Strong Economic Growth Has Brazil's Business Aviation Market Booming

As other countries witnessed their general aviation sectors shrink during the economic downturn, Brazil’s has thrived. According to top Brazilian domestic aviation experts, the industry is expected to grow by 9.5% this year. This follows a 7.14% increase year over year in 2012 and a 6.4% increase in 2011. This growth has come from all sectors of the general aviation industry, but especially from business aviation, according to Dorieldo Luis dos Prazeres, an air-control expert at the Brazilian Civil Aviation Agency. Brazil has the world’s sixth largest economy and the second largest general aviation fleet behind only the United States. Late last year, Brazil hosted the Latin American Business Aviation Conference and Exhibition (“LABACE”) in San Paulo, an event that organizers said was the second largest general aviation show in the world after the one in Oshkosh, Wisconsin. The country is home to close to 1,700 corporate aircraft, a number which is expected to rise as Brazil’s economy continues to flourish. Brazil is also home to Embraer, the world’s third largest commercial aircraft manufacturer, behind Boeing and AirBus. Embraer began manufacturing business aircraft in 2002 and has several available models.  

Couple this extraordinary growth with Brazil’s playing host to two major international events in the next three years, the 2014 World Cup and the 2016 Olympics, and you see an enormous need for aviation infrastructure to move people and cargo. To meet this need, last month, Brazil’s government unveiled an ambitious plan to build eight new mega-airports and 800 new regional airports. According to President Dilma Rouseff, any city with a population close to 100,000 people should have an accessible airport within 60 kilometers. In doing so, the Government clarified its goals to boost the general aviation industry, especially the existence of small- to medium-sized airplanes and private aircraft ownership.

The Brazilian general aviation market could present industry participants with numerous business opportunities over the next several years in a variety of areas. As this issue progresses, please check back to this blog for future posts.

China's Corporate Aircraft Industry Takes Off

Spurred by China’s continuous economic growth and desire to maintain the country’s strong presence in the international marketplace, China announced that the general aviation sector is now an economic growth pillar of the country’s 12th Five-Year Plan (2011-2015). As a result, China has eased regulations restricting corporate aircraft ownership by private individuals and companies, and relaxed regulations to permit corporate aircraft to fly in low-altitude airspace. The corporate aircraft industry responded by courting thousands of China’s newly minted millionaires and billionaires. In fact, last week a Chinese Luxury Consumer White Paper suggested that there are 63,500 ultra-high net worth individuals in China.

Corporate conglomerates like General Electric Co.(through its subsidiary GE Capital Corporate Aircraft Finance) and Honeywell International Inc.(through its Aerospace Division) are seizing the opportunity to provide capital, financing and manufacturing expertise -- having recognized the importance of this market and the opportunities to meet today’s and tomorrow’s demands. For instance, industry insiders expect last year’s registration of 132 private aircraft on China’s mainland to grow and surpass 1,000 in ten years.

This, of course, begs a few questions. Who will provide these aircraft? Who will pilot them? Who will provide maintenance? Who will update existing airport infrastructure? To answer some of these very questions, over 150 Chinese and international industry leaders met last week in Shanghai at the Asian Business Aviation Conference. At the conference, 30 corporate aircraft were on display, along with exhibits demonstrating companies’ products and services in the corporate aircraft industry.

Industry experts agree that opportunities in China exist today. Those already in the corporate aviation industry space should look to capitalize on this economic opportunity and bring their unique products and services to a growing China market.

Special thanks to Sullivan & Worcester’s Reggie McKoy, Legal Research and Business Development and Marketing Intern, for assistance in preparing this post.

White House Completes Review of Effluent Limitation Guidelines Governing Discharges From Airport Deicing Operations

Recently the White House Office of Management and Budget (“OMB”) completed its review of the Environmental Protection Agency’s (“EPA”) Effluent Limitation Guidelines governing discharges from airport deicing operations. The guidelines, which will be implemented under the National Pollutant Discharge Elimination System (“NPDES”), require airports within the scope of the rules to collect spent deicing/anti-icing fluid and treat the associated wastewater. According to EPA’s website, the Agency projects the Final Rule to be published in the Federal Register in May 2012. 

The Federal Aviation Administration (“FAA”) requires airlines to remove frozen precipitation from an aircraft and airfield pavement to protect the safety of the passengers and cargo. Airlines use anti-icing/deicing (“ADF”) because it is economical and effective. According to EPA, during typical wet weather conditions, it can take an estimated 150-1,000 gallons of ADF to deice smaller corporate or business size aircrafts and 1,000-4,000 gallons to deice a large commercial aircraft. The concerns raised by environmentalists and residents living close to airports are that chemicals within ADF discharges may affect nearby surface and ground water quality, including reductions in dissolved oxygen, fish kills and contamination of drinking water sources. After more than a decade of research, EPA agreed.

The proposed Effluent Limitation Guidelines require airlines to use the best available technology to control direct discharges of toxic and non-conventional pollutants. Factors considered in assessing the best available technology include the cost of achieving effluent reductions, the age of the equipment and facilities involved, the process employed and potential energy impacts.

The use of best available technology and the amount of ADF required to be captured depends on the number of annual departures and the gallons of ADF used. According to the guidelines, an airport using more than 460,000 gallons of ADF annually, with more than 1,000 annual commercial jet departures and more than 10,000 departures of all aircraft must use best available technology to capture 60 percent of used ADF. Airports using less than 460,000 gallons of ADF annually must use best available technology to capture 20 percent of used ADF, meet the effluent limit for chemical oxygen and certify use of non-urea based pavement deicers or meet the effluent limit for ammonia. Additionally, airports with more than 1,000 annual jet departures and fewer than 10,000 annual departures must certify use of non-urea based pavement deicers or meet the effluent limit for ammonia.

