What Is a Fractional Ownership Program? A fractional ownership program means any system of aircraft ownership and exchange that consists of all of the following elements:
Typical contract terms for fractional programs are five years. Participating in a fractional program will require companies to sign a multi-year program agreement, and, in addition to several other documents, a dry lease aircraft exchange agreement and a purchase agreement.
Though a fractional owner has purchased an aircraft, it may not necessarily be flying on that specific airplane. An appealing aspect of the fractional programs is that they usually are able to provide an aircraft within four hours of when requested. If a specific airplane is not available, the aircraft provided will be virtually identical to the one owned.
In addition to the initial acquisition cost, fractional owners will pay a monthly management fee and an occupied hourly fee for each hour flown. The monthly management fee and the occupied hourly fee generally are adjusted annually based on the Consumer Price Index. Additionally, owners may pay a fuel variable and certain charges are subject to federal excise tax, Additional fees may be applied when traveling outside the continental United States. Fractional providers often include stock items for catering but will charge extra for nonstandard or custom requests.
Fractional ownership operations began in 1986 with the creation of a program that offered aircraft owners increased flexibility in the ownership and operation of aircraft. This program used current aircraft acquisition concepts, including shared or joint aircraft ownership, and provided for the management of the aircraft by an aircraft management company.
The aircraft owners participating in the program agreed not only to share their own aircraft with others having a shared interest in that aircraft, but also to lease their aircraft to other owners in the program (dry lease exchange program). The aircraft owners used the common management company to provide aviation management services including maintenance of the aircraft, pilot training and assignment, and administration of the leasing of the aircraft among the owners.
During the 1990's the growth of fractional ownership programs was substantial and this growth is expected to continue. As these programs grew in size, complexity and number, there was considerable controversy within the aviation community as to their appropriate regulatory structure.August 9, 2011 Even amidst a turbulent economy, the nation's fractional aircraft market has made a turn toward what appears to be a period of sustained growth, according to several sources. For example, Flight Options, the industry's second-largest fractional ownership company, reported a 467-percent increase in fractional share sales for the period compared to a year earlier. Likewise, Flexjet saw a 64-percent increase in its fractional aircraft share purchases in the first quarter.
Operators also are rebuilding their aircraft fleets, which declined by 14 percent overall from their peak in 2008, according to a UBS Investment Research study published in May. And, to the benefit of business aircraft manufacturers, fractional operators even have begun placing orders for new aircraft. Flight Options in July secured $167 million in financing from Brazil's Banco Nacional de Desenvolvimento Economico e Social (BNDES) to purchase Embraer SA's Phenom 300 aircraft.
While the overall economy has sputtered this summer, fractional operators say business has continued to improve as existing customers re-enter the market or increase their fractional aircraft usage.
In addition, they say an increasing number of new prospects are making the move to fractional ownership as an alternative to flying commercially or owning a business jet outright. "About 30 percent of our business is from new people coming into Flexjet, so we're really excited about that," said Bruce Peddle, the company's vice president of sales and marketing.
Among the factors driving renewed interest in fractional ownership, as well as business aviation overall, is the declining availability of commercial airline flights, especially in smaller markets, said Mike Silvestro, CEO of Flight Options.
A continuing focus on "value" also is helping to drive growth. For example, the typical Flight Options customer has been the small business operator or entrepreneur who favors fractional ownership over buying an aircraft. "The common thread was that this customer was evaluating what was the greatest value," Silvestro said.
Today, larger business enterprises are turning to fractional for the same reasons. "We've had a great increase in business with medium-sized companies, and even good-sized companies being much more receptive to going through their whole value proposition," Silvestro said.
To their credit, fractional operators have helped increase the value perception by introducing a variety of programs and add-on benefits.
For example, Flexjet has introduced a program that allows customers to carry forward an unlimited amount of unused fractional hours from one month to the next. "If you didn't use up all your hours because you might have been a little concerned about the stagnant economy, we're going to let you carry those forward and keep that relationship," Peddle said.
Flight Options also has introduced a "membership program" for the Phenom 300 where customers can use the program without purchasing a share in the plane.
While jet card programs, where customers purchase a set number of flight hours, and charter increased in popularity during the recession, fractional ownership - which is the core business for fractional operators - is expected to continue to increase in popularity into the foreseeable future.
"We do see a difference in the growing business between cards, for example, and charter flying versus fractional," Peddle said. "Our fractional business is continuing to build momentum and that's the thing we're really excited about."