.

Finally, CM states that its program aircraft and fractional owners operate internationally and asks for its proposed trust program to apply to operations outside of the United States. It states that it is unaware of any reason why th e Fractional Program Trust Structure would not be in compliance with the requirements of the Standards of the International Civil Aviation Organization.

A summary of the petition was published in the Federal Register on March 25, 2009 (74 Fed. Reg. 12924). The FAA received comments opposing the grant of this exemption from NetJets Aviation, Inc., AlphaFlying, In c., and Bombardier Aerospace Corporation (Flexjet), as well as a response to these comments from CM. These comments are available for review in the rulemaking docket.

NetJets raised several concerns in its comments generally based on the differences between the current fractional ownership structure and CM’s proposed Fractional Program Trust Structure. First, NetJets argued that a grant of the exemption would dilute key concepts of ownership that the FAA relied upon in issuing subpart K and in determining that fractional ownership program operations are private, general aviation operations. Second, it commented that the exemption would violate the clear language of part 91, subpart K because the dry lease under the CM program would not be “among all of the fractional owners” as required in the regulation but would also include the program manager. Third, NetJets commented that5

the proposed Fractional Program Trust Structure would potentially betray the trust and understandings developed during the Fractional Ownership Aviation Rulemaking Committee (FOARC) and subpart K rulemaking. Fourth, it argued that the proposed Fractional Program Trust Structure might cause other U.S. Government agencies to reconsider their treatment of fractional ownership program operations in areas such as tax, civil aviation security, and customs. Fifth, it commented that approval of the fractional program structure could have an adverse impact on the ability of fractional ownership programs to conduct international operations as private, general aviation operations. Sixth, NetJets argued that an approval of the CM program would be more appropriately dealt with through rulemaking because of the broad impact a grant of this petition might have on the fractional ownership industry and potential unintended consequences apart from fractional ownership program operations. Finally, NetJets commented that the Fractional Program Trust Structure may create difficulties with registering security interests in the fractional beneficial interests and will result in a loss of public transparency regardi ng the ownership of civil aircraft interests.

The comments received from AlphaFlying, Inc., and Flexjet mirror the comments raised by

NetJets.

CM filed a response to these comments. In its response, CM noted that, if granted, this exemption would not affect other subpart K programs. CM also argued that the FAA should review its proposal on its merits within the context of the regulations and the review should not be influenced by its competitors’ opposition to the Fractional Program Trust Structure. CM stated that there are no regulatory issues with the proposed structure, which, if granted, would address a need expressed by the FAA Registry for a stable registration model for fractionally owned aircraft. CM argued that the proposed Fractional Program Trust Structure conforms to the fractional ownership program required and contemplated by subpart K. It contended that because the rights associated with ownership of a beneficial interest in a Delaware statutory trust are indistinguishable fr om ownership of an aircraft interest in a statutory or common law trust now widely used in the fractional industry, and thus the proposed Fractional Program Trust Structure would conform to the fractional ownership program contemplated by subpart K.

CM also argued that the lease/sublease structure of its Fractional Program Trust Structure is not substantially different from the current frac tional ownership dry-lease structure. Further, CM stated that operational control of fractional ownership aircraft is specifically established under §§ 91.1009, 91.1011, and 91.1013, which would still govern its operations. CM noted that it is unaware of any issues that approval of its structure will create with foreign aviation authorities. Further, it stated that CM has limited international operations and it should, therefore, not be assumed that an exemption would cause other entities to reevaluate the nature of fractional programs. It argued that the exemption will only address CM’s program and will not affect other programs that would be free to continue operating under their current practices. Finally, CM asserted that the Frac tional Program Trust Structure would streamline and increase the efficiency of registration of fractional ownership interests at the FAA Registry and that if such a program is unappealing to lenders, the marketplace will constrain6

its use. It further noted that its program will not create security concerns because fractional ownership programs require fractional managers to maintain a list of all fractional owners and associate aircraft, which would still apply to owners under the Fractional Program Trust

Structure.

The FAA's analysis is as follows:

The FAA finds that a grant of exemption would not be in the public interest.

After evaluating CM’s petition, the FAA has conc luded that there are significant differences between the structure of fractional ownership programs as established by part 91, subpart K, and the proposed Fractional Program Trust Structure detailed in CM’s proposal. Due to the significant alterations to fractional ownership programs that would result from a grant of this petition, including an impact on fractional ownership operations conducted internationally, the FAA concludes that granting this exemption would not be in the public interest.