This begs the question, who’s paying the bill for the purchase and maintenance of the best available technology; airports, airlines or customers? EPA’s proposed guidelines state that historically, most or all airport costs are eventually paid by airlines and passed through to airline customers. However, due to severe financial distress experienced by the airlines after 9/11 and the recent economic recession, cost pass through percentages by airports are significantly lower than a decade ago when the rate was 100 percent. For large airline operations and airports, the effect of the regulation won’t disrupt their bottom line; by contrast, for many small operators and airports, the cost of this regulation may be more than they can bear. 

Some airports have decided to reduce or eliminate their use of ADF altogether. For example, according to a WINGS Magazine article, New York’s John F. Kennedy Airport and New Jersey’s Newark International Airport invested in an Infrared Deicer technology designed and built by Radiant Aviation Services, Inc. The airports employing this new technology as an alternative to ADF, have found it to be reliable and cost-effective.

For airports with deicing operations, requirements for capture and mitigation of ADF will soon become a reality as EPA works toward finalizing and implementing its Effluent Limitation Guidelines. Airports meeting the criteria outlined in the proposed guidelines should begin preparing to meet these standards. As this issue progresses, please check back to this blog for future posts.

Special thanks to Sullivan & Worcester’s Legal Research and Business Development Intern, Reginald McKoy II, for assistance in preparing this post.

Recent Statements Highlight Difficulty in Achieving a Global Compromise on Aviation Emissions Regulation

Since taking effect on January 1, 2012, the European Union Emissions Trading Scheme (“EU-ETS”) has continued to be a hot button issue among the international aviation community. As such, much of the recent content of this blog has been devoted to covering this unfolding issue, including the following posts:

Global aviation emissions negotiations are ongoing at the International Civil Aviation Organization (“ICAO”), however, each side of the question has taken a hard-line position which could make a compromise difficult or even unrealistic. Late last month, representatives from more than 20 non-EU countries, including the Russian Federation, the United States, India, China, and Japan met in Moscow, Russia in an informal “coalition of the unwilling” to protest their inclusion in the EU-ETS and to discuss measures to counteract its effects. The meeting resulted in a signed declaration that each country would consider a variety of actions including strongly urging the ICAO to adopt a multilateral approach toward international civil aviation emissions, barring their country’s aircraft operators from complying with the EU-ETS, and/or imposing levies/charges on EU aircraft operators. The joint declaration can be found here, as communicated by the Russian Federation. Continued discussions are planned for this summer in Saudi Arabia. Although most believe that the rhetoric of the Moscow joint declaration was “less aggressive” than previous draft statements, it may be enough to create momentum toward a global solution to this problem.

This month, a joint announcement was released by Airbus and eight other EU aviation companies stating that the current situation is “intolerable” and that threatened retaliation will have serious negative effects on the EU aviation industry. Airbus, Air Berlin, Air France, British Airways, Iberia, Lufthansa, MTU Aero Engines, Safran, and Virgin Atlantic all called for a global compromise facilitated through the ICAO. Shortly after its release, Connie Hedegaard, the EU’s Climate Action Commissioner, applauded the statement as creating more pressure for global action to regulate aviation emissions. The Office of the EU’s Climate Action Commissioner has preferred a global consensus approach, but has publicly and steadfastly held its position to move forward with the ETS despite the dissidence from non-EU countries.    

Among the aviation industry, the greatest concern is a resulting international trade war. China, for example, has reportedly told its airline operators to not cooperate in the EU-ETS and has suspended $12 billion worth of aircraft orders with Airbus, placing thousands of jobs at jeopardy. Reports indicate that India is contemplating a similar stance. As demonstrated by the Moscow joint declaration, this could just be the tip of the proverbial iceberg as other countries are considering similar countermeasures and further retaliatory restrictions on EU aircraft operators. The EU aviation industry is worried, and with good reason, that other important markets will follow in China’s footsteps.

The ICAO has established a dedicated working group, consisting of five member states and the International Air Transport Association (“IATA”), to study the issue and propose a global framework for international aviation emissions by the end of 2012, so that it can be adopted at the next IATA governing conference in September 2013. The ICAO may create any type of international regulation system, however, a compromise may come from one of two clauses in the 2008 law (2008/101/EC) that allow for the ETS to be easily modified. First, flights into the EU could be exempt from the ETS if emissions-reducing measures are in place in the country of departure. Second, if equivalent measures to the ETS are put in place in the country of origin, then airline operators may be exempted. However, as indicated by the recent difficulty in approving a successor to the Kyoto Protocol, a global environmental agreement on aviation emissions will be difficult to reach among the ICAO’s 190-plus members.

As this issue progresses, please check back to this blog for future posts.

 

Special thanks to Sullivan & Worcester’s Michael Karp, Business Development and Marketing Intern, for assistance in preparing this post.

