By Karen Di Piazza
Air charter brokers—how much do you really know about them? Are some brokers dishonest, illegally selling Part 135 tickets, holding out as the direct carrier, and how do they come up with their pricing?
These and more questions are the tip of the iceberg since the Department of Transportation published a “notice” on the Federal Register warning deceptive charter brokers to wise up and adhere to statute 14 CFR, and particularly section 399.80, “Unfair and Deceptive Practices of Ticket Agents.” Chartering aircraft, particularly jets, is quickly becoming the fastest growing segment of general aviation, akin to fractional ownership, or outright ownership, and if you believe that very light jets will be the nation’s next hot ticket, as does NASA, the DOT is worried about who’s selling charters to the public.
Dayton Lehman Jr., the DOT’s deputy assistant general counsel, who is the primary on the notice, told Airport Journals that anyone could become a charter broker; it’s an unregulated segment of GA that up until now the DOT wasn’t overly concerned about.
“We’ve seen a proliferation of air charter brokers with the advent of the Internet; now, a website and telephone constitutes being a broker,” he said. “We’ve seen a great increase in people who call themselves brokers; consequently, there have always been laws protecting the public, which is necessary to do.”
Lehman said perhaps some brokers don’t get it, but the DOT makes it clear that “anyone who holds out, sells or arranges for air transportation is an air ticket agent!”
He said the law is as old as dirt, and ignorance or disregard for it won’t get you out of it.
“The rule states that you cannot sell air transportation unless you have a certificate or unless you hold an exemption from the certificate requirements,” he said. “In this case, the certificated party is the Part 135 charter operator. This is the general underlying provision of the statute, which goes back, I think, to the 1938 Civil Aeronautics Act. The amendment to that is the Federal Aviation Act of 1958, so it’s been a longstanding requirement that before you hold yourself out as responsible for providing air transportation to the public, you have to have a certificate or an exemption.”
When asked how many charter brokers exclusively selling 135 tickets have received exemptions, he replied none-which means that most of them are breaking the law.
Lehman uses a scenario where a college university calls up a broker and wants quotes to take its students on a trip with an on-demand charter company.
“The broker contacts carriers and gets a bunch of bids for the trip and decides that the best trip costs $10,000,” he said. “So far, in that scenario, the broker is acting as an agent for the customer. If the broker signs a contract with the university to provide it aircraft, and say the broker now marks the cost up to $11,000, and the broker then signs a separate contract with the carrier-only between the broker and the carrier, and not between the broker as an agent for the customer and the carrier-that’s a problem. It’s a problem because the broker has engaged in air transportation by selling or promising to provide air transportation when they aren’t a carrier and they aren’t authorized to do so.”
In other words, he said if a charter broker collects funds upfront from a customer, and their contract is promising air transportation from point A to point B, it’s a problem; they’re breaking the law because they don’t have authority to sell air transportation; they’re not an airline and they’re not an agent of an airline.
“If someone calls a charter broker and requests that the broker finds an aircraft for on-demand air charter going from point A to point B, and the broker tells them okay, they’ll represent the customer in doing that, then the broker is acting as the agent of the customer, and that’s okay,” he said. “The customer can pay all the money they want to the broker, but only if the broker is acting as an agent to ‘find’ an air carrier. If the broker contracts with the customer to provide the air transportation, that’s a problem.”
He said that scenario would only be legal if the broker had a “380,” which is “economic authority” to sell air transportation as an indirect carrier-like a tour operator or travel agent. He also said that for a broker to become an indirect carrier with economic authority, the broker would have to adhere to provisions similar to what Part 121 or Part 135 operators do.
“Both of those carriers must be certificated under title 41101 of the Federal Aviation Act, title 49, which requires carriers to escrow funds,” he said. “If a carrier were to sell a ticket directly to a customer, the money would have to be placed into an escrow account and the funds are not released to the carrier until after the flight has taken place.”
By escrow accounts, he said, the carrier cannot have access or “control” of the funds before a flight takes place, and brokers have to establish contracts with the 135 operators.
“Today, we have air charter tour operators, for example; they’re indirect carriers,” he said. “They’re allowed to act as an indirect carrier under 14CFR and sell air transportation in their own right as a principal, even though they don’t actually operate an aircraft. We have a regulatory system in place for that; they’re charter flights. For example, Apple Tours does this, but they’re still a broker; the difference is that Apple Tours is licensed to do that because they’ve complied with 14 CFR and funds are secured.”
Although the DOT is quick to point out the law, the majority of brokers have essentially been breaking the law, and Lehman knows it. He admits that the problem is that the DOT doesn’t have any regulatory systems in place for charter brokers, who simply want to be the middleman between a customer and the Part 135 operator.
