AFS

- 11

- 068

- E Exemption No. 10141A

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 PETITION FOR RECONSIDERATION

By letter dated November 29, 2010, Mr. John R. Copley, Garofalo Goerlich Hainbach PC, 1200 New Hampshire Avenue, NW

. , Suite 800, Washington, D

. C

. 20036

- 6802, on behalf of CitationShares Managem ent, LLC (CitationAir), filed a petition for reconsideration of the Federal Aviation Administration’s (FAA) September 30, 2010, denial of CititionAir’s petition for exemption from §§ 91.1001 and 91.23 of Title 14, Code of Federal Regulations (14 CFR).

T he petitioner requests relief from the following regulation:

Section 91.1001(b)(2) through (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 av ailable, 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 owner2

operating the aircraft will be d eemed 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 own ership 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 United States ( 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 su ch 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:

Ci tationShares Management, LLC (CitationAir ), a fractional program manager and certificated air carrier, has petitioned the Federal Aviation Administration for reconsideration

of its denial of an exemption from the following regulations pertaining to part 91 subpart K fractional ownership operations:

(1) CitationAir 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 ownership interest arising under a single Delaware statutory trust structure outlined in the CitationAir Fractional Program Trust Structure;3

(2) CitationAir requests an exemption from § 91.1001 to the extent necessary to clarify that “dry

- lease aircraft exchange,” as defined in § 91.1001(b)(2) of subpart K, may include the arrangement for exchange of aircraft arising under the CitationAir Fractional Program Trust Struc ture; and

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

section.

The purpose of the exemption would be to permit CitationAir to implement a Fractional Program Trust Structure for ownership, registration, and operation of fractional ownership program aircraft. A key feature of the proposed structure 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 title s of all the aircraft in the fractional program

, and fractional ownership p rogram participants would be beneficial owners of a series in the

trust relating to specific aircraft in the fractional program

. CitationAir would act as the fractional ownership program manager, would administer the statutory trust, and would continue op erating program aircraft as a part 135 certificate holder. The CitationAir Fractional Program Trust Structure would continue to follow the operational control provisions as set forth in §§ 91.1009 through 91.1013 of subpart K.

Additionally, CitationAir seeks to clarify that § 91.1001 pertaining to dry

- lease aircraft exchanges would apply to its proposed fractional ownership arrangement . Under the

CitationAir Fractional Program Trust Structure, there would not be a dry

- lease aircraft exchange arrangemen t among all of the fractional owners. Instead, CitationAir would hold a lease to the program aircraft entered into a statutory trust, and fractional owners would have access to all of the program aircraft, without crew, on an as needed basis through a sub lease directly from CitationAir

.

Finally, CitationAir 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 c omponent of the CitationAir Fractional Program Trust

Structure because CitationAir is a part 135 certificate holder.

In its petition for reconsideration, CitationAir as serts that ownership of a benefi cial inter e st in a trust that holds legal title to an a ircraft is the equivalent of actual ownership, with the possibility of gain or loss to the beneficial owner, and has been treated as such from the initiation of fractional ownership programs. It contrasts beneficial ownership with multi

- year leaseholds, i n particu lar those which are not finance base d b u t are mere operating leases,

which are quite distinct from actual ownership of an aircraft and the responsibilities that come

with it. Citation Air also asserts that th e FAA refused to consider Citat i o nAir’s assertion that any doubt as to the placement of operational control in the fractional owner participa n t would be dispelled by the unique provision of § 91.1013, requiring briefings on operational control4

and signing of an acknowledgement by th e fractional owner participant acknowledging operational control of the aircraft.

CitationAir also asserts that the FAA misapprehended the basis for relief with regard to the dry

- lease arrangement proposed in the program because it was merely seeking confirmation

t hat its program could be operated under the current dry

- lease provision of § 91.1001(b)(5). It

also asserts that the FAA failed to consider that a program aircraft may be included in the dry

lease aircraft exchange to supplement program operations, which shows that subpart K does not require that fractional owners lease their aircraft to each other and that its proposed program already meets the plain language requirement of subpart K as to dry

- lease exchange.

CitationAir further states that the FAA’s con cern about the effect of granting the petition on international subpart K operations is vague and undefined without substance and should not form the basis for rejecting the petition. It also states that the exemption would only apply to

CitationAir and o ther fractional operators would not be affected if the FAA approves the

program.

Finally, CitationAir asserts that the FAA did not fully consider the April 2007 letter from the Aircraft Registration Branch of the FAA’s Flight Standards Service stating tha t the growth of fractional ownership programs, and their associated aircraft registration needs, have placed an

administrative burden on the Registry reducing its ability to meet the registration needs of fractional operations and all other aircraft owners

.

The FAA's analysis is as follows:

Upon reconsideration, t he FAA finds that a grant of exemption would not be in the public

interest.

