Read this before signing a fractional ownership contract

Since 1978 when the NetJets programme was launched, fractional ownership has been an efficient way to fly on business jets. If you use corporate aircraft for less than 300 hours a year you should definitely consider fractional ownership or charter.

While buying a fractional share is simpler than purchasing a whole aircraft. It is worth checking the following things before signing a fractional contract.

Don’t negotiate on price

“Don’t argue on price, argue on the little things,” says one former senior manager at a US fractional operator. “Salespeople cannot easily negotiate on price, but they can make concessions on things like dead legs and using two different aircraft in one day. These are significant charges and can easily add up.”

For example, if you are based in the US and wish to fly to Hawaii or the Caribbean, fractional operators will typically charge you for two empty ferry flights.  You may be able to negotiate the rate for some of these.

Read the small print

This may seem obvious but many buyers are not familiar with everything they are agreeing to. Not all contracts are the same and salespeople will not necessarily draw your attention to clauses that are less attractive to you.

Fractional contracts are not particularly long documents – particularly in comparison with aircraft purchases and financing – but you are buying a share of an expensive asset. It makes sense to use someone who is experienced in managing and negotiating fractional aircraft contracts. “An experienced lawyer is worth every dollar you pay them,” says one manufacturer. “Don’t just use your normal lawyer. Use a specialist.”

Breaking up is never easy

Fractional ownership is more flexible than buying your own aircraft but it is worth making sure that you understand the rules if you decide you do not want to keep your share in an aircraft.

Buyers of fractional shares typically commit to five years of ownership with the option to terminate early after three years.  If the owner decides to sell their share at three years they typically need to give three months’ notice (and pay fixed monthly management fees for these three months).  The fractional ownership company also charges a re-marketing fee, which is usually either 7% of the aircraft value at the time of the sale, or a further three months of fixed costs.   

You may be able to sell your share on the open market (or through an exchange like FracTrade or Fractional Jets Europe) before the minimum three-year term but the fractional company does have the right to decide on transfer of unused hours.

The value of your aircraft is hard to predict

It is easy to get an aircraft valuation. Various consultants or appraisers publish aircraft values and aircraft value forecasts regularly. But no one really knows what will happen. Business aviation is cyclical and this is a risk for anyone considering aircraft ownership of any sort.

In the run-up to 2007 some business jets rose in value, however, anyone buying a share in 2007 has been hit very hard. “Depreciation is manageable at 5%, 6% or even 8% a year,” says one broker. “But 35% hurts.”

It is worth remembering that fractional jets fly many more hours than the average corporate aircraft so depreciate faster than aircraft owned by single users. There is also less data about fractional values so valuing a fractional share is harder than valuing an entire aircraft.

Your hours can expire

Use it or lose it. Only a certain proportion of unused yearly allowances can be carried over to the next year. “We have a customer who bought a share of a Citation XLS three years ago and has never flown on it,” says one consultant. “He had assumed that it could carry those miles over but the maximum you can carry over into one year is very low. It was in the documentation he signed but he was not happy.”

Extra hours are usually more expensive than charter

Fractional companies are often happy to sell you extra hours if you have used up your allocation and also to let you use larger aircraft for longer trips. But the cost of these will probably be more than you could achieve in the charter market. However, you may consider it worth paying a premium to guarantee consistent service and avoid hassle.

It you regularly fly more hours than you own it may be worth combining jet cards with factional ownership. If most of your flights are short it may be more economical to buy a mid-size share and use a card programme for occasional longer flights.  

Second-hand shares can be good value

In weak markets it can be worth asking about pre-owned aircraft. “No one should be looking to sign a new aircraft contract at the moment,” says Chris Moody, CEO of Fractional Jet Europe, an exchange for second-hand shares. “The thing to remember with fractional jets is that you may never fly on the aircraft you own.  The operator simply sends you any aircraft from the fleet, so there is no advantage to buying a new share over a used one.”

Hourly fees do go up after an aircraft reaches five years, to reflect higher maintenance cost,s but Moody says this is more than made up for by the lower acquisition costs. “Jets have taken a massive hit, so values are down and you can get a good purchase price now,” says Moody. “In the boom market these shares were not available, but now you can get them at a discount.”

Enjoy it

Many owners love the freedom and time-saving that fractional companies offer and all of the operators take customer satisfaction seriously. Fractional ownership is an affordable way to own part of an aircraft and has opened up business aviation to many. You may be able to get cheaper flights using the open charter market but many people feel it is worth paying extra for the benefits that fractional operators offer.