Assessing Aircraft Leases Prior to Adding Aircraft to an AOC

Regulatory Policy CEO-PN007-2010 Assessing Aircraft Leases Prior to Adding Aircraft to an AOC Sponsor: Policy Issue No: Executive Manager Operations One Policy Issue Date: July 2010 Policy Review Date: July 2011 Reason for the Policy The purpose of this policy is to advise of a change of legislative requirement regarding leased aircraft being added to an AOC. Civil Aviation Orders (CAOs) 82.1, 82.3 and 82.5 have a requirement for aircraft leases to be reviewed prior to an aircraft being added to an AOC. This requirement must not be confused with the Safety Management System (SMS) responsibilities of an operator under CAO 82.3 and 82.5 sub-parts 2A.2 (a) (v) respectively in relation to the management of aircraft leases and the relationships between an aircraft operator (lessee) and the lessor (the supplier of an aircraft). This information must be clearly documented within an operator s SMS Manual. This will be assessed by CASA as a separate exercise to that of adding an aircraft to an AOC. Background The practice of aircraft leasing, i.e. the rental, rather than purchase of aircraft, by an operator from another operator or non-airline entity, has been growing steadily in the last two decades. The use of leased aircraft plays a significant role for airlines in the provision of both domestic and international aircraft services, reflecting in particular the economics and flexibility of leasing over purchasing (such as reducing the initial cost burden or debt level, gaining tax CEO-PN007-2010-01 CEO-PN007-2010 Page 1 of 33

benefits, and meeting seasonal demands for additional capacity). In a liberalised regulatory environment, leasing facilitates the entry of new operators to the market. Effective [date to be inserted] April 2010, CAOs 82.1, 82.3 and 82.5 have a requirement for aircraft leases to be reviewed prior to an aircraft being added an AOC. The purpose of reviewing aircraft leases is to identify if leases have conditions, limitations or penalties that could be detrimental to the safe operation of a particular aircraft. Policy Relevant Legislation Under Section 27AC(1)(c) of the Civil Aviation Act 1988, operators seeking an AOC are obliged to provide information and documents that can be reasonably required by CASA. Under Section 28A(1)(h) of the Civil Aviation Act 1988, for a foreign aircraft that is to be leased and added to an Australian AOC, the operator can be required to provide CASA with a description of the lease provisions. Under CAO 82.1, 82.3 and 82.5, aircraft lease details and conditions must be reviewed by CASA and found acceptable prior to an aircraft being added to an AOC. Assessing Aircraft Leases Staff responsible for managing the addition of an aircraft on to an AOC are to request a copy of the aircraft lease from the applicant. CASA does not need to see the financial arrangements associated with an aircraft lease. In requesting lease agreement details, CASA staff should make it clear to the lessee that any information that is provided will be treated in absolute confidence and will not be divulged to any third party. All information provided to CASA relating to aircraft leases is to be treated as commercial-inconfidence. This includes the secure filing of aircraft leases and access is to be restricted to only those CASA staff who need to have direct involvement with them. If a lease is found to contain conditions, limitations or penalties that are considered to have a detrimental impact upon the safe operation of the aircraft, the matters of concern are to be referred to the applicant for resolution. Should the matters not be resolved to CASA s satisfaction, the application to add the aircraft to an AOC should be rejected. The rejection should be supported by a Statement of Reasons which will be provided to the applicant. An operator must provide details of the lease conditions, to enable CASA to assess the arrangements for operational control of the aircraft, aircraft maintenance and ensuring airworthiness. Aircraft leasing can be arranged in many ways, which can result in varied and complex safety situations, particularly if an aircraft registered in another Contracting State is to be operated in CEO-PN007-2010-01 CEO-PN007-2010 Page 2 of 33

Australia by an Australian operator. Coordination is required between the organisation providing the aircraft and the operator as well as the regularly authorities concerned. It is important that staff undertaking the assessment of a leased aircraft that is to be added to an AOC, ensure that all of the safety responsibilities are understood, identified in writing and clearly met by the various parties involved. Aircraft Leasing Information Package An Aircraft Leasing Information Package (ALIP) is available on TRIM (ED10/76694). The ALIP relates to leased aircraft utilised commercially under an AOC for both domestic and international operations. The ALIP has been developed as an interim measure while the AOCM is being re-written. The ALIP will be withdrawn in December 2010 when the Inspector s Handbook element of the amended AOCM will be published and the contents of the ALIP included into that document. Signed John F. McCormick Director of Aviation Safety CEO-PN007-2010-01 CEO-PN007-2010 Page 3 of 33

Appendix 1 Aircraft Leasing Information Package Note: This information package has been produced in order to inform inspectors about the types of aircraft leases that are in common use within the aviation industry. This package has been developed as an interim measure whilst the AOCM is being rewritten. The package will be withdrawn in December 2010 when the Inspectors Handbook element of the new AOCM will be published and the contents of this package subsumed into that document. 1.1 Introduction Changes to CAO 82.1, CAO 82.3 and CAO 82.5 introduced on 13 April 2010, now require inspectors to review and assess aircraft leases prior to adding an aircraft to an AOC. This package relates to leased aircraft that are to be utilised commercially under an Air Operator Certificate. It covers both domestic and international operations. The purpose of this package is to provide guidance to inspectors on the different types of aircraft leases, matters to be considered when assessing a lease agreement in terms of the intended aircraft operation, duration of a lease, the obligations placed upon operators and the oversight responsibilities of CASA. This part does not cover the processes required for AOC issue or adding an aircraft to an AOC. These functions are described in the AOCM. It does however draw to the attention of inspectors, matters of significance that could easily be overlooked when assessing a leased aircraft for inclusion on to an AOC. In addition, CAO 82.3 and CAO 82.5 under sub-parts 2A.2 (a) (v) respectively, state that: 'A Safety management System (SMS) must, as a minimum, include a statement of the operator's safety policy and objectives, including, amongst other things, documented details of the relevant third party relationships and interactions.' This requirement includes the proper management of aircraft leases and the relationship with, and the responsibilities of, the lessee (the operator) and the lessor (the supplier of an aircraft). This information will be documented within an operator s SMS Management Manual. Inspectors should be aware of this requirement when undertaking the assessment of aircraft leases. 1.1 Definitions For the purposes of clarity when assessing documents provided by an operator and in order to prevent misunderstandings between CASA inspectors and foreign operators and/or regulatory authorities, the following definitions have been included. 1.2.1 Article 83 bis Agreement (to the Chicago Convention 1944): An agreement between two Contracting States whereby the oversight responsibilities of one Contracting CEO-PN007-2010-01 CEO-PN007-2010 Page 4 of 33

