““CEOs go to their vacation homes just after companies report favorable news, and CEOs return to headquarters right before subsequent news is released. More good news is released when CEOs are back at work, and CEOs appear not to leave headquarters at all if a firm has adverse news to disclose. When CEOs are away from the office, stock prices behave quietly with sharply lower volatility. Volatility increases immediately when CEOs return to work.” —David Yermack, a New York University finance professor, whose recently released study shows a correlation between when CEOs take their private jets on vacation and movements in their companies’ stock price ”
Another way to unload your fractional
When the time comes to sell your timeshare in a luxury resort, you naturally consult the property's operator to see what kind of deal it can offer. Chances are, however, that you also keep your options open in case someone wants to buy your share directly, which would save you any fees the resort might charge for the transaction. Selling an aircraft share is no different; while the fractional manager would obviously prefer that you pay its remarketing fee and accept whatever price it offers, you may have more attractive options.
Many fractional share owners don't understand that they have alternatives when they need to sell a share before the contract is over or when their contract is complete. "Their fear is that they can't [sell their shares privately]," said Dan Dugger, founder of fractional trading company Fractrade.
In fact, share owners are legally allowed to sell to anyone, he explained. However, fractional providers do try to limit that right in their contracts.
Dugger, a former southeast sales vice president for NetJets, estimates that about 25 percent of fractional share transactions involve used shares. He said he has sold shares managed by NetJets, CitationShares and Flight Options, but because fractional companies have carefully controlled the process, a robust secondary market hasn't developed. Dugger claims he can save fractional owners substantial sums by charging half the providers' contracted remarketing fee for the transaction.
Other independent consultants can help you with share sales to third parties, but the ones contacted for this article report that few jet shares are sold outside of the fractionals' systems. "It's turned out to be a smaller part of our business," said Kevin O'Leary, president of Jet Advisors in Broomfield, Colo.
Fractional companies are reluctant to allow sales to third parties, according to O'Leary. "They don't necessarily want a free marketplace where you can get what you can [for the share]," he said, noting that if a shareowner is leaving the program and will no longer be a customer, the provider has no incentive to try to maximize the share sale price. When a fractional provider buys back a share, he explained, the company resets the management fee to the current level instead of reselling the share as is and allowing the new owner to continue to pay at the original shareowner's fee level. "If I sell the share, I can sell it within the framework of the existing contract."
If the secondary sale is presented to the fractional company correctly, some program managers will accept third-party involvement, said Daniel Herr, a Murray Hill, N.J. attorney who specializes in the fractional jet market. "It depends on the program," he noted, adding that while some fractional companies try to restrict secondary sales in their contract language, most recognize that gaining a new customer that way is better than no customer at all.
Herr has seen fractional programs limit secondary sales until after a certain time has passed, usually two years into the contract period. "That would be waived in the right circumstances," he said, such as when the company can add a customer for a relatively low marketing cost. Another recent development, he noted, is the fractional company allowing the sale outside of its system but imposing a transfer fee, which is usually less than the typical 7-percent remarketing commission that fractionals assess.
The problem with the secondary market for fractional jet shares, Herr said, is that "there is no community of fractional owners, no common meeting ground. It's difficult to bring them together."
James Butler, CEO of Shaircraft Solutions and a columnist for this magazine, tackled that issue by creating an online forum for fractional share owners called Shaircraft Connections. Members can post comments about fractional ownership and shares for sale; they can also list itineraries, so they can share costs on some trips. Shaircraft is offering complimentary one-year memberships "for the foreseeable future," according to Butler. (The normal annual fee is $495.) The company also assists share buyers and sellers with legal paperwork and processes involved in a sale.
"There's a genius to the fractional model," Butler said, "in the sense that [owners] are not able to communicate with each other. Shaircraft Connections provides them an opportunity to communicate. It changes the balance of power between owners and providers."
Butler agrees with O'Leary and Herr that an efficient secondary market for fractional jet shares has yet to develop. "I don't think it's an accident," he said. "The major providers are intent on controlling the market. They don't want owners competing for their customers and they don't want to lose their remarketing fees."
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Advantages for Share Buyers
If you buy used fractional shares on the secondary market, you may luck out with some of these potential advantages, according to Dan Dugger, founder of fractional trading company Fractrade.
• Acquiring "bonus" hours that the previous owner never used. These are unused flight hours in the previous owner's contract that remain available to the new owner.
• Enjoying lower management fees. As long as the fractional company agrees to allow the existing terms to continue through the life of the contract, you can avoid paying the current, higher fees you'd get if you bought a share in a new aircraft from the same company.
• The ability to buy a hard-to-find share aircraft, like the Gulfstream V. Shares in some popular aircraft get sold quickly and often are not available.
Fractional Providers Weigh in on the Secondary Market for Fractional Aircraft Shares
Several fractional jet providers offered their insights into the complexion of the secondary market for jet shares.
Avantair, which sells shares in the turboprop P.180 Avanti, appears to take a casual approach and encourages customers to remarket their shares in whatever way best suits their needs. "They can contact us," said Darren Blackett, vice president of sales, "and we will do it for them or they can remarket them on their own." Avantair doesn't guarantee to buy back shares, he said, but that isn't necessary because residual values on P.180s remain relatively high. Recent Avantair shares have been selling for 90 to 94 percent of their original value after five years, he added.
CitationShares has no problem with owners selling shares via third parties. "We permit the sale of used shares through a third party under certain circumstances and conditions," said Steve O'Neill, CitationShares' founder and CEO. But third-party transactions are rare at the company and owners don't often bring their own consultant. "At CitationShares," O'Neill said, "15 percent of customers engage legal counsel, while no more than two to four percent of the customer base utilize an outside consultant."
Executive AirShare, a regional fractional provider, discourages third-party involvement in share sales. "Our concern is if you had an owner who wanted to sell outside our base of operations, it would be difficult to service," said Keith Plumb, executive vice president and COO. Plumb added that Executive AirShare is obligated to buy back shares for market value less a remarketing fee with 90 days' customer notice and that it has always beat that deadline.
Flexjet won't permit a transfer of an aircraft interest to a third party until after 24 months, said a spokeswoman, and the company reserves the right to purchase the interest within 10 days of the request for transfer. Flexjet might exercise this right because the proposed transferee fails to meet contractual requirements for the transfer, Flexjet has another customer waiting in line to purchase the interest or the company is in the process of exiting customers off the particular aircraft for fleet-management purposes. If Flexjet agrees to the transfer of the interest, it retains the right to modify the remaining program agreements. "We do not dictate who our customers or prospective customers may choose to retain as consultants to assist them in these types of transactions," said the spokeswoman.
Flight Options responded to queries with this statement: "Flight Options' contracts provide for, and set forth guidelines that govern, the possible re-sale of fractional shares. Such sales must meet regulatory and eligibility requirements. Flight Options works with owners to best meet their changing needs, but we do not release any stats on the numbers of owners who sell shares through secondary sales arrangements."
NetJets did not respond to our queries about its opinions and policies regarding the secondary market for fractional jet shares.