Private Travel: Preflight Check

  • Fluto Shinzawa

Five years ago, at the crest of a robust economy, membership in fractional aircraft ownership peaked. Inexperienced private fliers snapped up five-year shares, blind to the possible collapse of the market. Now, as their shares approach expiration and the economy recovers from a recession, they are seeing the values of their purchases slashed, sometimes in half. “This marketplace has torn the hearts out of some people,” says Kevin Russell, executive vice president of NetJets, the largest provider of fractional shares.

 

Those private fliers who were hurt by the market correction have grown more savvy. However, as newcomers to private flight upgrade from the airlines’ first-class seats, new niches are gaining interest. Among these are 25-hour fractionals, which offer 25 hours of flight in fractional fleets, and national charter brokers, which provide on-demand flight hours from a network of local charter operators. “The beauty of all the proliferation of new players is that the true winner is the customer,” says Mark Stone, CEO of Sentient (formerly eBizJets), the first national charter broker. “Now the customer can buy the way he wants.” (Sentient does not refer to itself as a national charter broker. The company bills itself as a private jet membership program; fliers become Sentient clients by purchasing blocks of flight time in advance.)

This guide examines four options for private flight—traditional fractional ownership, 25-hour fractionals, the services of national charter brokers, and those of national charter operators—and the differences between them. Included are overviews of each method, contact information for the significant players in the markets, and a list of critical questions that prospective fliers should ask private flight providers, along with the answers they might receive.

Fractional Ownership

Once considered the premier method of private flight, fractional ownership has lost its bloom, according to some naysayers, as shareholders grouse about the depreciated values of their holdings, the inflexibility of their five-year contracts, and the lofty prices of entry. “We’re gearing up for the crash of fractional ownership,” says Todd Rome, chairman of Blue Star Jets, a national charter broker. “Fractional ownership is falling apart.” NetJets Chairman Richard Santulli acknowledges that the past two years have been difficult for his company, but he disputes any sea change in the industry. “Fractional ownership is not dead,” says Santulli, whose company claims a 70 percent market share. “I still believe in the fact that our growth will continue for the next 10 to 15 years.”

 

If I purchase a fractional share, will its value depreciate significantly by the time my contract expires?
In the supercharged economy of the late 1990s, the paper value of aircraft such as the Gulfstream V and Bombardier Global Express actually increased, and owners turned profits by selling their shares to other individuals. Today, depending on the provider and type of aircraft, a share can be worth as little as 40 percent of its original value. The primary reason for the lower prices is the glut of pre-owned aircraft on the market; on average, it takes as long as one year to resell a high-quality used airplane. “I know a gentleman whose fractional share is almost up [with his current provider],” says Sentient’s Stone. “He loves our program and wants to come in, but he would get only 45 percent of his money back, and that absolutely makes his stomach turn.”

While it is impossible to predict future depreciation rates, one way to protect your investment is to purchase shares in planes that retain their values better than others do. Among those that NetJets cites are Cessna, Gulfstream, and Raytheon.

Why should I purchase a fractional share when I could buy an entire plane?
Depending on your level of use, purchasing an airplane outright may be more prudent fiscally. For example, if you fly as much as 150 hours a year, it might be more cost efficient to buy a plane rather than a 150-hour fractional share. Once you purchase an airplane, you can hire an aircraft management company to charter the aircraft to help recoup your costs. Greg Thomas, CEO of PrivatAir, a national charter operator that also manages aircraft, sets the maximum annual theoretical utilization of a plane at 1,000 hours (using an average flight length of approximately 2.75 hours, multiplied by 365 days). Someone who flies 150 hours a year could conceivably make the plane available for charter for the remaining 850 hours. “To buy your own airplane, you’re looking at putting up a large capital investment,” says Thomas, “but there are good tax benefits.”

Among the private flight options, is fractional the safest way to fly?
Fractional providers consider their service the safest form of private aviation. For example, NetJets requires prospective pilots to have at least 2,500 flight hours. Once hired, pilots must undergo flight simulator training and attend flight safety school twice a year. They are allowed to operate only one type of aircraft. FAA-certified dispatchers create flight plans, full-time meteorologists track weather patterns, and program managers, in conjunction with Air Security International, a private security firm, manage flight operations for each owner.

However, PrivatAir’s Thomas argues that a fractional provider such as NetJets cannot make sweeping claims to be safer than its competition. NetJets operates under Part 135 of the federal rules regulating aircraft operations. But PrivatAir is compliant with Part 121, which, Thomas says, is more stringent than Part 135. “If I go on a NetJets [Boeing Business Jet], the interior of that aircraft would not pass inspection to 121 standards,” he claims. “The materials can give off noxious smoke. They don’t have enough life rafts or safety equipment to pass the 121 test. Their pilots can fly longer hours than the 121 standards. We can show they are operating to different regulation standards. We don’t need to get in an argument about safety.”