State are transferred by arrangement to the other Contracting State in order to maintain effective airworthiness and operational control of an aircraft registered in the first Contracting State but operating within the jurisdiction of the second Contracting State. 1.2.2 Bilateral Agreement: An agreement between CASA and the regulatory authority of another Contracting State concerning the management and regulatory oversight responsibilities for an aircraft or aircraft as appropriate. This does not include transfer arrangements made under ICAO Article 83 bis agreements. 1.2.3 Cape Town Convention: A diplomatic convention on international interests and title of mobile equipment and including protocols specific to aircraft which came into effect in March 2006. The aircraft specific protocols include aircraft, engines and helicopters. The aim of the convention is to establish surety of title of ownership so that in the case of a defaulted or failed lease agreement and bankruptcy, ownership of an aircraft is clearly identified irrespective of location and physical control when the default or failure occurs. This information may be useful to regulators should an AOC operation collapse. Whilst the major aviation countries are signatories to this convention, Australia has opted not to sign. Australia will be adopting similar requirements via the Attorney General s Department at a later date. 1.2.4 Charter: as determined by the following kinds: a. The carriage of persons or cargo for hire or reward to or from any place, other than carriage in accordance with fixed schedules to and from fixed terminals or carriage for an operation mentioned in Civil Aviation Regulation (1988) Sub-regulation 262AM (7) or under a permission to fly in force under Sub- regulation 317(1) b. The carriage, in accordance with fixed schedules to and from fixed terminals, of passengers or cargo or passengers and cargo in circumstance in which the accommodation in the aircraft is not available for use by persons generally; c. The purpose of transporting persons generally, or transporting cargo for persons generally, for hire or reward in accordance with fixed schedules to and from fixed terminals over specific routes with or without intermediate stopping places between terminals. 1.2.5 Contracting State: A State that is a signatory to the Convention on International Civil Aviation Chicago 1944. 1.2.6 CRAF Program: Applicable only to United States N registered air transport aircraft Civil Reserve Air Fleet (CRAF) whereby an aircraft operator agrees for an aircraft to be requisitioned by the US Government in times of emergency and at short notice irrespective of other commitments that the operator has made for an aircraft. This applies to any designated US registered CRAF aircraft anywhere in the world. 1.2.7 Interchange: Aircraft interchange or interchange flight is a regularly scheduled, single-aircraft through-service linking a route of one airline operator at the interchange point to a route of a second airline operator, with the same aircraft being crewed by and under the operational control of the respective authorised operator on each route. An interchange provides passengers with the benefit of a single-aircraft service on what is essentially an CEO-PN007-2010-01 CEO-PN007-2010 Page 5 of 33

interline operation and may provide additional benefits to the carriers involved in the terms of better aircraft utilisation. 1.2.8 Lease (aircraft): A contractual arrangement whereby a properly licensed operator (AOC holder) gains commercial control of an entire aircraft without transfer of the ownership. Aircraft leases by operators can be characterised by their purpose. Airline operators use financial or capital leases to avoid substantial capital outlays or debt often required in the purchase of aircraft directly from the manufacturer or, to reduce taxation or other costs. With a financial or capital lease, at the end of the lease term, the lessee has the option to purchase the aircraft at an agreed price. With a financial lease, the aircraft appears on the lessee s balance sheet as it is viewed as a purchase. In contrast, operating leases are designed to meet an airline s need for additional aircraft, often on a seasonal or short-term basis. This type of lease is normally used by an airline to acquire aircraft for periods of a few months up to seven (7) years. With an operating lease, the aircraft does not appear on the lessee s balance sheet. For regulatory purposes, the two basic types of aircraft leases are: dry leases, where the aircraft is leased without crew, and wet leases where the aircraft is leased with crew. o Wet leases with partial crew often without cabin crew - are usually referred to as damp leases. o ACMI Lease: is what could be described as a full-service wet lease where an aircraft, crew, maintenance and insurance are provided in a single financial package by the lessor. This type of lease is often used by start-up airlines or where additional capacity with corresponding support is required by an existing operator. Usually, the aircraft is provided on a block-charge basis where a minimum number of flying hours are specified on a monthly basis. The lessee must pay for these whether or not they are actually flown. ACMI leases generally run from one month up to one to two years. A sub-lease refers to the lease of an already leased aircraft by a third party. Under normal commercial arrangements, wet leases of less than one month duration are mostly classed as ad-hoc charter. 1.2.9 Lessor: The organisation or person financing an aircraft lease and providing an aircraft to a lessee. 1.2.10 Lessee: The organisation or person to whom an aircraft is leased. In most cases this will be the AOC holder who becomes the Registered Operator of an aircraft. 1.2.11 Montreal Convention 1999: An updated version of the Warsaw Convention which covers responsibility and liability for international carriage of persons, baggage and cargo. CEO-PN007-2010-01 CEO-PN007-2010 Page 6 of 33

1.2.12 Operator/Airline Operator/Air Carrier: An AOC holder engaged in commercial air transport activities carrying passengers, freight or both. 1.2.13 State of Registry: The State on whose register an aircraft is entered. 1.2.14 State of the Operator: The State in which an aircraft operator s principal place of business is located and registered. 1.2.15 Transfer - International: A transfer of an aircraft between operators in two different States of Registry. This could be the transfer of an Australian registered aircraft to an operator in a foreign State or, a foreign registered aircraft transferred to an Australian operator. 1.2.16 Transfer - Domestic: The transfer of an Australian registered aircraft between two Australian operators. 1.2.17 Shared Transferred Aircraft: Where an aircraft is utilised by one operator under that operator s AOC for part of the day and then leased to another operator for utilisation during the remaining time under the second operator s AOC. Typically this would be operator A carrying passengers during the day and operator B flying freight at night. 2. General The practice of aircraft leasing, i.e. the rental, rather than purchase of aircraft by an operator from another operator or non-airline entity, has been growing steadily in the last two decades. The use of leased aircraft plays a significant role for airlines in the provision of both domestic and international air services, reflecting in particular the economics and flexibility of leasing over purchasing (such as reducing the initial cost burden or debt level, gaining tax benefits, and meeting seasonal demands for additional capacity). In a liberalised regulatory environment, leasing facilitates the entry of new operators to the market. Various types of leases are in general use and these are described above in the Definitions section. Aircraft leasing can be arranged in many ways, which can result in varied and complex safety situations, particularly if an aircraft registered in another Contracting State is to be operated in Australia by an Australian operator. Coordination is required between the organisation providing the aircraft and the operator as well as the regulatory authorities concerned. It is important that inspectors undertaking the assessment of a leased aircraft that is to be added to an AOC, ensure that all of the safety responsibilities are understood, identified in writing and clearly met by the various parties involved. In this regard, there is no predetermined formula that will fit all situations from the perspective of safety every one is different! Under Section 27AC (1) (c) of the Civil Aviation Act 1988, operators seeking an AOC are obliged to provide information and documents that can be reasonably required by CASA. Under Section 28A(h) of the Civil Aviation Act 1988, for a foreign aircraft that is to be leased and added to an Australian AOC, the operator can be required to provide CASA with a description of the lease provisions. CEO-PN007-2010-01 CEO-PN007-2010 Page 7 of 33