Pratt & Whitney's Innovation Aids Hawaiian Airlines in Earning Carbon Credits

Hawaiian Airlines has become the first airline to earn aviation-based carbon credits in part by utilizing Pratt & Whitney’s innovative EcoPower engine-washing system. EcoPower reduces fuel burn by using atomized water to wash engines in a closed-loop system that both filters and reuses water. According to the Hawaiian Airlines press release, the reduction of emissions by 22,000 metric tons “has had the equivalent effect of taking 700 cars off the road annually. In addition, since launching the program in 2005, Hawaiian’s commitment to the engine-washing system has saved the company more than 2.5 million gallons of fuel, along with an estimated 26,000 gallons of water that would have been used with traditional washing methods.” For more information on the technology, also check out Pratt & Whitney’s press release.

U.S. District Judge Dismisses Environmental Group's Legal Suit to Force EPA to Regulate Aircraft Engine Emissions

As previously posted, in June 2010, the Center for Biological Diversity (“CBD”) filed suit in the U.S. District Court for the District of Columbia (Ctr. for Biological Diversity et al. v. EPA et al., No. 1:10-cv-00985), alleging that the Environmental Protection Agency (“EPA”) unnecessarily “dragged its feet” and delayed making a determination that aircraft engine emissions significantly contribute to air pollution and climate change. 

Disagreeing with CBD’s position, on Wednesday, March 14, 2012, U.S. District Judge Frederick J. Scullin, Jr. declined to force EPA to study such emissions, stating that the agency properly focused on larger and more major pollution sources first and could not consolidate its processes for automobile and aircraft emissions findings into a single study because they were different sources. The ruling does require EPA to review CBD’s administrative petitions and respond within 90 days of the judge’s order, however, the ruling does not compel EPA to make an endangerment finding within 90 days of the order. As you may recall from our earlier post, on July 5, 2011, the court also dismissed CBD’s efforts to push for similar marine vessel and non-road vehicle engine emissions regulation.

EPA does plan to release findings on aircraft emissions in the future, but said it has focused its limited resources on a bigger piece of the air pollutant pie. As this issue progresses, please check back to this blog for future posts. 

Environmental Advocacy Group Sues EPA to Regulate Emissions from Aviation Gasoline

As we mentioned in our October 19, 2011 post, “EPA Sets Its Regulatory Cross Hairs on Leaded Aviation Fuel,” an environmental advocacy group, Friends of the Earth, filed a 2006 petition asking EPA to find that lead emissions from the use of aviation gasoline (“Avgas”) in the general aviation sector endangers public health, and to regulate such emissions under the Clean Air Act.  In May 2011, the group submitted a Notice of Intent to sue the EPA.  Last week, Friends of the Earth filed a lawsuit to challenge EPA’s failure to respond to the 180-day petition and for failure to regulate lead emissions from Avgas.

Friends of the Earth point to two facts that it says mandates immediate corrective action by EPA through regulation of Avgas: (1) according to EPA estimates, sixteen million people reside and three million children attend school in close proximity to the 22,000 airports where leaded Avgas may be used; and (2) there is no safe threshold for lead exposure.

As posted earlier, it is well-known that lead is highly toxic and may cause adverse health effects, thus, it was phased out of automobile gasoline many years ago.  A recent study from Duke University concluded that children living within 1,000 meters of an airport where Avgas is used show a higher blood lead level than other children.  EPA has commissioned air quality monitors be installed at 15 airports to gather information on lead pollution and the Federal Aviation Administration has assembled a task force to orchestrate a move away from Avgas use.  However, it appears that these actions were not good enough for Friends of the Earth.   According to the group, this lawsuit asks EPA “to move more quickly and definitively in establishing regulations.” 

Air pollution remains a top priority at EPA.  It is likely that we will see regulation of air emissions, such as lead emissions, in the near future.  As this issue progresses, please check back to this blog for future posts. 

FAA Outlines the Environmental Risks to the Aviation Industry

The United States Federal Aviation Administration (“FAA”) recently released its Aerospace Forecast for Fiscal Years 2012-2032. In the Forecast, FAA identified several risks to the aviation industry, including aviation’s impact on the environment and the uncertainty surrounding the European Union’s Emissions Trading Scheme (“EU ETS”).

Aviation sector operations are expected to grow to meet expanding national economic and mobility needs. With this growth comes increased noise pollution, air quality, and water quality concerns, especially around new construction and expansion of existing airports. Global carbon emissions from the fleet are also expected to rise, unless mitigated by new cleaner aircraft technologies, renewable fuels, operational improvements, and market based measures. If the aviation industry does not address these issues and make significant progress, tighter restrictions via environmental standards and operating limitations will be imposed, thus potentially depressing industry growth.

The report also notes that the effects of market based measures, such as the EU ETS, are unpredictable. Implementation of the EU ETS has the potential to increase costs for U.S. airlines, which in turn, could reduce the funds available for investments in new emissions reduction technology. However, the reverse could also be true. In the face of increased operating costs, U.S. airlines could hasten the development of more fuel efficient technologies. Most likely, U.S. airlines will face a short-term increase in operating costs that will soon be reduced through the adoption of cleaner technologies and fuels. Such an outcome would only be hastened by the uncertainty and recent increase in oil prices.

