Negotiating Aircraft Management Agreements

Most aircraft owners who own an aircraft elect to use a management company to manage the daily operations and maintenance of their aircraft. This allows the aircraft owner to focus on what they do well and hire someone else to handle something that is complex and highly regulated. Aircraft owners expect that the management company knows how to maintain an aircraft so dispatch reliability will be good, safety is not compromised and costs are reasonable.

Once the management company is selected, it will provide its standard management agreement (“MA”). In general, the MA will state how the aircraft and records must be maintained, when the owner must approve maintenance work, fees for the services, insurance requirements, and if the owner elects to allow the management company to charter the aircraft. I am fortunate to have the opportunity to work with a number of great management companies who have invested time and money into creating good MAs. However, once in a while, I am asked to review a MA for a company I haven’t worked with before and I am sometimes shocked with what I find. Here is a list of some of the key items to focus on when reviewing the MA:

  1. Aircraft Records. How will maintenance and possession of the Aircraft Records be handled? If there is any language in the MA that allows the management company to withhold Aircraft Records from the owner for any period of time, the language should be removed. If the management company is allowed to withhold Aircraft Records from the owner then the Aircraft Records can’t be sent to a pre-buy facility when the aircraft is being sold. The industry standard is that at all times the owner (i) owns the Aircraft Records, (ii) shall have access to Aircraft Records and (iii) may obtain possession of the Aircraft Records for a pre-buy inspection at any time. Any management company that attempts to hold Aircraft Records as leverage for payment for services should not be considered by an aircraft owner for management services.
  2. Charter usage. If the aircraft is going to be chartered, the MA should be clear and fully disclose how the profits from the charter are going to be distributed. If there is an attempt to be less than transparent on the distribution, ask for clarification in the MA or move on to a different management company.
  3. Payment Terms. Are the payment terms reasonable and consistent with what the owner can actually comply with in the normal course of the owner’s business?
  4. Storage. If the MA is not clear where and how the aircraft will be stored when it is at its home base and away from the home base, clarify the MA so it is clear.
  5. Scheduling. The MA should be clear on how an owner arranges a flight and if a charter flight is already scheduled, what happens if the owner wants to use the aircraft instead of allowing the charter flight. Does the owner need to approve each charter flight?
  6. Crew. The MA should be clear as to crew qualifications, who handles hiring the crew, who employs the crew and what happens if the owner is not satisfied with the crew that is assigned or hired. Additionally, there should be a representation from the management company about its background check, drug testing policy and screening process for all employees.
  7. Maintenance. When the management company is overseeing the maintenance of the aircraft, are all discounts received by the management company passed along to the aircraft owner and is there a markup on parts? If the maintenance work is going to exceed a certain amount, prior approval from the aircraft owner should be required.
  8. Insurance. The MA should include who is obtaining insurance, minimum rating status of insurance provider, the type and amounts of coverage being provided and cancellation notice requirements. The insurance amounts should be reviewed carefully to make sure adequate insurance is in place to provide the peace of mind the owner desires.
  9. Indemnification and Limitation of Liability. There are often very specific liability and indemnification provisions in a MA. These should be reviewed carefully to make sure the owner understands the limitations that may be placed on the liability of the management company in the event of an accident or incident.
  10. Term. What is the term of the MA? How much notice does an owner have to give prior to terminating the MA? Or in the alternative, how much notice is required of the management company in order to terminate the MA?

The best advice I can give is if the MA you receive is terribly one-sided, has outrageous terms or is inconsistent with the proposal you received, move on to another management company. There are great management companies out there and if the MA sent to you is not a fair agreement documenting the terms already agreed upon, it should be an immediate red flag about how the management company operates.

 Amanda Applegate - Partner, Aerlex Law Group