Under CAO 82.1, CAO 82.3 and CAO 82.5, aircraft lease details and conditions must be reviewed by CASA and found acceptable prior to an aircraft being added to an AOC. With the above listed regulatory provisions, CASA inspectors should request an operator to provide a copy and detailed description of the aircraft lease provisions. The more complex the lease arrangements appear to be, the more questions that CASA will need to ask. In requesting lease agreement details, CASA inspectors should make it clear to the lessee that any information that is provided will be treated in absolute confidence and will not be divulged to any third party. The request to provide a lease details to CASA does not mean that an operator is being requested to provide specific financial information CASA is not concerned with how much an operator will pay to lease an aircraft. This element along with many other considerations may be reviewed in the overall financial viability assessment conducted by financial specialists within CASA as part of the AOC process. Most major Australian airlines lease aircraft, generally from aircraft leasing organisations or financial institutions. These aircraft are normally registered in Australia, delivered to the airline and operated on dry leases as if they were aircraft that were fully owned by the airline. In such cases, as long as no unusual provisions or penalties exist within the terms of the lease, normal safety requirements can be met without concern and the aircraft can be processed as if it were a fully owned aircraft being added to an AOC. Major airlines often have long-standing agreements with other operators including some foreign operators for the lease of aircraft during periods of high capacity demand. This enables them to integrate known aircraft into their airline system without having to undertake the activities that would be required if an unknown aircraft was acquired from another source. This sort of arrangement applies equally to dry and wet leased aircraft. For the smaller operators, particularly those in the 19 to 30 seat class, a full description and details of lease provisions should always be requested from the operator. It is not unusual to find that the leases for this class of aircraft have been funded by private individuals or organisations that do not normally deal with aircraft leasing as their primary business. In the past, It has been found in a few cases that severe limitations have been imposed by financiers of leases on the operation of particular aircraft, which has potentially, or actually, impacted upon safety of operations. Persons or organisations outside the operator s company who have funded the leases of individual aircraft have placed strict departure performance and route/hours usage limitation on aircraft for reasons of financial return. This has led operators to consider or to take unsafe action and operations in order to meet the terms of the aircraft leases and the financial expectations of those funding the leases. In many cases, leases often contain reporting requirements for the operator to provide details of hours of aircraft utilisation, fuel burn, defect reporting, maintenance undertaken, etc. This information is also sent to airframe, engine and vendor systems manufacturers in order for them to meet warranty and/or performance contractual obligations. These obligations should be reflected in an operator s various organisation procedures manuals as appropriate. CASA should be aware of these requirements. CEO-PN007-2010-01 CEO-PN007-2010 Page 8 of 33

Inspectors should review each lease agreement to ensure that: The lessor and lessee are properly identified on the lease; The lease is signed by the appropriate personnel in both the lessor's and the lessee s organisations; The effect date of the lease is identified; Operational control is specifically identified as being vested in a party to the lease; Responsibilities for performing maintenance are specifically identified and vested in particular parties to the lease; Responsibilities for keeping aircraft maintenance records are specifically identified and vested in parties to the lease; Maintenance programs (lessee's or the lessor s) are identified. In summary, inspectors should be aware of, and understand, the type of lease that they are reviewing; the conditions, limitations and requirements of the lease; regulatory matters Australian or foreign Authority - associated with the lease and any other provision, commercial or regulatory that will adversely affect the safe operation of an aircraft. The more questions that are asked of an organisation applying to place a leased aircraft on an Australian AOC, the safer the outcome of the exercise will be. If a lease is found to contain limitations or conditions that are unacceptable to CASA, the matters of concern should be referred back to the lessee for clarification and/or resolution. If the matters are not resolved to CASA s satisfaction, the application to add the particular aircraft to an AOC should be refused. 2.1 Air Service Licence Applications - Leased Aircraft AOC holders or applicants intending to operate international scheduled air services must make application to the Department of Infrastructure, Transport, Regional Development and Local Government for an International Air Services Licence. For a domestic Air Service Route Licence, application must be made to the relevant state government department as appropriate. CASA does not have regulatory jurisdiction over the issue of Air Service Licenses and is therefore not involved in the relevant processes. This information is provided in order to inform inspectors that other government agencies have an interest in leased aircraft used for commercial purposes and, when discussing future operations with airline AOC applicants, inspectors will be able to inform the applicants of this requirement. CEO-PN007-2010-01 CEO-PN007-2010 Page 9 of 33

2.1.2 International Airline Licence Application Using Wet or Damp-Leased Aircraft Airline applicants proposing to use wet or damp-leased aircraft to conduct scheduled international air services must provide the Department of Infrastructure, Transport, Regional Development and Local Government with the following information: a declaration that they intend to use wet or damp-leased aircraft to conduct the proposed services; details of the provider (lessor) of the aircraft for the proposed services; and evidence that the wet-leased aircraft provider (lessor) holds an approved Air Operator's Certificate and Transport Security Program for the proposed services. Approved airline applicants will receive a 'Restricted' International Airline Licence when operating wet or damp leased aircraft. If an airline holds a Restricted Airline Licence because it is utilising wet or damp-leased aircraft and it wishes to commence operations with its own aircraft in the future, it will need to apply for a full International Airline Licence. 2.1.3 Inter-State & Intra-State Airline Licenses The Australian Constitution gives state and territory governments power over regional commercial aviation as it is largely an issue of intra-state trade. Licensing of intra-state aviation services is administered respectively by: The New South Wales Government Ministry of Transport; Queensland Transport; The South Australian Department of Transport, Energy and Infrastructure; or The Government of Western Australia department of Planning and Infrastructure. These four states require application to be made for licenses to undertake commercial air services on specific routes. As part of the application process, Airline Route Licence applicants are required to provide details of leased aircraft that will be operated on the route for which application is being made. Intra-state air services in Victoria, Tasmania, Northern Territory and the Australian Capital Territory are deregulated and therefore the use of leased aircraft is not a factor in operating air services within these jurisdictions. 2.2 Leases All Types CEO-PN007-2010-01 CEO-PN007-2010 Page 10 of 33

The processes for assessing dry, wet and damp aircraft leases can each be considered under two distinct headings: Australian registered leased aircraft and foreign leased aircraft. Whichever type of lease is used to add an aircraft to an AOC, CASA must be satisfied that the lease does not have any limitations or conditions that are detrimental to safety. Of the many types of leases, CASA should pay particular attention to sub-leases as there is the potential for these to be undertaken without the knowledge or permission of the primary lessor and this could invalidate the primary lease and could have insurance, safety and adverse legal implications. Note: Leases usually require the operator of an aircraft the lessee - to use the radio callsign allocated to the particular lessee s airline or operation so that airport and ATC charges are attributed to the lessee s organisation rather than the lessor of the aircraft. 2.3 Purchase/Lease-Back of Aircraft It is not uncommon for inspectors to assess an application to add an aircraft to an AOC where the aircraft has been subject to a purchase/lease-back deal. This function is often undertaken for financial reasons. An airline purchases an aircraft from a manufacturer at a significant discounted price for one reason or another. The airline then approaches a financial institution and negotiates a price close to the list price of the aircraft and then sells the aircraft to that organisation. The difference between the sale price and the purchase price is the airline s immediate profit. The airline then lease the aircraft back from the financial institution and operates it over a number of years. The lease costs are amortised over this period and are paid for out of the income earned from operating the aircraft. In many countries, taxation relief exists when leased equipment is operated. The financial institution has the benefit of purchasing an aircraft at below list price and makes its profit on the lease charges. At the end of the lease period it still has an aircraft which it can sell back to the airline, another operator or use for further leases. From the regulatory perspective, aircraft subject to purchase/lease-back deals should present no additional problems when assessing the suitability of an aircraft to be added to an AOC. The deal is likely to have been completed prior to the application to add the aircraft to an AOC and therefore unless there are any obvious reasons why additional investigation is required, the aircraft should be treated like a normal dry lease aircraft. 2.4 Structure of Aircraft Leases Aircraft lease agreements usually comprise details of the lessor, the lessee, the particular aircraft and engines and lease Articles identifying the conditions, obligations, limitations and requirements involved in the agreement. The Articles within a lease agreement cover a number of financial obligations and wide range of requirements associated with the aircraft to ensure that is operated safely, maintained correctly and is returned to the lessor in good condition. Of the range of requirements associated with the aircraft, CASA inspectors assessing a lease as part of an application to add an aircraft to an AOC will be interested in reviewing the following topics: CEO-PN007-2010-01 CEO-PN007-2010 Page 11 of 33