 

United States Navy Procures Historic Amount of Aviation Biofuel

The United States Navy recently purchased 450,000 gallons of algae and animal oil fat based biofuel from Louisiana based Dynamic Fuels, LLC, which is the single largest order of biofuel by the federal government in history. The biofuel is a drop-in fuel, meaning that no modifications to existing engines are necessary, and will be combined with marine diesel or aviation gas to be used in the newly formed “Green Strike Group.” The fuel combination has already been tested in the F/A – 18 fighter jet, as well as the V-22 Osprey and other sea vessels. Critics point out that the $12 million price-tag is too steep during a time which the military is already facing deep budget cuts, however, the Navy has always led the nation in transforming energy use and further, is responding to executive orders and instituted goals to invest in and to attain 50% of its fuel from renewable sources. The 450,000 gallons is only a fraction of the 1.26 billion gallons of fuel the Navy uses each year, but according to the USDA new release, the purchase “accelerates the development and demonstration of a homegrown fuel source that can reduce America’s, and our military’s, dependence on foreign oil.” The Navy’s procurement of the biofuel will enable it to test the cost and energy effectiveness on a large scale platform, which in turn could have a direct impact on the airline industry in the future.

UBS Report Could Spell the End of the EU-ETS

According to a recent article in The Australian, “Europe’s $287bn Carbon ‘waste’: UBS report,” Swiss banking giant UBS reported that the European Union’s Emissions Trading Scheme (“EU-ETS”) has cost the continent’s consumers $287 billion in exchange for a negligible impact on cutting carbon emissions, and as a result its carbon trading market is on the verge of collapse. The report claims that had the funds been part of a targeted approach to replace the European Union’s dirtiest power plants, emissions could have been reduced by 43 percent.

This report is yet another blow to the EU-ETS as worldwide opposition to the scheme grows, especially in the aviation industry. As reported in the article on the National Business Aviation Association website entitled, “Report: EU-ETS Will Be Costly, Have Minimal Emissions Impact,” the International Civil Aviation Organization (“ICAO”) has adopted a white paper from 26 nations including the U.S. and Canada urging the EU to omit its air operators from complying with the EU-ETS. Further, as posted earlier on this blog, the U.S. has made moves to legislatively prevent U.S. airlines from participating in the EU-ETS. Actions like these could cripple the EU-ETS and signal the end of the scheme as a whole.

The bank’s findings add even more uncertainty to the overall ability to implement an international carbon trading market. The report came at a time when the U.S. announced it would forgo its own cap-and-trade system, Canada became the first country to withdraw from the Kyoto Protocol, and the Durban, South Africa Climate Talks ended with a non-binding agreement that will not be implemented until 2020. As this issue progresses please check back to this blog for further posts.

Special thanks to Sullivan and Worcester’s Michael Karp, Business Development and Marketing intern, for preparing this post.

Coalition Lobbies Senate on Passage of EU-ETS Prohibition Bill

As a follow-up to our October 26, 2011 post entitled, “House Passes European Union Emissions Trading Scheme Prohibition Act,” the National Business Aviation Association (“NBAA”) along with 14 other organizations representing the aviation sector formed a coalition to lobby the Senate on the passage of Senate Bill S.1956. The Senate bill is similar to that of House bill H.R. 2594, which passed convincingly in the House and prohibits U.S. airlines from complying with the European Union Emissions Trading Scheme (“EU-ETS”). The coalition claims that U.S. operators would lose billions of dollars if the EU-ETS prohibition is not passed, which in turn would fill the coffers of the European governments.

The projected date of implementation of the EU-ETS is January 1, 2012. For more details regarding the Coalition please see the NBAA website.

 

Special thanks to Michael Karp, Business Development and Marketing Intern, for assistance in preparing this post.

Announcement of SEC Investigation into Disclosure of Perks Involving Use of Aircraft by Executive

A recent article in The Wall Street Journal, SEC Probes Nabors’s Executive Perks, Jets,” reported that Nabors Industries Ltd. had disclosed an informal Securities and Exchange Commission investigation related to perquisites and personal benefits received by the officers and directors of Nabors, including their use of non-commercial aircraft. It is possible that a June 2011 article in The Wall Street Journal, (“Corporate Jet Set: Leisure vs. Business”), piqued the SEC’s interest in Nabors’ executive compensation reporting practices. The June article reported that Nabors had not disclosed the cost of aircraft perks provided to its CEO in 2009 and 2010 – although FAA records indicated that during 2009 and 2010 the most visited destinations after Houston (where Nabors is based) were New York, Palm Beach and Martha’s Vineyard.  The article reported that Nabors’ CEO owned houses in all three places, and estimated that the costs of the flights to or from Palm Beach or Martha’s Vineyard alone would have cost around $704,000. A Nabors spokesman was quoted as saying that the company had offices in both Palm Beach and Martha’s Vineyard, at the CEO’s homes, and that the CEO “worked out of those locations a lot.”

The recent article serves as a reminder that the SEC has some firm views regarding the disclosure of what it considers “perquisites and other personal benefits.” Given that journalists and other interested parties recently have been provided with increased access to information on company aircraft movements through the curtailment of the BARR program (discussed below), this may be a good time for reporting companies to take another look at their reporting procedures regarding the personal use of aircraft by their executives.

Nabors is a ’34 Act reporting company, and is subject to SEC executive compensation disclosure requirements. Under Item 402 of Regulation S-K, reporting companies must disclose compensation paid to certain executive officers and directors in the nature of “perquisites and other personal benefits,” unless the aggregate amount of such compensation is less than $10,000. If perquisites or personal benefits are required to be reported for a particular executive officer or director, then each perquisite or personal benefit that exceeds the greater of $25,000 or 10% of the total amount of perquisites or personal benefits must be quantified for that individual and disclosed in a footnote to the compensation table required under Item 402.  Item 402 requires perquisites and other personal benefits to be valued on the basis of the aggregate incremental cost to the registrant. Examples of aggregate incremental cost could include the cost of fuel, additional crew expenses, landing fees and other charges attributable to flights conducted for the personal benefit of an executive officer or director. Aggregate incremental cost would generally not include the acquisition cost of an aircraft.

