Question of the Month: What Are the Pros and Cons of Equity and Non-Equity Flying Clubs?

Over the past few years, we’ve seen an interesting shift in the way that new flying clubs’ structure themselves.  For example, of the 34 flying organizations we’ve helped start so far in 2021, 21 are equity clubs, 10 are non-equity and three are co-ownerships. From our records, it is also clear that the ratio of non-equity clubs is steady increasing.

In this month’s Question of the Month, we’ll dig a bit deeper and look at some of the pros and cons of the two main types of flying clubs—equity and non-equity—or as Drew puts it, ownership or loanership.  Whist it is tempting to just look at the financial aspects of the two club models, we’ll also blend-in some thoughts on culture, ownership and safety.

As many of our regular readers know, the Flying Clubs website is packed full of useful and topical information, including the oft-visited Downloadable Resources page and the archives of the Club Connector Newsletter, especially those of Question of the Month. We are also working on a revision of the comprehensive The Guide to Starting a Flying Club in which we’ll expand on the various plusses and minuses of different club models, as well as clarifying the differences between club structure and tax exemption—more on that another time, but for a primer, take a listen to Flying Clubs Radio, Edition 23.

Before we look at the differences between equity and non-equity flying clubs, let’s be clear that all recreational flying clubs operating from publicly funded airfields, regardless of organizational structure, must follow the rules set forth by the FAA and as interpreted by airport operators. Remember that the definition of a flying club, as stated in FAA Order 5190.6 (The Airport Compliance Manual) is, in part:

“FAA defines a flying club as a nonprofit or not-for-profit entity…organized for the express purpose of providing its members with aircraft for their personal use and enjoyment only.”

As we have labored in these pages many times before, this definition makes it perfectly clear that a flying club is not a commercial operator or business, and provides only for its members, not the “general public”.  The 2016 Amendment to the Order further clarifies the required behaviors of a flying club, and makes it crystal clear that clubs shall not “hold out” (advertise) for any services to non-members, nor may a club solicit for new members based on any promise of learning to fly.  For more details on this, see the January 2018 Question of the Month: “As a flying club member, can I use club aircraft to receive flight instruction and pay an instructor?”, but in the context of this article, all definitions and limitations apply equally to all (legitimate) flying clubs, regardless of their organizational structure.  By the way, in order to help clubs understand the expectations and limitations imposed by the FAA (and to some extent the IRS), we created a set of Standards, Values and Best Practices, that can be found on our Downloadable Resources web page.

Now, a further definition in FAA Order 5190.6 states, in part, that:

“The ownership of the club aircraft must be vested in the name of the flying club or owned by all its members. The property rights of the members of the club shall be equal; no part of the net earnings of the club will inure to the benefit of any individual in any form, including salaries, bonuses, etc.”

The words “vested in the name of the flying club or owned by all its members” seem to suggest that a flying club must always either own the aircraft, or that all members shall have equal “shares” in the aircraft.  These are, in fact, the two possible variants of an equity club.  That is, either members are equal participants in the club that in turn owns the aircraft, or that members have equal shares in the aircraft as well as being members of the club.

The reason we raise this here is that it seems to imply that “ownership” of the aircraft is part of the FAA definition for a flying club, and hence eliminates the option of a club leasing aircraft (for the personal use and enjoyment of members, only), which is what occurs in a non-equity club. As we clarified in the March 2018 Question of the Month: Can a flying club lease an aircraft, and if so, how does it work?, the FAA effectively expands the notion of ownership to include “owner-like powers”, where the lessee (a club in our case) has long term and exclusive operational control of the aircraft, and that the lease is vested in the name of the club.  We interpret the last part to mean that a formal lease agreement is in place between the named lessor and the legal entity of the flying club.

Okay then, we have successfully shown that both equity and non-equity clubs are “allowed” so let’s move to the core of this article, that is, the relative pros and cons of the two structures.

Equity Club

When members own equal shares in the club airplane or when the club owns the airplane and members are equal owners of the club, you have an equity flying club—the club and/or all its members own the aircraft.

