Fractional “owners” are actually tenants in common of an airplane owned by the fractional company (similar to a lease), rather than real owners. A real owner would make their own decision when and if the plane is needed to be sold, rather than being forced to sell back to the Program Manager at 2, 3 or 5 years. Furthermore, many fractional share holders rarely if ever actually fly in the actual plane they own the share in. One might be forgiven for thinking that the term “Fractional Ownership” is actually marketing spin designed to fool the buyer into thinking that they are an owner after all, and enjoy the kudos of owning their own aircraft.
Marketing spin or not, there are an awful lot of individuals and companies who have purchased a fractional share rather than charter or purchase their own aircraft. Many choose to go fractional because they like:
· the excellent overall level of service;
· occupied hours pricing (which includes the cost of empty legs within the region);
· guaranteed availability of their selected type of share;
· possibility to interchange or upgrade (subject to availability);
· their large fleet which offers backup of replacement aircraft;
· excellent safety record;
· reduced complexity (perhaps perceived) compared with full ownership.
So surely this is a transportation solution that you should consider if you haven’t already?
Netjets and other providers
In Europe, unlike the States, Fractional Ownership schemes are deemed by the European Aviation Safety Agency (EASA) to be Public Transport Flights and so operators require an European Air Operators Certificate (AOC), and therefore from the outset it one should not be surprising that there are limited, if any, cost saving benefits to the shareholder of this type of operation relative to chartering. Netjets are the leading provider of Fractional Ownership in Europe and operate under a Portuguese AOC and their offer both "Occupied" and "All hours" pricing schemes on a fleet which includes the Cessna Citation Bravo, Citation Excel, Hawker 800XP, Falcon 2000, Falcon 7X and Gulfstream G550.
Whilst Netjets popular "occupied hours" program is expensive (relative to Charter) you only pay when you fly, so there are no ferry charges or positioning costs inside the European or US Zones. So this is ideal for trips, which are extended over a number of days, or trips, which are one way or do not start or finish from your home base. As a consequence your required total usage of an aircraft could be reduced. It should be appreciated though that the "occupied hours" scheme pricing, is ideally suited to those clients at the periphery of the geographic operating region who gain free positioning, rather than those perhaps at the centre, who would not need to pay for much positioning with Charter.
Furthermore, fractional ownership schemes suffer from the fluctuations in demand during peak times, and typically have to charter in themselves to cover their guaranteed commitments during holiday weekends. With an increasingly and inherently complex operations structure, these additional costs tend to mean that their cost per hour is always going to be high.
Fractional Ownership Pricing
"Fractional ownership" requires you to pay up-front the portion of the aircraft share you are purchasing for your own usage. In most cases the minimum fraction you can purchase is either 1/16 or 1/32. Thus, you have to lay out up front all of that money for your share of an aircraft. Fractional program commitments typically range from 2 years to 5 years, so the outlay you are paying isn’t in perpetuity but just for the duration of contract. At the end of the program the aircraft is then repurchased from you at current market value less the program remarketing charges, which are typically up to 7%. If you want to continue your program, the fractional company will require you sign new agreements and so buy back in at the current market rate of whatever the new jet costs.
However, your share will depreciate over the period of the contract period significantly, thus you will lose a substantial amount of money on your share. So there’s a very big catch here. Let’s say you own a 1/16 share of the entire plane (about 50 hours a year). If you only flew on the plane for 50 hours a year (250 hours over 5 years) and no one else flew on the plane, that plane would depreciate at a normal and relatively predictable rate. Unfortunately, the plane will actually depreciate at a rate of (250 hours x 16 = 4000 hours) which will yield a much higher amount of depreciation of the asset than your individual 23 share.
Thus, when the fractional program operator “buys your share back from you”, they are buying it back at a hugely depreciated value, which naturally increases your per hour average rate.
Other important catches to watch out for are:
- The usual 12 minutes of taxi time charged on all flights.
- Short hops are rounded up to a minimum of an hour.
- There are charges for flights outside your Primary Service Area for ferrying.
- A significant remarketing commission at the end of the Contract, of up to 7% to remarket the aircraft.
- Significant hourly fuel surcharges.
- Annual price rises (OECD Consumer Price Index). The European monthly and hourly costs have risen by 40% in the last 4/5 years.
- High density airport charges in Europe.
- Your legal costs of entering the program, you will need a good aviation lawyer!
- Significant supplementary costs per hour if you exceed your allocated share.
If you are considering a fractional share or already in a scheme, then you must consider these costs, along with the accelerated depreciation, along with the cost of capital (for the share), monthly fees, hourly rate and surcharges into account. When you do this the cost per hour flown is very high.
In summary: fractional ownership programs just aren’t good value compared with Charter, nor do they give you all the flexibility of Ownership. They just don’t add up financially unless, perhaps, you live at the periphery of a region. Av8jet can help advice on your Fractional acquisitions, sales, valuations and alternatives.