Fairer SHARES A WELL-NEGOTIATED FRACTIONAL CONTRACT WILL PROVIDE YOU WITH MORE REWARDS FOR YOUR INVESTMENT RISKS BY JAMES D. BUTLER IN PURSUIT OF pro ts that have proved elusive, fractional-jet providers have altered the industry’s basic business model. Where once fractional ownership enabled you to enjoy the conveniences of private ight while assuming only a small portion of the investment risk associated with full ownership, now the fractional companies are expecting you to take on the bulk of the risk. You will not be able to reverse that situation when negotiating a fractional contract, but you can bargain for a more balanced deal and have the jet company add a number of valuable concessions to the agreement. fairer shares Early on, in the mid-1990s, fractional provid- For any fractional contract, a jet company has ers marketed their service as a new and improved a basket of concessions that it can use to seal the version of the existing aircraft-management deal. The key is to negotiate for concessions that arrangement. With fractional shares, owners add value for you. For example, if all your ights would enjoy relative cost certainty and guaran- are longer than one hour, you will nd no value teed liquidity, while the providers bore most of in a short-leg waiver, which allows a fractional the variable cost risk. An owner paid a purchase owner to pay for the actual ight time instead of price for a share of the aircraft at the outset, and paying the one-hour minimum rate. Thus if you then paid a monthly management fee and an negotiate for this concession, you will waste part hourly rate for ight time. The latter two of the value available in the basket, costing you expenses could increase over the duration of the the opportunity to negotiate for other, more contract term by no more than 3.75 percent per bene cial concessions. year or the rise in the consumer price index. In SHARES many cases, the provider guaranteed to buy the share back from the owner at a speci ed mini- mum price when the contract expired. Over time, though, the industry has experi- enced increases in aircraft maintenance costs, pilot salaries, insurance fees, and other manage- TRADITIONAL CHARTER ment and operating expenses, as well as a decline Extra Fees Should Equal in the values of pre-owned aircraft. Providers Provider’s Additional Costs have responded by adding pilot-salary and insur- ance surcharges to the bill. They also have raised IF YOU ARE fl ying privately for the fi rst time, or fuel surcharges, which in some cases cover more you have a specifi c trip that does not lend itself to than the actual cost of the fuel. In addition, and the more substantial investments of fractional perhaps most signi cantly, the providers long ago ownership or jet cards, pay-as-you go traditional eliminated any guaranteed oor on their repur- charter might be the best choice. chase prices of fractional shares. Consequently, Once you have identifi ed a reputable charter today’s fractional owners nd themselves in operator, be certain that the price quote specifi es much the same situation as outright owners: the model and vintage of the aircraft that will be They pay for aircraft management, and they bear provided (and if possible, the tail number of the the variable cost risk and the risk associated with specifi c aircraft). Determine whether the price the price uctuations in the secondary market. quote is fi rm and, if so, for how long. Find out In the coming years, it is likely that fractional what, if any, additional charges you will have to providers will continue shifting variable costs in pay. Some operators will guarantee a price a business where expenses are di cult to con- without a fuel surcharge for only a short period. trol. When you also consider the impact of Many operators add a 3–5 percent surcharge for the stock-market gyrations and the economy as credit-card payments. Some will waive this fee if a whole on the private aviation industry, it you hold the reservation with a credit card but becomes clear that fractional providers will have agree to wire payment within a short period to operate their businesses creatively in order to after the trip. survive and thrive. Therefore it is essential that It is essential that you understand the charter you negotiate the best possible deal before sign- company’s cancellation policy. The operator is ing a fractional agreement. rightly concerned about tying up aircraft, but “What’s negotiable?” This is the question I hear penalties should be assessed only for last-minute most frequently from private jet travelers, whether cancellations and should be based on costs actually they are considering a fractional share, a jet card, incurred by the operator. If your itinerary involves or even just a charter ight. “A lot” is usually the deadheading the aircraft, the operator should try to answer I give. Indeed, the larger the investment, sell those deadhead fl ights, and you should receive the more exible the jet provider likely will be. credit based on the fees it collects. —J.D.B. fairer shares The other essential focus of any negotiation so that surcharges and other expenses that pop should be the contract’s legal provisions. It is the up later do not come as a surprise. And you will contract, not the alluring brochure, that will want to negotiate the buyback provisions so that govern your rights and obligations. the share is liquid and you can receive a fair Fractional contracts appear to be short and price for it when you sell. full of boilerplate items. Some companies even Additionally, you should work some sweeten- will say they do not amend their contracts. ers into the deal. These can include guaranteed Generally, this is not the case. For one of our upgrades to a larger aircraft if you need one and clients, we recently negotiated more than 150 downgrades to a smaller aircraft when you want alterations to a fractional deal with a company to save on fuel and a smaller cabin will su ce. that had claimed it did not change its contracts. You might also want to negotiate for extra ight Some items should be nonnegotiable from time at the standard hourly rate, the aforemen- your perspective. The jet company must be nan- tioned short-leg waiver, guaranteed use of two cially strong and have a proven track record. Its aircraft simultaneously when you are ying in pilots and aircraft must have spotless safety passengers from multiple locations, and ferry- records. And the aircraft must suit your needs; it fee waivers when you make trips beyond the must at least be the right cabin size, have the company’s primary service area. appropriate range, and o er su cient space for Depending on your travel needs, some of luggage. If you have doubts concerning any of these concessions might be of no use. Bargain these points, you should not go forward. only for the concessions that add real value to Acquiring a fractional share is a fairly compli- your investment and provide you with the most cated transaction, and clauses in the contract reward for the cost-related risks the fractional relating to liability, cost sharing, and liquidity are providers now expect you to assume. all drafted for the fractional company’s bene t. To make the contract more balanced, you will James D. Butler is an attorney and the CEO of want to negotiate the liability provisions so that, Shaircraft Solutions (www.shaircraft.com). Shaircraft at a minimum, the provider remains fully respon- negotiates private-air-travel investments for individu- sible for performing its obligations. als and businesses, including fractional ownership, jet You will also want to be sure you understand card programs, and charters. Butler also specializes in the allocation of variable costs in the contract, fractional-share valuation disputes. JET CARDS Smaller Investment, Fewer Concessions IF YOU FLY less than 50 hours Flexibility is always a benefi t, so contract should include the per year, do not want to make a be certain you understand how models and vintages of the aircraft large up-front capital investment, long you have to fl y the purchased that will be provided to you. Be and are willing to pay a premium hours before they expire. If you certain that you are comfortable to shift the variable cost risk to are buying a jet card from a with these aircraft, and confi rm the operator, a jet card might be fractional company, retain the that all of the operators and planes a better option than fractional right to eventually roll over the have been approved by a ownership. hours into a fractional share. reputable safety-rating service As with any contract, it is impor- As for expenses, know what such as ARG/US or Wyvern. tant to read the fi ne print of a jet additional costs, if any, will be Because your investment—and card agreement. Try to negotiate a your responsibility. Be especially thus the company’s profi t—is pay-as-you-go arrangement. If you sure to check whether you will smaller than in a fractional deal, are required to pay the entire have to pay fuel surcharges. expect fewer concessions. purchase price up front, see if you If you are dealing with a block Nevertheless, do not hesitate to can negotiate protections for your charter company that does not ask for any of the relevant investment, such as a requirement own or operate some or any of its sweeteners suggested for a that the jet company hold your aircraft, but instead farms out fractional deal.