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Is fractional right for you?

An independent review from the respected publication Corporate Jet Investor validates the NetJets fractional ownership model.

Do I fly 50 hours or more a year?
Fractional shares start at 1/16th of a private jet, or 50 hours flight time a year. Jet Card programmes start at 25 hours a year.

Am I bothered by the inconsistency of charter?
If you charter private jets regularly, you will have travelled with several different operators. While some operators maintain high levels of service, one of the main benefits of fractional ownership is the consistency of service it can offer. With charter you get the aircraft, pilot and crew that are available at the time, as well as the quality of service that each operator offers.

A fractional share offers familiarity and consistency. Your jet will arrive with the same interior, same layout, and the service you set out with the company. Whether it is ensuring your favourite brand of vodka is on board, the blankets are made of the correct wool, or simply arranging transport to and from airports, fractional means you always know what to expect.

Do I want to pay more than charter?
For most private jet flights charter companies are cheaper per flying hour. This is because in purchasing a share of a private jet, you are responsible for a share of its upkeep. Fractional companies therefore charge customers the initial purchase price of the share, a monthly management fee and an occupied hourly fee (they charge a flat hourly rate for the time you spend in the air, and do not charge positioning costs, as charter companies do).

Flight Options, a leading fractional, provides a list of these costs for different fractional shares in an Embraer 300 aircraft:

  

1/16

3/32

1/8

Purchase Price

$537,500

$806,250

$1,075,000

Monthly Management Fee

$6,998

$10,497

$13,996

Occupied Hourly Rate

$1,454

$1,454

$1,454

 
One charter broker claims that when these extra fees are taken into account, hourly costs for charter can be 30% cheaper than fractional jets. Although you would have to book early for this. Some 40% of NetJets Europe customers fly within 24 hours of booking.

Can I predict my usage over the next 5 years?
Fractional contracts are typically for five years, with an option to cancel after three. This means that you need to be confident that your usage will be consistent for the term of your contract. Only a small amount of hours from one year can be carried over to the next, and vice versa with using hours from next year this year.

And don't forget, you own a share in a private jet - cancelling your contract early means selling your share, which most companies either insist is sold back to them or charge a re-marketing fee at around 7% of the share price. If you do sell on the open market before the end of your contract you will not be able to transfer unused hours to the next owner.

All this means you need to be sure you will avoid all this mess. For instance, you buy a share in one model of jet. If you need a different type of jet for a flight fractional companies will arrange this, subject to availability, but there may be some negotiation over hourly costs or giving up more of your contracted hours.

So there is still flexibility. Some companies keep fractional shares and if they have a temporary need for extra hours or bigger jets - say they are opening a new facility in Eastern Europe - they add these through Jet Card programmes.

Jet Cards
Jet Cards were introduced by fractional operators to give customers access to their fleets without a long-term commitment. Flight time is purchased in 25 hour blocks, typically on a one year contract. This means customers are not tied in and there are also no monthly management fees to pay, a payment is made upfront for the hours and with each flight the hourly costs are deducted from this amount. To make up for this, however, hourly costs on Jet Cards are much higher - $6,540 for an hour on a CJ3 with CitationAir for example - but you get many of the benefits of fractional ownership without the long-term commitment.

Can I afford a significant financial outlay?
Charter is pay as you go. You pay a single fee each time you fly, so can stop flying whenever you want. With a fractional share you need the cash for your purchase in your account to pay upfront, and then the ability to pay the monthly management fees and occupied hourly costs for the duration of the contract.

However, you may be able to finance your fractional share. NetJets will finance US companies, for examples, and some lenders will finance shares.

Do I want it known that I fly private?
One of the advantages of fractional is that it is easy to hide your private jet usage. This can be beneficial to public companies that would have to declare jets as assets in their finances - anti-business sentiment, particularly in the USA, is making this more appealing to the likes of Goldman Sachs, which is rumoured to be one of NetJets' biggest customers.

Individuals can find this attractive too. If you own a jet it can be easily recognised - it is quite easy, for instance, to find out where John Travolta is in the world by the tail number of his jet. As a fractional customer, you are very unlikely to fly on the same aircraft regularly and each plane is decorated in exactly the same livery.

 

Comparison: Charter, Jet Cards, Fractional ownership

 

Spot Charter

Jet Cards

Fractional ownership

Commitment period

No commitment

Typically 1 year

2 – 5 years

Financial outlay

Pay for each individual charter

Upfront payment

Upfront payment plus management fees and hourly flight costs

Pricing

Broker obtains quotes from operators

Fixed hourly cost

Fixed hourly cost

Choice of aircraft

Unlimited

Limited to chosen type of aircraft, can change for a fee

Limited to chosen type of aircraft, can change for a fee

Notice required

Subject to nearest suitable aircraft

Subject to contract, up to 48 hours

Typically 8 or 10 hour guarantee

Positioning charges

Charged for each charter

None within company service area

None within company service area

Tax

Can write down flights as business expense if applicable

Can write down flights as business expense if applicable

Can deduct depreciation of jet from corporation tax

Cancellation

Can charge 75% - 100% of price for cancellation

Rarely charge cancellation fees  if plane has not been moved

Rarely charge cancellation fees  if plane has not been moved

Service

Varies depending on the operator chosen

Consistent service

Consistent service

Admin

Call broker, broker comes back with quotes, select option. Broker comes back with fixed price.

Call fractional company

Call fractional company

 

 

Publication: Corporate Jet Investor  

www.corporatejetinvestor.com

Author: Tom Porter

Nov 29, 2011

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