Will the company remain solvent through the life of my share?
The purchase of a fractional share requires considerable up-front capital and a five-year commitment. Rumors of sales and acquisitions of various fractional companies might raise concerns about the stability of your investment. “The person that’s there to operate the plane for you has to be reputable and financially stable and secure,” says Steve O’Neill, CEO of CitationShares. “That’s the biggest risk to the fractional buyer.”

In March 2002, Flight Options merged with Raytheon Travel Air. But when Flight Options failed to raise enough financing to keep afloat, Raytheon became the majority shareholder, controlling 65 percent of the fractional provider. These transactions may not have had a direct effect on the values of fractional shares, but some owners became concerned about what they perceived as financial instability. “Financially, the company is very strong,” says Rich Heckman, senior vice president of sales and marketing. “It’s the best it’s ever been.”

25-Hour Fractionals

In June 2001, Marquis Jet Partners created the fastest-growing segment in private aviation. The company partnered with NetJets—a decision its competitors laud as the wisest business decision Marquis ever made—to repackage traditional fractional shares, which start at a minimum of 50 hours, into 25-hour annual blocks of flight time aboard NetJets planes, with no five-year commitment required. As of last September, Marquis had sold more than 1,000 of its 25-hour jet cards.

 

 

In response to Marquis’ success, two of NetJets’ fractional competitors have launched similar programs. CitationShares started Vector, which offers 25 hours of flight in its existing fractional fleet, and Delta AirElite teamed up with Flexjet to create Fleet Membership Select, which gives fliers 25 hours of flight in Flexjet aircraft. (Delta AirElite acts more as a hybrid, because it also offers entry into a national charter program.) Neither of the programs requires a five-year commitment. “I believe that there will be more jet cards sold this year than fractional shares,” says CitationShares’ O’Neill.

Why should I pay such a high per-hour premium compared with fractional
and charter rates?
While there is no up-front expense and no five-year commitment, the per-hour cost of flying with a 25-hour fractional is on average more expensive than other forms of private aviation. CitationShares’ O’Neill characterizes Marquis as a middleman that derives its profits from marking up the cost of the shares it purchases from NetJets. He says the Vector program is less expensive than Marquis because the company’s planes come directly from the manufacturer, and also because its Citation CJ1s, Bravos, and Excels are less expensive to operate than their equivalents in the Marquis fleet. O’Neill believes that Vector customers, like the 60 Marquis owners who graduated to NetJets in 2003, might someday upgrade to CitationShares. “The reality is that the fractional product is probably 25 percent less expensive,” says O’Neill. “As customers become educated with the process and the product, they will likely become fractional customers over time. It may appear that the jet card business is growing at a faster pace than the fractional business, but it’s doing so because it’s simpler and is perceived to be an easier and less risky customer transaction.”

Because I will pay more on a per-hour basis than if I were to purchase a fractional share, are additional perks available to me?
Through the company’s marketing affiliations, a Marquis client can enjoy several privileges. For example, you can shop at an Ermenegildo Zegna boutique after hours or have a tailor from the shop visit you at your office. Members of Delta AirElite’s program can earn miles for future commercial flights, while unused Vector hours can be applied toward a CitationShares purchase. 

If I don’t like the program, can I leave it?
Marquis and Vector clients must complete their one-year commitments, while Delta AirElite owners can exit the program at any time. Marquis claims a retention rate after the first year of greater than 90 percent. Retention rate numbers are not yet available for Vector or Delta AirElite because the programs were launched only recently.

Will I be billed for additional expenses beyond the initial charges?
Fuel surcharges, landing fees, overflight permit fees, and other sundry charges are included in the Vector price (for example, $84,995, plus a federal tax that is not included in the initial payment, for 25 hours in a CJ1). Delta AirElite’s price ($107,900 for 25 hours in a Learjet 31A) also includes management fees and fixed costs. Marquis’ base price ($109,900 for 25 hours in a Citation Ultra) rises to approximately $112,000 after the company imposes taxes and a war-risk premium, a fee initiated after the U.S. invasion of Iraq.

National Charter Brokers

While executive jet management, Jet Aviation, PrivatAir, and TAG Aviation manage aircraft for individual owners, perform maintenance, and oversee fixed-base operators, they also provide on-demand national charter for their clients. Each company has fleets that are larger than those of any local charter operator, and their rates are generally lower than those of fractional or 25-hour fractional programs. The majority of their clients make travel plans two to four weeks in advance and usually do not alter their itineraries. For those who need more flexibility, chartering from a national provider may not be the best option.

How do charter brokers vet their operators?
Air Royale International, Blue Star Jets, and Sentient all hire consultants such as Wyvern Consulting, Aviation Research Group/U.S., and Q-Star to perform audits on operators—although not all of these audits are performed on site—and background checks on pilots. While the requirements vary from one charter operator to another, pilots must attend flight safety school, planes must carry minimum levels of insurance, and maintenance must be performed on a regular basis before an operator can be approved.

