"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.
Structure
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 | |
|
CITATION CJ1
|
KING AIR B200
|
HAWKER 800XP
|
CHALLENGER 604
| |
|
5 |
7 |
8 |
9 to 19
| |
|
1,475 nm
|
1,500 nm |
2,556 nm |
4,077 nm | |
|
432 mph (380 kt)
|
325 mph (286 kt)
|
500 mph (440 kt)
|
540 mph (475 kt)
| |
|
$536,875 |
$287,500 |
$1,628,125 |
$3,068,000 | |
|
$7,200 |
$5,000 |
$12,000 |
$21,650 | |
|
$1,050 |
$775 |
$1,800 |
$2,708 | |
|
5 |
5 |
5 |
5
| |
|
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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