Jet Advisors Blog

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

Fractional Jet Agreements: What to Know Before You Sign

Posted on Mon, May 13,2013

This is the third in a series of blog posts by David Beach, former Senior VP of Contracts at NetJets, on what questions you need to have answered before signing a management services agreement on a private jet. 

 

Fractional Programs, Know the Terms & Conditions, Part 3

 

Challenger 601-3RAs stated in my last blog, a common facet to all fractional programs is the aircraft management services agreement. As this is, in my opinion, the most important of the numerous agreements that make up the contract package for program providers, it should be reviewed carefully and the terms and conditions clearly understood.

Maintenance

Who performs the maintenance and to what standards? Is the cost of maintenance covered by your monthly or hourly fees? Do you have exposure for modifications, refurbishment and/or Federal Aviation Administration (FAA) directives and/or manufacturers’ service bulletins and alerts? Do you have access to the maintenance records for your aircraft?

Flight Time Costs

Are flight time charges billed at actual flight time or estimated? Is there a per-flight or per-day minimum? How is taxi time accounted for and billed? What happens if your trip is interrupted by mechanical problems or regulatory requirements such as customs stops? Does the provider bill you for the additional landing and take-off, and does the per-flight minimum apply? How is the fuel consumed for your flights billed? Is it rolled into the hourly rate, and how is the cost of fuel calculated (providers’ actual or published average fuel rates)? How does the hourly fee escalate over the term of the agreement, and are there increases along the way as the aircraft ages and as the cost to maintain it increases? In addition to how your flight time is billed, you should know how your allotted hours (annual hours and contract term hours) are calculated and what the impact of under- or over-flying is and what happens if you trade to a smaller or larger aircraft. If you fly outside of the provider’s service area, is there a ferry fee, and does that impact your allotted flight hours?

Notice

In all programs there are notice periods for flight reservations. Does it vary by aircraft type, share size, area of travel and day of travel (peak or busy day versus non-busy day)? If you provide the required notice, does the provider guarantee to cover your flight? Does the provider have the ability to accelerate or delay your requested departure time depending on when notice is given or the level of demand for the departure day?

Customer Service

Most providers have a fairly large staff of customer service representatives. Do they assign an individual or team to your account or do you just get whoever picks up the phone? Will the provider’s customer service staff assist with flight-related services such as car rental, hotel reservations or shipping of excess baggage – and is there a charge for these extra services?

These are a few more of the areas you need to know about but there are more to come.

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

The Need-to-Knows of a Hawker 400XP Fractional Share

Posted on Fri, Apr 26,2013

This is the second in a series of blog posts by David Beach on what questions to ask (and find the answers to) before signing a lease or fractional share/fractional ownership contract on any airplane. Read our first installment of this series here: What to Know About Buying a Challenger 604 Share.

David Beach is the former Senior Vice President of Contracts at NetJets and the current VP of Administration at Jet Advisors.

 

Fractional Programs, Know the Terms & Conditions (Part 2)


Hawker 400XP, private jet, fractional shareAnother common facet to all fractional programs is the aircraft management services agreement. Regardless if the aircraft is a light jet like the Hawker 400XP or a large cabin like the Challenger 604, this is the most important of the numerous agreements that make up the contract package for program providers.

This agreement sets forth the ins & outs of the owner’s or lessee’s duties & payments and the services rendered by the providers along with their duties & responsibilities. Things to pay attention to and understand involve areas of operation, legal requirements (Federal Aviation Administration (FAA) and IRS), term, defaults, additional fees, and use restrictions to name just a few. There are more clauses to be aware of and those will be covered in subsequent blogs.

Operation

Is the provider you are considering worldwide, North American, or regional? If not worldwide, does the provider’s primary service area cover your needs? What are the requirements or limitations if you need to travel outside of the primary service area (additional charges, ferry fees, increased hourly charges and/or increased notice periods)?

Does the provider cover your flight with one of its aircraft, or are you subcontracted to an unrelated third party (and are you advised of this upfront)?

Legal Requirements

Legal requirements can be confusing, especially in the aviation field. Who is considered to be the operator of the aircraft? Does that extend to making sure the maintenance is in accordance with FAA requirements? Who communicates with the FAA if there are issues? Are pilots properly trained and licensed? Who acquires insurance coverage and determines the limits of that coverage? Are there fees to pay to fly the aircraft, then to land the aircraft, and taxes on the fuel you use, or on other fees associated with the management of the aircraft?

