September 1, 1997
Fractional ownership is rapidly changing the face of corporate aviation. In the not-too-distant past, prospective pilots or users of business jets had to plunk down huge amounts of money in order to buy an airplane outright. After that came the burdens of sustaining a corporate jet — insurance, pilot training, maintenance, hangaring, and fuel, to name a few — all of them resting on the buyer's shoulders.
With the prices of new corporate jets exceeding the $3 million mark (and this is just for an entry-level airplane), and with more and more customers realizing that their need for private air transportation doesn't justify such a huge cash outlay, an opportunity presented itself. In 1986, an entrepreneur named Richard Santulli came up with the concept of fractional ownership, bought Executive Jet International of Columbus, Ohio, and began to acquire a fleet of airplanes. After adding Cessna Citation S/IIs to Executive Jet's existing charter operation, Santulli began selling shares of the S/IIs. He called the program NetJets, and it was the nation's first fractional ownership scheme.
NetJets' success has been phenomenal. This fractional ownership fleet now numbers 95 airplanes, from the old S/IIs to brand-new Hawker 1000s, Cessna Citation Xs, and Gulfstream IV-SPs. In deals worth $2.3 billion, NetJets has ordered 169 more new airplanes in deals with Cessna, Raytheon, and Gulfstream in the past three and one-half years alone. In addition, Santulli has said that he will be buying new airplanes at a rate of 35 airplanes a year for the next five years.
He's well on his way. In May, Executive Jet bought 20 new Hawker 800XPs and a Hawker 1000 from Raytheon in a $210 million deal. At this year's Paris Air Show, Santulli announced that he had bought 50 Citation Excels in the biggest single order in unit size for business aircraft in aviation history. This brought NetJets' two-year total of Cessna purchases to 151 airplanes. Other Cessnas on order include 50 Citation V Ultras, 20 Citation VIIs, and 31 Citation Xs.
With approximately 700 owners in NetJets airplanes, Santulli claims that in the past five years Executive Jet has introduced more people to general aviation than the top five business jet manufacturers combined. He's probably right. Moreover, NetJets' purchases represent a huge proportion of new business jet sales. Obviously, NetJets has found a profitable niche in both serving its clientele and, some would say, in keeping jet airframe manufacturers' production lines and inventories moving. If individuals or corporations can't afford to buy dozens of new airplanes, at least Santulli can.
If imitation is flattery, NetJets certainly has admirers who hope to emulate its success. Bombardier (manufacturer of the Learjet and Challenger lines of business jets) and American Airlines' AMR Combs division announced the formation of their fractional ownership program two years ago. It's called FlexJet, and it's a part of Bombardier/AMR Combs' Business Jet Solutions umbrella organization — which also includes charter services under what's called the Alliance program. Today, FlexJet has 30 new airplanes in its fleet, and 150 participating owners. By year's end, it's expected that the FlexJet fleet will grow to 40 airplanes and 200 owners. The FlexJets fleet uses Bombardier's Learjet 31As, Learjet 60s, and Canadair Challenger 604s. As soon as it's certified, the new Learjet 45 will be added to the FlexJet fleet.
In June, Raytheon Aircraft Company unveiled its new fractional ownership program, dubbed Raytheon Travel Air (RTA). Initially, this program will offer fractional ownership shares in Beech King Air B200s, Beechjet 400As, and Raytheon Hawker 800XPs.
Another program, Alpha Flying of Norwood, Massachusetts, offers fractional shares in six Pilatus PC-XIIs.
How does fractional ownership work? It starts when an owner buys a share in one or more airplanes. Depending on the program and the airplane, shares are offered in initial increments of between one-eighth and one-half of the airplane's purchase price. In FlexJets' case, additional shares can be bought in increments as low as one-sixteenth. Ownership documents are issued, and for Internal Revenue Service purposes, shares count as bona fide depreciable capital investments — even though you own only a portion of an airplane. Ownership terms are usually set at five years, at which time owners may sell their shares back to the issuer at prearranged prices.
Each share entitles its owner to a certain number of flying hours per year. In NetJets' case, for example, a one-eighth share in a Citation V Ultra will cost you $778,000 up front and entitle you to fly in the airplane for 100 hours per year.
But those flying hours aren't free. No, no. NetJets bills you $1,187 for each of those hours, to cover the cost of fuel, maintenance, engine reserves, and other direct expenses.
That's not all. Your V Ultra will cost you another $7,275 per month in monthly management fees to cover indirect expenses such as insurance, pilot salaries and training, and hangar and administrative fees.