This is the “classic” notion of a flying club—where members are also co-owners—and the majority of existing flying clubs operate in this manner.  New members join the club, but also have an ownership stake in the club’s assets.  Leaving members dispose of their “equity share” by following the procedures laid-out in the bylaws—more on the topic of joining and leaving a club can be found in the February 2020 Question of the Month: How do flying clubs set their fee structures—and how do members join and leave a club?, but an important and general rule for all flying clubs is never, ever, to refund anything when members leave.  If you want to dig even deeper into this contentious topic, take a deep breath and review the May 2021 Question of the Month: Is our club still viable?

For the case of a newly forming club—or for that matter, an existing club adding additional aircraft to the fleet—the equity model clearly requires considerable upfront money. An existing club may well have accrued enough money to either buy the new plane outright, or at least fund the down payment, but members of a newly forming club, or an existing club that has operated on a breakeven budget or wants to keep its reserves for avionics updates, engine overhauls, etc., are going to have to come up with considerable funds.  This is the primary reason why we are seeing the relative growth of non-equity clubs—it is all to do with upfront capital versus recurrent payments.

Pros of Equity Clubs:

• The club and its members hold tangible assets—the airplane—and (under normal situations) no one can take it away from you.
• Members share equally in co-ownership of these expensive assets.
• Members experience ownership but without all of the risks and costs of sole ownership—we call this “ownership lite”.
• All members treat the aircraft as their own property, as indeed it is. Insurance for equity-owned airplanes is generally more available and less expensive (it can never be called “cheap”) than for leased airplanes. More on this in the Non-Equity section.
• There is a high degree of “skin in the game” since all members are equally vested in the equipment. This has important ramifications:

1.  Maintenance issues are quickly reported—and resolved. Members want to protect their equity investment by ensuring that the club planes are maintained to very high levels.
2.  There is a feeling of “our money” when it comes to maintenance, upgrades and improvements. Members are usually very enthusiastic to invest in the planes as each member will realize the overall benefit, but at a fraction of the total cost.

• Engagement in the planes is usually accompanied by engagement in the overall club. Co-owners are more particular when it comes to accepting new members, as all want to ensure that “their plane” will be well flown and looked after.
• Similarly, members of equity clubs are more likely to get involved in the running of the club in order to oversee their investment.
• Sharing a piece of complicated machinery with others definitely helps create bonds, friendships, and mentoring opportunities. The same opportunities exist in a non-equity clubs, but they may be harder to realize if the notion of shared skin in the game is missing.

Cons of Equity Clubs:

• A major downside of forming or joining an equity club is that of the upfront fees. By definition, an equity club involves an equal financial stake in the club’s assets, so as well as the joining fee for the privilege of joining an exclusive organization, you’ll also pay a hefty equity share. Strictly speaking, the equity fee should be reassessed on a regular basis to reflect the latest condition and value of the plane(s), but many clubs, especially older clubs with deeper pockets, consider the equity share as a fixed amount. Either way, members should not think of this as any sort of “investment”. You are joining a flying club to have shared access to nice aircraft, so the goal is to save money as you fly, not to make money on a deal.
• Due to the high upfront fees involved, equity clubs are generally comprised of older people who have the financial means to join. This is a gross generalization but look around most equity flying clubs and you’ll get the point. We hazard to say that this may be a reason why many young pilots don’t join flying clubs—they do not see people like themselves. What we need is a club model that better aligns with both the financial and generational lifestyles of newly minted pilots. Hold that thought!
• We have seen many clubs get themselves into all sorts of pickles by mismanaging the notion of equity shares, especially if they make promises of the club itself “refunding” the equity share should a member leave the club. As we’ve railed about elsewhere, a flying club should never refund anything. For more information on this, see the February 2020 Question of the Month: How do flying clubs set their fee structures—and how do members join and leave a club?, and also the sidebar entitled “Member Share Evaluation” in chapter five of The Guide to Starting a Flying Club.
• If you are thinking about joining an equity club, you should definitely have a clear understanding of your obligations as a co-owner. This shouldn’t be difficult as most clubs detail this in their bylaws, which should be easily available to new and existing members alike. A caution, though. If a prospective new member seems overly concerned with the process of leaving the club even before joining, then take this as an indication of a short-term member—perhaps someone wanting to join the club just to build hours at the attractive club rate. Thank them for their interest and move on!