When developing the fractional ownership rules, the FAA established the FOARC, which was composed of 27 representatives of the various constituencies interested in developing regulations creating fractional ownership programs. The FOARC reached unanimous consensus on all of its recommendations for changes to parts 91 and 135. The FAA notes that these recommendations did not include the concepts currently proposed by the petitioner. Likewise, neither the preamble to the notice of proposed rulemaking (NPRM) nor the final rule considered alternative ownership arrangements or definitions such as those proposed by the petitioner. See 66 Fed. Reg. 37520 (Jul. 18, 2001); 68 Fed. Reg. 54520 (Sept. 17, 2003). The FAA notes that both the final rule and NPRM that implemented subpart K stressed the importance of maintaining operational control and having clear delineation of regulatory responsibility for all fractional owners. The final rule noted that the “fractional owner has the ultimate responsibility to ensure the safety of the operation and compliance with the rules.” See 68 Fed. Reg. 54531.

Granting the proposed exemption to § 91.1001, thereby allowing the Fractional Program Trust Structure to operate without “a dry-lease aircraft exchange arrangement among all of the fractional owners,” would be contrary to longstanding legal interpretations regarding an operator’s responsibility for maintaining operational control and the intent of subpart K.Under a dry-lease arrangement, the lessee retains operational control of the aircraft. The drylease provision of subpart K was implemented to facilitate the use of the owner’s aircraft using the program manager to schedule the aircraft from within the dry lease exchange pool, while at the same time ensuring that operational control continues to reside with the lessee. See 68 Fed. Reg. 54537.

Under the proposed Fractional Program Trust Structure, a program participant would own a beneficial interest in a particular aircraft but would have access to all of the aircraft in the fractional program. In order to facilitate use of the owner’s interest in a particular program aircraft by other fractional owners within the same program, CM would dry lease the aircraft to the CM, who would then sublease the aircraft to program participants. CM stated in its7

petition that, under its proposal, the program participants would sublease the aircraft from CM without crew. Nevertheless, we note that the “employment, furnishing, or contracting of pilots” is a fundamental service provided by fractional ownership program managers. See § 91.1001(b)(8)(ii); 68 Fed. Reg. 54526. Accordingly, although it is possible that fractional owners would pilot program aircraft, or independently arrange for flightcrew, we anticipate that CM will continue to provide flightcr ew for flights conducted under the fractional ownership program. In the event that a program aircraft is operated under a sublease from CM to a program participant, and CM is providing the flightcrew, according to long held understanding, the arrangement would be considered a wet lease and operational control of the flight would reside with CM, rather than th e lessee, which is contrary to the intent of subpart K. See Legal Interpretation to George C. Douglas, from Rebecca B. MacPherson, Assistant Chief Counsel for Regulations (Jul. 31, 2009); Legal Interpretation to Fred Meier, from Rebecca B. MacPherson, Assistant Chief Counsel for Regulations (Jun. 12, 2009).

Moreover, the final rule emphasized the importance of the dry-lease provision by cautioning that management arrangements which do not “meet all of the definitional elements of a fractional program under subpart K, i.e., dry lease aircraft exchange agreement . . .” could not take advantage of subpart K regulations. See 68 Fed. Reg. 54526. The regulations do not contemplate the program manager providing an aircraft operated pursuant to subpart K to the

fractional owners. See 68 Fed. Reg. 54537. (“The program manager does not provide the aircraft . . . .”) Such an arrangement would be tantamount to allowing the program manager to conduct commercial operations without a part 119 certificate, which was not the intent of subpart K. Accordingly, the FAA does not believe that broadening these principles would be in the public interest.

Accordingly, to accomplish what the petitioners seek, the FAA would be required to alter the long-held understanding that operational control lies with the lessor under a wet-lease agreement and alter the definitional elements of subpart K. Although CM stated that program participants would continue to receive briefings on operational control and sign an acknowledgment that they are in operational control of the aircraft, as currently provided for in subpart K, the FAA does not believe that such an arrangement should be used in operations under subpart K of part 91. Rather, such flights would be required to be operated pursuant to a part 119 certificate.

Next, the FAA does not agree with CM’s contention that the current rule’s inclusion of a multi-year leasehold interest in the definition of “fractional ownership interest” opens the door to fractional ownership structures other than actual ownership or lease of the aircraft. CM argues that other ownership arrangements, such as its proposed Fractional Program Trust Structure, would be consistent with current regulations because the option for a leasehold

interest in the definition of “fractional ownershi p interest” demonstrates that ownership is not restricted to holders of legal title to an aircraft or a requirement to register that ownership interest with the FAA Registry.

