Fractional ownership or leasing of a private jet is a big decision. We give you a comprehensive overview of factors that will guide your decision
Fractional ownership and leases sit between full ownership and jet cards or on-demand charter in the hierarchy of private aviation solutions
How does it work, what are the costs, and when you should consider fractional ownership and leases?
What can you negotiate?
Having read and reviewed dozens of articles that cover fractional aircraft ownership, I find many of them somewhat misinformed. The typical approach is to espouse fractional ownership as the ideal solution if your annual flying ranges between 50 and 400 hours.
Said articles recommend full ownership if you fly more than 400 hours, jet cards for 25 to 50 hours, and on-demand charter for less than 25 hours of flying.
I don’t want to say these generalizations are wrong. They’re just overly simplistic and can lead you to make a decision that might not be the best fit.
Even in 2001, a long time ago, but long before jet cards and other shorter-term options really took hold, a white paper Embry-Riddle Aeronautical University pegged the sweet spot for fractional ownership at between 145 and 387 hours of annual usage.
To help you understand if you should be thinking about fractional ownership and long-term lease options from fractional providers, I enlisted the help of James Butler, the CEO of Shaircraft Solutions LLC, and an aviation attorney and expert.
Butler specializes in advising private flyers in terms of buying and leasing fractional aircraft, investing in jet cards, etc., and negotiates the contracts for these investments. I’ve quoted Butler extensively in this article.
Fractional Private Jet History
The fractional ownership concept in the private aircraft arena is closely tied to Richard Santulli, who pioneered it by launching NetJets in 1987, before selling the company to Warren Buffett’s Berkshire Hathaway in 1998 for $725 million.
The idea was to target companies and UHNW families that might not have ongoing demand sufficient to own their own airplane or, if they already owned one, needed multiple airplanes on a regular basis.
At the time, the only other option was on-demand charter, and there was often very little transparency about the safety and operational standards of charter companies.
Block charter offered some bulk-purchasing opportunities with fixed rates but generally didn’t guarantee availability. In other words, when you needed to fly, a plane might not be available, or at least a plane you were happy with.
Jet cards offering fixed one-way rates and guaranteed availability didn’t come on the scene until around the turn of the century and didn’t propagate until after the Great Recession when many private aviation users began looking for short term solutions.
Since that point, the number of jet card providers and programs more than doubled so that there are over 60 providers and more than 300 jet card programs. Some have thousands of members. Others run by boutique brokers have a dozen or so.
At the same time, you can count on two hands the number of fractional providers: Traqpak lists nine. NetJets controls 64% of the market, followed by Directional’s Flexjet, Planesense (focused on the Pilatus PC-12 and now PC-24), Flight Options (also owned by Directional, although they are phasing it out), Airshare (which recently announced an expansion), Airsprint (in Canada), Nicholas Air, and Northern Jet Management.
Still, fractional ownership remains a preferred solution for many private fliers and offers a wide variety of options from turboprops and light jets to ultra-long-range aircraft from Bombardier and Gulfstream.
Fractional jet ownership benefits
In the fractional model, the fractional company sells shares in multiple aircraft to various buyers. Each buyer agrees that all other shareowners may use its aircraft, all of which are managed and operated by the provider. In this way, fractional ownership guarantees the shareowner access to an entire fleet of aircraft for a contracted number of hours.
Instead of worrying about hiring and training pilots, complying with operating regulations and maintaining aircraft, the shareowner essentially purchases the use of an on-demand, executive airline.
What’s the starting point?
To buy-in, the standard minimum commitment is at least 50 hours of flight time per year and a contract term that runs at least three years, although five years is more typical, and some providers have options that can extend your contract for an additional five years, so up to 10 years.
To buy a share, you pay a purchase price for your fractional share of an aircraft. So buying a quarter share of a $30 million private jet means a $7.5 million outlay.
You then pay a monthly management fee, and an hourly rate for actual flight hours, plus various additional fees that include fuel surcharges, enhanced catering, and certain airport charges, and taxes.
You can also lease a fractional share of an aircraft if you want to avoid ownership. In that case, the acquisition costs and depreciation are built into your lease payments.
How much flying time do you get?
Typically, fractional providers use an annual occupied flight hours approach that is based on the following:
50 hours = 1/16th share
100 hours = 1/8th share
200 hours = 1/4 share
400 hours = 1/2 share
800 hours = Full share
Fractional Jet Ownership compared to Full Ownership
- Increased privacy, particularly with the upcoming ADS-B mandate, means you don’t have to worry about the media or competitors tracking your flights by tail number.
- Eliminate headaches of setting up, staffing and managing a flight department and hiring and training pilots or, alternatively, engaging a management company.