“There are presently no regulations covering them to do this,” he said. “That being said, we’re considering if exemptions are necessary, if brokers are dealing solely in the Part 135 world.”
When confronted by the fact that so many brokers don’t disclose what their fees or commissions are, whose aircraft specifically a customer would be flying on, and what the cost of such a trip would be, he said basically that’s why they reposted its rule under 14 CFR Part 380. When asked what level of protection the public needs when dealing solely with brokers acting as intermediaries for on-demand Part 135 trips, he said he didn’t know.
“That’s the real question, but at this time we don’t have an answer,” he said.
He agreed that brokers are everywhere, but has no idea how many because there’s no data. He said he knows brokers quote prices and take credit cards, and the public really has no idea if their money is safe, who they’ll be flying with or on what aircraft.
“I think some of those things are major issues, the protection of folk’s monies if necessary, insuring you know who you’re dealing with and importantly, knowing who the Part 135 airline is that you’ll be flying on,” he said.
Although the DOT is reviewing whether formal exemption requirements should apply to charter brokers, Lehman said they intended to enforce the statutory requirements as it stands now, making sure brokers operate legally. The DOT said they have staff to monitor broker activity, looking at websites, newspaper ads and complaints made by the public or otherwise. Lehman acknowledged that since 1958, the DOT has “not taken one enforcement action against a charter broker with respect to Part 135 aircraft.”
How does the public launch a complaint to the DOT? Lehman said they have one consumer telephone number, (202) 366-2220, but you can only leave a message after hearing a recording.
“Since it’s the same number that takes all consumer complaints, we’ve seen complaints go from 6,000 to 23,000 a year; we don’t have anyone available to answer the phone,” he said.
Whatever limitations the DOT has concerning enforcement actions or setting a final policy for charter brokers, Lehman reminds us of recent problems when the customer pays the broker upfront for charter flights.
“Say the broker goes out of business or disappears with the money, like FlightTime.com did in mid-2002; the customer can’t go to the air carrier because they don’t have a contract with the air carrier,” he said. “The customer lost monies because they paid the broker for air transportation, and the broker didn’t have authority to collect those funds.”
Investments or swindles?
Bob Kirkland, a retired Tennessee businessman who describes himself as a “layman” when it comes to hiring the services of charter brokers, told Airport Journals he knows all too well the consequences of paying brokers upfront. He became a statistic when he lost $50,000.
Kirkland invested $100,000 with FlightTime.com Corp., a Waltham, Mass. online charter broker, who filed Chapter 7 bankruptcy in mid-2002, leaving a trail of more than $10 million in claims.
“It was a so-called guarantee of flight hours, but then they went bankrupt, so I wouldn’t do that again,” Kirkland said.
He said he continues to use brokers, but he scrutinizes Part 135 operators’ history and gets four or five bids before he makes a decision to part with his money.
“I’m just a layman, and to cut to the bottom line, let’s compare how much insurance they have,” he said. “If they have $200 million insurance, the insurance companies check them out pretty well. I feel safer with one of the $200 million companies than one with $25 million; I don’t use any 135 operator that doesn’t have $50 million aircraft liability insurance.”
Kirkland charters frequently, and although he doesn’t think fractional ownership is a good investment, he does use NetJets’ sister company, Executive Jet Management.
“Their prices are higher than most bids, but I feel they have the insurance liability I’m looking for and that they’ll be there tomorrow,” he said.
NetJets owns and maintains its aircraft, and under its Marquis Card program, it allows customers such as Kirkland to prepay, at minimum, 25 hours of flight time.
Gene Miller of New York, a former FlightTime customer who lost $150,000, said FlightTime didn’t own aircraft and overextended its portfolio.
“I’ve looked into using a prepaid card program with CitationShares; I’ve even considered fractional ownership with them or NetJets, but I don’t travel enough to warrant the cost,” he said. “I really don’t believe in prepaid cards, especially dealing with brokers. One minute they’re in business promising you all kinds of incentives, and the next day they have your money-in their pockets.”
FlightTime isn’t the only broker to whom Miller has lost money.
“Recently, I needed a quick trip and used an online broker, but when I showed up at the FBO, I was told that the broker I had chosen was blacklisted,” he said. “They said he owed them thousands of dollars for unpaid trips, and they wouldn’t honor my agreement. I ended up paying the charter outfit directly and realized that a deposit wasn’t even made. I’m suing the broker now for $15,695, and the charter company said they had a suit going as well. I found out that the broker’s price was $4,000 over what the charter company charged for the same aircraft for the same trip; it makes me angry.
