Fractional Ownership–Part I

Fractional Ownership’s Continued Evolution–Part I — Originally published in BusinessAir Magazine, February 2015, Volume 25, No. 2.

Over the past decade, there have been many critics of fractional ownership who have indicated the model doesn’t work or that the model is broken. Many predicted that the industry could not sustain itself with the original model. The four key factors critics have focused on are:

I. the same hourly rate for every flight doesn’t work,
II. too much capital is required for a core fleet to support the fractional program,
III. programs with guaranteed availability on high demand days are forced to pay too much to subcontractors for supplemental lift, and
IV. too many aircraft types in one program add unnecessary complexities.

While there has certainly been contraction in the industry with CitationShares, Avantair, Inc. and Airshare Elite no longer in business, the remaining fractional providers are changing the nature of their fleets, increasing the number of customers they service and placing large, firm aircraft orders for years to come.

Has the fractional ownership model evolved to eliminate the suggested flaws identified by critics? Were the critics wrong? Is the booming economy masking the suggested flaws? The Avantair bankruptcy demonstrated that the product offering must be priced correctly. A model where management fees are not collected for as long as the owner owns the share seems fatally flawed.

Newer providers such as XOJet and Delta PrivateJets have created modified models where some of the risks identified by the critics are avoided. For example, XOJet has found its sweet spot for certain flights such as coast-to-coast flying. One of XOJet’s more popular programs offers variable pricing depending on airport selected, day of departure and time of departure. In this program, the customer does not pay the same price for every flight, one of the traditional criticisms of the standard fractional model.

Delta PrivateJets has created a hybrid ownership program with its “Ownership Assist” option. With this program, an owner purchases a whole aircraft, thus taking capital requirements for a core fleet away from the provider, and then leases the aircraft to Delta PrivateJets. The owner can use its own aircraft for a certain number of hours a year and generate a lease stream to help offset ownership costs. This is a twist on the more traditional fractional model, allowing Delta PrivateJets to avoid the capital outlay and the depreciation risks.

With the Directional Aviation Capital purchase of Flexjet from Bombardier and the closure of Cessna’s CitationShares, we’ve seen a shift away from manufacturer-owned fractional programs. It made no sense for a manufacturer to compete with one of its largest potential customers.

The ownership change has allowed Flexjet to offer more than one manufacturer’s products, so they have announced a significant order of Gulfstream aircraft. Flexjet has also reconsidered having the same hourly rate for all flights. They now offer a long-haul credit for flights over 2.5 hours on certain aircraft types. This encourages fractional owners to fly the longer flights with their fractional provider instead of selecting a charter company for such a flight, which would be less expensive under the charter model in many instances.

In addition to Flexjet, Directional Aviation Capital also owns Flight Options, Sentient Jet Cards and Sentient Jet Charter. This gives them the opportunity to service all of their clients’ needs by leveraging all of their product offerings. Directional also recognizes the opportunity to reduce costs by consolidating key functions within their various brands, and they are currently starting to put those consolidations into place.

In Part II of this series (click here to read), additional programs will be considered along with factors which are necessary to assess before entering into any program.

Please contact Amanda Applegate at 877-237-5398 or aapplegate@aerlex.com.