FRACTIONAL OWNERSHIP

Fractional aircraft ownership has become very popular over the last few years, and for good reason. The ability to have one or more aircraft available on just a few hours notice with a single phone call represents a level of convenience, privacy and luxury that has made it one of the leading choices for aircraft ownership among corporate executives, entrepreneurs, entertainers, athletes, and many others. Couple this convenience with the associated tax benefits of owning a portion of an asset without need for direct management, and the case for fractional looks strong indeed.

When considering fractional ownership, there are some potential pitfalls that need to be considered. As a rule, fractional contracts are complex documents that require the employment of an experienced attorney in order to successfully negotiate the details that can end up costing you more than 30% more than the cost of private aircraft ownership if not carefully managed. In particular, the main points discussed in this section should be thoroughly reviewed.

1. Taxes and fees – In most fractional programs, owners are required to pay all applicable taxes, which include federal, state, local and foreign taxes and duties, excise and fuel assessments, and any taxes or fees involved in domestic or international operations, such as landing fees, overflight permits, handling charges, airspace use charges, immigration and customs processing charges, and many others.
2. Liability Exposure – Whether you own an entire aircraft or a fraction of one, your name will be listed on the registration, which requires the appropriate insurance coverage to mitigate liability. As such, it may be necessary to obtain additional liability coverage beyond that provided by the fractional provider in order to be fully covered.
3. Primary Service Area – Every fractional program defines a “Primary Service Area”, which determines where you can fly without being assessed additional surcharges. In most cases, this PSA is the lower 48 states, plus an additional boundary of approximately 200 miles. Fees for operating outside of the PSA can be steep, and include ferry charges, crew charges, and hourly charges, depending on the program.
4. Positioning Costs – If the primary flight crew exceeds their duty time, you may be charged a fee for positioning a relief crew. This comes up often with international operations outside of the PSA.
5. Airport Surcharges – Some programs charge additional fees to owners who frequent certain congested airports.
6. Leg and Ground Time Restrictions – In some programs, restrictions are placed on the number of legs that can be flown, along with the maximum ground time between each stop. Exceeding these times may result in additional fees or hours deducted from your annual allotment.
7. Fuel Escalator – Nearly all of the fractional contracts include an established average rate per gallon of fuel that is usually adjusted annually base on a recognized index. If the actual price of fuel deviates in either direction by a preset amount (usually $.01 per gallon), the provider may add a surcharge per hour of operation to compensate. Depending on the cost of fuel, these surcharges can become quite expensive very quickly, and are a consistent profit center for fractional providers.
8. Sales Commission and Remarketing Fees – Fractional contracts are based on a five year term, with some providers allowing you to stay in your aircraft beyond that time period, and some forcing you to sell your share back and purchase a new one. For the programs that enforce the latter, a sales commission as high as 7% may be assessed, along with a remarketing fee. In some cases, if an owner wishes to sell their share early, the provider will still charge the 7% commission, even if the owner finds another buyer.
9. Aircraft Substitution – Many provider agreements state that they can provide an aircraft that is “substantially” the same as the one purchased by the owner in the event that the owner’s aircraft type is not available. This wording must be carefully reviewed in order to understand how the provider defines the term “substantially”.
10. Early Use of Time – Many new fractional owners use their annually allotted hours much faster than they anticipated, and this can result in stiff fees if additional hours are required. These additional hours are charged at an average rate of 3 times the hourly rate that the owner would typically pay.
11. Residual Value – The residual value of the aircraft at the end of the five year term is a dynamic value that is wholly dependent on the prevailing market conditions at the time of sale. In a strong market, the aircraft will typically retain around 80% of its value. In a down market, however, that value can dip as low as 50%. The lower values revolve around the price paid for the share of the aircraft. For instance, most providers purchase aircraft at deep discounts, and then sell the shares at list price. The problem here is two-fold. First, in today’s market, even an individual buyer can purchase an aircraft at some sort of discount, meaning that the fractional owner is paying a premium for his or her share that may be overvalued in the market. This overvaluation can result in substantial losses when the aircraft is sold at the end of the contract at fair market value. Second, fractional agreements are based on 800 hours of flying time per year. In practice, these aircraft are typically flown 2000 hours per year, meaning that the actual value of the aircraft will be lower due to higher time, much like a car with high mileage.
12. Takeoff, Landing and Minimum Time Surcharges – Every program charges owners takeoff and landing fees, which equal one-tenth of an hour for each takeoff and landing. These fees cover the cost of operation of the aircraft on the ground during taxi, and can reduce your usable annual hours by as much as 20%, depending on stage length. Further, many programs charge a minimum of one hour for any leg that is less than an hour’s length in time. Thus, for shorter legs that last less than an hour, such as New York to Boston, you will be charged for a complete hour’s time, which further reduces your usable hours.