Non-Equity Club

If the club leases the airplane(s) operated by the club, you have a non-equity flying club.  Someone else owns the airplane and it is registered in the name of that person or perhaps an LLC owned by that person or a consortium of owners.  We previously explained that The Airport Compliance Manual clearly permits the idea of leasing for many types of operations, including flying clubs.  Indeed, the idea of leasing aircraft is woven into the very fabric of aviation, including airlines and general aviation.

In all cases involving leases, it is not just necessary, it is absolutely essential that a formal agreement be in place between the two parties—the lessor (owner) and lessee (the club).  Whilst the terms and conditions of the lease are negotiable, the fact of having a lease agreement is not.  Even if the owner is a friend—especially if the owner is a friend—you must, must, must have a formal agreement in place for the duration of the lease.  Again, refer to the March 2019 Question of the Month for more details and to the example lease agreements on our Downloadable Resources.

There are several facets to the lease agreement, including duration, lease fees and so on, but the really big one to lock down, in writing, is responsibility for maintenance—who pays for what.  In our book, the situation is clear.  The owner should provide to the club, for the duration of the lease, an airworthy aircraft—and airworthiness is an on-going responsibility.  So, the lessor should be reasonable for all matters of airworthiness—after all, it is in their best interest to own an airworthy aircraft as otherwise it is just a pile of metal.  Included in this is the labor involved for the annual inspection, which is a requirement for continued airworthiness, and of course, responsibility for airworthiness directives or anything else that affects the regulatory notion of airworthiness.  On the other hand, the club will add airframe hours, engine hours and so on, which affects the plane’s value, so the club should be responsible for usage and wear-and-tear maintenance, and most definitely for any damages incurred when the airplane is in its care.  We also strongly advise that the lease agreement includes a section dealing with expectations for the return of the aircraft upon termination of the lease—leave no stone unturned!

We now get to a fundamental difference between equity and non-equity flying clubs—the responsibility for maintaining a reserve for time and life-limited parts. In the case of an equity club, the situation is clear…the club owns the airplane and is fully responsible for everything…maintenance, annuals, ADs, and engine/propeller overhauls.  In the case of a non-equity club, this needs to be clearly addressed in the lease agreement.  Again, in our book, anything to do with airworthiness is the responsibility of the owner, and they, not the club, should be maintaining the reserves.  Of course, the money comes from club members as part of the per-hour charge levied when they fly the airplane, but it is passed through to the owner as part of the per-hour rate. 

Pros of Non-Equity Clubs:

• The club doesn’t own the airplanes that they operate. This translates into much lower upfront costs to join the club, as there is no notion of equity. This is the primary driver for the increase we are seeing in non-equity clubs, and there are two main ways in which this is happening:
  1. Younger pilots probably don’t have much in the way of savings, so generally cannot afford to join an equity club, but there is more to it than that. A big part of the AOPA’s You Can Fly mission is making aviation accessible to more people. We also know that the pilot population is aging, and we need to make aviation more accessible to younger people. In the Flying Clubs group, we are working with colleagues in the High School Initiative to explain the benefits of flying clubs to students, and we are also repositioning the notion of flying clubs in ways that will be more attractive to younger pilots. We’ll talk more about this is a future edition of Club Connector, but a big part of getting younger people involved in flying clubs is to align with their lifestyle, and very generally, this is moving away from having to own everything. Mobility is a key facet of many young people’s lives and so more are renting accommodation and leasing cars rather than being burdened with the responsibilities of outright ownership. Clearly, non-equity flying clubs fit right in here. People can be members of an aviation club, with all the social and educational benefits of a flying club, but without the responsibilities of co-ownership of expensive assets. Moreover, the non-equity club model makes it easier for a group of younger pilots to start their own club, with their own values and culture. In other words, we see the non-equity flying club as a critical component in the goal of getting more young people sustainably engaged in aviation.
  2. Another group that benefits from the lower upfront costs of non-equity flying clubs is those in more rural areas of the country. We have worked with many people over the years who have the dream of a flying club, only to have it dashed by the realization that they cannot get a critical mass of interested people to purchase a club plane. In almost all of these situations, there are enough people interesting in joining a flying club, but not in putting down several tens of thousands of dollars for the privilege. Two things will happen. Rarely, the founders will give up the dream. More and more, however, they listen to the story about non-equity clubs. All that is needed is a plane to lease…and this again can go off in two directions—we’ll talk about how to find a plane to lease later in this article, but more and more of these dedicated founders are electing to buy an airplane as a small group, and then lease it to the club, and, amazingly, there is a financial incentive for them to do so. Let’s say that 4 founders form an LLC (the recommended way to establish a co-ownership group like this) and each puts $10,000 as the down payment on an $80,000 airplane. They finance the remaining $40,000, which over a 10-year term will cost around $450 per month. The founders also establish a non-profit corporation as the legal entity for the club, and they put in place a long-term lease agreement between the LLC and the club’s corporation. In the agreement, they stipulate that the club will pay a base-lease fee of (at least) $450 per month, in addition to per-hour fees based on usage. The $5,400 annual lease fee is 6.75% of the aircraft’s value, which is in line with guidelines for the base lease fee—see the March 2020 Question of the Month. If the club has ten members, each will contribute $45 per month (as part of their monthly dues) to the fund the lease payment. Over time, the loan is paid off, the founders will own the airplane outright, and will have effectively earnt $40,000 on a $40,000 investment. Not a bad return—but in addition, they will be collecting and accruing reserves for engine overhauls and other ownership responsibilities. The members enjoy the benefit of exclusive access to an airplane, and most of them will have only paid joining and usage fees. Win-Win, indeed!
• Let’s talk about joining fees. As we have said, new clubs will find it much easier to attract members by virtue of the lower costs of joining a non-equity club. A wise club will still charge a joining fee as a way to instill ownership-like responsibilities, but this in no way implies a stake in the assets of the club. Think about this carefully as it definitely impacts the way in which members view the value of club membership. You want to charge a fee that is high enough to create a sense of ownership in an exclusive organization, but not so high that you limit the pool of prospective members. We talked earlier about separating the club joining fee from that of the equity share (in an equity club), and in our book, the joining fee applies equally to both club models. It is literally the fee to be part of something that has exclusive value. Again, from earlier, the club should never refund anything, which in the case of the non-equity clubs means the joining fee. The joining fee is an upfront, non-refundable amount of sufficient size to instill a strong sense of ownership in the club itself and will go a long way to prevent “renters” rather than members joining the club.

Cons of Non-Equity Clubs:

• The club will never own the airplane, but that is the whole point!
• To operate a non-equity flying club, you’ll need to find a plane to lease. In today’s market, (November 2021) is very difficult to find a plane to purchase, so leasing may actually turn-out to the a “pro”, but anyway, how do you find a good aircraft to lease? There are several ways to do this, each requiring some leg work:

1. Younger pilots probably don’t have much in the way of savings, so generally cannot afford to join an equity club, but there is more to it than that. A big part of the AOPA’s You Can Fly mission is making aviation accessible to more people. We also know that the pilot population is aging, and we need to make aviation more accessible to younger people. In the Flying Clubs group, we are working with colleagues in the High School Initiative to explain the benefits of flying clubs to students, and we are also repositioning the notion of flying clubs in ways that will be more attractive to younger pilots. We’ll talk more about this is a future edition of Club Connector, but a big part of getting younger people involved in flying clubs is to align with their lifestyle, and very generally, this is moving away from having to own everything. Mobility is a key facet of many young people’s lives and so more are renting accommodation and leasing cars rather than being burdened with the responsibilities of outright ownership. Clearly, non-equity flying clubs fit right in here. People can be members of an aviation club, with all the social and educational benefits of a flying club, but without the responsibilities of co-ownership of expensive assets. Moreover, the non-equity club model makes it easier for a group of younger pilots to start their own club, with their own values and culture. In other words, we see the non-equity flying club as a critical component in the goal of getting more young people sustainably engaged in aviation.
2. Wander around the local airports on a nice sunny weekend and chat with people polishing their pride and joy. Be respectful, here. Blurting out “hey, wanna leaseback your airplane to a bunch of people you don’t know?” will likely solicit an appropriate response. Instead, explain that you and a few select local pilots are thinking about establishing a flying club and looking for a plane to lease. Never use the term leaseback, which to many of us implies a flight school having unlimited access to the plane and student pilots beating it up for small returns. Be prepared—create a “prospectus” that outlines your idea and give a couple of examples of costs and payments. Be really clear that this is a flying club, and only a limited number of members will ever fly the plane. Further, as a member of the club, the owner will have equal say in accepting new members, so they’ll have a voice in who flies their airplane. This takes some work—and be prepared to be rebuffed—but from experience, there is a fifty percent chance that you will find a good airplane to lease, as well as a new member.