So what makes an item a “perquisite”? In the release that accompanied its most recent revision to Item 402 in 2006, the SEC identified two factors in determining when an item is a perquisite. First, an item is not a perquisite “if it is integrally and directly related to the performance of the executive’s duties.” The SEC provided, as an example of this type of item, a Blackberry or laptop computer, if the company believes it is an integral part of the executive’s duties to be accessible by email to the executive’s colleagues and clients. Otherwise, an item is a perquisite “if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.” A company policy that requires an executive to use company aircraft for personal travel for security purposes or the provision of a helicopter service for an executive to commute to work from home may be of benefit to the company, but, in the view of the SEC, is not integrally and directly related to the performance of the executive’s duties and confers a direct or indirect benefit that has a personal aspect. In the SEC’s view, unless that benefit is generally available on a non-discriminatory basis to all employees, it is a perquisite and, if over the $10,000 threshold, must be disclosed. 

It is unclear how the Nabors’ investigation will turn out.  

What is clear is that the SEC takes a broad view of what constitutes a perquisite, and is likely to regard most kinds of personal use of company aircraft as a perquisite, and subject to disclosure.

It is also clear that the use of company aircraft has recently become easier to track than ever before – thus making the personal use of company aircraft potentially more visible than ever before. Aircraft movements are generally made available on a near real-time basis via the FAA’s Aircraft Situation Display to Industry (ASDI) data feed to subscribers – which include for-profit flight tracking services. Until recently, aircraft owners and operators could request that aircraft identification information be blocked from the ASDI feed via the Block Aircraft Registration Request (BARR) program, which was administered by the National Business Aircraft Association (NBAA) on behalf of the FAA. The BARR program, which did not require any special showing for blocking requests, proved extremely popular with owners and operators of corporate aircraft. Effective August 2, 2011, however, the FAA curtailed the BARR program such that only a request justified by a “Certified Security Concern” would be honored, and it took over the management of the program from the NBAA. Efforts are underway to reverse the FAA’s curtailment of the BARR program, and it is not yet clear how the FAA’s administration of the curtailed program will work in practice. In any event it seems likely that, in the short run at least, the FAA’s action will lead in the direction of more disclosure, not less.

Aviation Industry Considers the Use of More Biofuels to Cut Emissions and Reduce Costs

As reported in earlier posts, non-European Union airlines may soon be subject to the EU Emissions Trading System (“ETS”). As airlines face pressure to reduce carbon emissions and to cut their $200 billion annual fuel bill, many are weighing the advantages of using more aviation biofuels, in addition to employing improved fuel efficient designs and materials. Yesterday, United Airlines made the first domestic commercial flight from Houston, Texas to Chicago, Illinois powered by a biofuel blend from San-Francisco based Solazyme, Inc., which is 60 percent traditional jet fuel and 40 percent algae-based biofuel. In addition, on Wednesday, Alaska Airlines plans to begin 75 regular passenger flights from Seattle, Washington to Portland, Oregon and to Washington, D.C. fueled by a 20 percent biofuel blend made from used cooking oil. (Chicago Tribune)  

Last month, another airline announced its plans to fly its passengers on a waste gas-based fuel by 2014, thus cutting its carbon footprint in half. Virgin Atlantic Airways plans to be the first airline to use waste gas from industrial steel production to move well beyond its initial pledge of a 30 percent carbon reduction per passenger by 2020. Virgin is a pioneer in this area, flying a Boeing 747 from London to Amsterdam in 2008 on a mixture of babassu oil and coconut oil and stands to be a leader moving forward. (Environmental Leader)   

Biofuels, however, are not without critics, as biofuels often are produced from first-generation edible crops or from plants that consume arable land that would have otherwise been used for edible crops. To solve this dilemma, the aviation industry is turning to other plant sources that grow in arid conditions as well as municipal organic waste to convert into aviation fuel.

Commercial airlines are certainly moving toward taking advantage of biofuels. It is only a matter of time before business and corporate aircrafts follow. As this issue progresses please check back to this blog for future posts.

Positive Cooperation on the Horizon Regarding Wind Turbine Radar Concerns

As mentioned in our July 1, 2011 post entitled “Wind Turbines Effect on Radar Systems and Aviation Security,” the wind energy and aviation security sectors continue to struggle towards common ground, but signs of government agency cooperation with both developers and one another reveal that change is in the works.

The Federal Aviation Administration certainly has its eye on aviation safety and security concerns, as wind turbines may impact radar dependant air traffic and often fall within FAA jurisdiction over construction projects proximate to an airfield or over 200 feet tall. To help ease concerns, FAA has even mandated contribution to radar development efforts as a condition for siting approval. Similar worries have been voiced by the National Oceanic and Atmospheric Administration pointing out that wind turbines often disrupt registration of weather events, such as areas of high precipitation, causing potentially dangerous forecasting and weather tracking obscurities.

Wind energy industry developers understand the agencies’ concerns. To put the technological issue with wind turbine interference in perspective, the technical director with Raytheon explains that “a wind turbine can look like a 747 on final approach” and they “don’t want to have the software eliminate a real 747,” which is a difficult hurdle to surmount. As a result, this issue will remain contentious for both the commercial and business aircraft industries until these concerns are addressed.