“I would rather call a charter outfit directly; memberships have similar qualities to FlightTime, and I suppose it’s too bad for the honest brokers, but my experience has been that they will lie, lie, lie-say anything to sell trips.”
According to the DOT, these practices are illegal. Brokers are supposed to refund a trip promptly if they can’t provide what they promised, and the broker’s commission and the actual charter price should have been disclosed, which brokers rarely do.
Some brokers disclose more about charges, commissions and customer contracts than others. Airport Journals talked with Nathan W. McKelvey, CEO of Charterauction.com, a Massachusetts-based online broker who said Jane Garvey, former Federal Aviation Administration chief, “helped set up a meeting with the FAA to make sure they met compliance on the DOT’s notice.”
“We hired her during the summer of 2003 and we made structural changes-for instance, the ‘segregation’ of the funds,” he said. “Actually, the people preset up membership accounts-$100,000, $250,000 or $500,000, which go into the escrow account at Merrill Lynch.”
When asked if Merrill Lynch controlled the escrow account, protecting customers’ money and then disbursing funds after the customer had received their flight, according to the DOT’s mandate, he responded that it was too expensive to have Merrill Lynch monitor the funds. He also said that the accounts were in the clients’ names, but admitted that his company has “access to draw funds out of the accounts.”
“Once a customer posts a trip, and the operators come back with their bids, all the background information is provided on the operator, the crew, the aircraft and everything about it,” he said.
When asked why a customer should trust his company, and what would prevent his customers from losing all their money, similar to FlightTime, he said that wouldn’t happen.
“I set this up specifically because of the FlightTime fiasco,” he said. “True, I have the authority to take money out, but I absolutely would not. I think the DOT is right in trying to change the way brokers operate, but I hope Dayton Lehman and the DOT isn’t trying to take out the little guy. We’re not executives yet. I know a lot of brokers are concerned about this.”
McKelvey said he started his online broker business in 1999, and that today, the majority of his 60 customers have invested $100,000; a split of 10 customers have invested between $250,000 and $500,000. He also said that to be on the safe side of the law, he has applied for a Part 135 certificate-in case the DOT determines that he can’t continue operating this way. He also agreed that something should be done to promote ubiquitous pricing amongst brokers. However, he declined to disclose how much he charged as a commission or fee when he deducted funds from his customer’s bank accounts.
“It’s different for different clients; it would be unfair for me to go ahead and just give my rates to you,” he said.
Richard Aboulafia, vice president of the Teal Group, a Fairfax, Va.-based research company that provides industry with sometimes hard-to-swallow analysis, shared his opinion on charter broker-investment schemes.
“The problem is simple; once you’ve identified that there’s part of the air transport market where people will pay almost anything for the service they want, you can take advantage of those people,” he said. “After all, it’s the opposite of a commodity-a well-defined service with a strong level of competition. Instead, private air service is highly differentiated by type of plane, geography, flexibility, etc., so there are many different price points. Again, given some people’s cost-insensitivity, you can convince them to part with cash for almost nothing in return. That’s incoherent.”
According to National Air Transportation Association President James Coyne, the quarry the DOT is hunting is well prepared and well funded. He said brokers will charge one person one amount for a trip and then, when selling a dead-leg on the same trip, will quote a different price.
“It reminds me of some of the third world countries, where you have beat-up cabs all over the place and people are negotiating every step of the way, sort of like a Turkish bazaar,” he said. “You wonder if this is almost like some sort of random pricing and if it’s good for anybody.”
Coyne said he’s not really in favor of more complicated regulations. In his view, a lot of the regulations drive up costs for consumers and others, but in this case, he believes the DOT is trying to address some abuses that need to be addressed.
“There are clearly people out there who are misrepresenting themselves to the customers,” he said. “I’m not saying that every broker does that, but there are definitely some bad apples in the barrel. The question that always comes when you’re trying to get rid of bad apples in a barrel is how to save the good ones without ruining the whole barrel. In general, most of our charter members recognize that there are misrepresentations out there in the marketplace.”
He said one of the problems is that the public doesn’t know with what or whom they’re dealing.
“They don’t know what kind of broker they’re dealing with-a broker who is an agent for the customer, for the Part 135 operator or both,” he said. “I think it’s appropriate for greater transparency in this whole process; however, many of our members like the fact that some of these brokers have helped make the pot get bigger for everybody.”
Coyne said brokers can afford to do a lot more advertising than one Part 135 operator.