When considering a petition for exemption from the FAA’s aviation safety rules, the FAA must consider whether grant ing the petition would be in the public interest , and whether granting the exemption would adversely affect safety, or how the exemption would provide a level of safety at least equal to that provided by rule. See 14 C FR § 11.81.

The FAA initially denied CitationAir ’s petition because of a determination that it would not be in the public interest. Specifically, the FAA denied the petition after finding that: (1) the proposed Fractional Trust Program structure would be inconsistent with the requirements o f subpart K; (2) the proposed structure’s lack of dry

- lease aircraft exchange agreement among the owners would raise operational control questions; (3) a beneficial interest in a Delaware Statutory Trust is not the equivalent of a fractional ownership inte rest as contemplated by subpart K; and (4) a grant of the petition could call into doubt the view, held by foreign civil aviation authorities, that the fractional aircraft operations are general aviation operations. Additionally, the FAA found that the pr ecedential nature of an exemption, and the previously anticipated costs to the FAA of administering subpart K mitigated against granting the petition for exemption.5

Upon denial of a petition for exemption, the petitioner may ask the FAA to reconsider it s petition for exemption. The petition for reconsideration must show that the petitioner has a significant additional fact that was not considered, that the FAA made an important factual error in the denial, or that the FAA did not correctly interpret a l aw, regu lation, or precedent.

See 14 C.F.R. § 11.101. As discussed below CitationAir asserts that, in denying its petition, the FAA did not correctly interpret the regulations from which CitationAir seeks the exemption.

In its petition for reconsiderati on, CitationAir states that the FAA “misunderstood the essential nature of trust ownership and leasehold interest in an aircraft,” arguing that “traditional fractional programs treat beneficial owners of single trusts as fractional owners under subpart K.” CitationAir also noted that owners of beneficial trusts share the possibility of financial gains or losses as do traditional aircraft owners. The petitioner also highlighted that a beneficial owner in a Delaware statutory trust shares in the profits and losses of the

beneficial interest.

The FAA agrees that fractions of aircraft may be owned in trust, however, the distinction between the ownership arrangement under subpart K and th e one proposed by CitationAir is

that

, currently under subpart K, trust s are the registered fractional owner of an aircraft. A trust

is not the sole owner of the aircraft with the fractional interest arising from a beneficial interest sold to program participants

. CitationAir argued in its petition for exemption that

owners hip interest does not require the owner to be an FAA registered owner evidenced by the acceptability of a long

- term lease for fractional ownership.

Upon reconsideration, the FAA maintains its determination that the term “fractional ownership interes t” must be read narrowly and the fact that the regulation considers a lease

hold an ownership interest does not open the door to other forms of ownership interest other

than an interest in the aircraft itself. In this case, the FAA does not believe that s elling an interest in a trust that owns the aircraft is the same a s purchase of a share of the aircraft in

trust.

CitationAir also stated that the FAA refused to consider its assertion that mandatory briefings and written acknowledgment that the fractiona l owner maintains operational control would dispel concerns with which entity maintains operational control under its proposed beneficial ownership structure

.

U nder CitationAir’s proposed program fractionally owned aircraft would be subleased from

C itatio n A ir to the fractional owner . A s program manager, CitationAir would also provide the flight crew

. This arrangement would be a wet lease because the aircraft and the crew are provided by the same source. T he underlying assumption is that under a wet leas e operational

control remain s with the registered owner of the aircraft . However, determinations of operational control are fact specific and made on a case

- by

- case basis. See Legal6

Interpretation to Leonard Kirsch, from Rebecca B. MacPherson, Assistant Chief Counsel for Regulations (June 17, 2011). The FAA acknowledges that provided the terms of § 91.1009 pertaining to the operational control of fractional program aircraft are met

, the written acknowledgement by the program participant that he or she h as operational control of a flight could indicate operational control by that person. However, because the proposed ownership structure would not be consistent with the traditional assumptions associated with what person holds operational control under a wet lease, the proposed change could create scenarios where operational control remains in question. Additionally, the proposed ownership structure would create a new barrier for oversight between the FAA and registered owners because the FAA would have t o contact the fractional ownership program manager to determine the parties holding beneficial interest in a trust. Such a fundamental change to the fractional ownership model would be more appropriately made by rulemaking

.

C ita t ionAir also stated the FA A misunderstood the nature of its request with respect to the dry lease provision of subpart K asserting that its proposed program already meets the plain language requirement of subpart K and had only asked the FAA for confirmation of that

statement

. The FAA acknowledges that the initial petition asked for an exemption from that provision “to the extent necessary to clarify that ‘dry lease exchange’ . . . includes the arrangement for exchange of aircraft arising under ” the proposed trust ownership structu re. It adds in its petition for reconsideration that “[s]ubpart K does not require that the fractional

owners lease their aircraft to each other.”