- Don’t worry about hangar or parking space, either at your home base or airports, you fly into, something that can impact vacation destinations during peak periods and trips to major sporting events.
- No need to have a back-up aircraft readily available when your aircraft is down for maintenance.
- Last-minute mechanical problems won’t kill your trip. Fractional providers will provide backup aircraft, usually within hours. If you remember, GE fessed up to flying a backup aircraft for then CEO Jeff Immelt for that reason.
- You may be able to access more than one aircraft at the same time, although fractional companies do have limitations and rules governing multi-aircraft use. This can be useful when flying family or executives simultaneously from various locations.
- You may have the ability to access other aircraft types that are better suited than your primary aircraft for certain trips, again with contractual restrictions.
- You may benefit from having pilots and an operator experienced at flying regularly into airports that you only fly to occasionally.
Disadvantages compared to Full Ownership
- There are restrictions on selling your share before your contract is over.
- When you fly outside your Primary Service Area (PSA), you pay ferry fees and expenses related to the flight crew, including costs to reposition pilots and flight attendants, hotels, and per diems.
- Minimum flight time charged is typically 60 minutes, including taxi time, so if you make a lot of 30-minute flights, you will get billed 60 minutes regardless.
- On high demand or “peak days,” your provider has the right to change your departure time, typically three hours in either direction.
- During busy periods, or at its discretion, your provider is allowed to contract with charter operators for supplemental lift, so you may end up on a third-party aircraft, presumably something you wanted to avoid by going the fractional route.
- If you fly more than your contracted amount, you have to go to the market to buy incremental hours. If you fly fewer than the contracted hours, you may lose those hours at the end of your contract, although some providers permit the sale of unused hours on a limited basis.
- Fractional providers have no-smoking policies and there may be restrictions on transporting pets.
- Pilots are subject to duty time restrictions that presumably would not be a problem if you owned an aircraft and employed pilots directly.
- Fractional operators have more stringent restrictions on the airports they will fly into, particularly related to runway length, so an owner of a specific type of aircraft may be able to fly into a short runway airport based on manufacturer specifications, but a fractional operator will not.
- The major fractional providers do not allow even type-rated owners to fly the plane, so you won’t be able to jump behind the controls.
Fractional Jet Ownership vs. Jet Cards
- Fractional ownership allows you to choose a specific aircraft type and for the most part, those types come in standard configurations. Jet card products vary between operators and brokers, so with broker jet cards you typically can get a variety of aircraft types and a multitude of configurations within a category – light jet, midsize jet, etc.
- Lead time for booking and canceling flights is generally less than jet cards, so if your trips are typically booked or changed within 24 hours of departure, fractional ownership may be a better solution, although some cards have booking windows as little as six hours.
- While some jet cards have 60 minute daily and segment minimums for light and midsize jets, typically minimums are 90 to 120 minutes, so if you mainly fly shorter flights, fractional ownership could make more sense.
- FAR Part 135 regulations governing jet card flying are more restrictive on pilot duty time, which may limit your ability to conduct same-day flights at your fixed rates.
- The big fractional providers have larger PSAs than most jet cards, so if you are flying to Central America or the deep Caribbean, and even Hawaii, fractional ownership may make more sense.
- You prefer to fly on a fleet of aircraft that is managed, operated and maintained by a single provider.
- An aircraft model in the fractional fleet suits your needs. You won’t be happy if your aircraft can’t make your favorite trip without a fuel stop, hold your ski equipment or land on the closest airport’s runway, and upgrading or downgrading to larger or smaller aircraft tends to be much less cost-effective than choosing the right one upfront.
Disadvantages compared to Jet Cards
- The minimum commitment for fractional typically starts at 36 months, whereas with jet cards you buy what you need – from 10 hours to 100 hours or more, and when you are done, you either purchase more flight time or not. That also means one year you might buy and use 50 hours of jet card flights, then the next year 100 hours, and after that back to 50 hours.
- Jet cards often provide more flexibility to roll over unused hours from year to year.
- Some jet card programs will refund your unused deposit, meaning if your flying needs change suddenly, you can get out fast.
Fractional Jet Ownership compared to On-demand Charter
- Fractional programs provide you with a specific aircraft type, usually in a standard configuration. With on-demand charter there are a variety of configurations of a specific type of aircraft and various types of aircraft in a given category, so you likely have a different cabin experience from a trip to trip.
- Charter pricing is based on availability when you book, and cancellation policies not only vary from operator to operator but trip to trip. Aircraft owners who make their aircraft available for charter each have their own restrictions, so one may not allow pets, while another does.
- Unless you establish a relationship with one operator, you’ll need to research each trip to ensure you’re getting the best price and that the operator meets your standards for safety and pilot qualifications.
