Murky Waters for Charter Brokers
Here’s how they—or perhaps even you—could run afoul of the law.
Brokers play an important role in the U.S. air charter market by bringing together operators and customers. However, there’s a right way and a wrong way to do this. Some charter brokers have become overly creative in the methods they use to stimulate business, running afoul of Department of Transportation requirements in the process.
A 2011 DOT Consent Order concerning Global Airline Services illustrates one tactic that can get charter brokers into trouble. Global would sign “purchase orders” obligating it to provide charter flights for universities’ sports teams; it would then contract with air carriers to fulfill the obligations. As such, the schools would receive transportation indirectly, making Global what the DOT calls an “indirect” carrier.
The DOT criticized arrangements like this in a widely read 2004 Notice. Charter brokers, said the Notice, must act as agents of direct air carriers by digging up charter customers or as agents of customers by locating providers of air transportation.
But Global, according to the DOT, was doing neither of these things. Instead, it was acting as a principal, effectively buying air transportation from charter companies and then reselling it in separate transactions to universities. This might not be unlawful if the charter broker possessed economic authority from the DOT to hold itself out as a provider of air transportation or had an exemption from DOT requirements provided by the agency. Lacking both of these, Global was fined $60,000, plus another $60,000 if it failed to cease the illegal activity.
What’s the DOT’s gripe with Global acting as an indirect air carrier? Though the actual provider of charter flights to the university may have had the requisite safety authority from the Federal Aviation Administration, the broker lacked the requisite economic authority from the DOT. As indicated in the 2004 Notice, DOT rules require carriers using large aircraft to “maintain a bond, in an unlimited amount, to guarantee performance of all charter flights” or an escrow account to hold all payments received for such flights. Further, the DOT says charter brokers acting as indirect air carriers engage in “unfair and deceptive practices and unfair methods of competition” in violation of federal law.
In a 2007 Consent Order fining an unlicensed indirect air carrier called Imperial Jets, the agency noted that the company’s Website “contained language that reasonably could have led a customer to conclude that Imperial Jets is a direct air carrier, which it is not. For example, the ‘About’ page…referred to ‘information regarding all your Imperial Jets flights,’ and [said] that ‘most of our planes can noticeably decrease your travel time without layovers, refueling or connections.’” (emphasis added)
Federal authorities want to know, and the public has the right to know, exactly who is operating the flights, and everything from the advertising for air transportation to the names on the napkins passed out with on-board refreshments should be consistent with that objective. A 2007 DOT publication, for example, chastised air carriers that distribute branding materials such as “napkins, brochures, pad and pens” with the charter broker’s name or logo.
Nor is the wayward charter broker the only one who can get in trouble as an indirect air carrier. “To the extent that a direct air carrier knows or has reason to know of the broker’s unlawful conduct,” says the agency, “the direct air carrier is also engaged in an unfair and deceptive practice or unfair method of competition” in violation of federal law.
Even fractional share owners can inadvertently become indirect air carriers. For example, the owner of a fractional share who receives compensation from a friend to pay for a trip on “his” aircraft can be acting as a principal in selling air transportation.
In 2013, the DOT took a different tack in an 11-page Notice of Proposed Rulemaking (NPRM) regarding air charter brokers. Acknowledging that “air charter brokers increasingly play a role in marketing air transportation services,” the NPRM suggests allowing them to act as principals for single-entity air transportation (i.e., where the charterer, not the passengers, pays the charter bill) as long as they “self-disclose”—that is, make clear to charter customers that they are broker-principals, identify the operating air carrier for the customer and make various other pertinent disclosures. As a result, charter brokers that comply would be able to act as indirect air carriers without further DOT authority.
In an unprecedented role reversal, however, reputable charter brokers and other industry parties, including the National Business Aviation Association (NBAA), have urged the DOT to go beyond the proposal in the NPRM and institute registration requirements for charter brokers. Holly Whitaker, president of Exclusive Air, a New Hampshire charter brokerage firm, says she favors a registration process that would qualify brokers. “Today, anyone with a cell phone can be an air charter broker,” she comments. “There are no certifications, no qualifications and no insurance requirements.” As a result, charter customers and air carriers alike need to exercise caution in dealing with people claiming to be charter brokers.Unfortunately, the DOT may lack the resources to establish a registry and vet compliance by brokers. But the NBAA recommendations, which are not unduly burdensome for either brokers or the DOT, are a good start. If they’re adopted, they will make a registry of charter brokers available to the public so that charter customers can verify who they are dealing with. If they’re not adopted, charter brokers may act on their own to create their own registration and/or certification process.
Jeff Wieand is a senior vice president at Boston JetSearch and a member of the National Business Aviation Association’s Tax Committee.