The corporate aircraft has found a home in Corporate America. Over 12,000 companies in the United States today own or operate business aircraft, which represents an increase of approximately 100% since 1991. The unparalleled convenience, flexibility and savings in time that come with private air travel simply cannot be matched by the airlines.

There are, of course, drawbacks and challenges to owning your own aircraft. Aircraft ownership is expensive and raises a host of new concerns and worries, such as having to perform proper aircraft maintenance, obtain proper aircraft insurance, comply with FAA regulations, hire qualified pilots and so on. The general aviation industry has addressed these concerns and, over the past few years, has developed and refined a product that makes corporate ownership of a business jet or turboprop affordable and relatively easy: the Fractional Interest.

TRAVELING ABOARD THE CORPORATE PLANE

Without question, private air travel provides convenience and can save valuable executive time, enhance productivity and help to balance the lifestyles of those in the company who travel most frequently by air. Not surprisingly, demand among companies and high net worth individuals for private jet and turboprop aircraft was exceptionally strong during the latter part of the 1990s, fueled in large part by a strong, robust economy.¹ However, prior to development of Fractional Interest Programs, companies usually had to choose among (a) purchasing an entire aircraft, which often was cost prohibitive, (b) joining with another company or person to own an aircraft, which still was expensive and created scheduling conflicts (particularly on the holidays), (c) avoiding ownership altogether and simply chartering an aircraft, which often worked but at great expense, or (d) purchasing commercial airline tickets. The Fractional Interest Programs that matured during the latter part of the 1990s, and are now readily available in the marketplace, give companies and individuals another alternative — the convenience of a private airplane without having to incur the costs of full aircraft ownership.

A BIT OF HISTORY

Fractional Interests have come a long way in a short period of time. Development of the “fractional” concept is attributed to Richard Santulli of Executive Jet Aviation, Inc. In the mid-1980s, Executive Jet, through its subsidiary, NetJets, sought to meet the needs of business travelers for whom neither charter nor full aircraft ownership was satisfactory. Over the next few years, growth was modest. In 1991, for example, 17 aircraft in the U.S. were dedicated to fractional programs. During the latter part of the 1990s, however, fractional ownership witnessed unprecedented growth, thanks in large part to Warren Buffett’s Berkshire Hathaway, Inc., which purchased NetJets in 1998 and became a huge promoter of fractional programs. Today, over 700 aircraft are committed to fractional programs in this country. Although that number represents less than ten percent of all general aviation aircraft in the United States, it represents over 4,000 companies and individuals who, as aircraft co-owners, have found an effective way to access the benefits of private air travel. Here’s how it works.

FRACTIONAL INTEREST PROGRAMS

A key to understanding Fractional Interests is to recognize that these programs involve a group or pool of aircraft — not just a single plane — owned or controlled by the Program Operator.² The aircraft offered for sale (or lease)³ in these programs vary widely. Depending upon the Program Operator, the aircraft may include new or pre-owned corporate jets or turboprops, ranging in size from the King Air 200B (turboprop with seating for six passengers) to the Gulfstream V (heavy corporate jet with seating for at least 14 passengers). Corporate jets offered for sale through Fractional Interest Programs in the U.S. range from Lear 31, 35, 36 and 45 aircraft, to Cessna Citation VI and VII and Dassault Falcon 2000, 900B/C, 900EX jets, to the Gulfstream V and the Boeing Business Jet.

The largest Program Operators in the United States today are NetJets, Flight Options (which recently completed the acquisition of Raytheon’s fractional business known as Raytheon Travel Service), and Bombardier Business Jet Solutions (through its “FlexJet” program). According to recent figures, the “Big Three” have a total of 617 corporate airplanes committed to their fractional programs in this country.⁴ In addition, there are several other companies in the United States and Canada that offer fractional programs. These companies offer Fractional Interests in various aircraft models and types. For example, NetJet and Flight Options offer Fractional Interests in corporate jets manufactured by Gulfstream Aerospace Corporation, Cessna Aircraft Company and Raytheon Aircraft Company. Flight Options also offers the King Air B200 turboprop in its program, among others.⁵ FlexJet offers the interests in aircraft manufactured by Bombardier. Purchase prices, of course, vary widely depending upon the make and model of the aircraft purchased and extent of the ownership purchase. For example, Flight Options currently lists the sale of a 1/16 interest in a King Air B200 for $277,200 and a similar interest in a Gulfstream IV at $1,484,375. As explained below in more detail, in addition to the purchase price of a Fractional Interest, owners pay to the Program Operator monthly management fees and, when they use an aircraft in the program, an hourly fee to cover the actual operating costs of a trip.

