Jet Advisors Blog

Fractional Jet Programs: Trouble in Paradise

Posted on Thu, Aug 01,2013

Private Jet Learjet 45XRYou reviewed the various fractional programs and selected the one that was the best for your travel needs. For years you enjoyed the flight services provided and everything was working as advertised and as you expected – then the service became erratic and a little later nonexistent.  What do you do?  More importantly, what can you do?

If you leased the fractional aircraft share and have consistently flown your allotted hours, you may be in good shape. If your lease was direct with the provider and not with a third party financial institution, your biggest problem might be simply finding another provider for your air transportation needs. However, if you purchased the fractional share, you’re in a completely different position.  Not only will you need to find alternative travel arrangements, but what do you do about your owned interest in the aircraft, your asset?

Most (but not all) fractional programs have a guaranteed buy-back provision in the event of default by the provider. Even if your fractional program agreements have the guaranteed buy-back provision and the service is discontinued, the cause is mostly likely due to the financial condition of the provider.

If your fractionally owned aircraft is fully sold into the fractional share program (i.e. wholly owned by you and other participants in the program and no fractional share is held by the provider), you can try to contact the other owners of the aircraft (FAA records are public information) and reach an agreement amongst yourselves on what to do with the aircraft. Options may include finding a third party manager for the aircraft with the owners sharing the costs of operation and use of the aircraft based on how much they own – I do not think this is feasible unless the aircraft is the rare fractional program aircraft with just a few owners – or selling it on the open market. However, any of the options may be difficult to pursue due to the structure of the program agreement you signed and the legal requirements if the provider has declared bankruptcy.

Selling the aircraft on the open market is probably the best option, but it will have its own set of issues to overcome. Is the aircraft airworthy? The fractional provider is required to keep the aircraft airworthy, but if the provider is in a financial bind, has airworthiness actually been maintained?  What about the engines that go with your specific aircraft? Some providers state in the program agreements that the aircraft will have a specific type of engine installed while others specify the exact serial number of the engines. If serial numbers are specified, where are the engines and how do you get them reinstalled on your aircraft?  Is your aircraft lien free? And - probably the most important item - where are the aircraft log books and are they complete and up-to-date? 

Even if your aircraft is airworthy, the appropriate engines are installed, there are no liens, and the log books are complete, what about its fair market value?  Even a small fractional provider going under can have a huge impact on aircraft values when that provider’s fleet is placed on the market. For instance, if 25 used aircraft of a specific type are currently for sale, with only 3 sales in the last 6 months, an insolvent provider with a fleet of 50 aircraft of that type would flood the market. The addition of 50 extra aircraft on the used market would add approximately 8 years of available used inventory, swiftly crushing that aircraft type’s market value.

If you find yourself in a situation where your fractional provider fails to deliver the service you signed on for and want help with the fallout, please feel free to call us at 617.600.6868 and we'll help you navigate your options and find a solution to your private jet needs.

Topics: fractional, fractional ownership, private jet, fractional share, private jets, jet lease, fractional program, fractional jet program

Fractional Jet Ancillary Agreements

Posted on Fri, Jun 21,2013

In previous blogs, I discussed getting into and out of fractional ownership programs and how those programs work. This is the final installment in the fractional program blog series, and now I’ll cover the ancillary agreements that make up most fractional programs’ document package.

The main agreements are the fractional aircraft purchase agreement (or lease, if you choose that option) and the fractional aircraft management services agreement – these two agreements form the core of the document package. Not all fractional providers have the same agreement structure but have combined the necessary terms and conditions into other agreements to make the program work. Other agreements include:

  • Fractional Share Gulfstream G200 Jetthe fractional aircraft owners agreement,

  • fractional aircraft dry-lease and exchange agreement,

  • aircraft acceptance form,

  • limited power of attorney,

  • corporate resolution,

  • warranty bill of sale and assignment, and

  • acknowledgement of fractional owner’s operational control responsibilities.

Different subsidiaries of the fractional provider parent are the fractional provider party to the diverse agreements to separate their respective duties and obligations.

The fractional aircraft owner’s agreement is the only document that does not include a fractional provider entity. This agreement is solely between the owners of a specific aircraft and sets forth their obligations to each other.

The fractional aircraft dry-lease and exchange agreement is the agreement that makes fractional ownership work. It is essentially a dry lease (meaning no services related to ownership or operation of the aircraft are included) of the program aircraft amongst the various owners. The services needed are provided by the fractional program manager and arranged by the administrator of the dry lease agreement.

Fractional Jet Share Ownership ProgramThe aircraft acceptance form evidences when and where the aircraft share was delivered to the program participant. Normally the date of this document is the date that all of the agreements become effective.

The limited power of attorney grants the program provider the authority to act on the program participant’s behalf with regard to filing requirements with the Federal Aviation Administration (FAA). Some fractional providers even draft it in such a way that they have the ability to transfer the aircraft share back to them or to a third party. You need to check with the provider since some offer other options in lieu of the limited power of attorney.

The corporate resolution goes hand in hand with the limited power of attorney, giving the program participant the authority to provide the program provider the limited power of attorney. As its name states, this is only required when the program participant is a corporate entity.

The warranty bill of sale and assignment is in addition to the FAA bill of sale that is filed with the FAA and passes title and registers same with the FAA. The warranty bill of sale goes further in that it not only confirms the program participant’s ownership of the share but indemnifies the participant in the event title issues arise.

