Aerlex Law Group

Fractional Ownership Part II

Fractional Ownership’s Continued Evolution–Part II — Originally published in BusinessAir Magazine, March 2015, Volume 25, No. 3.

In last month’s article (click here to read), I began writing about the evolution of the fractional aircraft ownership model and described new product offerings that are emerging as alternative options in the marketplace. In the first part of the series, I identified four common criticisms of the fractional ownership model: (i) the same hourly rate for every flight isn’t appropriate, (ii) too much capital is needed for a core fleet to support the fractional program, (iii) programs with guaranteed availability on high demand days are forced to pay too much to subcontractors to provide “supplemental lift,” and (iv) too many aircraft types in one program add unnecessary complexities.

As noted in the first part of this series on fractional ownership, Flexjet and Flight Options now have common ownership, and both have significant market share in the condensed fractional ownership industry. All three of the major players (Flexjet, Flight Options and NetJets) have plans to retire certain aircraft from their fleet. This may alleviate the criticism that offering too many aircraft types makes programs too complex. Such retirement comes at a good time when the economy is strong.

The elimination of certain model types by fractional providers can be a risky move. When a particular model of aircraft is retired from a fractional fleet, owners are not offered renewals in that model and have a forced decision to make: move to a new aircraft type, switch to a different fractional provider or leave fractional ownership altogether. Staying with the aircraft they already own is not an option. Fortunately, these decisions probably result in less attrition in good economic times. NetJets has timed the market right with phasing in their signature series aircraft and phasing out virtually all of their previous aircraft offerings. With the fleet planning NetJets has done, they will have fewer aircraft types and a much newer fleet of aircraft. NetJets worked directly with the aircraft manufacturers to create their signature series. The development of this new aircraft product was based on the unique knowledge NetJets has acquired in being a manufacturer’s customer that flies aircraft more hours per month than traditional users.

Another criticism of the fractional model is that on-demand travel all over the United States is very logistically challenging and comes with a host of complexities that are often uncontrollable.
Regional fractional ownership companies such as PlaneSense and Executive Airshare continue to do well in their niche, perhaps, in part, because they limit their service areas and avoid having long range repositioning flights. Also, Executive Airshare is a days-based fractional program rather than the traditional hours-based model and that encourages members to use more hours on the usage days.

Membership programs such as Wheels Up and jetcard programs like Marquis Jet Cards have not only spurred evolution in the fractional market, but also have created a new market that allows a new group of clients to experience private aviation at an even lower price point than fractional ownership. Regardless of what critics of the model say, fractional ownership will continue to be an important part of private aviation for decades to come. For customers, it is not just about price (because there have always been less expensive alternatives), but about having one telephone number to call, impeccable safety records, reliable service and ease of program use. The program offerings and programs themselves will evolve over time, but this is the sign of a healthy, inventive industry. The model itself is sound, but finding ways to minimize the possible flaws through innovation will benefit both fractional providers and fractional owners.

With so many variations on the original model now in existence, it is often difficult to compare programs. When selecting a program for the first time or encountering a forced decision when an aircraft model is being phased out, it is important to consider the following:

1. Does the program selected best match your individual needs?
2. What are the guaranteed service standards under the contract?
3. Is the fractional provider financially stable, and will they be able to provide service for the full term of the agreement?
4. Does the aircraft being purchased work for your needs (baggage, range, seating configuration, etc.)?
5. Are there restrictions on when or where the aircraft can be used, and how do those restrictions impact your planned usage?
6. How long will the aircraft being purchased be offered in the program (when will you be forced into repurchase)?
7. What are the additional costs not included in the hourly rate or management fee (fuel, airport fees, communications, catering, etc.)?
8. Who is tasked with watching over and planning your flights on a daily basis so any problems that occur are resolved before you show up at the airport?

As programs are becoming more varied with more potential for customization, the same program will not be the best program for everyone. Regional programs, membership programs, programs with global reach, and whole aircraft ownership with guaranteed lease income are all very different offerings. Significant consideration must go into assessing which program best fits the individual’s needs.

Please contact Amanda Applegate at 877-237-5398 or