A Fractional Interest represents a partial ownership interest in one aircraft included in the Program Operator’s group or pool of airplanes. A buyer may purchase any percentage interest in an aircraft; usually, interests are sold in fractions of 1/16 or 1/8 depending upon the program and the aircraft involved. At closing, the buyer becomes a co-owner of an undivided interest in the aircraft, and that ownership interest is registered with the FAA in Oklahoma City, Oklahoma.⁶ For example, if your company purchases a 25% interest in a Hawker 800XP aircraft, the company will own an undivided 25% interest in the airplane and will file a registration application with the FAA showing itself as a co-owner. Interestingly, if the remaining 75% ownership interest in the aircraft has not yet been sold by the Program Operator when you close your purchase, you will not know (nor will you be able to control) who may purchase “the rest” of your aircraft. The first unique feature of a Fractional Interest Program is that, by purchasing a partial interest in one aircraft, you are allotted, each year by the Program Operator, a specific number of flight hours (typically referred to as “occupied hours”). The number of occupied hours allotted each year to a particular owner varies with the size of the Fractional Interest acquired. For instance, a typical schedule may look as follows:

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Thus, in our example, if a company is a 25% owner of a plane, it would be entitled to 200 “occupied hours” per year.

One might expect that, with multiple owners and only one airplane, scheduling problems inevitably would occur. Similar problems might be anticipated if a co-owner in Atlanta, for instance, wanted to use “its” aircraft while in another city, awaiting the end of a longer than anticipated business meeting involving another co-owner. This is where the group or pool of aircraft in the Fractional Interest Program comes into play. If an owner’s aircraft is unavailable, the Program Operator will provide another aircraft in the program of the same make and model — oftentimes with the same interior design and color scheme — so the user never recognizes any difference in equipment. Furthermore, if you need a larger (or smaller) cabin or more (or less) range for a particular trip than provided by your aircraft, many Program Operators allow you to migrate to another make and model of aircraft to “fit” the flight profile of your trip. A program may even allow you to utilize two aircraft at the same time. Advance notice to the Program Operator of four to eight hours usually is all that is needed to ensure an aircraft will be available to fill the travel needs of an owner (assuming, of course, the Program Operator performs in accordance with its agreement with the owner). Generally, an owner may use a U.S. fractional aircraft anywhere in the contiguous 48 states of the United States, Canada, Mexico and parts of the Caribbean and, with the prior consent of the Program Operator, any other location. In essence, by purchasing a partial ownership interest in just one aircraft, the owner of the Fractional Interest has available to it the entire fleet of aircraft in the operator’s program, 24 hours a day, seven days a week.

The benefits available to owners of Fractional Interests do not stop with aircraft availability. The Program Operators ordinarily provide a complete turnkey transportation service for all co-owners. These services include recruiting and selecting qualified and trained pilots to operate the aircraft, and qualified and trained aircraft mechanics to maintain and refurbish the aircraft while on the ground. All flights are managed and tracked by ground personnel of the Program Operators, and meteorological and other necessary flight information and services are provided by the Program Operators to flight personnel. The Program Operators also obtain and manage all insurance for the aircraft, including hull and liability policies, and arrange for fuel, hangarage (if necessary), and all other trip-specific requirements. Many of these ancillary services, while of critical importance, are never seen by the owners of Fractional Interests, with the end result being that the owners have no more involvement in the operation of the aircraft than they would as a ticket holder on a commercial airline.