- With on-demand charter, you will pay for positioning flights, catering, and deicing. It’s not uncommon to have to pay to deice twice for one flight – once for the positioning flight and a second time from your departure airport.
- If there is a mechanical problem or a pilot gets sick, your provider will need to re-quote the trip and you likely will have to pay any price differential unless you have arranged otherwise.
- If you’re forced to find a different operator, unless your broker covers it, you will have to pay the new operator before you fly, even while waiting for a refund from the original operator.
Disadvantages compared to On-demand Charter
- If fractional ownership is like a marriage and jet cards are a committed relationship, on-demand charter is like casual dating. There’s no commitment beyond the specific trip you book.
- If you fly a lot of same-day roundtrips, you may be able to find a local operator who can provide attractive round trip pricing.
- For each trip – or date – you can get an aircraft specific to your needs, so in one case you might want a large cabin jet that seats 14 people, and the next trip, one that has a separate rear cabin that turns into a private bedroom.
Provider Options – Ownership vs. Lease
In addition to flying at least 50 hours per year (the minimum size of most fractional shares), Butler explains the key benefits of going the fractional ownership route.
Reasons to buy a share
- You can use the depreciation deductions that are applicable to a capital asset. Keep in mind that in most cases, this means showing your fractional share on the books of your company.
- You’re willing to live with not knowing the cost per actual flight hour upfront. With a fractional share, you’ll bear much of the risk of operational cost increases and, more importantly, the risk that the value of your aircraft (and thus your share) may change significantly from the time you buy it to the time you sell it back to the program—a key factor in determining your overall cost.
- You’re prepared to make a substantial capital outlay. Remember, fractional ownership means buying a share in an actual aircraft.
- You can identify a financially sound fractional provider that has a track record of sustained excellence in operating its program.
Butler adds, “You’re not just buying flight time, you’re going into business with the program operator and relying on that operator to run the business and buy back your share at the end of your term (generally five years).”
Reasons to lease
Butler says, “In corporate settings, leases can be preferable to fractional ownership as they may be better received by shareholders and in public reports. Many shareholders may find travel expenses (i.e. through leasing) more agreeable than an asset (i.e. fractional ownership). It can sometimes be a less controversial option.”
He notes, “With a lease, there is no upfront investment, whereas, with fractional ownership, you have a large upfront share purchase. Therefore, you lose the immediate use of that capital with a fractional contract, although you can expect to get some portion of that back at the end of the contract term.”
He adds, “Fractional shares typically are repurchased by the provider at the end of the contract term. At that time, you’ll receive back a portion of your initial outlay. However, there are no guaranteed minimums, and so any return is completely tied to the market value of your aircraft. You may get much less back than you expected. With a lease, however, the market risk is shifted to the provider, a variable that certainly is factored into the lease cost, but which also cabins your financial uncertainty.”
The Primary Service Area
- Primary Service Area (PSA) is the flying region where you get core benefits of guaranteed availability and fixed rates without ferry fees. It varies by both provider and aircraft type so just because your friend flies with Provider X to Destination Z with Aircraft Type Y doesn’t mean that same destination is in the service area for Type A. In other words, make sure the places you will be doing the vast majority of your flying are within the PSA of the program you are buying.
Differences when flying outside your Primary Service Area
- Outside the PSA, expect to pay ferry fees as well as costs for crew overnights and per diems.
Choosing an aircraft type
Most programs offer more flexibility in downgrading to smaller aircraft than upgrading to larger aircraft, but either way, it’s generally most cost-effective to purchase a share in the aircraft that most often will suit your needs.
That is because providers charge an interchange fee in connection with an upgrade or downgrade, which is generally a premium to what owners of that type of aircraft are paying. In other words, you can switch, however, there is an extra cost.
How do the agreements work?
Butler writes, “Once you’ve decided to purchase a fractional share, you’ll receive a set of contract documents from your provider. Your salesperson will do his best to convince you that everyone signs the same simple contract. The contracts are short and are made to look like standard boilerplate. Don’t be fooled. These documents govern your rights and obligations with respect to what most likely will be a multi-million dollar investment, and they are negotiable.”
Here’s Butler’s brief description of the critically important documents and what they mean to you:
If your provider is awaiting the delivery of your aircraft, it’ll want you to put up a deposit to hold your share. This document should identify the specific aircraft in which you’re buying the share, guarantee that the pricing won’t change and include a firm delivery date. Most importantly, make sure you understand how and when your deposit becomes nonrefundable.
This is the document through which you purchase your share from the provider. Just as important, the Purchase Agreement provides the terms under which the provider will repurchase your share at the end of your contract term. All too often, buyers don’t consider the likely decline in value of their aircraft, and thus their share, when projecting the “all in” cost of their investment.
