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Fractional Ownership (Part 1)

David Wyndham describes the anatomy of this form of Business Aviation in a two-part article. This month he covers the basics of the concept.

David Wyndham   |   1st July 2013
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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 1).

David Wyndham describes the anatomy of this form of Business Aviation in a two-part article. This month he covers the basics of the concept.

Fractional ownership lowers the barriers to purchasing and using a business aircraft. The capital needed to gain access to one or more aircraft is reduced by acquiring a shared interest in the asset. The idea is much like that of time-share vacation properties. When you don’t need full time access- why pay for the entire property?

Furthermore- the level of knowledge and expertise required to use the aircraft is provided by the company that sells the shares to a number of co-owners and operates the aircraft on their behalf under a dry-lease exchange agreement. In buying a share of an aircraft and having a professional management company run the entire aviation operation- you can step into the world of business aircraft ownership without the need to set-up and understand the requirements of an aviation operation.

HOW IT WORKS
Each fractional owner purchases an interest in a specific- serial-numbered aircraft based on 800 occupied hours per year for each whole aircraft. Each owner is guaranteed 50 occupied hours annually for each 1/16 share that is purchased. Helicopter shares can be as small as 1/32- or 25-hours. Adding additional shares of either airplanes or helicopters often can be sold in 1/32nd increments since mixing multiple types of aircraft is easier at this level- giving the buyer more flexibility. Hours are billed by block time: actual flight time plus 12 minutes. Aircraft availability is guaranteed with as little as four hours’ notice.

Owners are charged only for hours during which they actually occupy the aircraft (occupied hours). The cost of repositioning flights (‘deadhead’ hours) is covered indirectly by the occupied hourly rate (i.e.- there is no additional charge for moving the shared aircraft from location to location when it is unoccupied). Each shareowner has access to an entire fleet of aircraft within the fractional provider’s stable- providing them the ability to use multiple aircraft simultaneously to meet demand.

The fractional owner can use a different aircraft type from the one actually purchased- as needed- by exchanging hours at given interchange ratios for different aircraft types. The fractional provider can also upgrade a customer- at no additional cost- to a larger aircraft at its discretion. Fractional providers operate a core fleet of company-owned aircraft and use charter aircraft to provide backup services whenever one of the “owned” aircraft is not available.

The Fractional Ownership company provides the crew- maintains the aircraft and handles 100% of the management of the aircraft operations. They cover all the training- safety- scheduling and record keeping. Fractional programs operate via a series of contracts and agreements between the aircraft owners(s)/lessees and the fractional provider that operates the aircraft on behalf of the owners. FAR Part 91K- which is the Federal Aviation Regulation governing fractional ownership- requires providers to run their operations much like a Part 135 commercial (i.e.- charter) operator- but with some additional requirements of the aircraft owner to exercise a level of “operational control” regarding where and when the aircraft operates. Note that the owner of a fractional share is deemed to retain operational control of the aircraft and thus is basically responsible for compliance with FARs.

If you own the fractional interest- that shared asset can qualify for depreciation and other tax benefits when used for business purposes.

WHO ARE THE MAJOR PLAYERS?
NetJets- which provides numerous light jet- midsize- large and global business jet options- is the world’s largest fractional provider with programs in the US and Europe. The company recently announced a program for China where a NetJets affiliate will offer management and charter services for private business aircraft. The remaining large fractional ownership companies- presented below- are wholly in the US.

• Avantair (Offers Piaggio Avanti turboprop aircraft).
• Flexjet (Consisting of Bombardier Learjet and Challenger models).
• Flight Options (Fleet comprised of various light to mid-size business jets).
• Executive AirShare (Mixture of Embraer Phenom 100/300 light jets and King Air turboprops based regionally within the USA).
• PlaneSense (Offers Pilatus PC-12 turboprop aircraft regionally in the Northeast USA).

Within each program is a defined Primary Service Area (PSA). Flights outside the PSA may incur additional service charges and positioning fees for the aircraft.

While fractional programs have been provided since the late 1980s- each arrangement between provider and shareholder typically is tailored to the owner’s needs. Thus it is essential that a company considering the purchase of a fractional share have legal representation to ensure insightful due diligence before agreeing to the terms of a fractional contract. Next month- we continue our study of fractional ownership examining contract terms- costs and extraordinary uses.

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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