Aircraft delivery details Operation of aircraft Limitations and penalties Manufacturers and vendor equipment warranty Sub-leasing and wet leasing Maintenance, modification and repair of aircraft Reporting and inspections Title and Registration including the consequences of non-compliance with elements of the Cape Town Convention Aircraft/engine fit and combinations Insurance Return of aircraft Loss, damage and requisition Consequences of default - liabilities CRAF Program obligations ( N Registered aircraft only). This list is indicative only. There are likely to be many other topics that will be of interest to inspectors and as each lease agreement is different, it is the responsibility of inspectors to determine what they wish to see. 3. Dry Leases Australian Registered Aircraft A dry lease is where an aircraft is leased to an operator without a crew. Normally, operational control of any dry-leased aircraft rests with the lessee. In most dry lease agreements, the lessor is a bank or finance company of either a leasing or a holding company. In neither case will the lessor have the operational expertise, the facilities, or the desire to assume responsibility and liability for the day to day operations of the aircraft. The lessee is usually considered to be the operator for the purpose of holding an AOC. 3.1 Dry Leased from an Aircraft Leasing Company or Financial Institution CEO-PN007-2010-01 CEO-PN007-2010 Page 12 of 33

The addition of an Australian registered dry leased aircraft supplied by a professional leasing company or financial institution to an operator with an established AOC, operating a similar or the same type of aircraft, should not present any difficulty. Similarly, the inclusion of a dry leased aircraft onto a new AOC should be straight forward. In both cases, subject to relevant lease information being provided by the operator establishing that there are no abnormal conditions or clauses, the normal processes specified in the AOCM should be followed in order for an aircraft to be entered onto an AOC. The operator should be asked the following questions in relation to the lease terms: What are the general terms of the lease? (When provided, this will generate further questions). Are their any requirements or obligations that have a safety impact or restrict or limit the operation of the aircraft in any way? Are there any penalties associated with the lease agreement? Who will be the Registered Operator? Who will be responsible for all operational and maintenance control of the aircraft and how will this be achieved? Responses to these and any further questions should be in writing. In the event of receiving responses from the operator indicating that there are conditions or clauses in the lease agreement that in CASA s view, could impact upon safety, then the CASA inspector acting as the particular AOC project manager, should negotiate a resolution of the matter with the organisation. It is not practical to provide detailed guidance in the event of responses that are of concern to CASA as lease conditions can vary from company-to-company and aircraft-to-aircraft. Consequently, these matters should be dealt with on a case-by-case basis. 3.2 Dry Leasing from another Australian Operator - Shared Transferred Aircraft A number of smaller operators under-utilise their aircraft on their own routes and services and often make their aircraft available for lease during the periods of aircraft inactivity. These leases or sub-leases, from a regulatory perspective, can be difficult to assess and oversight. With larger aircraft and operators, the potential problems associated with this sort of arrangement are usually less. When an aircraft that is owned by one operator is being leased to another operator on a parttime basis typically, one operator conducts day-time passenger services and the second operator undertakes night mail flights using the same aircraft - it is extremely important that CEO-PN007-2010-01 CEO-PN007-2010 Page 13 of 33

CASA establishes who is responsible for what, when and how, and that effective control processes are in place to address these issues before the aircraft is added to an AOC. These matters should be clearly specified in writing within the lease agreement. With such operations, significant maintenance aspects can be overlooked. In particular, if the lessee wishes to use the Lessor s Maintenance Control Manual, System of Maintenance, Operator Minimum Equipment List, maintenance Release, etc., then approval for those documents must be given to the Lessee AOC holder. This means that the lessee s Maintenance Control Manual will reflect: The aircraft registration; The Lessor s AOC holder s Maintenance Control Manual; The Lessor s System of Maintenance; The Lessor s Operator minimum equipment List; and The approved Lessor s maintenance Release which has been approved for use by the lessee s AOC operation. The Lessee s manual suite should be reviewed to determine whether there are adequate procedures: to provide guidance in relation to the incorporation of leased aircraft into the Lessee s operating systems; for the use of the Lessor s system of maintenance in relation to the aircraft, engines, propellers and equipment; For the use of the maintenance reliability program (where applicable); For training programs to provide for configuration differences, where the aircraft is maintained under the Lessor s maintenance program. The regulatory assessment and oversight processes become even more complex if the aircraft is an already leased aircraft which is then being sub-leased to the second operator as described above. When adding such an aircraft to an AOC, CASA inspectors should establish as part of the assessment process that the original leasing company the lessor - has approved the sub-lease of their aircraft to the second operator. Assuming that this is the case, Inspectors should ensure that the sub-lease is practical, acceptable and legitimate. Sub-leases must also not negate responsibilities required or specified under the primary lease contract. Whenever a sub-leased aircraft is to be added to an AOC, inspectors should consider the following list of matters. CEO-PN007-2010-01 CEO-PN007-2010 Page 14 of 33

What are the general terms of the lease and sub-lease? (When provided, this will generate further questions). Are their any requirements or obligations that have a safety impact or restrict or limit the operation of the aircraft in any way? Are there any penalties associated with the lease or sub-lease agreements? Who will be the Registered Operator? What lines of communication have been formally established: who will talk to whom names and positions of relevant people? What flight documents tech-log, defect log, MEL etc. will be used and who will manage/coordinate their use? What arrangements have been made to familiarise flight crew and maintenance personnel with the flight documents and maintenance programme? What considerations and arrangements have been made to assess the existing maintenance programme as this programme may be based upon a different flight profile and usage than that which may be flown by the second operator? What considerations have been made for lifte and timed components and systems that have had their maintenance hours extended through fully justified life-extension programmes but which may not apply to an operator with a different operational and flight profile? What will be the fuel policy established for both operations? How will defect reporting be undertaken? Who will be responsible for AD management and implementation? What arrangements have been made for the initial and on-going as required briefing for staff on document usage & control? What requirements are there in the contract for reporting matters of any sort to leasing company? What arrangements and provisions have been put into place for manuals, amendments to manuals & a formal distribution list? How will maintenance be conducted and defect rectification managed on a daily basis? What arrangements have been made for flight crew training and familiarisation relevant to the leased/sub-leased aircraft? CEO-PN007-2010-01 CEO-PN007-2010 Page 15 of 33