Subpart K defines a fractional ownership interest as the ownership of an interest or holding of8

a multi-year leasehold interest, or a multi-year leasehold interest that is convertible into an ownership interest in a program aircraft. See 14 CFR § 91.1001(b)(4). In the preamble to the final rule, the FAA noted that a “long-term lease [is] equivalent to an ownership interest” thus permitting leasing under subpart K. See 68 Fed. Reg. 54536. This statement, and the regulatory requirements of subpart K, must be read narrowly. In the NPRM, the FAA stated, “[i]f an aircraft ownership arrangement does not fit within [the definitions of a fractional ownership program,] it may well fit within one or more of the existing operating models in part 91, subpart F . . . . In these circumstan ces, proposed subpart K would not apply.” See 66 Fed. Reg. 37524. The FAA reiterated this concept in the final rule by stating that “traditional management companies and other management arrangements may not meet all of the definitional elements of a fractional program under subpart K . . . and therefore would not be subject to regulation under subpart K.” See 68 Fed. Reg. 54526. Therefore, the FAA does not agree with CM that because a long-term lease may constitute a fractional ownership interest, the FAA would also consider a beneficial interest in a trust that holds actual title to the aircraft to also be a fractional ownership inte rest. Ownership of a beneficial interest in a trust which holds legal title to an aircraft is too far removed from actual ownership, unlike the multi-year leasehold of the actual aircraft.

Third, granting CM’s petition for exemption could negatively impact the ability of fractional ownership aircraft to operate under rules pertaining to international private aviation in foreign countries. Foreign civil aviation authorities generally consider fractional ownership programs to be international general aviation operations largely due to the understanding that fractional ownership program participants remain the registered owners of the aircraft they operate. As a result, fractional ownership aircraft operating in countries outside of the United States are generally not subject to those countries’ regulations governing commercial aviation.

Both the FAA and the DOT, Office of the Secretary, Aviation and International Affairs Division, share the concern that removing the re gistered ownership link to the aircraft by granting this petition would cause foreign countries to reevaluate whether fractional ownership operations may be conducted under the operating rules for general aviation. CM argued that the exemption would only apply to its operations and that its aircraft perform limited international operations. However, the FAA and DOT have determined that granting this petition would indicate, to foreign civil aviation authorities, a shift in the FAA’s policy that fractional ownership programs are not considered commercial operations.

Fourth, although CM is correct that a grant of this exemption would apply only to its program and would not have an immediate impact on the fractional ownership industry as a whole, such a grant would be precedential. Any subsequent petition for exemption that is materially similar to the one at hand would likely be summarily granted. Therefore, the FAA does not agree with CM that a grant of this exemption would have a limited impact on the fractional ownership industry. Given the industrywide eff ect on the structure of fractional aircraft ownership, such a change would be more appropriately accomplished through rulemaking.

Finally, CM contends that the proposed Fracti onal Program Trust Structure would result in9

cost savings to the FAA because it would reduce workload on the FAA Registry associated with processing, reviewing, and filing of docum ents associated with fractional ownership

programs. See CM Petition for Exemption at 10-12 (Jan. 26, 2009). CM also included in its filing a letter from FAA’s Flight Standards Se rvice Aircraft Registration Branch supporting an alternative ownership program for fractional aircraft and noting that such a model may reduce the burden placed on the FAA Registry. See CM Petition for Exemption at Exhibit B (Jan. 26, 2009). When implementing subpart K, the FAA considered the costs that would be incurred by the FAA for administering the rule and determined that such costs were acceptable given the anticipated safety benefits of the rule. See 68 Fed. Reg. 54556-57. Further, even assuming that the FAA may realize a cost savings under the Fractional Program Trust Structure, the FAA believes that such a cost savings would not outweigh the public

interest considerations discussed above.

In summary, this exemption, if granted, could significantly alter the way FAA, the public, and foreign civil aviation authorities view operational control, and its associated responsibilities, for fractional ownership operations. Additionally, if granted, this exemption would significantly alter the structure of fractional ownership programs as established in subpart K of part 91. Such a fundamental change to the structure of the fractional ownership rule as proposed by the petitioner is not appropriate for petition for exemption and would require rulemaking. Accordingly, the FAA does not find this petition to be in the public interest.

Finally, the FAA finds that the proposed Fr actional Program Trust Structure would be inconsistent with the regulations governing fractional ownership operations and could, therefore, not be implemented without an exemption from those regulations.

The FAA’s Decision:

In consideration of the foregoing, I find that a grant of exem ption would not be in the public interest. Therefore, pursuant to the authority contained in 49 U.S.C. §§ 40113 and 44701, delegated to me by the Administrator, the petition of CitationShares Management, LLC for an exemption from 14 CFR §§ 91.1001 and 91.23 is hereby denied.

Issued in Washington, D.C., on March 29, 2010.

/s/

John W. McGraw Acting Director, Flight Standards

Service