Perhaps most importantly, the Program Operators, as a group, have an excellent safety record, as does corporate aviation in general. All airplanes in a Fractional Interest Program must abide by the federally mandated maintenance and operational provisions of Federal Aviation Regulation (FAR) Part 91. Some Program Operators comply with the more stringent provisions of FAR Part 135 that apply to charter and air taxi operators.⁷

Typically, the Program Operator is paid a monthly management fee by each fractional owner, regardless of an owner’s aircraft usage during the month. In many programs, these management fees are designed to cover the indirect costs of aircraft ownership, such as insurance expenses, refurbishment costs, pilot training costs, hangaring fees and administrative overhead. In addition, whenever a fractional owner flies on “its” plane or another plane in the program, the owner typically pays a predetermined hourly charge to cover actual trip costs, for fuel, catering, routine maintenance, and pilot fees and expenses. Ferry and “deadhead” costs (i.e., the costs incurred to move an aircraft into position for a passenger flight) usually are borne by the Program Operator and not the owners or user of the plane.

The buyer of a Fractional Interest may be able to finance its purchase of the partial ownership interest. Fractional Interest financing is offered by some of the Program Operators. For instance, FlexJet, through a sister company, Bombardier Capital Incorporated, offers financing, as does Citation Shares, through its affiliate Cessna Finance Corp. On the other hand, conventional equipment-based or cash flow financing may be difficult to find, since banks and other institutional lenders have had little experience with the new fractional product. In such financings, banks and other lending sources may require a pledge of other assets or personal guarantees.

As with any significant asset, an owner needs to know when and how it can sell or otherwise dispose of its interest. Fractional Interests are subject to various agreements with the Program Operator. These agreements, among other things, place restrictions on the right of an owner to dispose of its Fractional Interest during the term of the arrangement. Although program agreements vary, many Program Operators require that, while an aircraft is dedicated to the fractional program, a fractional owner must first obtain the written consent of the Program Operator before selling or disposing of its Fractional Interest, and then only if the buyer or transferee agrees in writing to be bound by all of the applicable program agreements.

Some agreements allow the owner to “put” the Fractional Interests to the Program Operator at any time or upon the expiration of the owner’s management agreement with the Program Operator, in which event the Program Operator is obligated to purchase the Fractional Interest at fair market value less a brokerage fee. Fair market value is established either by agreement of the parties or, failing an agreement, by an appraisal process described in the program agreements. Similarly, if an owner defaults under its contractual obligations to the Program Operator, or upon the expiration of the owner’s management agreement with the Program Operator, the operator ordinarily retains a “call” right, obligating the owner to sell its Fractional Interest to the Program Operator, usually at fair market value less a brokerage fee.

DOCUMENTING THE FRACTIONAL INTEREST ARRANGEMENT

Participation in a Fractional Interest Program typically involves the entry into various agreements with the Program Operator, including a Purchase Agreement, a Management Agreement, an Owners Agreement, and a Master Interchange Agreement. Though the terms and conditions of these agreements vary from one Program Operator to another, they typically follow a similar pattern:

PURCHASE AGREEMENT

The Purchase Agreement sets forth the terms and conditions under which a Fractional Interest will be purchased by the buyer. This agreement sets forth all of the usual and customary provisions of an aircraft sale agreement, including a description of the interest to be purchased, the purchase price, seller’s warranties (and disclaimer of all other warranties), buyer’s warranties, and conditions precedent to the performance of each party. Importantly, this agreement usually contains the restrictions on the buyer’s right to sell or otherwise dispose of its Fractional Interest during the term of the arrangement.

MANAGEMENT AGREEMENT

The Management Agreement sets forth the terms and conditions under which the Program Operator will manage the aircraft for the owner. This agreement sets forth, among other things, the specific services to be furnished by the Program Operator for the owner’s benefit, the provisions of the FARs under which those services will be rendered, the monthly management fees and hourly charges that will be due and payable from the owner, the applicable insurance provisions, and the procedures to be followed by an owner in requesting an aircraft for service. Typically, the Management Agreement has an initial term of five years and is renewable by the parties.

OWNERS AGREEMENT

The Owners Agreement is entered into by all of the co-owners of a specific aircraft. This agreement ordinarily requires that each co-owner enter into all of the other program agreements with the Program Operator.

MASTER INTERCHANGE AGREEMENT

The Master Interchange Agreement is entered into by all owners of the aircraft and the Program Operator, and provides the terms and conditions under which the owners’ aircraft will be used by other participants in the Fractional Interest Program.

