Top Bar
770-507-5001    |    info@vanallen.com

Plane Talk



Aircraft Ownership: Charter, Whole or Fractional Jet Ownership

Posted on: March 21st, 2013 by JAgur

Given the multitude of aircraft ownership and operating options, it is not surprising that there is substantial confusion regarding the nature of the various options and the methods for determining which option is best suited to a particular business.  Below we will explore the options of whole aircraft ownership, fractional ownership, and charter, including flight cards and block charter programs. We will discuss some advantages and disadvantages of each option and suggest guidelines regarding which option is best suited to a particular travel profile and annualized hourly aircraft usage.

 

Whole Jet Ownership:

As annual demand grows to 200-250 flight hours, whole ownership becomes economically viable.  Under whole ownership, the aircraft owner directly employs the pilots, mechanics and other personnel necessary to the operation of the aircraft or contracts for some or all such services with an aircraft management company.  When selecting whole ownership, the most important decision is selecting the right aircraft for the company’s mission profile.  As a general rule of thumb, it is recommended to purchase an aircraft which supports 90% of the travel requirement.  For the exceptions, other resources like charter can be used.

Some Advantages of Whole Aircraft Ownership Include:

  • Complete flexibility on scheduling usage on an ad hoc, short notice, basis (including operation under Part 91 of the Federal Aviation Regulations (FAR) – generally the most flexible form of aircraft operations).
  • Direct influence on operational safety and service standards.
  • Generally greater availability of tax deductions including those for depreciation and interest.
  • Turnkey piloting and maintenance oversight through use of an aircraft management company.
  • Complete customization of the aircraft interior and exterior

Some Disadvantages of Whole Aircraft Ownership Include:

  • Inflexibility on choice of aircraft size/type to fit each trip; stated conversely, oftentimes aircraft size/type is determined by reference to greatest needs, and too much capital is invested with reference to the majority of trips.
  • With whole ownership, it provides the greatest amount of travel flexibility but also the greatest amount of commitment financially and administratively.  As mentioned earlier, there are structures and operations (joint ownership, management companies) to reduce this burden.  But overall, the commitment level is still high versus fraction or charter..

As with any asset, there is a certain amount of risk.  Operationally, there is a potential liability to the owner and operator which must be properly insured.  So safety and standards must be managed well.

 

Fractional Jet Ownership:

Fractional ownership combines many of the advantages, while eliminating many of the disadvantages, of whole ownership.  In a classic fractional ownership program, you purchase an undivided tenants in common interest in a particular aircraft over a specific term (usually 5 years).  Typically each 1/16th interest entitles the owner to 50 flight hours per year (although, newer programs are innovating on this concept to offer smaller interests with fewer flight hours or usage calculated based on the number of calendar days that the owner reserves the aircraft).  This concept has proven successful because an ownership share allows the owner to access the entire fleet of aircraft managed by the program, facilitating both scheduling flexibility and aircraft type/size selection.  This allows the owner to select the aircraft best suited to the mission on a flight-by-flight basis.  Fractional offers a consistent level of service and standardization.  Administratively, the program providers will have a specified point of contact making scheduling and changes easy.

Anyone anticipating as many as 175 flying hours per year should closely examine fractional ownership.  This metric can vary upwards in situations where you need multiple cabin sizes and range capabilities, as well as “simultaneous usage” requiring multiple aircraft on a single day.  However, the 175 hours metric is suggested because the effective hourly cost of traditional whole ownership and the cost of fractional ownership will approximate each other, depending on a variety of assumptions made.  Primary among these assumptions is the residual value of the aircraft after several years.  Fractional programs may cause aircraft to accrue an average of 1,300 hours per year, and further because the only “buyer” of the aircraft is the fractional program itself, the market value of the fractional aircraft can be expected to decline far more rapidly than with whole aircraft ownership.  Offsetting this consideration is that the capital outlay is only a percentage of the capital outlay with whole aircraft ownership.  Consider the following hypothetical example: an aircraft valued at $20,000,000 with a 3% annual decline in value, results in a loss of $600,000 in capital in year one; the same aircraft is purchased in a fractional program – if the owner required 200 annual hours, then ¼ share would be purchased, costing $5,000,000.  The fractional aircraft would have to decline in value at least 12% in the first year in order for the owner to suffer a loss of $600,000 in capital.

There are several fractional providers to consider with different operational models and footprints.  Some fractional programs are small with only a few aircraft and serve a regional market, with aircraft based at only one or two airports.  Other programs are large organizations with numerous aircraft of various makes and models, serving national and international markets.  Customers of the larger programs can have an aircraft pick them up at any suitable airport in the U.S., and parts of the Caribbean, Canada, Mexico, Central America and Hawaii, and not be charged for deadhead time.  Smaller regional fractional programs typically have more restrictions on where they will pick you up or drop you off, and may charge for deadhead time if your trip does not begin or end at the home operating base of the aircraft.  These smaller programs typically attract owners by offering lower fees.  With the larger programs, enhanced service parameters translate to increased fees.

Some Advantages of Classic Fractional Ownership Include:

  • External “turn-key” management; high level “concierge” style services.
  • Guaranteed buy back provisions (less a “remarketing” commission).
  • Interchange provisions allow access to multiple aircraft with different cabin size and range abilities.
  • Greater degree of anonymity while traveling within a fractional fleet.
  • Flexible operating parameters under FAR Part 91, subpart K, or alternatively, less flexible operating parameters under FAR Part 135 however, with enhanced liability protection planning.