Master Dry Lease Exchange Agreement
This document governs the relationship among all fractional owners in the program. Essentially, each owner agrees to share his plane with every other owner, thus enabling the provider to utilize the entire fleet to service all the owners. This arrangement is a common feature of all fractional programs; so much so that you may rarely, if ever, actually fly on the aircraft in which you own a share.
This document governs the core issues of your investment. Nominally, it reflects your appointment of the provider as the manager of your aircraft and as the administrator of the program.
But more importantly, the Management Agreement tells you when you can fly, how many hours you can fly and what costs you’ll incur when you fly.
It describes how your flight time will be calculated, what you’ll pay if fuel prices go up, and how far in advance you must reserve your flight.
There is also your right to interchange, i.e., use other models of aircraft in the fleet, and how you’ll be charged if you do. It specifies peak travel days when greater restrictions on your use of the aircraft apply, and it maps out the service area within which you can fly.
Butler says, “These documents, and not that beautiful brochure, will govern your rights and obligations. The contracts may look simple, but if you don’t read and negotiate them carefully, you may make a million-dollar mistake.”
What can you negotiate?
As providers exit aircraft types they typically offer them as jet cards. However, you might also be able to get the types on a short-term lease.
You may also want your flights as possible to operate under Part 135 instead of 91k as an additional shield against litigation in case of an accident or injury.
Also, keep in mind, the larger the share you buy, the more clout you will have, and if you are buying multiple shares, that will give you added leverage.
What you should know about residual values?
While you can look at historic values, it’s hard to predict. An article by Corporate Jet Investor notes, “In 1987 you could buy a new GIV for about $17.8 million (about $42.75 million in today’s dollars). You could have flown that jet about 400 hours a year (typical utilization) for the next 15 years and then sold it in 2002 for about what you bought it for.” The same article shows a Global Express new in 2003 to the end of 2016 saw its value fall from $44.4 million to $13.5 million.
That same 2017 article said the new normal is “a rule of thumb, business jets should depreciate at about 9% to 10% annually” with caveats “type of aircraft, global economy, OEM production rates, and retail pricing along with engineering and technological developments.”
What if you need more hours in a year?
In some cases, providers have a marketplace where owners can buy and sell hours they need or don’t need. However, Butler says, you pay a fee and you shouldn’t assume what you need will be readily available when you need it. He and others say fractional ownership and leases work best when you are sure that you will have similar flying patterns and aircraft type needs for the term of your contract.
What if you don’t use all your hours in a year?
If you can’t sell the hours via your provider’s marketplace, you likely can roll over unused hours. If you are unsure that the proposal reflects your year-in, year-out needs, make sure to understand what provisions there are to rollover hours, penalties, and if fractional ownership or leases are indeed the right solutions.
What if you want to get out early?
Butler says you’re going to need an aviation attorney who has experience negotiating contracts with providers, and it’s better to start with one before you sign, so you will understand what options you will have if you need to exit early.
Legal advice – Is your own lawyer good enough?
Butler writes, “Most private air travel arrangements, such as buying a fractional jet share or buying into jet card or block charter programs, involve rather complicated legal, regulatory and liability issues, and substantial dollars, and so deserve a careful legal review.”
Indeed, it’s not the alluring brochure or the salesman’s pitch that will govern your rights and obligations, but rather a contract drafted by the jet provider for its benefit.
“As a general rule of thumb, says Butler, “anytime you’re parting with more than $25,000 in exchange for a promise by a jet company to fly you sometime in the future, you should have an experienced attorney review the paperwork. Indeed, even if you’re just booking a charter flight, which may cost less than $25,000, issues like cancellation fees, aircraft and crew specifications, safety standards, etc. are likely to be covered in the fine print that comes with most standard charter contracts. You’ve got to sweat the details.”
Butler explains, “Jet companies, fractional ones in particular, have a subtle way of making their contracts seem simple (and so non-threatening). They print them in a way that makes them seem short and full of boilerplate. Some will even tell you that they don’t change their contracts and, ‘Everyone signs the same documents.’ Not so!”
You may first think to call on your in-house or family attorney. “Bad idea,” says Butler. “Your average attorney understandably won’t have experience with how these contracts work and so won’t know which aspects are negotiable and which are not. Faced with these circumstances, you may be inclined to just go ahead and sign the ‘standard’ contract, only to find out later that you’ve made a costly mistake.”
Butler concludes, “In the end, anytime you contract for a private jet flight—putting your dollars and, more importantly, your safety and that of your family and business associates on the line, you should have an experienced attorney, who specializes in aviation transactions, review the contracts.”
Contacting James Butler
Butler can be reached at email@example.com or 301.652.9885
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