• Another way to get the word out is to arrange an introductory new flying club meeting. Create a flier and post it on airport noticeboards, the café bulletin board and so on—anyplace where people look, really. Don’t just have those “contact-me-if-interested” tear-off tabs, but advertise a meeting, with coffee and snacks. If possible, hold the meeting at the airport for the full sensory experience, but of course talk with the airport manager first, and ensure that there is access to the meeting room from the road side of the airport. At the meeting, present a few slides or have a handout detailing your idea and anticipated costs. From experience, the first two questions you will get are: “What airplane does the club operate?” and “How much does it cost?”, so be armed with some answers. Fifty percent of the people will grumble and say something like “call me when you have a plane”, but that still leaves half of the group. Let them know early on that you are establishing a non-equity club, so the joining fees will be considerably less than for the equity club they all know about at the next-door airport. You are likely to find that some number of the group are aircraft owners and are there just for interest, but one of them may be the one you are looking for—someone who wants to retain ownership of their airplane, but have other people help pay for it. Let the Flying Clubs team help you with this. Contact us and we’ll co-host your meeting and will send invitation emails to all AOPA members within, say, 50-mile of the airport. During the presentation, we’ll introduce the benefits of flying clubs and then you can talk about your specific ideas. We’ve helped start many clubs by providing this level of support, so please take advantage of this offer!

• As mentioned earlier, it is critical that a solid lease agreement is in place between the owner and the club, and that it is renegotiated on a reasonability regular basis, say every 12 or 24 months. Make this part of business at the club’s annual general meeting. As a reminder, we talk more about leases and lease agreements in the March 2018 Question of the Month.
• Good lease agreements have termination clauses applicable to both parties which, of course, can be a double-edged sword. You need the protection of a termination process and period, but then it might actually be exercised. This will leave the club without an airplane and you’ll be back at square-one, but, hey, you now know what to do and perhaps there is the option of the club buying the airplane and becoming an equity club, or a few members becoming the new owners and continuing the lease.
• As mentioned earlier, spend a great deal of time and thought on the clauses that detail maintenance responsibilities. On this topic, a club leasing an aircraft should never be responsible for engine overhauls, avionics upgrades and so on. It makes no sense for a club to put money into someone else’s airplane, that could, theoretically, be yanked from the club and sold at a premium on the club’s nickel. You must be really clear about this in the lease agreement, especially if the owner of the aircraft is also a club member, which, by the way, is the only way that the owner can continue to fly their airplane, as the lease is exclusive to club members, only, in order to satisfy the FAA’s “owner-like powers” requirement.
• Some insurance companies will not provide insurance for non-equity clubs as they claim that members will not look after the planes as well as if they actually co-owned them. We think this is total balderdash. We’re taking about airplanes, here, not rental cars! As for all clubs, equity or non-equity, your best defense against rising insurance premiums is to maintain proficiency and not make insurance claims. Even better, follow a formal safety program and let the insurance company know what you are doing. See the May 2020 Question of the Month for more information on pilot proficiency programs and for general amusement, listen to Steve and Drew rant a bit about insurance in Flying Clubs Radio editions 3 and 14.

So, there we have it—the details, and the pros and cons, of different structures of flying clubs.  Your Flying Clubs Crew, Steve and Drew, have personal experience with these models, as Drew’s club is an equity flying club with two airplanes, and Steve’s club leases an aeroplane that is actually owned by Steve himself!

One more thought before we leave it for this month.  We get calls from equity clubs asking if in addition to owning their club plane(s), they could include a leased aircraft.  Perhaps they want to try out a make/model before actually buying one, or perhaps the leased plane will only be used by a subset of members.  Either way, we don’t see any major issues with this hybrid approach and indeed it is a good way to bring another airplane onboard without full ownership responsibilities.  Be sure to let your insurance company know, and it might be worth rereading previous Question of the Month articles on introducing a new airplane to the fleet, transition training and the all-important rule “do not establish membership tiers”, which as we have stated before, and feature in the upcoming Flying Clubs Radio Edition 25, will invariably end in tears.

As always, fly lots and fly safely!