Of course, for larger, longer-range airplanes, share prices and fees are higher. A one-eighth share of a FlexJet Challenger 604, for example, goes for $2,620,000 and allots you 100 flying hours per year, at $2,120 per hour. Monthly management fees run $15,200.
Those are steep prices, but compared to conventional ownership, they can be quite reasonable. Consider that if you bought that V Ultra outright, you'd have to front a full $6 million or so to buy the airplane. Then you'd have to put yourself (if you'll be flying) and another pilot, or two pilots (if you'll be flying solely in the back) — and a mechanic — through recurrent training at a professional training center. Don't forget their salaries and benefits. Any maintenance would be your problem, and so would any hangar or other fees. When the airplane is down for maintenance, finding and paying for another aircraft is also up to you.
Experts say that conventional ownership makes sense only if you plan on flying at least 400 hours (smaller jets) or 500 hours (larger ones) per year. Flying less than that would create per-hour costs that would surely raise a CFO's eyebrows.
The advantages of fractional ownership extend beyond the purely economic. Not only are owners freed of having to pay for and schedule airplanes and pilots, but they can summon them to any decent-sized airport on a few hours' notice. Own a half-share in an RTA Beechjet and one will appear within a four-hour response time; own a one-eighth share in an RTA 800XP and you wait for no more than 10 hours.
Fractional outfits keep track of each of their airplanes via centrally located operations centers. NetJets' ops center is at the Port Columbus (Ohio) International Airport. FlexJets' is at Dallas' Love Field. RTA's is at Raytheon headquarters in Wichita. It's up to operations managers to juggle their fleets' comings and goings and to keep track of who needs which airplane where. Fractionally owned airplanes generally aren't based at any one airport. Instead, they continually fly from one mission to another. Owners, by the way, aren't charged for deadhead legs.
Although owners may buy a fraction of a single jet, that fraction can, in effect, be spread around the entire fleet. It's not like a time-sharing arrangement on a beachfront condo. The fraction you buy is not attached to any one airplane when it comes to availability. This lets fractional managers make airplanes available every day of the year, 24 hours a day. NetJets goes a step further, guaranteeing full-time availability.
In the FlexJet program, owners holding one-quarter or more shares can even trade up or down in the aircraft line, with fee adjustments and an hourly "exchange rate" differential applied to various airplane combinations. NetJets uses a similar formula to trade up or down in the fleet.
For a Lear 31A owner moving up to a Challenger 604, for example, one hour of Challenger time will cost 2.7 hours from the annually allotted 31A time. It's even possible to use two or more airplanes simultaneously under this scheme. Let's say you were having a business meeting in Denver. You and another employee in a district office in Phoenix need to get there, but so do six company officials in New York. Your company owns a share in a 31A.You take the 31A, and the six in New York come via the Challenger. The hourly allotments are posted on the 31A, and the company pays an extra hourly fee for using the Challenger (the 604 is $925 more per hour than the 31A).
RTA also offers shareholders the chance to move up or down within the fleet, using similar differential arrangements.
Soon, NetJets will be offering Gulfstream's 6,500-nm G-V for use in the program; the company has already added a handful of brand-new 0.92 Mach Citation Xs to the flight line. FlexJet will follow suit by offering Bombardier's 6,700-nm Global Express.
The move to globalization of fractional ownership is already under way. A NetJets European operation has begun, using some of Executive Jet's old S/IIs — and soon, Citation VIIs. American customers on European business trips form the crux of this infant operation based in Lisbon, Portugal. Now there is talk of expanding NetJets operations to the Middle East and Asia.
At this point the future seems to belong to fractional ownership. A mini-debate centers on whether this is good or bad. Some corporate flight departments see fractional ownership as threats to job security — and perhaps justifiably so. Several flight departments have indeed been shut down in favor of fractional ownership. On the other hand, some companies with very active flight departments have turned to fractional ownership as a means of augmenting their existing fleets and have retained their flight crews.
With 70 to 80 percent of fractional owners new to flying by business jet, one could argue that this bodes well for general aviation as a whole. Manufacturers hope that fractional owners will eventually become full owners — buying straight from the factory. So far that hasn't happened.
However, the story isn't over. We all know that once you've flown by private jet, airline travel takes on all the allure of a Trailways bus. But even if today's shareholders don't turn into retail prospects, the savings, convenience, and comfort possible through fractional ownership nudges the public perception of general aviation business travel more and more into the realm of a mainstream activity. Now that's progress.
E-mail the author at [email protected].
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