United States defense and military agencies maintain that wherever there is a threat and concern caused by radar interference, this concern trumps the push to erect wind energy farms. The Department of Defense has been accused of “foot-dragging” after missing two deadlines pertaining to the impact of wind farming on military operations, and has been criticized regarding the last minute blockage of a Caithness Energy project in Shepherds Flat, Oregon after the company had the project vetted by the Air Force years earlier. Although this project is now on track to becoming the world’s largest wind energy farm, the skein of bureaucracy has been a subject of criticism.  In response, the Department of Defense has changed course and begun to develop a timely, transparent review process through the DOD Energy Siting Clearinghouse, a “one-stop shop” within the DOD for developers and other government agencies.

A current and unique case to watch is that of prospective offshore wind farms on Virginia’s Outer Continental Shelf. Recently, the Virginia Offshore Wind Coalition was pleased to receive results from a Department of Defense assessment identifying 18 of 25 proposed optimum wind harnessing tracts as “compatible with military needs and rules so long as certain [unspecified] guidelines are met.” These wind corridors were of particular importance to the Department of Defense due to both the Norfolk Naval Station, the world’s largest naval base, and a NASA launch facility being in the vicinity. With multiple bids on the table from both turbine farm and energy transmission developers, many are hopeful that the lengthy review process might be nearing its end.

As this issue progresses please check back to this blog for future posts.

 

Special thanks to Sullivan and Worcester’s Alex Kellenberg, environmental intern, for preparing this post.

Chinese Acquisition of United States Aircraft Manufacturer Facing Possible Department of State Scrutiny

On June 28, 2011, the Minnesota based small aircraft manufacturer, Cirrus, was acquired for a reported $210 million by China’s state-run Chinese Aviation Industry General Aircraft (“CAIGA”). This acquisition has raised questions concerning jurisdiction and China’s ability to gain access to potential U.S. military technology. CAIGA currently manufactures a stealth jet fighter and has come under scrutiny for previously bidding on U.S. defense contracts. Thus, a request for jurisdiction review to the Department of State was initiated just after CAIGA’s purchase of Cirrus. 

Cirrus has a line of four-seat turbo prop planes, along with technology for a small jet prototype, the Vision SF50. Cirrus uses Williams International’s FJ33-4A-19 engines on the SF50. It is this engine technology that has come under scrutiny. The FJ33 uses a Full Authority Digital Engine Control (“FADEC”), which the Department of State may classify as a military item. If it does, Cirrus could lose access to its prototype due to its acquisition by a foreign-owned company. Until the decision is made, the SF50 remains with Williams International.

The Department of State’s jurisdiction review could take up to six months. A similar review last November denied a Chinese acquisition of a U.S. technology start-up worth $2 million, just one of a handful of Chinese acquisitions that were not approved. As this case progresses, please check back to this blog for future posts. 

First Business Jet and Commercial Trans-Atlantic Flight Powered By Biofuel Blend

Special thanks to Sullivan & Worcester's Van Hilderbrand and Ari Hoffman, environmental intern, for preparing this post.

In 2008, Boeing predicted that within three years biofuel-powered aircraft could be carrying passengers around the world (The Guardian UK). This month, that prediction came to fruition when on June 18, a Honeywell operated Gulfstream G450 became the first business jet powered by biofuel and the first aircraft to fly to Europe from North America using a 50% camelina derived biofuel and 50% petroleum-based jet fuel blend (WSJ). Camelina is a promising alternative fuel because it can be grown on marginal land in rotation with wheat acreage and therefore does not compete in the food chain. The aircraft used Rolls-Royce engines without making any modifications either to the aircraft or engines. Compared to a petroleum-based flight, the biofuel flight saved approximately 5.5 metric tons of net carbon dioxide emissions.

On June 20, Boeing fulfilled its prediction on the commercial scale. A Boeing 747-8F flight from Everett, Washington landed in Le Bourget, France becoming the first ever trans-Atlantic flight of a large commercial aircraft powered by a biofuel blend. The plane powered all four of its General Electric engines on a blend of 15% camelina-based biofuel mixed with 85% traditional kerosene. Importantly, like the earlier flight, the aircraft did not require modifications to run the biofuel blend.

Although biofuel technology has been around for a number of years, these flights herald a new beginning for large-scale adoption of greener jet fuels in the aviation sector. As this issue progresses, please check back to this blog for future posts.

Bonus Depreciation Extended for 2010

On September 27, 2010, President Obama signed into law the "Small Business Jobs Act of 2010." One aspect of this law is of particular interest to the business aviation industry – the extension through 2010 of the bonus depreciation program under Section 168(k) of the Internal Revenue Code. The bonus depreciation program is applicable to certain kinds of  "qualified property." The program provides a taxpayer with a depreciation deduction equal to 50% of the taxpayer’s adjusted basis in the qualified property for the taxable year in which the property is placed in service. Bonus depreciation has been touted as incentive for businesses to accelerate replacement and purchases of equipment

The business aviation industry has generally been a prominent advocate for bonus depreciation. The new law extends the bonus depreciation program for another year – through the end of 2010. Prior to the passage of the new law, the program was only available for property that was acquired by a taxpayer before, or that was acquired by a taxpayer pursuant to a written contract that was entered into before, January 1, 2010. Also, if the property in question was an aircraft, it had to be put into service by the taxpayer before January 1, 2011. Under the new law, these deadlines have been extended to January 1, 2011 and January 1, 2012, respectively. The various technical requirements that define "qualified property" under Section 168(k) of the Code are otherwise unchanged.