Will there be any interchange of flight or cabin crew and if so what arrangements have been made? The above list of questions is not finite and is provided for guidance only. Other and/or more questions may be appropriate as the need for clarification to aid assessment might require. 4. Wet Leases Australian Registered Aircraft A wet lease is the provision of an aircraft with a crew.the Lessor and the Lessee will often be operating companies, and it is often difficult to determine the identity of the company or individual who is exercising operational control over the aircraft, in order to make a determination as to who should be the AOC holder. In most cases it will be the wet lessor who manages the aircraft, who owns the aircraft and controls through employees the operating systems, and maintains and offers the services of the aircraft to others. The operator is usually considered the person or company who exercises authority and responsibility for operational functions such as assigning crew members for particular flights, directly paying crew members for their services, and initiating and terminating flights. In cases where doubt exists as to whether the Lessor or the Lessee is the operator, it will be necessary to obtain and analyse all commercial agreements between the parties and ask the following questions: I. Who receives any financial benefit ( hire or reward ) from the use of an aircraft authorised under the AOC? II. Who issues invoices for the use of an applicable aircraft? III. In whose name are these invoices issued? IV. Are the AOC authorised operations being conducted under one or more registered business names? V. Who is the registered owner(s) of the business name? VI. Who conducts advertising for the AOC authorised operation? VII. Is that person the AOC holder or the AOC holder s travel agent or leasing agent? VIII. Is there a business or operator name, logo or other device painted by way of livery on an aircraft authorised under the AOC? IX. If so, what is that name, logo or device and who is the owner of same? X. Who is in actual and legal possession of aircraft authorised under the AOC? XI. Who employs the flight and cabin crew? XII. Who pays their salary on an ongoing basis? CEO-PN007-2010-01 CEO-PN007-2010 Page 16 of 33

XIII. Who pays incidental expenses of the business relating to AOC operations such as insurance, fuel, maintenance? XIV. Who is the person who exercises actual control for initiating, diverting and terminating flights? XV. Who makes decisions to assign flight crew members and aircraft? XVI. To whom do pilots and maintenance personnel work as direct employees or agents? XVII. Who markets the services provided under the AOC and accepts new work? XVIII. Who owns the bank account into which revenue from the AOC authorised operations is paid? XIX. Who ensures that only trained and qualified crews are assigned to conduct flights? XX. Who ensures that only airworthy aircraft are assigned to AOC authorised operations? This analysis should be undertaken in conjunction with advice provided by CASA s Legal Branch. The use of a wet leased aircraft by an operator is often undertaken to provide additional capacity; as a short-notice stop-gap to address un-forecasted additional demand for capacity; as a planned short-term addition to capacity; or, as a planned substitution for an aircraft undergoing major repair or maintenance. An airline operating a wet-leased aircraft cannot abrogate its responsibilities under the terms of its AOC for the operation and control of the aircraft. The responsibility for the overall operation of the wet-leased aircraft operating on the airline s network is that of the airline s CEO and key personnel. The airline s manual suit should be amended to incorporate all aspects of the operation of the wet-leased aircraft and should clearly indicate how the aircraft and crew integrate into the airline s systems. This can be achieved by additional chapters in the operator s various key manuals which are included for the period of the lease. In assessing a wet leased aircraft for inclusion onto an AOC, there are two specific management considerations: the responsibility for the aircraft including its support and control; and the crew that have come with the aircraft. As part of the assessment process of adding a wet leased aircraft to an AOC, the following points should be considered and put to the operator: What are the general terms of the lease? (When provided, this will generate further questions). Are their any requirements or obligations that have a safety impact or restrict or limit the operation of the aircraft in any way? Under the terms of a wet lease agreement, details will cover the aircraft, aircraft operation, maintenance, flight crew and cabin crew. CEO-PN007-2010-01 CEO-PN007-2010 Page 17 of 33

4.1. Aircraft Operations including Flight Crew The nature of a wet-leased aircraft places the aircraft as an operational asset at the disposal of the airline to which it has been leased. Inspectors assessing the addition of a wet-leased aircraft to an AOC should also review the lessor s operational documentation to ensure that systems are in place for the transfer of the aircraft to the lessee; that the on-going regulatory and safety obligations are maintained; and that the aircraft can be withdrawn from the lessee s organisation and returned to the lessor s organisation without compromising safety and operational control. In addition to the matters listed above concerning the question of who exercises operational control over the wet leased aircraft, the following operational matters of regulatory and safety consideration should also be established in writing prior to the wet-leased aircraft being added to an AOC: On which routes or geographic area is the aircraft intended to be operated? What arrangements have been made for crew training and checking, route familiarisation, managing flight and duty time, and integration into the host airline - lessee s systems? What arrangements have been made for crew substitution should that be required? What arrangements have been made to integrate the lease crew/s into the organisation for which they have been contracted to work? What arrangements have been made for emergency procedures training and examination for the flight crew/s? Does the lessor s operational document suite adequately cover the wet-leasing of an aircraft to another operator? How has the leased aircraft been integrated into the operator s airline system so that the aircraft is presented to the passengers as a normal airline X aircraft? What arrangements have been put into place to ensure that the wet-leased aircraft enters the lessee s organisation without difficulty and at the end of the lease period is returned to the lessor s organisation? As previously stated, other questions may need to be asked of either or both the lessor or lessee, as specific cases vary and therefore each application to add a wet-leased aircraft to an AOC must be treated on a case-by-case basis. 4.2 Aircraft Maintenance When a wet-leased aircraft is integrated into an airline system, it is critical that both the lessor and lessee ensure that all maintenance requirements are effectively addressed. This must CEO-PN007-2010-01 CEO-PN007-2010 Page 18 of 33

include training of personnel in the differences between the leased aircraft and the normal fleet aircraft and informing them of any special or particular arrangements that have been made under contract to cover maintenance during the period of the lease. With such operations, significant maintenance aspects can be overlooked. In particular, if the lessee wishes to use the Lessor s Maintenance Control Manual, System of Maintenance, Operator minimum Equipment List, maintenance Release, etc., then approval for those documents must be given to the Lessee AOC holder. This means that the lessee s Maintenance Control Manual will reflect: The aircraft registration; The Lessor s AOC holder s Maintenance Control Manual; The Lessor s System of Maintenance; The Lessor s Operator Minimum Equipment List; and The approved Lessor s maintenance Release which has been approved for use by the lessee s AOC operation. The following aircraft maintenance related matters of regulatory and safety consideration should be established in writing prior to the wet-leased aircraft being added to an AOC: Who will be responsible for maintenance, maintenance control and aircraft records? Where will maintenance work be undertaken? Will company maintenance personnel work on the aircraft? If so, o o o What training will they receive? How will they certify for work? What system of maintenance and system of certification be used? How will defects be managed and rectified including those occurring at down-route ports? What maintenance documentation including manuals will be made available for use by the organisation? Is the leased aircraft subject to an aging aircraft maintenance programme or corrosion control programme? Who is responsible for emergency training of flight and cabin crew whilst the aircraft is on lease? CEO-PN007-2010-01 CEO-PN007-2010 Page 19 of 33

