"Fractional" Flying, Anyone?   

by Walter Hinton

Fractional ownership programs for corporate aircraft have grown rapidly in popularity since the start of the concept in 1986. They bring together groups of co-owners who each acquire part ownership in a corporate aircraft, not unlike time-shares for vacation homes, except that aircraft access is available on any day. Under standardized contracts, the owners agree to share an aircraft, to swap use of other aircraft in the same program and to use a professional manager. For a business not requiring several hundreds hours of private flying per year, the cost savings can be substantial compared to owning and operating one whole aircraft. Fractional ownership can also be an efficient adjunct to an in-house flight department that is fully utilized. For these reasons, joining in such a program can be attractive to smaller companies with regular transportation needs, as well as large companies needing a little more lift than their own corporate jets provide.

The growth of this industry has been so rapid that such programs are now amount the largest purchase customers for corporate aircraft in the United States. At the close of 1986, there were three fractional shares owned by participants; at the close of 1996, there were 548; and at the close of 2001, there were 4,900. Following 9/11, fractional-aircraft business has continued to grow, even as commercial airline travel has shrunk. Prospects for growth in 2002 are healthy, if behind 2001's exceptional 28% rate. Traditional air-charter services are also experiencing current growth, which several of them attribute to the greater inconvenience and difficulty of commercial flying after 9/11.

There is nothing new about companies or individuals joining together to co-own aircraft they themselves fly, and to share operating costs. Joint ownership was already a popular way of engaging in private aviation long before fractional programs were invented. For 30 years the Federal Aviation Regulations (FAR) have authorized joint ownership and other arrangements for sharing private aircraft.

What is new about fractional-ownership is the combining of the familiar joint-ownership arrangement with centralized management, piloting services, aircraft cross-lease exchanges and a marketing program. Participants pay a fixed, monthly management fee as well as hourly fees for aircraft usage and receive an allocation of annual flight hours based on the size of their respective shares. For example, ownership of a one-eighth fractional share in a light business jet typically authorizes the owner to fly 100 hours per year in any program aircraft of the same type, or more hours in a small and slower aircraft under the exchange feature of the program. the accompanying table shows typical recent pricing for some different aircraft types commonly used in fractional programs.

Fractional Aircraft Programs
Recent Pricing for One-Eighth Share, Authorizing 100 Hours Annual Usage
9 to 19
Max. Range
1,475 nm
1,500 nm
2,556 nm
4,077 nm
Max. Cruise
432 mph (380 kt)
325 mph (286 kt)
500 mph (440 kt)
540 mph (475 kt)
Purchase Price
Mgt. Fee/Mo.
Hourly Fee
Term Years
Resale Price
FMV less 7%
FMV less 7%
FMV less 5-7%
FMV less 4%
Sources: "CitationShares," "AvShares," "NetJets," "FlexJet"

Fractional programs are different from traditional "on-demand" charter operations, where the customer buys transportation services from an aircraft operator holding FAA authority to fly the public for hire. The aircraft are professionally managed and professionally flown in both fractional programs and air charters alike. But unlike charter operators, typical fractional programs are tailored to operate under the private-aviation regulations (Part 91 of the FAR), under which the co-owners and not the managers are the "operators" of the aircraft. This feature generates cost savings, since air-carrier regulations applicable to charter operators impose many additional government requirements, affecting the cost and convenience of flight.

Which Flight Option?
Overall hourly costs in fractionals are generally comparable to the cost of chartering. But many companies prefer fractional ownership to charters because it offers shorter advance-notice minimums, greater likelihood of aircraft availability when needed, tax benefits from asset ownership and more specialization in the customer's preferred aircraft type. Additionally, fractional programs usually provide cost-free aircraft ferrying for pickups within the program's prime service area, whereas chartering generates a charge for flying time whether the aircraft is occupied or not. From a pure cost standpoint, fractional appears to hold the edge over charter above a threshold of about 50 hours of annual usage, depending on aircraft type.

Compared to full ownership of an aircraft, fractional ownership lowers the entry barrier by significantly dropping the up-front purchase cost. And below a certain level of annual hours, fractional ownership also delivers savings when viewed on a basis of overall costs per hour. This is because the fixed costs of the aircraft are spread among several owners and not absorbed by just one owner. Depending on the type of aircraft, the break-even level between the fractional and full-ownership options can range from 200 or 250 up to 400 hours of usage per year. The analysis is the same as for any other in-hour service that could be outsourced from independent providers. The savings consist in shifting away from the company the capital costs, personnel costs and other fixed expenses the company would incur if it undertook to provide the service internally. It is not unusual for a small to medium company owning 100% of an aircraft to sell about a 75% interest in it to a program manager and join the program with its remaining 25%.

Fractional programs also offer the added benefits of predictable cost levels over the terms of the relationship, usually five years, and preplanned exit. Further, during the term, the participant normally may adjust its ownership level to match its changing needs for transportation. Availability of the aircraft also would not be affected by required periodic maintenance on a single aircraft or training for a single pilot.

FAA Oversight
Fractional programs enjoy a very good safety record overall. But to date, fractional-program managers themselves have been free of government regulation, except to the extent they also provide charter services. Anyone with enough aviation experience and some financial backing could go into business as a program manager. This situation, however, is about to change. Recently the FAA proposed new regulations, known an Part 91 "Subpart K," which would regulate fractional-program managers specifically for the first time. The manager and the co-owners would share the obligations to maintain all aircraft in airworthy condition and to ensure their safe operation. The manager would be required to hold FAA-issued "Management Specifications" and to educate the co-owners on their FAR responsibilities arising from Part 91 operation. Required equipment for fractional-program aircraft would be expanded beyond that required for regular private flying. Specific flight time, duty time and rest time requirements for fractional program pilots would be imposed for the first time.

For existing fractional programs, Subpart K compliance would be phased-in over about 15 months. Since 1999, fractional program managers who belong to the National Business Aviation Association (NBAA) have been required to adhere to NBAA's fractional program guidelines, which closely resemble Subpart K. Such managers should face only low incremental costs of complying with Subpart K during the transition period. Final regulations are expected potentially in the early part of next year, after review by the Department of Transportation and OMB. They would take effect 30 to 60 days after publication.

Fractional ownership often can provide an efficient alternative to full ownership of a business aircraft. The NBAA publishes a list of its member companies offering fractional-ownership programs.

Download PDF copy of "'Fractional' Flying, Anyone?" from November 2002 Greenville Magazine.(32MB)

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