Aircraft fractional ownership in Brazil - a long-waited regulation

Adriana Simões

Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados, Brazil

adriana.simoes@mattosfilho.com.br

Marcelle Fazzato Lopes

Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados, Brazil

marcelle.lopes@mattosfilho.com.br

Introduction

As a well-established business model in North America and Europe, the fractional ownership operation of aircraft is aligned with the shared economy trend and has been designed to follow the constant change of profile of business aviation customers.

Based on the collective use of an aircraft by the acquisition of shares (minimum percentage of rights to use the asset), the model allows business aviation customers to ‘own’ business jets and use its features for a smaller fraction of the price for the entire operation, as fixed costs are equally divided amongst the shareholders and variable costs may be charged in proportion to the time of use of the aircraft.

According to Corporate Jet Investor data[1], the leading country in a number of most popular private jet registries in 2014 was the United States, with more than 12,000 aircraft, followed by Brazil, registering 764 aircraft. Therefore, Brazil is one of the major players worldwide pertaining to the private jet market, indicating a promising country for business aviation and its fostering mechanisms, such as the fractional ownership of aircraft.

Brazilian regulation

History

As the business model continued to grow in several jurisdictions, multiple companies started to explore the market in Brazil, despite it not being officially regulated by the National Civil Aviation Agency (‘ANAC’) until February 2021 – as further detailed below. Prior to the issuance of the specific regulation, companies offering fractional ownership of aircraft have adapted their operations to the general rules applicable to private aircraft, governed by the Brazilian Civil Aviation Regulation No. 91 (‘RBAC No. 91’), or to air taxis, governed by the Brazilian Civil Aviation Regulation (RBAC) No. 135. The companies usually created cooperatives between the ‘shareholders’ or even established structures of complete joint ownership among the interested investors to govern the shared operation.

Identifying uncertainties related to the allocation of liabilities before ANAC and third parties, such as in the case of an incident or accident occurring with the aircraft, and the allocation of liability for violations, ANAC convened the Public Hearing No. 17/2015 to receive public comments regarding a regulatory proposal for the fractional ownership model.

Taking into account that new regulations would directly impact on the then-current social and economic interests of Brazilian civil aviation, which had previously evolved, ANAC adjusted the proposed wording as per the public comments received in Public Hearing No. 17/2015 and reopened the possibility for further public comments through an additional Public Hearing No. 15/2019.

Nearly two years after the end of Public Hearing No. 15/2019, ANAC published Resolution No. 606, of 9 February 2021, to amend the RBAC No. 91 and insert the Subpart K regarding fractional ownership operations (‘Subpart K’). The proposal was inspired by Subpart K of the Code of Federal Regulations, Title 14, Chapter I, Subchapter F, Part 91, published by the Federal Aviation Administration (FAA) (‘FAA Regulation’), the civil aviation authority of the United States of America (‘US’).

Resolution No. 606

Subpart K establishes the requirements for operation of private aircraft under a fractional ownership programme. The programme shall be comprised of (i) a single manager and (ii) two or more airworthy aircraft, with at least one aircraft having two or more shareholders. The relation between the manager and the shareholders must be formalised through a programme agreement that shall be reported to ANAC (despite maintaining its confidential status).

An important feature of the Brazilian regulation is the allowance of the participation of shareholders in a fractional ownership programme indirectly, being represented by partnerships or associations of shareholders. The creation of entities as intermediaries to represent individual investor shareholders in a business relationship with the programme manager led to a change in the structure and closing of programme agreements: when partnerships or associations are chosen by shareholders to intermediate the relationship, the programme agreements must also be signed by these entities, in addition to the shareholders themselves and the programme manager.

As per the provisions of Subpart K, each shareholder shall have ownership rights, possession rights or possession rights convertible into ownership of the aircraft included within the programme, observing the minimum fractional ownership interest established by the regulation of (i) 1/32 of rotary-wing aircraft and (ii) 1/16 of fixed-wing aircraft. The afore-mentioned limitation determines the maximum flight hours that can be used by the shareholders, once Brazilian regulation prevents the use of more flight hours than those attributed to the interests held by each shareholder.