Challenger 604, private jets, fractional ownership Term

The term of the agreement can have a big impact on future aircraft value if you purchase the share. A too-short term can restrict your options without the ability to extend it or renew it. Does the term automatically renew/extend, and for what period? Do you have the option to terminate instead of extending?

Defaults

What actions can you take or not take to be declared in default? What actions or inactions put the provider in default? If a default occurs, are there cures, and how long do you have to cure? What are your rights if the provider defaults?

Additional Fees

If the provider has to modify the aircraft to comply with regulations or upgrades, or refurbishes the aircraft, who pays for it? If the provider increases crew salaries, is that cost passed on to you? Domestic or international landing fees, segment fees, airspace fees, communication fees, and concierge fees - are they bundled into the hourly flight charge and/or the monthly management fee, or passed on to you as incurred? If they are passed on as incurred, are they passed through at cost or with an administrative fee tacked on?

Use Restrictions

Use restrictions are not limited to the provider’s primary service area; most providers have certain limitations on high-demand days, which are usually called peak period days. On peak period days, your cost per hour may increase, you will have a longer notice period, and the likelihood of a delay or acceleration to your requested departure time increases. Some programs, depending on your contract, may further restrict your use on these peak period days.

These are a few of the areas you need to know about, but there are more to come…

 

Top Issues When Buying Fractional

Topics: fractional, fractional ownership, charter flights, Hawker 400XP, private jet, fractional share, private jets

What to Know About Buying a Challenger 604 Share

Posted on Wed, Apr 10,2013

Are you thinking about buying a fractional share on a Challenger 604 through Flexjet? A Hawker 800XP through NetJets? A Phenom 100 from JetSuite? Are you leasing for the first time or want to make sure you've got all your bases covered before you enter a new agreement?

David Beach, former Senior Vice President of Contracts at NetJets and current VP of Administration at Jet Advisors, is beginning a series of blog posts on what you need to know before you agree to a fractional share or lease on any airplane. 

 

Fractional Programs: Know the Terms & Conditions (Part 1)


Challenger 604 fractional share lease private jetWhile at first glance, they appear to be very similar in structure and offerings, not all fractional programs are the same - and I am not referring to just aircraft types offered. The terms and conditions governing the programs vary for each provider as well as the agreements used. Consequently, the terms and conditions as well as the documents should be reviewed and understood before you sign on the dotted line.

The document that accomplishes this is either a fractional interest purchase agreement or lease agreement. In either of these agreements, there are things to be aware of, and in some cases, they can be negotiated away or made more favorable to you.One thing, though, is common to all programs. To become a member or owner (as the fractional programs refer to customers), you must acquire ownership of an interest (also referred to as a share) in an aircraft.  This is accomplished in one of two ways: either an outright purchase (yes, you buy a “piece” of the aircraft) or through a lease. In the purchase scenario, you receive a bill of sale for the share and are registered as a partial owner of the aircraft with the Federal Aviation Administration (FAA).

Does the provider make reasonable efforts to position the aircraft in a "tax-friendly” location at time of delivery?

What is the guaranteed term of ownership or leasehold? Most programs have a 5-year initial term (60 months), and some give you the option to terminate early after a preset minimum term of ownership or leasehold. If you terminate early, are there penalties or fees? Most ownership structures have a brokerage fee due at termination based on your share’s fair market value at the time of termination regardless of whether you go full term or terminate early.

Since the brokerage fee is based on your share’s fair market value, how is that value determined? Do you have the option to dispute it, or is it take-it-or-leave-it? Is the repurchase at termination guaranteed in a certain time frame, or does provider have to find a new buyer before they buy back the share?

Business corporate private jetWhat are your rights if the provider defaults or ceases to do business? For the large providers this is unlikely, but if it did happen, the market would be flooded with aircraft, values would plummet, and you would be holding the bag along with the other owners with shares on the same aircraft.

Another provision to be aware of is assignability. Can you freely assign to an affiliate or to a third party that is unrelated to you or your company? If the share can be assigned, are there fees required for documentation, filings, movement of the aircraft, etc.?

What are your obligations for registering the share with the Cape Town Convention on International Interests in Mobile Equipment (International Registry) when you purchase it and when you sell it back? While not a major expense, signing up to the International Registry and filing or consenting to the purchase and sale back will cost at least $1,000.

 

 

Top Issues When Buying Fractional

Topics: fractional, fractional ownership, private jet, fractional share, jet lease, Flexjet, NetJets, JetSuite, phenom 100, embraer phenom 100, Hawker 800, Hawker 800XP, challenger 604