New FAA Rules Require Re-Registration & Renewal of Aircraft Registrations for U.S. Registered Aircraft

Under recently adopted rules, all current FAA aircraft registrations will expire between March 31, 2011 and December 31, 2013, and each new aircraft registration issued on or after October 1, 2010 will have a term of three years and will include a stated expiration date. Prior to the adoption of these rules, an aircraft registration was effective until the aircraft was either sold, deregistered or otherwise disposed of. 

According to the FAA, approximately one-third of the 357,000 registered aircraft have inaccurate records – because of failure to report changes in aircraft ownership, address changes and destruction. This level of inaccuracy raised safety and law enforcement concerns. In response, the current registration system has been abolished and replaced with a three-year term renewal program. The rules - entitled “Re-Registration and Renewal of Aircraft Registration” - were published in the Federal Register at 75 Fed. Reg. 41,968 and become effective October 1, 2010.

Owners of FAA registered aircraft are responsible for re-registration and renewal, but others, including operators, lessors and financiers of FAA-registered aircraft are also affected. As noted below, all affected parties need to be aware of these new rules, and in particular the deadlines imposed under the new rules. The consequences of non-compliance could include the grounding of the owner’s aircraft and the need to affix a new N-number to the aircraft. 

Expiration of Current Registrations and New Registrations

Under the new rules, all FAA aircraft registrations issued prior to October 1, 2010 will expire, and re-registration must occur during the applicable filing window, in accordance with the following schedule:

 

 If the Certificate was issued in:  The Certificate expires on:  The owner must apply for re-registration between these dates – to allow delivery of the new certificate before expiration
 March of any year  March 31, 2011  November 1, 2010 and January 31, 2011
 April of any year  June 30, 2011  February 1, 2011 and April 30, 2011
 May of any year  September 30, 2011  May 1, 201 and July 31, 2011
 June of any year  December 31, 2011  August 1, 2011 and October 31, 2011
 July of any year  March 31, 2012  November 1, 2011 and January 31, 2012
 August of any year  June 30, 2012  February 1, 2012 and April 30, 2012
 September of any year  September 30, 2012  May 1, 2012 and July 31, 2012
 October of any year  December 31, 2012  August 1, 2012 and October 31, 2012
 November of any year  March 31, 2013  November 1, 2012 and January 31, 2013
 December of any year  June 30, 2013  February 1, 2013 and April 30, 2013
 January of any year  September 30, 2013  May 1, 2013 and July 31, 2013
 February of any year  December 31, 2013  August 1, 2013 and October 31, 2013

 

FAA aircraft registrations issued on or after October 1, 2010 must be renewed prior to the expiration date stated on the certificate of registration. No registration will be valid for longer than three years. Renewals must be filed during a filing window that begins five months prior to the registration expiration date. 

Re-Registration and Renewal Process; Failure to Re-Register or Renew

The new FAA rules place the responsibility for re-registration and renewal of U.S.-registered aircraft upon registered owners. Each registered owner should be careful to complete re-registration or renewal within the applicable filing window. 

The process will be kicked-off approximately 6 months before the applicable registration expiration date by a notice from the FAA registry to the registered owner. The notice will be sent to the address for the registered owner shown in the FAA registry’s records. The notice will contain instructions for online re-registration or renewal, and will also contain a passcode to log into the FAA’s website. The passcode will be unique to that aircraft. When the user logs in, it will be asked to confirm the existing registration information in the FAA’s records. If that information is correct, the user may simply click on the website to confirm, and will be required to pay a $5.00 fee. If the FAA’s information is incorrect, the user will be directed to a blank re-registration/renewal form (AC Form 8050-1A for re-registration and AC Form 8050-1B for renewal) that the user must complete (with the correct information), print out and mail to the FAA registry, along with a check for re-registration/renewal fee.

If the owner has not re-registered or renewed by the 60th day prior to the registration expiration date, the FAA will send out a second notice to the registered owner. At that point, the passcode permitting on-line re-registration and renewal will expire. The owner may still re-register or renew, but must submit a paper application.

If the owner does not re-register or renew by the registration expiration date, the aircraft’s registration will expire. At that point the aircraft will be without authority to operate. Existing insurance coverage will likely lapse. The owner may re-register the aircraft using a new AC Form 8050-1 Aircraft Registration Application. The FAA will process the owner’s Application – but that could take weeks. In the meantime, the aircraft must remain grounded. Under FAA rules, the aircraft may not be operated under the pink copy of the Aircraft Registration Application (as it can be when title is transferred). Following the expiration of registration, assuming the owner fails to reinstate its registration, the existing N-number for the aircraft may eventually be cancelled. 

Failure to re-register or renew may complicate the registered owner’s life in other respects too. It may cause a default under any lease or finance agreement involving the aircraft. In addition, it may call into question whether previously-filed security agreements continue to “perfect” the security interests of lenders. According to the FAA, in its explanation of the new rules, security interests registered with the International Registry (Cape Town) will not be affected by failure to re-register or renew with the FAA because Cape Town registrations are not dependent on continuing aircraft registration with the FAA. However, assuming that to be the case, how the failure to re-register or renew will affect pre-Cape Town security interests in aircraft is not completely clear. Given this uncertainty, lenders should monitor the re-registration and renewal deadlines for all their financed aircraft, whether or not their interest is registered under Cape Town. Note that the FAA will not send any of the above re-registration or renewal notices to a lender or lessee. These notices are sent to registered owners only.