Under the CitationAir proposal

, parties w ould not enter into a dry lease; rather

, CitationAir

“will have an arrangement to sublease all of the aircraft to each of the fractional owners.” Petition for Exemption at 4. As defined in the regulation, a dry

- lease aircraft exchange is “an arrangement, d ocumented by the written program agreements, under which the pro gram aircraft are available, on an as needed basis without crew, to each fractional owner.” CitationAir asserts that its sublease arrangement provides the requisite access to program aircraft and therefore meets the definition of a “dry

- lease aircraft exc hange

. ” The FAA does not agree. In reviewing the definition, we look to the meaning of the words used in the regulation . The regulation requires a “dry

- lease aircraft exchange agreement.” Under CitationAir’s reading of the regulation the term “dry

- leas e” would be read out of the definition thereby permitting any type of “aircraft exchange agreement” that meets the remainder of the

definition. A review of the preambles to the NPRM and Final Rule implementing subpart K

shows no evidence that CitationAir’ s reading is the preferred interpretation.

T he FAA interprets the term “ dry lease” as being a critical element of the definition. A “dry

lease” is defined as a lease of an aircraft in which the owner provides the aircraft and the lessee supplies his or her own flight crew and retains operational control of the flight. See Legal Interpretation to George C. Douglas, Jr., from Rebecca B. MacPherson, Assistant Chief Counsel for Regulations (July 21, 2009). Here, the aircraft owner (the trust) dry

- leases a n aircraft to CitationAir which, in turn, subleases the aircraft to the program participants who

own a share in the trust that owns the aircraft. Import antly, CitationAir also provides the7

flight crew to the participants, creating a wet lease

. See Legal Interpretation to Jerry A. Eichenberger, from Rebecca B. MacPherson, Assistant Chief Counsel for Regulations (Aug ust 26, 2011).

As noted in the underlying denial

, management arrangements which do not “meet all of the

definitional elements of a fraction al program under subpart K, i.e., dry lease aircraft excha ng e agreement . . .” would not be subject to subpart K regulations. Accordingly, the FAA is not altering its determination that the aircraft exchange proposed by Citation Air does not meet the requi rement for a dry

- lease exchange agreement in subpart K.

CitationAir stated that the FAA ’s and DOT ’ s concerns with a grant o f exemption on the ability of fractional ownership aircraft to operate under part 91 in foreign countries are vague and undefined an d should not be used as the basis for rejecting the petition. The FAA disagrees and reiterates its statement in the underlying denial that, along with the DOT, Office of the Secretary, Aviation and International Affairs Division , it believe s that granting the petition would indicate to foreign civil aviation authorities a shift in the FAA’s policy that fractional ownership programs are not considered commercial operations. Also, as noted, the fact that fractional ownership program participants are the re gistered owners of the aircraft they operate is key to fractional aircraft operations being considered international general aviation operations.

CitationAir stated that the FAA’s determination that a grant of exe m ption would be precedential was incorre ct and asserted that a grant of petition would not be a blanket change for fractional ownership programs. CitationAir is correct that a grant of exemption would not require other programs to change the aircraft ownership model used by other companies , and that a summary grant of exemption would not be available to petitioners that did not want to run a program set up the same way as Citation Air ’s.

Nevertheless, if this exemption is granted and another petitioner submitted a program to the FAA proposing fractional aircraft ownership by beneficial trust, similar to what was proposed here, the FAA wou ld likely grant that exemption because of the similarity of the facts presented

. We reiterate the conclusion reached in the denial of exemption that such a ch ange, which would allow for an industry

- wide change in the method of ownership of aircraft under subpart K is more appropriately accomplished through rulemaking.

Finally, CitationAir argued that the FAA’s determination that the costs of re

- registration of fractionally owned aircraft were accounted for in the rule implementing subpart K are mitigated by the April 2007 letter from the FAA R egistry noting that the growth of such programs have, in fact, created a burden on the R egistry. In the denial of the u nderlying petition, the FAA noted the letter and its statement that a stable registration model may reduce the burden on the FAA Registry. Nevertheless, the FAA determined that any cost savings would not outweigh the public interest considerations weighin g against granting the petition. Upon reconsideration, the FAA is not revising this determination.8

In conclusion, the FAA maintains that the proposed Fractional Program Trust Structure would be inconsistent with the regulations governing fractional owner ship operations, and any such change would be appropriately made through rulemaking and not by exemption

.

The FAA’s Decision

In consideration of the foregoing, I find that a grant of exemption would not be in the public interest. Therefore, pursuant to t he authority contained in 49 U.S.C. §§ 40113 and 44701, the petition for reconsideration from CitationShares Management , LLC for an exemption from

14 CFR §§ 91.1001 and 91.23 is denied.

Issued in Washington, D

. C

. , on June 23, 2013.

/s/

Michael P. Huerta

Administra tor