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Fractional Ownership

Following on from last month- David Wyndham completes his coverage of Fractional Ownership- examining contracts- costs and extraordinary usage.

David Wyndham   |   1st August 2013
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David Wyndham David Wyndham

As an Instructor Pilot in the U.S. Air Force- Dave's responsibilities included aircrew...
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Fractional Ownership:
Easy entry into the arena of Business Aircraft (Part 2)
Following on from last month- David Wyndham completes his coverage of Fractional Ownership- examining contracts- costs and extraordinary usage.

Fractional Ownership requires intricate agreements between the aircraft owners or lessees and the operator. These agreements— exacting contracts- actually—are mandated by the Federal Aviation Regulations in FAR Part 91K. They allow for the purchase or lease of a fractional interest in a single aircraft- direct the fractional provider to manage the aircraft- and allow for the “interchange” of the aircraft in which your company or you own a share to exchange flight time in another airplane within the entire fleet of the fractional provider on relatively little advance notice.

Ownership contracts run typically for five years- but it has become common to see 24 and 36-month terms. Depending on the provider- the contracts can be cancelled early with certain conditions. However- each contract usually has unique provisions to suit the needs of the purchaser. Typically- there may be significant financial penalties for early cancelation of the contract.

FRACTIONAL COSTS
There are four costs involved with fractional ownership: three are fixed and one is variable. The first fixed cost is the initial capital outlay or lease payment- according to the type of aircraft and the size of the fractional share purchased.

The second fixed cost is a monthly management fee for crew- training- hangar- insurance- and other management-related costs. This cost escalates annually based on the CPI or a fixed minimum increase- whichever is greater.

The third fixed cost is the base hourly rate for each hour flown to pay for fuel- maintenance- standard catering and normal landing fees. This cost also escalates annually based on the CPI or a fixed minimum increase- whichever is greater.

The fourth cost- which is variable- is the Fuel Component Adjustment (FCA) or Fuel Surcharge- which accounts for fluctuations in the cost of fuel and is added to the base hourly rate. This hourly cost adjustment- which stems more from the marketing of the program’s hourly rates rather than the fractional program failing to correctly anticipate their fuel cost- can be nearly as much as the base hourly costs.

At the end of the contract (assuming the owner elects not to renew)- the share is sold back to the management company and the owner receives a check for the resale price of the asset less resale/marketing expenses. As an owner- you bear the residual value risk. If you sell rather than renew at contract’s end- the share value is based upon market conditions at that time. You do not have the ability to delay the sale waiting for the market to improve.

UNIQUE USES OF FRACTIONAL OWNERSHIP
While Fractional Ownership is a relatively easy way for a company to launch its initial involvement with Business Aviation- some experienced flight departments use shares to add a different level of capability to existing operations. It is rare that the small- in-house aviation organization is able to meet 100% of the corporation’s demand 100% of the time. The demand may fluctuate seasonally- or may be associated with the occasional need to have multiple aircraft in use at one time.

We have one client who operates primarily in North America. However- their business in Asia has grown dramatically. They are actively exploring the acquisition of a global business jet to take their senior executives from the US to Asia. That demand is not sufficient travel to justify full-time ownership of such a jet- but a 75 to 100 hour fractional share is a perfect fit.

A fractional share is a way to bridge the gap between current capacity and future needs as a company expands. For example- if your current aircraft is essentially at full utilization- but demand is increased and you need more flight hours per year- a fractional share may be appropriate.

Fractional can also be used as a component of an executive compensation package. Another client of ours has provided its CEO with 50-hours of Fractional Ownership for his personal use. That arrangement keeps the compensation amount clear and avoids tax-related issues with personal use of the company aircraft.

SUMMARY
The advantages of Fractional Ownership are many:

• Service levels are generally very high.
• Professionally dispatched aircraft are available24/7.
• Costs to acquire the aircraft are proportional to the share size.
• Aircraft interiors/exteriors are standardized among the fractional fleet.
• For a business- there is the ability to have the tax benefits of depreciation that come with ownership.
• Hourly costs are for occupied hours. The cost to position the aircraft to pick you up is not directly charged to you.
• Aircraft availability is guaranteed with as little as four hours’ notice.
• Within a fractional provider’s fleet offerings- you can upgrade or downgrade aircraft size with a billing ration in proportion to the aircraft.
• Single point of contact applies for all services. But there are also elements of Fractional Ownership that must be considered- such as:
• Fixed annual hours and fixed contract lengths may not match your travel needs.
• Leaving a contract early can result in exit fees. (Read contract carefully.)
• Minimum billable flight time is one hour.
• Limited types of aircraft are available.
• Contracts only purchased in blocks of 25 hours.
• When exiting the program- the aircraft is assigned a Fair Market Value. You have little control over the pricing- and time of sale coincides with your contract- not the aircraft market.

Overall- Fractional Ownership offers an excellent first step into the benefits of owning an aircraft. The fractional provider handles all the details. The share owner has access to experienced flight crews and mechanics. And if the typical mission profile calls for considerable one-way flying- costs can be low compared to other options.

Do you have any questions or opinions on the above topic? Get them answered/published in World Aircraft Sales Magazine. Email feedback to: Jack@avbuyer.com

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