Has the leased aircraft been included in the lessee s organisation s Maintenance Control Manual? If so, how and what aspects have been addressed. What arrangements have been made to train the operator s ground handling staff in any differences between the leased aircraft and the fleet standard aircraft? What provisions have been made to handle defects at the ports to which the leased aircraft will fly? What arrangements have been made to familiarise the lessee s maintenance personnel with the flight documents and maintenance programme? What considerations and arrangements have been made to assess the existing maintenance programme as this programme may be based upon a different flight profile and usage than that which may be flown by the second operator? What considerations have been made for life and timed components and systems that have had their maintenance hours extended through fully justified life-extension programmes but which may not apply to an operator with a different operational and flight profile? 4.3 Cabin Crew Cabin crew that have been selected to go with an aircraft on a wet-lease will in all probability be fully conversant with the aircraft. However, this should not be taken for granted and inspectors should establish that the cabin crew do indeed have the appropriate knowledge. As with other matters associated with integrating a wet-leased aircraft into the lessee s system, it is important to ensure that processes has included the cabin crew, both in safety and customer responsibilities. The following cabin crew related matters of regulatory and safety consideration should be established in writing prior to the wet-leased aircraft being added to an AOC: What emergency procedures and ongoing training and assessment arrangements have been put into place for cabin crew? What arrangements have been made for cabin crew fatigue management and rest periods? What arrangements have been made to change or replace cabin crew as may be required? What arrangements have been made for the supervision of cabin crew both in flight and as a work-group? CEO-PN007-2010-01 CEO-PN007-2010 Page 20 of 33

The above list of questions is not finite and is provided for guidance only. Other and/or more questions may be appropriate as the need for clarification to aid assessment might require. 5. Damp Leases Australian Registered Aircraft A damp lease is where an aircraft is leased with partial crew. Typically, this is with a flight crew but not a cabin crew. The matters covered previously for wet leased aircraft apply directly to damp leased aircraft with the exception of the cabin crew. Under this arrangement, the cabin crew that will operate the damp leased aircraft will be drawn from the cabin crew of the lessee s airline. The selected cabin crew should receive familiarisation training on the damp leased aircraft so that they understand the aircraft layout and the operation of the relevant installed equipment. They will be required to undergo emergency procedures training for the leased aircraft and this should be in addition to emergency procedures training that they undertake for the normal fleet aircraft. The cabin crew will also need to be integrated into the operating procedures and safety procedures used by the flight crew that have been provided with the damp leased aircraft. The flight crew should also be briefed on cabin crew procedures and should be sufficiently familiar with cabin crew practices that, should an emergency arise, the established emergency procedures will used to full effect. 6. Leasing of Foreign Registered Aircraft Inspectors should be aware of the additional conditions specified for foreign registered aircraft published in Section 28A of the civil Aviation Act 1988 and also relevant matters in Sections 27 and 28. When an application is received for the inclusion of a foreign registered aircraft to be operated on an Australian AOC, or better still, if CASA is first approached by an organisation considering making application to add a foreign registered aircraft to an Australian AOC for any reason whatsoever, CASA should establish the compliance status of the State of Registry of the foreign registered aircraft with ICAO Standards and Recommended Practices (SARPS). SARPS are expressed in the 18 Annexes published by ICAO and these are available either on the ICAO Website or through the CASA/Airservices Technical Library. If an ICAO Contracting State does not comply with any or certain aspects of the SARPS which are published as the minimum standard for international operations, then that State will register a difference with ICAO stating how their regulatory system varies from the CEO-PN007-2010-01 CEO-PN007-2010 Page 21 of 33

relevant SARPS. The registration of a difference against SARPS may conflict with the Australian regulatory system and could introduce a legal or operational loophole whereby safety may be compromised. It is therefore extremely important to establish that any registered difference with ICAO SARPS does not impinge upon CASA s ability to establish and ensure safe operation of the foreign aircraft should it be placed upon an Australian AOC. Most Contracting States publish their registered differences to the ICAO SARPS in their Aeronautical Information Package (AIP). This is normally contained in the General Section. In Australia s case, the differences to ICAO SARPS are published in the AIP Supplement. The safety critical differences that should be considered are published in: Annex 1 Personnel Licensing Annex 2 Rules of the Air Annex 6 Operation of Aircraft Annex 8 Airworthiness of Aircraft Annex 10 Aeronautical Telecommunications Annex 11 Air Traffic Service Annex 16 Environmental Protection Annex 17 Security Annex 18 The Safe Transportation of Dangerous Goods by Air Should differences be found, technical specialists and CASA Legal Services should be consulted as appropriate. It is possible that an organisation may seek to lease an older aircraft for reasons of lower costs or availability. It is important therefore that Inspectors do not place a leased foreign registered aircraft onto an AOC without first checking the following matters and thereafter seeking and taking advice from the CASA Airworthiness and Engineering Branch of Standards Development and Future Technology Division. The matters of concern relate to the structural integrity of an aircraft and must be considered: Is the aircraft the subject of an aging aircraft programme? Is the aircraft subject to a corrosion control programme? Can the lessor provide a history of any aircraft damage? CEO-PN007-2010-01 CEO-PN007-2010 Page 22 of 33

Can the lessor provide a full maintenance and repair history of the aircraft from manufacture to the present? Can the lessor demonstrate that all Airworthiness Directives and manufacturer s safety related modifications have been incorporated on the aircraft? 7. Dry Leased Foreign Registered Aircraft It is most unlikely that a foreign registered aircraft would by dry leased and added to an Australian AOC as a foreign registered aircraft. There would be so many requirements to meet both the foreign regulations and those of Australia that the whole exercise would be impractical. Under the legislation of many Contracting States, such an action would not be legal. Certainly there is no provision within Australian legislation for an Australian aircraft to be dry-leased and operated as a VH aircraft on a foreign AOC. If an application were received to place such an aircraft on an Australian AOC, the logical solution would be to place the aircraft on the Australian Register and for it to meet all Australian legislative requirements. 8. Wet Leased Foreign Registered Aircraft A wet lease is the provision of an aircraft with a crew. The use of a foreign registered wet leased aircraft by an operator is occasionally undertaken for short periods to provide additional passenger or freight capacity or, to provide highly specialised mission aircraft such as water-bombers for fire-fighting activities. An organisation operating a foreign wet-leased aircraft cannot abrogate its responsibilities under the terms of its AOC for all aspects of the operation and control of the aircraft. The lease agreement between the Australian AOC holder the lessee - and the foreign lessor organisation must clearly define the areas of responsibility as defined in the Civil Aviation Act and this agreement must be found acceptable to CASA prior to the aircraft being added to an Australian AOC. Details of who is responsible for what by name and position - on the foreign wet-leased aircraft should be included in amendments to the organisation s document suite. In addition, CASA and the NAA of the State of Registry should have written agreements concerning regulatory oversight of operational and airworthiness control of the aircraft and this should be established prior to the addition of the aircraft onto an AOC. For an aircraft that is to be used in airline service, systems should be put into place to integrate the flight crew into the lessee s airline system. In practical terms, the best possible option of lease types would be an ACMI lease which provides the aircraft and all support functions for a fixed period. CEO-PN007-2010-01 CEO-PN007-2010 Page 23 of 33