Finally there is the acknowledgement of fractional owner’s operational control responsibilities. This document is required if the program participant elects to have its flights conducted in accordance with Federal Aviation Regulation Part 91 subpart k. Some fractional programs only operate under Part 135, and in that case this document is not required.

Topics: fractional, fractional ownership, private jet, fractional share, private jets, jet lease, fractional program, fractional jet program

Fractional Jet Programs: What to Know About Your Fractional Provider

Posted on Fri, Jun 14,2013

Hawker 800XP Fractional Jet ProgramYou probably have had enough about fractional programs’ aircraft management services agreements, but there are a few more aspects to explore and review. Some are minor, some non-negotiable, but all could cause you to experience unexpected costs.

If needs change relating to your ownership structure, does the agreement provide for assignability to related and unrelated parties? If it does, is it provided as part of the service or are there related fees for the assignment? If you assign your share and have excess hours, do they go with the share or are they forfeit?

What insurance limits are provided and are they high enough to cover potential exposure? Can you buy “add-on” liability coverage? If the provider’s policy premiums increase over the term of your ownership, can they pass that increase on to you, and if the provider or the insurer makes changes to your coverage, are you notified prior to the change?

Catering can be very expensive; is catering included under services provided? What type of catering - is it preset or can you order whatever is available based on your departure point? Are aircraft stocked with snacks and beverages, and is the selection and variety appropriate for the aircraft type you own? Keep in mind that due to aircraft size and galley configuration, catering can be limited to space/storage available. It is no fun to fly with a tray or bag of food in your lap.

Most fractional providers have some form of interchange within the fleet provided there is more than one type of aircraft in the fleet. Some providers allow interchanging to smaller aircraft anytime but interchanging to larger aircraft on an as-available basis. Some allow you to interchange up or down freely (provided aircraft type requested is available). When you interchange in a fractional program, the hours you fly on the larger or smaller aircraft are multiplied by a preset interchange percentage. Is this percentage equitable or almost punitive?

Due to Federal Aviation Administration regulations that apply to fractional jet programs, you may have the option to have your flights flown either in accordance with FAR Part 91 or Part 135. Operationally, you will see little impact on electing to fly under either regulation. Some feel that opting for your flights to be flown in accordance with Part 135 provides more protection from potential liability in the event of an accident.

Each fractional program sets forth the rates they charge either on a monthly or hourly basis; some even have a fee charged on an annual basis. Be familiar with how they escalate, normally on an annual basis on January 1, but sometimes they have an increase built in to take effect at a certain point in an aircraft’s lifecycle.

The last item I want to touch on is aircraft availability. Does your program guarantee you an aircraft even if they have to charter one from a third party provider? If the provider does not guarantee an aircraft, what is your recourse? If they do guarantee an aircraft for all of your trips, what do they consider a “comparable” or better aircraft to the one you own?

 

 

Top Issues When Buying Fractional

Topics: fractional, fractional ownership, private jet, fractional share, private jets, fractional program, fractional jet program, Hawker 800XP

How to Exit a Fractional Program

Posted on Thu, Jun 06,2013

fractional programOK, you’ve had a lifestyle change and no longer need your private jet, or you need fewer hours than you did when you purchased the fractional share. What do you do? More importantly, what can you do (i.e. what are your options)?

Hopefully you are in a program with well-defined procedures for an easy and somewhat painless exit. The first step is sending written notice to your fractional provider. This step is critical since it starts the “clock” for timing your exit. Normally the full term of your commitment is five (5) years, but with an out after a minimum term is reached. These minimum terms range from 24 to 36 months. You do not have to wait until the minimum term expires and can give your written notice prior to expiration (usually 90 days prior).

Not only does the written termination notice start the clock, but it gives your fractional provider the ability to provide you with the agreements necessary to exit and their view of the market value for your fractional asset. Now what? Review the agreements to make sure they match the terms in the document package signed when you entered the program. Then look at the market value offered compared to what your fractional provider is reselling like shares for. How close are these values? You have to expect some variation but not huge differences. If in doubt, there are resources to call upon, such as ASA certified appraisers who are very knowledgeable in the aviation marketplace. For a relatively small fee, they could save you large amounts of money or at least give you peace of mind that the deal you are offered is fair and equitable.

Fractional ProgramIn addition, having the share appraised helps in your discussion with the fractional provider but may lead to the provider hiring an appraiser and further still to an appraiser arbitration process. Keep in mind – aircraft values are very sensitive to the economy, probably more so than any other asset you possess. We saw a Hawker 400 depreciate 87% in less than 10 years for one of our clients. Almost all programs have some form of brokerage fee deduction on repurchase; some vary by aircraft type and some vary by the length of your ownership. If you have exceeded the hours allotted for the period you owned your share, the fractional provider will reconcile your account and bill additional charges for any excess hours. Unfortunately, if you have under flown the contract, the majority of providers do not issue you a credit or payment for those unused hours.

Once the market value of your fractional share is agreed upon and the termination agreements have been executed, it is time to close the exit. Make sure the location for the transaction (the sale back of your share to the provider) is in a tax-free jurisdiction or your fractional provider issues you a tax exempt form since the provider is purchasing your share for resale.

 

 

Top 5 Issues Selling a Fractional Share

Topics: fractional, fractional ownership, Hawker 400XP, private jet, fractional share, private jets, fractional program, ASA certified appraisers, hawker 400

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