However, Marquis CEO Bill Allard says that because each broker contracts the services of hundreds of local charter providers, it is impossible for the aviation consulting firms to perform detailed audits on each operator. “Their interests aren’t aligned with the [clients],” Allard says of national charter brokers. “They make money on the margin of what they can charge the [client] and what they can get the plane for. They try and find the cheapest one, then pass it on to the client at the highest possible price. They will get the cheapest, but maybe it’s not the best.”

The brokers respond by citing their partnerships with nationally respected aviation consultants that perform audits and safety checks on each operator. “The safety issue is moot because we are part of the Wyvern alliance,” says Wayne Rizzi, president and CEO of Air Royale International. “We’re at [fractional] standards or even higher.”

How much insurance is provided on each flight?
The level of insurance depends on how much coverage the individual charter operator wants to purchase, which eliminates the broker from the equation. Depending on the operator, the insurance can be as low as the cost of the charter flight. Conversely, each NetJets and Marquis flight is guaranteed for $300 million worth of insurance to cover the cost of an incident if one occurs. However, the charter broker may insist on a minimum level of insurance, and industry professionals recommend inserting a rider in your contract that establishes a minimum amount for each flight.

What kind of support infrastructure is in place?
While a fractional provider such as NetJets has a staff of FAA-certified dispatchers and meteorologists who can arrange optimal flight paths and avoid bumpy patches, national charter brokers do not have similar support crews.

National Charter Operators

While executive jet management, Jet Aviation, PrivatAir, and TAG Aviation manage aircraft for individual owners, perform maintenance, and oversee fixed-base operators, they also provide on-demand national charter for their clients. Each company has fleets that are larger than those of any local charter operator, and their rates are generally lower than those of fractional or 25-hour fractional programs. The majority of their clients make travel plans two to four weeks in advance and usually do not alter their itineraries. For those who need more flexibility, chartering from a national provider may not be the best option.

What happens if my travel plans change?
The fleets of national charter providers are generally smaller than those of fractionals, 25-hour fractionals, and charter brokers. So if your meeting runs late, you may be charged an additional fee to keep your plane waiting.

 

You may also be affected if the owner who books the previous flight encounters a delay. (To maximize utility, charter companies schedule flights as close to each other as possible.) For example, your 5 pm takeoff may not take place if the flight before yours arrives late. “Anybody who has more than 40 planes will be almost certain to guarantee you the plane when you need it,” counters PrivatAir’s Thomas, whose U.S. fleet boasts more than 40 aircraft. “If we can’t find a plane, we’ll go into the charter market and get another one with the equivalent standards of the fractional guys.”

Can I fly on similar planes each time?
Depending on demand, the plane you request may not be available. Also, because national charter fleets are smaller than those of the other private flight services, a mechanical issue may ground the plane you desire. “We do have charter customers who like flying on specific aircraft, and to the greatest extent possible, we will accommodate their wishes,” says PrivatAir’s Thomas. “Sometimes we just can’t do that because the owner is using the plane or another customer is using that plane. We have a range of planes that we can substitute if we know a specific plane is not available. But sometimes guys will walk away from the trip and go to something else because they don’t like the interior.”

What standards apply when a national charter operator approves a plane
for its fleet?
The bulk of a national charter company’s fleet comprises planes that belong to individual owners. When they are not flying their planes themselves, the owners, to recoup their costs, sign them over to the companies for charter. “Every plane that joins our fleet undergoes conformity inspection,” PrivatAir’s Thomas says. “We are rigorous, and we make no bones about that in the proposals we prepare for owners. There are planes that don’t make it onto our certificate because of deficiencies in those standards.”

Does chartering make sense if I plan to fly to five of my remote offices
in the span of a week?
National charter providers are not as well equipped as their competitors to handle such requests. You may be charged positioning fees, deadhead payments, and other surcharges so that the charter company can maximize efficiency and ensure that the travel plans of other clients—and the plane’s owner—are not disrupted.

Fractional Ownership
CitationShares, 203.542.3000, www.citationshares.com
Flexjet, 800.FLEXJET, www.flexjet.com
Flight Options, 877.703.2348, 216.261.3880, www.flightoptions.com NetJets, 877.356.5823, 732.326.3700, www.netjets.com

25-hour Fractionals
Delta AirElite, 800.927.0927, 859.767.3500, www.airelite.com
Marquis Jet Partners, 866.JET.1400, www.marquisjet.com
Vector, 800.340.7767, www.citationshares.com

National Charter Brokers
Air Royale International, 800.7.ROYALE, 310.289.9800, www.airroyale.com Blue Star Jets, 866.JET.TIME, 212.446.9037, www.bluestarjets.com
Sentient, 866.473.6843, www.sentientjet.com

National Charter Operators
Executive Jet Management, 877.356.5387, 513.979.6700, www.ejmjets.com Jet Aviation, 561.233.7233, www.jetaviation.com
PrivatAir, 203.337.4600, www.privatair.com
TAG Aviation, 914.949.4424, www.tagaviation.com

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