The manager shall have mandatory management requirements issued by ANAC (especificações administrativas) in order to conduct its operations. It shall be the manager's responsibility, in its set of requirements, to maintain an updated list of all shareholders and aircraft data, among other requirements. In addition, the manager shall be responsible for the provision of services related to hiring, training and qualification of pilots and other crew members, as well as aircraft maintenance and the implementation of operational safety management system.

Subpart K also provides for ANAC’s right to inspect, at any time, the manager's compliance with the applicable rules and administrative requirements. It is worth pointing out that, as applicable to any private operation conducted under RBAC No. 91 in general, the regulation expressly forbids the commercial transportation of people and/or goods on shared programme flights.

Under the fractional ownership model designed by ANAC, the manager must be the responsible party for the operational control of the aircraft and shall be the figure registered before the Brazilian Aeronautical Registry, despite the fact that the aircraft will be operated for the benefit of each shareholder.

Main differences from the FAA Regulation

Although Subpart K was inspired by the FAA Regulation, ANAC has proceeded with a few important modifications to adapt the rules to the Brazilian environment. One of the main differences refers to the term length of the programme agreements. Despite the existence, in both countries, of legal instruments to regulate the relations between manager and shareholders, the FAA Regulation provides for multi-year agreements covering fractional ownership, while Brazil opted for a one-year minimum duration of the contract.

Moreover, there are important changes regarding operational control. While the FAA Regulation determines that the operational control of a flight shall or shall not be assigned to the shareholder depending on the circumstances of the operation, the operational control will always be attributed to the programme manager in Brazil, even when the flight is carried out for the benefit of a shareholder. Furthermore, the responsibilities regarding the operation rely on the Brazilian manager, instead of the ultimate responsibility of the shareholder as reflected in the FAA Regulation. Although the delegation to the programme manager of tasks related to the shareholder’s responsibility is acceptable in the US, there is no provision in this regard in the Brazilian regulation.

In terms of tests and inspections, the FAA Regulation enables the total or partial suspension of management qualifications when the programme manager fails to present the regulatory requirements, or any sort of record, document or report required by the competent authority. Although Subpart K provides for the inspections by ANAC to ascertain the compliance of a programme manager to its management requirements, statutes or applicable regulation, the aviation authority may not proceed with a suspension along the lines of the FAA Regulation.

Lastly, the FAA Regulation provides for an internal anonymous safety reporting procedure seeking to promote safe operations, as well as for the establishment of procedures to respond to incidents or accidents arising from the operation. Brazil, in turn, developed an extensive section in Subpart K dedicated to the system of management for operational safety, which requires numerous measures from operators in order to guarantee safe operations by identifying dangers and operational risks, setting goals and performance indicators for operational safety, and applying corrective and preventive actions.

Conclusion

The amendment of RBAC No. 91 introducing Subpart K, aligned with the US standards, illustrates Brazil’s commitment to Article 37 of the Chicago Convention, which establishes a duty of collaboration between contracting states to promote, to the greatest extent possible, the uniformity in regulations, standards, procedures and organisation in relation to aircraft.

However, even though introducing Subpart K in the Brazilian legal system has been an important achievement to the fractional ownership model, there are certain issues that remain uncertain such as the possibility of attributing an infraction to the shareholder. Considering that the operational control of shared programme flights is attributed to the programmre manager in Brazil, at first glance it would be unlikely to punish the shareholder directly for potential infractions. ANAC could argue that personal acts carried out by the shareholder led to an infraction, and the possibility of attributing such infraction directly to the shareholder or not must be addressed by the programme agreements.

Also, we may foresee issues related to the possibility of a manager’s allocation of joint liability of the shareholder, in case of infractions, accidents or incidents. In this regard, arguing that the shareholder was the actual operator of the flight could hold him jointly accountable, according to the Brazilian Aeronautical Code. However, this allocation would remove the operational control from the programme manager and, therefore, would mischaracterise the operation as a fractional ownership model, according to RBAC No. 91.

The implementation in Brazil of a worldwide long-standing regulation on fractional ownership programmes demonstrates the intention of Brazilian authorities to foster a new operation model through modern and internationally recognised rules. Moreover, fractional ownership is expected to foster new deals in the aeronautical sector and to have positive economic impacts for business aviation.