Are fractional shares worth the money?
By Jeff Burger - September 1, 2009
Suze Orman didn’t pause before answering when I asked whether she’d ever considered replacing her charter flights with a fractional jet share. “I think they’re rip-offs,” said the personal-finance guru, in an interview that appeared in our April/May 2009 issue. “First of all, you tie up a quarter-million dollars or whatever for the luxury of having the plane whenever you need it, at supposedly a reduced per-hour cost. Oh, give me a break: They charge you round-trips even if you’re going one way.”
Then, in case anyone might miss her point, she added, “I wouldn’t own a fractional share if my life depended on it.”
Well, Orman didn’t become famous by soft-pedaling her opinions. But “rip-off” is a strong term, suggesting at the least overpricing and at the most outright fraud. And obviously not everyone agrees with Orman–including, presumably, most of the thousands of people who now own fractional shares in the U.S.
Up-front Expense
So who’s right–Orman or the frax fans? She’s clearly correct that buying a fractional jet share ties up lots of money–not as much as you’d spend to buy the whole aircraft, but her quarter-million-dollar figure is actually on the low end. At fractional provider NetJets, for example, prices start at around $425,000. That’s for a one-sixteenth share–the equivalent of 50 hours a year of flying time–in a Hawker 400XP, which happens to be the model Orman likes to charter. The figure doesn’t include monthly management or hourly operational fees, not to mention fuel surcharges, catering, onboard phone bills or a variety of other add-ons.
However, Orman is wrong in saying that fractional providers bill you for round-trips even if you’re going one way–in fact, that’s what charter operators do. Granted, fractional pricing does take into account the costs of so-called deadhead flights needed to position aircraft for their next revenue-producing trip, but those costs tend to be relatively low. That’s because they’re spread among all shareowners and because operators of large fleets typically achieve efficiencies that minimize the need for positioning flights.
Still, I haven’t heard anybody call fractional flying less expensive than charter; when Orman mentioned a “supposedly reduced per hour cost,” she was probably referring to the fact that the hourly operational fee for using a fractional share tends to be less than the hourly charge to charter the same model aircraft. Nevertheless, when you add up all the costs–including those mentioned in the previous paragraph and the substantial portion of the purchase price that you don’t recoup when you sell out–you have to conclude that fractional shares represent one of the most expensive ways to fly privately. (For some buyers, tax write-offs can help ease the pain.)
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