In light of the new rules, owners of U.S. registered aircraft should:

  1. Check that the owner’s name and address on file with the FAA registry is current and accurate – and do that now! If corrections need to be made, they should be submitted as soon as possible. If the address on file with the FAA is incorrect, the owner will not receive these notices, won’t receive its passcode for web access and may fail to complete the re-registration and renewal process by the applicable deadline. Please see the FAA registry’s re-registration web page for further information.
  2. To avoid unpleasantness, re-registration or renewal should be effected during the online filing window. The online filing window will last for only three months – the fifth, fourth and third months prior to registration expiration. Re-registration and renewal should be completed during the online filing window to avoid having the current certificate expire prior to issuance of the new certificate. The FAA will send two registration expiration notices to the registered owner. Re-registration or renewal applications submitted after the second FAA notice (at 60 days prior to expiration) will be processed, but a new registration certificate may not be issued until after the expiration of the current registration. If that happens, the aircraft may not be operated until the FAA issues a new certificate – leaving the aircraft owner subject to the FAA’s schedule. The rules do not permit temporary operation through the use of the “Pink Copy” registration certificate.  
  3. Operators, lessees and lenders need to be proactive too. Owners of FAA registered aircraft are responsible for re-registration and renewal, but operators, lessees and lenders may be affected too. Operators, lessees and lenders, not just registered owners, need to be proactive about - and should monitor - the re-registration and renewal process.   

Please see www.faa.gov or “Re-Registration and Renewal of Aircraft Registration,” 75 Fed. Reg. 41,968 (July 20, 2010) for additional details.   

Proposed FAA Interpretation Would Relax Reimbursement Prohibition for Personal Use Under Part 91

There have not been a lot of positive developments concerning the business aviation community in the recent past. So it was welcome news when, on June 30, 2010, the Federal Aviation Administration announced that it was considering a relaxation of its so-called (and long established) “Schwab Interpretation” under Part 91.501(b)(5) of Federal Aviation Regulations (the “FARs”).

Most business aircraft are operated under one of two regulatory regimes under the FARs – FAR Part 91 or FAR Part 135. Part 91 is applicable to general aviation not involving operations for compensation or hire, and is a less onerous regulatory regime than that applicable to air taxi or chartering operations (Part 135). The more relaxed rules applicable to Part 91 come with certain conditions, however. The underlying premise of Part 91 is that the need for regulatory oversight is reduced where an operator of an aircraft is using its aircraft for its own use or for the use of its guests, and not for compensation or hire. Available exclusions from the “no reimbursement” rule are narrow. 

One of the exclusions – referred to as the “intercompany exclusion” (FAR Part 91.501(b)(5)) – permits all costs of ownership, operation and maintenance to be reimbursed. However, a condition of the intercompany exclusion is that “the carriage must be within the scope of, and incidental to, the business of the company [i.e., the operator] (other than transportation by air).”   Moreover, the FAA has historically taken a narrow view of the meaning of this two‑part “scope of” and “incidental to” test.  In 1992, Charles Schwab & Co., Inc. requested an interpretation of Part 91.501(b)(5) that would have permitted Charles Schwab to reimburse the company for flight costs related to certain vacation trips made by Mr. Schwab. The request stressed the need for the company to maintain prompt communications with Mr. Schwab. The FAA was not, as it turned out, at all receptive to this request. It responded (more than a year after the request) that Mr. Schwab was travelling for pleasure and that this sort of carriage was not within the scope of or incidental to the business of Charles Schwab & Co. Reimbursement of these flight costs was not permitted under Part 91.501(b)(5).

Seventeen years later, with the encouragement of the National Business Aircraft Association, the FAA announced it was considering revising the Schwab Interpretation. In its June 30 announcement, the FAA stated that it had tentatively determined that a company could be reimbursed for the pro rata cost of owning, operating and maintaining an aircraft when used for routine personal travel by certain highly-placed officers and employees.  The FAA stated that it recognized that these individuals might be unable to reliably schedule personal travel due to the nature of their employment. For such an individual, it might make more sense for the company to provide the company aircraft than to reimburse the individual for the cost of the cancelled commercial airfare. The FAA reasoned that the ability of the company to modify travel plans on very short notice could render a particular flight both within the scope of and incidental to the company’s business.

The proposed interpretation addressed, without getting specific, the criteria that should be used to determine who is a “highly-placed officer or employee.” The FAA stated that a company that expects to take advantage of this interpretation should maintain and regularly update a list of individuals whose positions may require them to change travel plans on very short notice. The FAA indicated that this list may draw from the set of officers, directors and more‑than‑10% owners of a company, but that not all the officers and directors are likely to be subject to the high level of company interference with personal travel plans that is required. The FAA suggested that the company’s board (or equivalent body) decide who belongs on the list.

The proposed interpretation represents a substantial modification to the Schwab Interpretation – and, if ultimately adopted, could be of considerable help to members of the business aviation community.

You may ask why a highly-placed officer or director would seek the privilege of reimbursing his or her company for flight costs. Financial reporting is the principal reason. For public companies, the personal use of corporate aircraft may have to be disclosed in reporting executive compensation (at aggregate incremental cost). That is a disclosure that is likely to attract attention – usually not a good thing where personal use is involved. However, generally no compensation element needs to be reported where the individual is fully reimbursing the company for the cost of the flight – which the FAA’s proposed interpretation would permit. 

Comments on the FAA’s proposed interpretation are due by August 9, 2010.