Why an escrow account is important when buying a jet card

In this Guest Column, Private Jet Card Comparisons has asked James D. Butler, CEO of Shaircraft Solutions LLC, to discuss the financial risks of jet card deposits.

By James Butler

A common aspect of almost any jet card program is paying the jet card company upfront for all your flight costs.

In return, you get a “promise” of certain flight time, services, etc.

In some cases, you’ll have one year, two years, or more to use the funds on your account, but during that time, the jet card company enjoys using those funds.

An attorney experienced in this area should raise the following concerns:

What happens to your funds on account if the jet card company goes out of business?

This question is not fanciful or useless nitpicking; recall Avantair, FractionAir, etc.

Since some (but certainly not all) jet card companies are in reality little more than charter clearinghouses—companies that make arrangements with various independent charter operators around the country to provide aircraft for their customers’ trips—they generally operate hand-to-mouth—with thin profit margins and in some cases large marketing budgets.

Thus, it’s not uncommon for small start-ups like these, and even more substantial jet card companies, to suffer financial reverses and, ultimately, bankruptcy.

Without going into too much detail, it’s likely that the funds you’ve paid to the jet card company have been commingled with its other funds.

Therefore, in any such bankruptcy, you’ll become an unsecured creditor, essentially last in line to be paid.

Pfft! Your funds are gone, never to return, or, at best, you’ll see pennies on the dollar.

Unless…you require that your funds be deposited into an escrow account.

In this arrangement, your funds are held by an independent third party, usually a financial institution, and are only paid over to the jet card company when you utilize your jet card, have a balance due for your flight, and approve the withdrawal and payment.

The funds in escrow do not become the property of the jet card company until that time, and if the jet card company goes into bankruptcy, your funds do not become part of the bankruptcy estate.

You lose nothing.

I’m sometimes asked what improvements I want to see in the jet card business.

From a legal perspective, I am highly interested in developing a standard practice of placing customer funds in escrow accounts across the board.

Although doing so adds a bit of complexity to the arrangement (Aside: I hate to see marketing materials that make jet cards look like credit cards because they tend to lull the customer into a false sense that this is a simple arrangement that is akin to using your credit card to pay for an Uber. Not so!)

A financial institution becomes the escrow agent, and an escrow agreement will be required, adding some additional paper to the deal.

Still, these arrangements and documents can become standardized so that the costs are minimal and the documents are repeatable templates.

Private Jet Card Comparisons’ helpful charts include information on whether particular jet card companies are amenable to establishing escrow arrangements with you.

This should be an essential consideration in assessing any jet card offering,

Too often, the uneducated private aviation consumer is blinded by slick marketing materials that intentionally make a jet card seem like a simple transaction.

In reality, you’re paying in advance, perhaps hundreds of thousands of dollars, in exchange for a mere promise of future services.

Protecting those funds through an escrow account provides effective added protection.

More generally, having an attorney sitting on your side of the table who knows the industry, the pitfalls, and where there’s room to negotiate can best protect your interests.

James D. Butler is an attorney and CEO of Shaircraft Solutions. This Maryland-based consulting firm has advised individuals and businesses on investments in private air travel for over twenty years. A foremost private aviation authority, Mr. Butler has in-depth knowledge of today’s private aviation options, including fractional ownership, jet card programs, and charter, and specializes in fractional share valuation disputes. Shaircraft’s clients range from business executives and retirees to family offices and professional athletes. Mr. Butler can be reached directly at jbutler@shaircraft.com or (301) 652-9885.

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