Bail out–or buy a share?
By James D. Butler - December 1, 2009
IS this A GOOD TIME to buy a fractional share? Or to sell the one you own? The answer, depending on your situation, could be yes to either question.
Let’s talk first about those who should consider bailing out. If you’re a fractional owner, you’ve invested a significant sum with a provider that has agreed to buy back your share at its fair market value. The attempt by some fractional companies to delay repurchase tells me that capital is tight. If you’re wary that financial problems may cause your provider to fail, you should seriously consider selling your share now. (Recall the nightmare that was FractionAir–a company that ceased operations a couple of years ago, leaving shareowners in the lurch. Some aircraft reportedly were scavenged for parts to keep other aircraft flying, and owners were offered pennies on the dollar for their shares).
Indeed this is an important moment with respect to the value of fractional shares. The market for preowned aircraft is poor. Asking prices for all aircraft have dropped, but high-time fractional aircraft will be especially affected because an uncommon number of low-time, nonfractional aircraft are entering the market.
As an analogy, if you’re looking for a used car and all the ones on the market have 100,000 miles on them, they should all hold their relative value and sell within a reasonable time. But, if suddenly, plenty of cars are available with 10,000 miles on them, the 100,000-mile ones will be less attractive and so will sit longer, further depressing their value. That’s what I suspect will happen as corporate aircraft, having been flown on average 400 hours per year, flood the market. Fractional aircraft, which usually are flown 1,100 or more hours per year, will become even less attractive and will decline in value more than the market as a whole.
At the moment, preowned aircraft sales are slow. Thus, if you sell your fractional share back to your provider now, you’ll enjoy the benefit of older comparable sales that reflect higher values, while fractional owners who wait could suffer the effect of comparable sales that likely will reflect a significant decline in their aircraft’s value.
At this critical time, it’s worth considering whether to reclaim your capital and use another private flying option, such as fractional jet cards (which allow you to employ the same fractional fleet) or even traditional charter (which has lots of excess capacity). As you do so, beware of lowball offers from your fractional provider for your share. In tough times like these, and with stakes so high, it’s important that you receive fair value for your share.
SO WHO WOULD WANT to buy a fractional share during such a difficult period? Perhaps you. For some, as Baron Rothschild reputedly said, “The best time to buy is when there is blood in the streets.” Or perhaps more to the point with respect to fractionals, as Warren Buffett has said, “Be fearful when others are greedy, and be greedy when others are fearful.”
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