BUYER BEWARE: Prepaid Charter Programs

BUYER BEWARE: Prepaid Charter Programs — Originally published in BusinessAir Magazine, November 2017, Volume 27, No. 11.

In the past six months, I have had three separate clients with problematic issues related to three separate prepaid charter programs. It is disturbing to have so many concerns in such a short period of time with three different private jet service providers.

In the first matter, my client paid in advance for a card program run by a charter operator which had received a high rating from a third-party auditor. However, each time the client sought to book a flight, the client was told that there were no aircraft available at the requested time. After requesting a refund of the unused monies, communications ceased and the company has since changed its name several times.

Another client prepaid into a block charter program and the operator thereafter filed for bankruptcy under Chapter 11, which entails reorganization of the company while it’s under the protection of the Bankruptcy Court. The court-appointed Chapter 11 trustee recently determined that block charter customers who had already prepaid for flight hours would need to make a cash co-payment for all flights booked under the block charter program – meaning, in essence, that block charter customers are paying twice for the same service.

Finally, I had a third client ask me to evaluate a jet card program the client was considering. Upon evaluation, I found numerous lawsuits had been filed against the jet card program for failure to provide services and/or to issue refunds in accordance with the terms of the contract. In this third matter, fortunately, the discovery was made before my client made any prepayment to the company.

There are over a hundred variations of jet cards, block charter and membership programs available today. One common program characteristic is the prepayment for services that will be performed in the future. Many programs have a sliding scale for the hourly rate, which decreases as the prepayment amount increases. A larger prepayment can provide a lower hourly rate, but the buyer is at risk of losing more if the private jet service provider fails to perform. If a buyer is considering a new program that has never been used before, the prepayment should be as small as possible, perhaps in installments, and ideally into an escrow account with funds to be disseminated as services are rendered.

Due diligence should be performed on the private jet service provider prior to entering into a contract or any prepayment of funds. For the due diligence on a private aviation company, I would suggest the following steps:

• Ask to speak with three people who currently use the service (whose identities you can independently verify) and discuss with those individuals their experience with the program and how long they have been a customer of the company.
• Find out the exact legal name of the company and perform searches on that company for any lawsuits which may have been filed against the company.
• Perform similar searches for lawsuits related to the individuals who are in leadership positions with the company.
• Perform an Internet search of the company to search for reviews and/or complaints of the company.
• Perform an Internet search of the individuals who are in leadership positions with the company to assess their history and their private aviation experience.
• Question others who use private aviation. Word-of-mouth in this small industry can be useful. It is likely someone knows something about the private jet service provider. Good or bad, they will have a reputation in the industry.

If any one or more of the above due diligence steps raises red flags, I would suggest moving on to find a company that you can feel comfortable with and trust.

If, after the due diligence is completed, you determine that you would like to move forward with a particular private jet services provider, (i) attempt to make the prepayment the smallest amount possible (and, ideally, pay in installments and into an escrow account), and (ii) review the service contract in meticulous detail. The most important items of the contract from a business standpoint are when and how the services will be provided, what happens if the services are not provided and under which circumstances is the provider required to refund the remaining balance of prepaid money. Since the private jet service provider is only providing a service, there must be guarantees around the types of services that will be provided and, if the services are not provided, how a refund will be processed. Further, there should be a default and remedies section and a provision that, in the event of a default, the non-defaulting party be entitled to attorney’s fees.

If you have been flying privately, you probably have a general understanding of the per hour cost based on the aircraft type used. If the prepayment program looks too good to be true, it probably is. The common thread is that old Latin admonition: Caveat emptor – “let the buyer beware”!

Please contact Amanda Applegate at 310-392-5200 or aapplegate@aerlex.com.