The last point is worth elaborating on.  Fractional program aircraft may be operated under either the general operating rules of FAR Part 91 subpart K, or under the commercial charter rules of FAR Part 135.   Under subpart K of Part 91, the customer is legally responsible for ensuring that the aircraft is operated in accordance with all applicable laws and regulations, and may be held liable for damages arising from any accident involving the aircraft.  Conversely, when a fractional aircraft is operated under Part 135, the fractional program provider is legally responsible for the operation of the aircraft.  Some fractional programs operate all program flights under Part 135.  Some fractional programs may not be licensed to operate under Part 135 and therefore operate all flights under subpart K of Part 91.  Most large fractional programs typically operate under subpart K of Part 91, but are licensed to operate under Part 135 and will do so for any or all flights for any owner who requests it.

Some Disadvantages of Classic Fractional Ownership Include: 

  • Increased Federal taxes on operations.
  • Due to the nature of the fractional model, the aircraft are constantly moving to meet the travel needs of numerous customers.  So as a customer, the flexibility of travel is somewhat limited.  Trip requests and changes have minimum notice requirements that can be limiting for some passengers.  Additionally, the need for punctuality around a given departure time will ensure aircraft and crew availability.
  • Less scheduling flexibility and availability especially during peak periods of usage (i.e. holidays, major sporting events).  During those peak periods, trips can be outsourced to local charter providers on various aircraft.
  • Fractional programs have a contractual term; at minimum 3 years.  The early termination provisions are expensive to exercise.  So if a business aviation option needs flexibility to change with the travel or company demands, fractional ownership has limitations.
  • A fractional contract will allot a specific number of flight hours per year (i.e. 100 hours per year).  A limited number of unused hours will often rollover and some programs permit excess hours to be “borrowed” from the upcoming year.  Excess usage hours are typically limited per year with penalties above a threshold.  So it is important for a fractional owner to regularly track historic and projected usage throughout the term.

 

Charter

Ad Hoc Charter:

If you fly fewer than 50 hours per year, ad hoc charter is likely your best option, but charter can be economically advantageous with annual utilization requirements in excess of 100 hours per year.  The use of ad hoc charter for your business flights will give you greater flexibility as to when and where you can fly versus the use of scheduled air service.  With ad hoc charter, you control the departure time for your flight and can fly into and out of a larger number of airports than those served by scheduled air carriers.  Depending on charter aircraft available in the immediate area (within 100 miles), charter affords the ability to match the aircraft with the specific travel need.  Thus, if a charter customer can use a smaller, more efficient aircraft for regional travel, the blended hourly cost will be lower. Charter has tremendous convenience associate with its “ad hoc” nature.  There is no long-term commitment, there is no capital outlay, and there is no requirement that you acquire aviation expertise.  Charter pricing also is generally very competitive, as it ultimately represents pricing that is “subsidized” by the aircraft owner.  This subsidy exists because the charter pricing in the United States does not reflect cost of capital, and further only reflects a small contribution towards the fixed cost overhead of the aircraft.

There are several disadvantages to the use of ad hoc charter rather than other alternatives discussed in this article.  You will not necessarily be guaranteed a flight on a specific aircraft, although, you certainly could request a specific aircraft and receive a confirmation prior to departure.  As a company’s need for charter grows, the ability to have access to a specific aircraft becomes increasingly difficult.  Most commonly, a charter aircraft is primarily dedicated to support its owner.  Charter trips are scheduled on an as-available basis and approved by the owner.  If a specific aircraft is not a requirement, often a charter client can use multiple aircraft or even multiple charter companies.  While this can bring some potential cost efficiencies, there is a high potential for variability in aircraft quality and service.  The aircraft that you charter could be of any vintage or layout and you may not know ahead of time all of the amenities it will contain. You will also not choose the flight crew assigned to operate the aircraft you charter.  You will not determine the amount or types of insurance coverage for the charter flight you schedule.  Additionally, the oversight of multiple vendor relationships can become burdensome.

Flight Card and Block Charter Programs:

Flight card programs have made fractional ownership program fleets available to persons with aircraft utilization requirements of fewer than 50 hours per year.  With a flight card program, a customer generally pre-pays for a certain number of flight hours (typically 25) on a certain make and model of aircraft, and thereby gains access to the fractional fleet of the fractional program affiliated with the flight card program.  Whenever the customer flies, the total number of flight hours flown is debited from the card.  When the flight hours are all used, the customer has no further obligation to buy another card.  Most large fractional programs have one or more affiliated flight card programs.

Block charter programs are similar to the flight card programs associated with large fractional programs, but usually provide for access to fleets of aircraft that are managed by charter operators rather than fractional fleets.  Aircraft in charter fleets tend to be older, on average, and do not have standardized interiors and amenities like those in fractional fleets.  With some block charter programs, you may have access to only the charter fleet of a single charter operator.  Other cards provide access to aircraft offered by many charter operators.  In order to offer such access, the program is effectively acting as your charter consolidator/broker.  Be aware, however, that the hourly rate pricing reflects infrastructure costs and profit margins, and is not simply cost, plus a percentage fee for the service.  So, the business model of these programs requires them to keep their costs to minimum and to remain competitive vis-à-vis charter companies.  Flight card programs generally offer all of the conveniences normally associated with fractional ownership.  With respect to flight cards tied to fractional ownership programs, there may be a slight cost premium associated with the lower annual aircraft utilization being purchased by the customer.  Block Charter programs, since they are tied to charter fleets, and therefore reflect charter fleet pricing, conveniences and inconveniences (e.g. older fleet averages), may generally reflect a price advantage vis-à-vis flight cards.

 


Tags: ,
WordPress Appliance - Powered by TurnKey Linux