As part of the assessment process of adding a wet leased aircraft to an AOC, the following points should be considered and put to the operator: What are the general terms of the lease? (When provided, this will generate further questions). Are their any requirements or obligations that have a safety impact or restrict or limit the operation of the aircraft in any way? Who will exercise operational control of the aircraft? Who will be responsible for operational control including aircraft scheduling, flight following, fuel management, reporting? On which routes or geographic area is the aircraft intended to be operated? What arrangements have been made for crew training and checking, route familiarisation, managing flight and duty time, and integration into the host airline - lessee s systems? What arrangements have been made for crew substitution should that be required? What arrangements have been made to integrate the lease crew/s into the organisation for which they have been contracted to work? What arrangements have been made for emergency procedures training and examination for the flight crew/s? Does the lessor s operational document suite adequately cover the wet-leasing of an aircraft to another operator? How has the leased aircraft been integrated into the operator s airline system so that the aircraft is presented to the passengers as a normal airline X aircraft? What arrangements have been put into place to ensure that the wet-leased aircraft enters the lessee s organisation without difficulty and at the end of the lease period is returned to the lessor s organisation? Who will be responsible for maintenance, maintenance control and aircraft records? Where will maintenance work be undertaken? Will the lessee s company maintenance personnel work on the aircraft? If so, o o What training will they receive? How will they certify for work? CEO-PN007-2010-01 CEO-PN007-2010 Page 24 of 33

o What system of maintenance and system of certification be used? How will defects be managed and rectified including those occurring at downroute ports? What maintenance documentation including manuals will be made available for use by the organisation? Is the leased aircraft subject to an aging aircraft maintenance programme or corrosion control programme? Who is responsible for emergency training of flight and cabin crew whilst the aircraft is on lease? Has the leased aircraft been included in the organisation s maintenance control manual? If so, how and what aspects have been addressed. What arrangements have been made to train the operator s ground handling staff in any differences between the leased aircraft and the fleet standard aircraft? What provisions have been made to handle defects at the ports to which the leased aircraft will fly? What emergency procedures and ongoing training and assessment arrangements have been put into place for cabin crew? What arrangements have been made for cabin crew fatigue management and rest periods? What arrangements have been made to change or replace cabin crew as may be required? What arrangements have been made for the supervision of cabin crew both in flight and as a work-group? The above list of questions is not finite and is provided for guidance only. Other and/or more questions may be appropriate as the need for clarification to aid assessment might require. 9. Damp Leases Foreign Registered Aircraft Damp leasing of foreign registered aircraft will require the same assessment of a wet leased foreign registered aircraft. The nature of a damp lease does not normally include cabin crew and therefore particular attention is required when it is intended to place the cabin crew drawn from an Australian operator and fly them on a foreign registered aircraft. CEO-PN007-2010-01 CEO-PN007-2010 Page 25 of 33

Cabin crew will require training on the foreign aircraft type even if a similar version of the aircraft is operated by the airline that employs the cabin crew. They will require relevant knowledge of the regulations of the foreign aircraft s State of Registry relating to all aspects of cabin crew activities and responsibilities. They will be required to meet all emergency procedures training and will need to integrate these functions with the flight crew that have come with the foreign registered aircraft. Details of the cabin crew responsibilities, training, briefing and testing will need to be included within the lease agreement and this must be acceptable to CASA prior to the aircraft being added to an Australian AOC. Within Australian legislation, senior cabin staff or persons are not specifically identified however, in many Contracting States legislation provides for a senior cabin attendant often termed as a Purser. It is common practice with many foreign operators that damp lease aircraft to other operators both in their home State or overseas, to provide a purser as part of the lease contract. This is to be encouraged should CASA be approached by an operator considering damp leasing a foreign registered aircraft. The purser can provide supervision and on-site training for the lessee s cabin staff and can act as the cabin manager during commercial operations. The added benefit of the purser is that he or she will be fully conversant with the legislation relating to the State of Registry of the aircraft and will be fully integrated into operating with the flight crew provided with the aircraft. The purser s functions should be included within the cabin operating and emergency procedures for the leased foreign aircraft as part of the lessee s manual suite. 10 Aircraft Leasing and the Virtual Airline Concept The virtual airline concept is where every component of an airline operating under an AOC, is provided by contract to the entity holding the AOC. The reasons for this concept are purely financial. Flying is an easily understood concept, but operation is less so. Operating must be different for Section 27 purposes from flying. Operate or operator is not defined in the CAA or CARs. The operator is that legal entity which satisfies the following criteria: a. it uses the aircraft; b. it has the authority to cause the aircraft to be flown; c. it receives some commercial advantage from the flight of the aircraft; d. it holds itself out as providing a service involving the flight of an aircraft. To operate an aircraft may be said to involve a series of aircraft flights having some common characteristics. CEO-PN007-2010-01 CEO-PN007-2010 Page 26 of 33

Take an example: Virtual Airlines a new entrant to the Australian industry. It is run by a passive investor with deep pockets but little experience in aviation. It has been advised by its Accountant to limit its tax and other liabilities by having as few employees as possible. So it looks around the industry and enters into contracts with aviation service providers to provide the following things and services for a fee: a. dry hire of aircraft; b. Aviation Manpower Services Pty Ltd, who supply pilots, chief pilots as required; c. ACME Manuals Pty Ltd, a professional manual provider to prepare and update the Operations Manual, Dangerous Goods manual, training and check in manual, maintenance control manual, etc. d. Jet Set Maintenance, the hire of a maintenance organisation, maintenance controller, equipment, tools hanger as required. e. Aviation Compliance Services, who will check the contracted services and systems for compliance with CASA s rules and regulations, will attend meetings with CASA inspectors and ensure the operation gets off the ground and keeps the regulator happy. f. Ace Check and Training Services, a CAR 217 organisation provider fashioned to meet the needs of its client and staffed by ex CASA FOIs. g. Summit Travel Services, a travel and booking agent with offices at local airports to interface with passengers, set schedules, collect fares, sell tickets etc. Where the so called Airline is a passive investor with the flying and aviation services being contracted who is the operator? Does the term operator have any meaning in these circumstances? Are there any particular problems for CASA with regulating operations of this type? On the criteria set out above Virtual Airlines is the operator and should be the holder of the AOC rather than any other contracting entity. Before CASA is authorised to issue an AOC it must be satisfied that: the organisation is suitable to ensure that the AOC operations can be conducted or carried out safely. (Section 28(1)(b)(1)). It is the AOC applicant s organisation being referred to, but this term organisation can include the entities contracted to provide services to the operator, and not just the operator s own employees. Section 28(1)(b) refers to the organisation s chain of command, the organisation has. suitably qualified employees, the facilities of the organisation. It is not inconsistent with the wording for the employees and facilities to belong to entities other than the operator, and the chain of command to be pursuant to a number of contracts. CEO-PN007-2010-01 CEO-PN007-2010 Page 27 of 33