“It’s akin to shared advertising revenue,” he said. “An individual charter operator doesn’t have the resources to go out and advertise just for his little charter business, but together with all the other ones that may do business with a broker, the broker advertises and it helps build demand. It’s a healthy thing to build demand for our industry; on the other hand, it needs to be truthfully presented to the customer. Otherwise, the customer thinks that different parties have made different promises. I fear there will be more lawsuits coming out of this mess. This is what produces lawsuits–miscommunication.”
Coyne said brokers are afraid that because of the bad apples in the barrel, the DOT is going to put them all out of business.
“So there’s a need that, somehow, the good guys in the business will come together,” he said. “They need to identify a set of practices they all agree to follow, with regards to proper identification of who owns the airplanes, proper identification of what kind of pilots and certifications they have, proper management of the money, guarantees and money-back guarantees, and importantly, be honest about who you are-full disclosure of everything.”
He said that applies to everyone including 135 operators and fractionals. He suggested that if the broker industry pooled together as a consortium, it would be able to self-regulate and weed out the FlightTimes of the world.
However, Larry Tobin, former project manager for FlightTime.com, who oversaw the company’s Internet network, doesn’t believe in full disclosure, especially since he purchased both websites, FlightTime.com and AirCharter.com from his former employer right after they filed Chapter 7, and began promoting online quotes from his home in California.
Although Tobin is upfront that he’s an online broker and doesn’t sell “memberships,” but rather arranges for charter lift, he still uses the old company’s marketing hype to convince customers they should trust the name FlightTime. When Airport Journals questioned whether that was ethical, because he chose to omit the fact that the same company’s history he was promoting didn’t disclose its bankruptcy and the consequences, leaving customers and 135 operators out to dry, he disagreed.
“I think that’s a setup question,” he said, and declined to explain why he hadn’t included the company’s history, since he chose to open that door by using it as a marketing ploy. He also said that he collects all the funds upfront and marks up the charter trip from five to 10 percent, and then pays the Part 135 operator when his customers have received the flight.
Coyne says the whole industry needs to change, especially how Part 135 operators handle business and marketing, which often leaves them beholden to brokers for business. He said a lot of the 135 operators are smaller companies, and because of that, they feel they can’t say no to a broker when they ask them to extend credit, paying for a customer’s trip after the fact.
“That needs to change,” he said. “If they band together, they could have the same marketing power that brokers do, which would eliminate some of the problems. I think in the next 10 years, you’ll see consolidation where there are fewer charter companies; there will be the majors. A shift of power one way or the other will happen.”
The woes of Part 135s
Tim Thompson, marketing manager of Executive Flight, Inc., a Part 135 operator in East Wenatchee, Wash., said they have had more problems with account receivables by other 135 operators than by brokers.
“We’ve only had one situation where a broker didn’t pay us,” he said. “We don’t have any problem working through brokers, if they are knowledgeable about the charter business, tax collection issues and who are financially sound. It would be good and reasonable to expect that there is some type of qualification process or certification for charter brokers, but there isn’t. This would assure everyone understands the tax process, other segments or facility fees involved, and that there was some financial due diligence involved that the end provider could have some confidence in before doing business with these entities.”
Other Part 135 operators such as Fairwind Air Charter, Stuart, Fla., and FBO Addison Express, LLC, Addison, Texas, haven’t had the same positive results when dealing with brokers and collecting money from them.
Chuck Sonson, a United Airlines pilot who owns a Massachusetts-based Part 135 company, AC Aviation, and Century Jets, a charter broker company that also brokers under the name of 24th Century Jets, said there are other ways 135 operators are stung. In his case, he made a $500,000 mistake when he brokered out flights on behalf of a fractional company needing supplemental lift. According to Sonson, the fractional company never paid him, so he couldn’t pay for the brokered trips.
NATA’s Coyne said it’s not uncommon that fractional providers call 135 operators for additional lift, but warned that 135 operators should deal directly with the entity that needs lift to prevent outstanding receivables.
Chris Henderson, Fairwind’s president, said Part 135 operators need an “official blacklist,” so they can unify with other operators throughout the U.S.
“We got stung for around $40,000 by a broker, who I later found out has done the same thing to loads of people,” he said.
Beverly Collins, Addison’s manager, said it’s not necessarily that Part 135 operators are stupid and continue extending credit to brokers; there are circumstances.
“It’s been in the last three years that brokers have been hitting smaller companies much more because there’s a huge influx of online brokers who are slick talkers,” she said. “They don’t have any aviation background; they come from all walks of life to make a quick buck. They place deposits, we, the charter operators, provide flights, and the next thing you know, the card is no good. We collect the balance of funds after the flight. Sometimes a deposit is paid way in advance, so we don’t know that the broker has cancelled that same credit card by the time a passenger takes the flight. Sometimes passengers lose all their money; even though the broker may have paid us a deposit, the passenger paid 100 percent plus a markup for the flight to the broker.”
