By AOPA's Pilot Information Center
Fractional ownership is a fairly new concept in the world of business aviation. It was first introduced in 1986, when NetJets was created from a company known as Executive Jets Aviation. Richard Santulli is credited with launching the concept of fractional ownership and giving it its start through NetJets. He recognized that there was a portion of the population whose aviation needs were not being met through chartering or full aircraft ownership. This is where fractional (percentage) ownership programs enter the picture.
Fractionals are co-ownership arrangements with a master interchange agreement between multiple aircraft co-ownerships that are signing a multi-year aircraft management agreement (including pilot service) with the company who sold them the aircraft. Operational hours per year are limited by the management agreement.
Fractional ownership offers a company or individual the option, instead of buying an entire business aircraft, to purchase shares of one. The majority of these companies offer shares in business jets, although there are a small number of companies that offer shares in piston aircraft. Fractional ownership was designed to be flexible in order to meet the needs of the customers. Therefore, as little as one sixteenth of an aircraft can be purchased, which offers around 50 hours per year, or as much as one half of an aircraft can be purchased, depending on how many hours are needed. The most common amounts purchased usually range from about one eighth to one fourth. Fractional owners pay a percentage of the price paid for an aircraft that is proportionate to the amount of hours they want available per year for the duration of the contract, although under most circumstances, additional hours can be purchased if the need arises. There is also a fee charged for all occupied flight hours that fluctuates with fuel prices, as well as a monthly overall fixed management fee that covers maintenance and administration of the program. In return, the customer receives a predetermined amount of hours in the aircraft of their choice, based on what their needs are and how much they are willing to pay. Fractional owners are guaranteed that this aircraft, or another aircraft of the same model, will be available to them 24 hours a day, 365 days a year, with as little as four to six hours advance notice. The management company will also take care of scheduling, staffing, flight planning, weather, communications, maintenance, catering, and insurance.
The marketplace for corporate aviation has been, and is projected to continue, growing at a significant rate. Over the next 10 years, more corporate jets will be delivered than ever before, and it is estimated that nearly 40 percent of them will be going to fractional ownership programs. In 1994, there were 140 fractional owners in 32 aircraft; as of December 2003, there were 6,200 owners in about 750 aircraft.
Fractional ownership companies are designed to cater to the needs of many different groups. These groups range anywhere from small companies that can't justify buying an entire aircraft, to large corporations that use fractional ownership as a means of supplementing their own fleet. Fractional ownership is also appealing to individuals who use the aircraft for business and personal needs. Considering that around 80 percent of fractional owners are first-time buyers and have no prior experience with business aviation, fractional ownership is a way of opening the door to many people who may not have entered otherwise.
Fractional ownership really took off because there are many companies that could not afford, or justify the cost, of owning and operating their own aircraft. These companies were left at the mercy of commercial airline flights, which can be time consuming and are not always reliable. The only other option available at the time was chartering, which can cost a significant amount for a company that requires any substantial amount of time in the air. Fractional ownership stepped up to fill the void left by other options; it is expensive, but in many circumstances, it's still less expensive than full ownership, and the flexibility offered by the program helps to compensate for the cost.
Certainly piston aircraft pilots have banded together to own and operate aircraft since Orville and Wilbur owned the first one. However, the popularity of fractional programs in the turbine aircraft market has formalized this multiple ownership concept in the piston arena with many, but certainly not all, of the popular program terms. Piston aircraft programs are more likely limited to a regional area because they are nearly 100 percent owner/pilot flown with the pilot going to the aircraft instead of the aircraft being flown to the owner's location for a departure. Structured ownership management is the desired benefit. Exchange aircraft flights in a different model of aircraft are not too likely but are only limited by the creativity and market base of the particular program operator.
Fractional ownership can be looked at as being the best of both worlds for many companies. With fractional ownership, a company has much of the freedom associated with aircraft ownership but almost none of the responsibilities and at only a portion of the cost. For a small company that is debating between commercial flights, chartering, fractional ownership, and full ownership, there are many benefits offered by fractional ownership. When making a decision, one thing to take into consideration is the time that could be saved by using business aircraft as opposed to commercial airlines. On a three-hour commercial flight, you may be able to uncomfortably work for a portion of it, arrive at your destination wrinkled and tired, travel to the hotel to freshen up, and then at last make it to your meeting. When traveling on a business jet, you can comfortably work for the entire duration of the trip, and you arrive at your destination ready to go. There will also be less time spent overnight and waiting in airports because your company's business aircraft will fly when you are ready. And you have a much larger choice of airports: There are approximately 750 airports available to commercial airlines, while business aircraft have access to about 5,000, not including privately owned airports.
For a company that is new to business aviation, fractional ownership looks especially appealing: There is less cash needed up front, the exact costs are known, and once the contract is up, exiting or renewing is fairly easy. Many small companies may be considering charter aircraft as an option. Chartering can be good if you aren't going to fly many hours; otherwise, it can become expensive. And the company may also be required to pay for what are known as positioning flights; these are the flights the charter aircraft makes to come and pick up passengers. Some fractional ownership companies may offer the option of providing your own pilot if given 24 hours notice.
While there are many advantages to fractional ownership, there are also some drawbacks to be aware of before deciding if this is the direction that is best for your company.
One of the greatest costs of owning an aircraft is the loss in real market value of the aircraft with age and use. Any company or individual who is considering purchasing an aircraft must take into consideration how well that model of aircraft retains its market value. This is an important issue for a company considering fractional ownership.
For example, assume your company purchases a quarter share in an aircraft that allows for 200 hours of flying time per year. Your company will be able to depreciate this asset for tax purposes at the same rate as a full-time owner.
The fractional ownership company has agreed to give you fair market value for your share, less a remarketing fee when you decide to leave the program or switch to a different aircraft (typically after five years).
Here's the catch: While your company is only flying 200 hours per year, the aircraft is losing market value at much higher rate — perhaps as much as 1,500 to 2,000 hours use per year.
Although fractional ownership programs offer excellent options to many companies and individuals, there are others who would not benefit from these programs.
To determine if fractional ownership is a good choice for your company, first evaluate your annual traveling needs, then decide how much you are willing to pay for them. Once you have an estimate, look at all the options and see what benefits are offered for the amount of hours you will need. Then, determine your yearly budget for travel and see how many hours each alternative would be able to offer you for that price. This comparison should give an idea of which option will best suit the needs of your company.
There are several other factors that should to be considered before making your final decision, such as where you will be flying. If most of your destinations are close to major airports, then commercial flying might be an option to consider, depending on what value is placed on time. If many of your destinations will be outside the United States, then your company might want to consider full aircraft ownership. This is because many fractional ownership and charter companies may require ferry fees, overnight fees, and daily charges for overseas flights.
There is no definitive formula to follow that will automatically produce the option that is best for your company. Every company requires different hours and has different priorities; it is important to fully weigh the benefits and drawbacks of every option before deciding which is best.