It would be incumbent on CASA before issuing the AOC to check the leases and other agreements between the operator and its service providers to ensure that the operator had experienced managers who could command services from the other entities necessary for the safe operation under the AOC. If the communication and command structure between Virtual and its contractors did not work well the safety implications are obvious. The scope for contractual disputes between these entities would threaten the safety of operations. The procedures and manuals of each of the component entities would have to fit together to ensure proper communications and well co-ordinated operations. The entity holding the AOC leases hardware and services and hires staff all from associated organisations, each linked by contract with established lines of responsibility. This enables an operator to start an airline with little capital outlay and, as everything is leased, significant tax advantages also apply. The ICAO Montreal Convention is another key reason for operating under a virtual airline concept. The Montreal Convention of 1999 is an updated version of the Warsaw Convention which covered international carriage of persons, baggage and cargo. The Montreal Convention has the effect, amongst other things, of lifting the limited liability against airlines for passenger injury and for claims to be heard in the jurisdiction of an injured passenger s residence rather than the jurisdiction in which the airline is based. This would mean that in countries where court awards for injuries are high, huge liability sums could be awarded against a small airline in a foreign country which could send the airline bankrupt. This liability is brought about by the selling of a passenger ticket by an airline in one country to a stated destination in another country and where on-carriage by one or more other airlines is utilised in order to reach that destination. In this case, even though two or more airlines will provide carriage, the ticket issued by the airline at point of sale is considered to be the only ticket and consequently the jurisdiction in which the ticket was sold can be the jurisdiction in which an injury claim can be heard. In light of the Montreal Convention, a number of smaller airlines have taken legal advice and have restructured themselves into virtual airlines. The virtual airline comprises a group of sister companies linked together by contract and providing all of the services required under the conditions specified for the issue of an AOC. In the case of a virtual airline, the management group comprising the people accountable under the Civil Aviation Act work for the company that holds the AOC and this company usually carries the airline s brand name. This company also usually provides day-to-day operational control of the airline including commercial activities. Aircraft are leased from a related company that either owns them or leases them from a leasing company. Flight and cabin crew are provided by another linked company and usually crew training is also provided by, or provided through, that organisation. Maintenance is contracted either to a company within the virtual airline group or to an external provider. Ground services are provided by yet another related company and this could also include ground support equipment of various sorts. CEO-PN007-2010-01 CEO-PN007-2010 Page 28 of 33

Whilst making inspectors aware of the virtual airline concept, assessment of applications for an AOC under such arrangements should be conducted in accordance with other relevant parts of the AOCM. For the leased aircraft used by a virtual airline, assessment of the aircraft leases by inspectors should be in accordance with the guidance provided in the various parts of this Package. In particular, if an aircraft is to be sub-leased by the aircraft providing company of the virtual airline group to the AOC holding company, it is important to ensure that the company aircraft owner leasing the aircraft to the aircraft holding component of the virtual airline will permit the sub-lease and that this is formally included within the lease agreements. Flag of Convenience Operations and Aircraft Leasing Agreements Definition Flag of Convenience operated aircraft are those aircraft registered in and receiving inadequate safety oversight by a regulator in the State of Registry, but which are operated outside the State of Registry. Under the Chicago Convention and ICAO Annexes the State of the Operator is the State responsible for operational safety oversight through the issuance and continuing oversight of safety systems relating to the AOC. The Chicago Convention requires that the operator should have only 1 AOC issued by the State where the operator s principal place of business is located. This requirement ensures that a single set of safety regulations is applied, and encourages the formation and operation of a coherent safety management system. Safety oversight by that AOC by one State insures clear lines of responsibility and accountability, giving other States the necessary assurance that they can call specific States to account if they have concerns either the safe operation of a foreign operator. Leases and other commercial agreements in relation to flag of convenience operations have the potential to place the State of Operator in a place other than the State of Registry. This may lead to the situation where the State of Registry will loose the ability to conduct adequate control and supervision, because operations are being conducted outside of its borders. This often means that airworthiness control becomes a problem for the State of Operator in the absence of proper safety oversight arrangements between the State of Registry and the State of Operator. Ideally a State of Registry should not register aircraft to be used in commercial air transport without clearly ascertaining from the outset who will be the State of the Operator. The principal place of business in the majority of cases is irrelevant in the case of wet leases as companies may set up in one country and provide long-term wet leases to carriers based entirely in multiple other States. On the issue of wet leaseof foreign aircraft, in view of the lack of jurisdiction of the Lessee's State, it is recommended that the State of Registry and the State of Operator CEO-PN007-2010-01 CEO-PN007-2010 Page 29 of 33

consult and enter into a bilateral agreement to ensure that operations involving leased aircraft meet safety standards equal to or better than those applicable in the Lessee's State. CEO-PN007-2010-01 CEO-PN007-2010 Page 30 of 33

Appendix 2 Aircraft Lease Assessment Check List Applicant.. ARN Aircraft Type & Model Registration AOC Reference Lessor of Aircraft. Lessee of Aircraft. Period of the Lease.. Australian Registered Aircraft or Foreign Registered Aircraft (Please delete as appropriate) Type of Aircraft Lease Dry Lease Wet Lease... Damp Lease... Sub-Lease.. Aircraft Lease Reference Information Copy of lease on file Assessment of Lease Conditions (Assessment for the different lease types should be carried out in accordance with the relevant part of the Aircraft Leasing Information Package) Aircraft delivery details.. Title and registration.... Operation of aircraft..... CEO-PN007-2010-01 CEO-PN007-2010 Page 31 of 33

Limitations, conditions and penalties..... Maintenance, modification and repair of aircraft.... Reporting and inspection.. Aircraft/engine fit and combination.... Manufacturers and vendor equipment warranty.... Sub-leasing - wet and dry.. Insurance... Return of aircraft.. Loss, damage and requisition.. Consequences of lease default liabilities.. CRAF Programme obligations ( N Registered aircraft only)... Any other matter considered relevant from the lease agreement assessment... Completion of Aircraft Lease Agreement Assessment CEO-PN007-2010-01 CEO-PN007-2010 Page 32 of 33

I am satisfied/not satisfied that the aircraft lease agreement provided to CASA for review and assessment, does not contain any conditions, limitations or penalties that in the normal course of operations would have a detrimental impact upon the safe operation of the specified aircraft. I recommend/do not recommend that this aircraft be assessed in accordance with the AOCM procedures for adding it to the (lessee s) applicant s AOC. Note: A recommendation not to proceed in placing the aircraft on an AOC due to conditions, limitations or penalties identified within the aircraft lease agreement must be accompanied by a Statement of Reasons. This Statement of Reasons will be used by CASA when formalising a response to the applicant. Remarks or comment... Signature. Date../../.. Airworthiness/Flight Operations Inspector Supported/Not Supported Signature. Date../../.. Team Leader Airworthiness/Flight Operations CEO-PN007-2010-01 CEO-PN007-2010 Page 33 of 33