It’s a new game—and perhaps a tougher one
Recent constriction in the fractional space and changes within the remaining programs are stacking the deck against shareowners, curbing rights, and cutting once-standard benefits, contend a pair of consultants who represent share buyers. We spoke with them about the trends they see and also solicited comment from the two largest national fractional-share providers, NetJets and Flexjet, both of which provided written replies to our queries.
First, the backstory: in 2013, Cleveland’s Directional Aviation Capital (DAC), the parent company of the Flight Options fractional program, purchased competitor Flexjet from Bombardier, the last major aircraft manufacturer in the fractional arena. (Cessna and Raytheon/Hawker Beechcraft had already ended their programs.) Now DAC plans to convert Flight Options to a charter company, leaving Flexjet and industry pioneer NetJets as the only national fractional-share providers. Since peaking at more than 530,000 flights in 2007, meanwhile, fractional activity has steadily declined, falling to fewer than 360,000 last year, according to Argus International.
“[With] so few providers in the market, and so few aircraft within the programs, it makes it quite difficult for shareowners to get the kind of flexibility they used to enjoy,” said consultant Michael Riegel of AviationIQ.
Attorney Daniel Herr of FractionalLaw agreed, citing a reduced ability to downsize to a smaller aircraft at a cost savings. In the past, he said, it was “economically reasonable” to opt for a smaller aircraft when desired, but now, “downgrade fees are almost punitive. In some scenarios, it can cost more to downgrade than to fly the larger plane you own [a share in].”
While calling downgrades “real benefits of the fractional program,” NetJets’ Pat Gallagher, executive vice president for sales and marketing, said, “If owners are incented to continually fly on aircraft they do not own, they deprive the owners of those aircraft from flying them,” affecting everyone’s “quality experience.”
Flexjet countered that it provides a proportional discount on hours used when downgrading. That gives customers “flexibility in deciding which aircraft makes sense for a given trip,” said Matt Doyle, the company’s vice president of sales. (Fees for upgrading to a larger aircraft have always been high, to discourage owners from buying a share in a small airplane simply to gain regular access to a larger one.)
Customers concerned about raised exchange fees for smaller-cabin models should check program rules carefully and consider workarounds. For example, if you’re contemplating purchase of a one-eighth share in a large aircraft with the intention of downgrading to a smaller model for occasional trips, buying a one-16th share in each might be a better solution.
Several industry professionals contend that fleet purchases have become driven by discounts—which aren’t passed along to shareowners—at the expense of customer preferences. Herr cited the example of Gulfstream’s G650, which has been in high demand, obviating the need for the manufacturer to offer discounts on purchases. That, he said, may explain why no fractional provider initially ordered the aircraft for its large-cabin fleet.
Flexjet—which did subsequently order G650s and is the North American launch customer for the highly anticipated G500—disputed Herr’s assertion. “We do not buy aircraft based on OEM discounts,” said Doyle. He added that when a large order results in a discount, “we seek to reflect it in the fractional-share purchase price.”
At NetJets, Gallagher said the first priority is meeting “needs and wants of owners.” He noted that given his company’s volume purchases, “we do receive some discounts, but when you spend a significant amount customizing the aircraft”—he cited inflight entertainment systems and exclusive, high-end interior appointments and furnishings—the discounts “aren’t as significant as you might think.”
If you’re exiting a share, your unused flight hours can no longer be part of the deal: “Owners are restricted from transferring unused hours with the sales of their shares,” said Herr.
Gallagher contended that share transfers “are extremely rare in the NetJets program, and therefore this hasn’t been an issue,” while Doyle pointed to Flexjet’s Versatility Plus program, which allows owners to buy and sell unused hours among themselves.
Herr, perhaps most damningly, charges that “many programs have no compunction about selling shares at inflated prices, preferring hidden markups to leveling with customers about the true cost of the services being purchased.” Said Riegel, “When providers show me spreadsheets, I don’t believe the numbers I see anymore.”
Responded Flexjet’s Doyle: “We provide our owners with full transparency into valuation; they also are sophisticated shoppers…who have access to market intelligence about pricing and valuations and can reflect that intelligence in their decision-making.”
Gallagher said that “the price for preowned aircraft in our fleet, like any asset, varies widely at different times based on micro- and macro-economic factors,” and that “when buyers sell their shares, the evaluation provision in our contracts ensures every buyer has the opportunity to exercise the independent appraisal process.”
But does Bombardier’s exit from fractional ownership leave Flexjet owners more vulnerable to potential financial calamities? “We no longer have a manufacturer in the business,” said Riegel. Industry observers have suggested Bombardier was more capable of and willing to support Flexjet and its then all-Bombardier fleet, to protect the value of its brand, than a private equity owner would be.
DAC’s principal, Kenn Ricci, disputed that contention, saying his company “has the resources to meet its commitments, even in the case of another black-swan-type event such as the financial crisis and recession of 2008–09.”
Meanwhile, as for tax advantages of ownership that fractional shares offer, Herr believes they’re “nowhere near as significant as the press thinks,” due to changes in the Jobs Act of 2004, which provided bonus depreciation but “implemented draconian measures on personal use” of aircraft, which he said have reduced purchase demand. He called aircraft manufacturers “shortsighted” for having supported the legislation. “The IRS gained far more than did the [manufacturers], and aircraft sales have suffered accordingly.”
What’s a shareowner to do? Riegel said some of his clients are considering alternative ownership strategies, driven in part by outstanding values in the preowned market and demand for quality lift from charter operators.
He cited a client who recently closed on a Learjet 45 purchased for “just a little north of $2.2 million.” When you calculate in all the costs, said Riegel, “he’s paying less than half per hour what he would have in a share.” Moreover, owners can negotiate deals with charter operators who will guarantee charter revenue to help offset operating costs, making full ownership more affordable. Some owners are also banding together for joint ownership of one aircraft, according to Riegel, creating an independent fractional company of sorts.
Despite the bad-mouthing, the fractional model doesn’t appear in danger of extinction; there remain enthusiastic users, Riegel said, who appreciate the new aircraft in fractional fleets and the reliability of the service. However, he added, “Those who have hard-core requirements or want the newest aircraft are being much more circumspect about the number of hours they’re using. Ten years ago, they might have had about 150 hours per year [in their share]; today it’s typically 50 or 75.”
As Herr also admitted, “For people who place a premium on safety, consistency, and convenience, fractional is still the place to be.”
James Wynbrandt, a private pilot, is a longtime BJT contributor who has written for the New York Times, Forbes, and Barron’s.