Man pondering decision.
“First you buy at retail, then you sell at wholesale, and that’s not going to change. That’s the way they make their money.” (Photo: FOTOLIA)

Inside Fractionals: Move up—or out

Fractional providers are refreshing their fleets, taking delivery of new models in the industry’s first major upgrade wave since the 2008 economic downturn. If you’re a shareowner in one of these programs, this may present you with a stark choice: “It’s upgrade to a new airplane or get pushed out,” says Fractional Law attorney Daniel Herr, who notes the wide contractual latitude fractional providers have been exercising as they start transitioning fleets. 

If you’re not given an ultimatum in the midst of your contract term, you may be pushed toward a new airplane at its end. “The programs seem to be more restrictive in terms of allowing renewals and extensions,” notes attorney Eileen Gleimer, a fractional-transaction specialist at Crowell & Moring. “That forces the owner’s hand.”

If you’re like most shareowners, your program membership predates the downturn, and you’ve since simply renewed your share or bought into a different aircraft already in the fleet. But if you’re shopping for an upgrade now, you’d be wise to put value retention high on your list of priorities. “The elephant in the room is the spread between what you paid for a share and what you get back,” says AviationIQ publisher and fractional-share adviser Michael Riegel.

While all these incoming aircraft are awesome performers, some will retain value better than others. Among the airplanes entering fleets, Embraer’s Phenom 300 and Bombardier’s Global 6000 represent newer designs and have been received enthusiastically in the marketplace, and the Gulfstream 500 and the forthcoming Citation Latitude are clean-sheet designs. However, Bombardier’s Challenger 650 and Gulfstream’s 450 are based on older designs and “are going to get slammed on residual values,” Herr believes. 

But new marketplace realities and the buyback policies of your provider will also affect the residual value of any aircraft you select. In earlier years, providers would typically buy back shares at 70 percent of their original value at the end of a five-year contract. In today’s market, aircraft can lose half their value or more during that time.

Moreover, new shares carry premium prices. Riegel notes that fractional programs typically order aircraft loaded with bespoke optional equipment that “does not help retain values” yet jacks up the buy-in price, increasing the provider’s margin at the shareowner’s expense. “This is insidious,” Riegel says, noting that contracts state “clearly and consistently” that when it’s time to exit the share, the provider will buy it back at fair market value. “But,” he notes, “I’ve seen offers of Bluebook minus 80 percent multiple times.”

Before 2008, says Gleimer, contracts stated, “‘Here are the guidelines for establishing fair market value,’ and you had the ability to challenge [the valuation] and get an appraisal closer to retail.” Newer contracts leave less room to challenge, she says. “The realistic way of looking at it is, first you buy at retail, then you sell at wholesale, and that’s not going to change. That’s the way they make their money.”

Fortunately for shareowners, concerns that the relatively high times of airframes being retired would leave them almost worthless haven’t been borne out. “From the first day of fractionals,” Herr says, “the boogeyman was, ‘What’s going to happen in 10 or 15 years when some Gulfstream [model] gets loose from a fractional program with 10,000 or 15,000 hours, and all comparable Gulfstreams have 5,000 or 6,000 hours? Fractional owners will get burned.’

“From the numbers I’ve crunched and what we’ve now seen from experience, that hasn’t happened,” Herr continues. “I would urge people to set that boogeyman aside.” 

No one is accusing the fractional companies of profiteering. It’s been a tough slog for providers, so the new aircraft offer an opportunity for them to bump revenue and induct more efficient aircraft with lower operating costs into service, giving them a double incentive to see you step into that new jet share.

As an alternative to upgrading, ask your provider about the availability of shares in aircraft already in the fleet. Other owners may have been waiting to upgrade, leading to situations where your airplane is slated for retirement, but an identical or similar model has one or more shares available. Be aware, though, that fractional providers typically resell shares at above-market prices.

You can also consider selling back your share and buying a share in a new or legacy aircraft in a different program. If you’re shopping for an old share, seek assurance you won’t soon be forced into the same upgrade decision. “If they offer five years with a five-year [term] extension, that’s one thing,” says Herr. “If it’s a two-year term with no extension, that’s telling you a very different story. That’s the best way to get intelligence on what they’re doing” with the fleet.

Aircraft shares in some programs are also bought and sold on the open market, and that’s another avenue worth investigating. 
 

A Look at Buyback Policies

We asked Executive AirShare, Flexjet/Flight Options, NetJets, and PlaneSense about their practices for setting aircraft values at the end of ownership periods. Flexjet/Flight Options and NetJets declined to respond.

At PlaneSense, which operates PC-12/NG single-engine turboprops, David Verani, director of sales and marketing, said the company “works with owners cooperatively to develop aircraft share values, taking into consideration third-party resources as well as our own experience as a seller in the used-aircraft market. This is the case whether the shareowner is establishing a price for a share sale to a third party midterm, or the share is being divested at the end of the ownership.”

Executive AirShare, meanwhile, establishes values “through contacts with aircraft brokers and dealers and comparisons to online aircraft value resources,” according to president and CEO Keith Plumb. 


James Wynbrandt, a private pilot, is a longtime BJT contributor who has written for the New York Times, Forbes, and Barron’s.

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