She said in cases like that, the customer would have to pay again. Sometimes the broker has collected all the funds, but never booked a flight.
“Over the last six years, we’ve been hit for about $300,000. If we didn’t have other areas of our business such as a maintenance department, we’d be out of business,” she said. “The booking of flights happens quickly; the same broker can hit several 135 operators in the same day, which they have. We’ve sued people, but a lot of times, you can’t find them at all; if you do, they have filed bankruptcy and are on to their next scam under a different name.”
Jacque Rosser, manager of flight operations for NATA, who oversees regulatory affairs, said she’s very involved with the DOT’s notice and agrees that there are some very honest brokers out there that want to operate legally.
“Brokers do have a tremendous value in this industry. I think the ones who want to see things done right will welcome change; the ones who don’t might be the ones that the DOT is concerned about for the protection of passenger’s money,” she said. “We have no real data on how many brokers there are now. It wouldn’t surprise me to find out we have 1,500 people out there, all separately acting as a broker, since it’s an unregulated part of this industry. I don’t think the DOT had any idea how large this sector of the industry had grown, but that’s going to change.”
NATA member Adam Webster, who owns AirWebster.com, a charter broker company based in Maine and Canada, said he wants to charge customers a “flat fee” for his company’s services of locating charter operators, and he’s challenging other brokers to do the same.
“There are some fast-talking, dubious salespeople who are so good at their jobs that the customer pays them $200,000 or more upfront without asking too many questions,” he said. “We think that’s an insane concept.”
Coyne agreed with Webster, and finds it amazing and sad.
“I ask more questions at the hardware store when I’m buying a shovel,” Coyne said. “What’s that saying? ‘A fool and his money are soon parted.'”
Greg Johnson, CEO of Portland, Maine’s Charter Operations LLC, a Part 135 company, who also runs OneSky.com, a charter broker company, agrees wholeheartedly with Webster about transparency.
“We’ve even gone to the point of creating an e-commerce, where Part 135 operators can control collections and billing for trips arranged by brokers, but most of them don’t want to take the time to collect their own money,” he said.
NATA’s Rosser makes a compelling argument for the reason that the DOT, since 1958, really hasn’t bothered with brokers.
“The DOT was really looking into fractional ownerships; by doing so, it got an eye opening as to the belly of the beast in this industry,” she said. “By the industry, I mean the entire GA industry. Now they have a renewed interest in what their responsibilities are for the industry and what their responsibilities are to the ‘innocent traveling public,’ but in doing that, they came up with several areas of concern. Obviously, they had concerns with fractional ownership and started with them, but on the charter side, they became aware at that point.”
She recalled a meeting in Dayton Lehman’s office.
“He was showing pages that were marked in red, and trying to understand who these people were,” she said, referring to “brokers.”
She said there were many names floating around, and to his untrained eye, from that standpoint, they appeared to be charter operators.
“He thought that, but he couldn’t find economic authority filed for these people, which is required to be an operator,” she said. “That’s kind of what got all this rolling; so many issues came up since then.”
Before that moment, she said the DOT had no idea who or what charter brokers were. She said that what got the DOT’s attention was offsite certificate management, commonly called “piggybacking.”
“It means, I have a certificate as the Part 135 operator and you have an airplane as the owner, and for whatever reason, economics or whatever, you want to put your airplane on my certificate and I let you do that,” she said.
She said how it works is that Part 135 companies are allowed under the law to charter the owner’s aircraft out, but if the owner “separately, away from the Part 135 operators control,” begins to charter aircraft out for hire, it’s not legal. Only licensed 135 operators are permitted to profit from chartering aircraft.
She explained that there had been cases where the DOT had taken enforcement actions against owners of aircraft because they had illegally chartered aircraft out for profit. As well, she said that the DOT puts responsibility onto the Part 135 operators for allowing a situation such as that to happen; the DOT’s rule indicates that a licensed 135 operator should be aware of what’s going on with any aircraft that is under its license-even if the owner is physically using the aircraft.
When asked how she viewed the DOT’s enforcement tactics, she said from the DOT’s standpoint, they aren’t telling anybody anything that wasn’t already on the books.
She added that any broker who claims the DOT is on a witch hunt might consider doing business differently, if they don’t want to seek economic authority and be accountable for funds they collect upfront. They have the choice to change direction in their business.