Prospective buyers of a Fractional Interest should thoroughly read and familiarize themselves with the terms and conditions of these agreements. Program documents vary widely in their length and the details they cover. Sometimes, in an effort to begin flying as soon as the general terms of a deal are reached, buyers spend too little time reviewing the details of the program documents. A little patience at this critical point can prove to be quite helpful. It should never be assumed that all program agreements are “standard,” “the same” or “non-negotiable.” Buyer’s counsel should always be asked to review and consider the proposed agreements so that everyone on the buyer’s side is aware of the costs and the business and legal risks associated with the purchase of a Fractional Interest.

The Fractional Interest is a fairly new development and certainly events may occur that raise novel (and potentially expensive) issues for the owners of Fractional Interests. For instance, it is entirely possible that a tax authority may file a lien with the FAA on an entire program aircraft for unpaid property, use or other taxes. Also, a government authority, such as the DEA, may seize or impound a program aircraft if illegal substances are found on board the plane. It is also possible that the FAA may assert fines against the owners of an aircraft if the plane is operated (through no fault of the Program Operator) in violation of the FARs — for example, if a co-owner is not a “citizen of the United States” as required by federal law.⁸ And, of course, the bankruptcy of a co-owner or the Program Operator itself may create considerable legal uncertainties for everyone involved.

Under most program documents, the Program Operator seeks to shift all loss and financial responsibility for these sorts of events to the co-owners of the aircraft, even though their use of the plane may have had nothing to do with the creation of any tax lien, the seizure of the plane, any FAA violations or another person’s bankruptcy. These are unexplored areas and it remains to be seen how these and similar scenarios would be handled by the parties and the courts. A recent review of the published case law across the country failed to identify any cases in which courts have dealt directly with these situations.

IS A FRACTIONAL INTEREST RIGHT FOR YOU?

According to industry information, Fractional Ownership of an aircraft seems to make economic sense whenever a company or individual requires between 50 and 400 hours of air travel per year. Usually if a company requires fewer than 50 flight hours per year, chartering a corporate jet or turboprop will make more economic sense. On the other hand, if a company’s needs exceed 400 flight hours annually, ownership of an entire aircraft may be the wiser course.

However, even if a company’s annual needs exceed 400 flight hours, fractional ownership may nevertheless be an attractive alternative, if the company usually requires more than one aircraft on a given day, originates flights from multiple locations, has varying numbers of passengers and trip distances, or otherwise operates an aircraft with significant ferrying or “deadhead” flying.

If a fractional interest is appealing, the next steps are to select an appropriate aircraft type and the right Program Operator, each of which may seem to be a daunting task. As a starting point, a reputable aviation consultant or even an experienced corporate pilot can begin to identify the make and model of aircraft that may best meet your requirements. Fortunately, too, virtually all Fractional Interest Program Operators in the market maintain Web sites that contain a tremendous amount of information concerning the aircraft in their programs, their experience, background and the services they offer. These sites allow interested persons to do some preliminary comparison shopping without having to leave their offices. Speednews now provides a Web site dedicated exclusively to Fractional Interest Programs. It has links to all of the major Program Operators and related service providers in the United States and Canada. Visit the Web site at www.speednews.com/fog

LOOKING AHEAD

The significance of Fractional Interests in today’s world of corporate aviation is evident from the tremendous growth in the number of industry participants in the past 15-plus years. During 1986, only three owners participated in fractionally owned aircraft. In 1993, the number of fractional owners was 110. In 1999, the number grew to 2,591. In 2000, the number grew by another 40% to 3,694. Today, well over 4,000 companies and individuals participate in these programs. Likewise, in 1986, Executive Jet was the only sponsor of a Fractional Interest Program, while today over 20 companies in the U.S. offer Fractional Interest Programs, involving new and used corporate aircraft and even helicopters.

Many industry observers believe that interest in these programs will continue, especially in view of tighter security measures — and resulting delays — now seen at commercial airports following the events of last September 11, and it is estimated that another 115,000 U.S. companies may be in a position to take advantage of an aircraft Fractional Interest Program. If that estimate is anywhere close to being correct, Fractional Interests should have an important ongoing role in the development of business aviation in this country.

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