Timeshare in the Skies

In the united states of America, fractional jet ownership is quite common, since NetJets launched it in 1986. NetJets nurtured the concept and now there are quite a few companies offering fractional jet ownership, among other services. Fractional jet ownership or timeshare of business aircraft has grown alongside outright ownership of jets by the uber rich; leased options and jet cards. In Europe it has picked up steadily, but in India it is a failed model. The concept has not caught on in India as business aviation, per se, is in its nascent stages with all the teething problems.

It was in 1986, that Richard Santulli launched what is now the number one business jet operator – NetJets. By offering a timeshare model with guaranteed availability, Richard lowered the cost and increased the utilisation of the aircraft, setting off a new trend in business aviation. NetJets is the industry leader. However, there are aircraft companies which do have their own fractional jet business – Cessna’s CitationShares and Bombardier’s Flexjet. As consumer interest in fractional jet ownership has increased, so has the competition between these companies.

EUROPE TRAILS US

After the US, the European market has taken on to fractional jet ownership model. According to Jim Christiansen, Chief Operating Officer of TAG Aviation, USA, “The US fractional ownership market started out skewed mostly to wealthy individuals, but now is ‘a real cross section,’ including more corporate users. Business aircraft have become almost a required tool in the US. Things are so fast-paced now that business people can’t afford to live by airline schedules.” He says, “It is just logical that Europe should follow.” European operators note that US private corporate aircraft operators are statistically safer than big scheduled airlines, and fractional providers follow this trend. The new Europe industry aims to follow this example.

However, in India, the only timeshare concept that has clicked is in the resorts segment where ‘timeshare’ is well within reach financially, thanks to instalments and loan options. One of the reasons for ‘timeshare in resorts’ to grow in India (elsewhere too), is that a ‘timeshare owner’ does get access to thousands of resorts worldwide. Some entrepreneurs in India did venture into fractional ownership of high-end luxury cars but that failed as those who could afford them went for outright purchase, while not thinking about what kind of utilisation it would have in a year. But in the aircraft segment, if the aircraft is in the hangar most of the time, with poor utilisation, then it is certainly a bad investment, unless of course one has the money to flaunt wealth.

GUARANTEED ACCESS OF AIRCRAFT

Fractional jet ownership, like any other timeshare product, is where the customers (referred to as ‘owners’) buy a ‘share’ of a plane, rather than an entire plane. The price is pro-rated from the market price of a full aircraft. Owners then have guaranteed access (for minimum 50 hours to about 400 hours annually or a certain number of days in a year, depending on each operator offering) to that plane or planes in the operator’s fleet. However, the fractional owner has to give advance notice, in some cases as little as four hours notice, to use his or her ‘fractional’ part of an aircraft. Fractional owners pay a monthly maintenance fee and ‘occupied’ hourly operating fee. Usually the latter is charged only when an owner or guest is on board, not when the plane is flying to a pick up point, or returning to base after completing a mission. The final cost component is fuel, which is often a surcharge above the hourly fee to account for price volatility.

In the business aviation sector, fractional jet ownership has been a successful model

Depending on the operator, the business jet or turboprop may be split into 16ths or even 32nds of a fractional share. These fractions translate to a number of hours per year, with a full 100 per cent share typically equating to 800 annual hours of usage. Most shares are sold at the 1/16 (50 hours) or 1/8 (100 hours) level. Although the plane is shared, owners are guaranteed access from any airport with just 4–48 hours notice, depending on the provider and the plan. This is referred to as the ‘call-out’ period. All shares are priced pro-rata, with no discounts for larger shares. In other words, a 1/8 share is twice as expensive as a 1/16 share, and half the price of a 1/4 share. The size of a share may dictate which additional benefits and rights the owner enjoys.

SUBSTANTIAL BENEFITS

The possible benefits of larger shares as listed out in Wikipedia include:

• ‘Short leg’ waivers – most plans require that each flight be a minimum of one hour. A waiver allows customers to be charged only for the actual flight time of a shorter trip.


• Availability guarantees – the strength of many guarantees increase with share size, for instance, shorter call-out periods and guaranteed access to larger planes.


• Overfly rules – some companies allow owners to access hours from future years if they’ve already flown their annual allowance.


• Ferry waivers – When flying outside of a provider’s ‘primary service area’, owners lose certain guarantees and often have to cover the ‘deadhead’ cost of moving the plane around. Some plans define secondary service areas, such as the Caribbean, where these expenses may be waived.


• Peak/Busy period access – Most companies declare popular holidays and heavy travel dates as peak or busy periods. These dates, see the highest demand, and can push the company’s logistics and business model to the limit. Accordingly, companies may reduce service levels by lengthening call-out periods, relaxing certain guarantees, and applying additional restrictions. These changes tend to be more stringent on owners with smaller shares or card members with smaller commitments.

As the fractional industry evolved, several firms started tweaking the plans, all to the benefit of the owners. Fractional jet operators also provide jet cards to potential timeshare owners. Jet cards allows one to purchase a block of time as opposed to buying an aircraft. For the owners all this translates to hassle-free maintenance of aircraft, crew hiring and salary issues, flight scheduling, hangaring, etc. All that a owner has to do is make a simple phone call or email or just use an app on his or her smart phone to utilise the aircraft, literally at his or her fingertips.

The options for customers are many with regard to plans and to the variety of planes they get to choose from. For operators, they expect the aircraft to be flying for 800 hours each year for it to be profitable. It is this 800 hours that most operators sell with the smallest fraction being 1/16th equivalent to 50 flying hours per year. The ownership fractions then goes up 1/8th or 100 hours; 1/2th or 200 hours; and 1/2 or 400 hours. The ownership commitment is normally for five years and companies do offer flexible commitments, depending on their business models. According to NetJets’s website, purchasing a 1/8 share in a Raytheon Hawker 400XP would set you back $7,93,750 plus a $10,582 monthly maintenance fee, and an hourly charge of $1,501. That 1/8 share works out to about 100 occupied hours per year.

According to a report the costs involved in fractional jet ownership can be broken down into four categories: (a) Initial capital fee, or acquisition cost, which varies based on the type of plane and the size of share you buy. A share in a light jet would start at about $2,75,000 for 1/16th; (b) Monthly maintenance fee, an amount that includes the pilot’s salary, insurance, maintenance and the cost of keeping the plane in a hangar; (c) Occupied hourly fee, which covers fuel, maintenance and in-flight catering whilst you’re onboard the jet; and (d) Miscellaneous, includes fuel surcharges.

The fractional ownership entails typically four documents that a probable owner will have to sign: (1) Binder/Deposit Agreement; (2) Purchase Agreement; (3) Master Dry Lease Exchange Agreement and (4) Management Agreement.

While the fine-print takes care of the do’s and dont’s, the business aviation sector has certainly been inventive in the kind of services it has to offer to attract clientele and fractional jet ownership has been a successful model and there cannot be a better example than NetJets which has dominated the industry.