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Chartering vs. Fractional Ownership of Aircraft

by Keith G. Swirsky, Esq., Galland, Kharasch, Greenberg, Fellman & Swirsky, P.C.

Chartering

Chartering is often the easiest and least expensive way to have an aircraft at your disposal, and does not entail the management burdens of ownership or leasing. However, there are a few drawbacks to chartering, especially for flyers that frequently use private aircraft. Charter services may not be able to guarantee that an aircraft will be available when needed, and if an aircraft is available, it may not be the type of aircraft best suited to the needs or desires of the charter client. Finally, chartering does not offer the "pride of ownership" to the charter client that is a standard feature of ownership, as any owner will attest.

Fractional Ownership

The latest "style" of aircraft ownership is fractional ownership. In a fractional ownership arrangement, owners purchase a fractional interest in a particular aircraft operated by a fractional aircraft program. A typical fractional aircraft program, or fractional program, will purchase a fleet of aircraft comprised of one or more specific aircraft types, and then will sell off each aircraft in pieces or "fractions." A fractional interest can be as small as a one-sixteenth ownership of the aircraft. Each such sale is conditioned upon the new owner contracting with the fractional program to manage the aircraft. Each such sale is conditioned upon the new owner contracting with the fractional program to manage the aircraft. The fractional program then operates all the aircraft in the program as a single fleet. In the jet marketplace, there are three new aircraft fractional ownership programs: Executive Jet Aviation offering its owners Cessna, Raytheon, Dassault, Gulfstream and Boeing (737) aircraft; Business Jet Solutions offering Learjet and Canadair Jets; and Raytheon Travel Air offering the Raytheon product line.  There are also numerous used aircraft fractional programs now developing.

The key element in a fractional ownership program is an agreement signed by all of the fractional owners, which allows each owner to use any of the aircraft in the program. Although the fractional owner legally owns a portion of one particular aircraft, what the owner actually receives as a member of the program is a specified number of hours of flight time each year on a specific type of aircraft. A fractional owner of one type of aircraft may also have access to other types of aircraft operated by the program. The program agreement permits the manager of the fractional ownership program to base individual aircraft at various airports all over the United States and in selected foreign countries, and to provide any program aircraft in the fleet to any fractional owner on an as needed basis, thus permitting maximum scheduling flexibility of aircraft all over the world. In practice, a fractional owner simply notifies the program manager when and where an aircraft is needed, and the program manager provides an aircraft. The aircraft provided may or may not be the actual aircraft in which the owner owns a fractional interest.

The benefits of fractional ownership are many:

• Aircraft are available from virtually any location in the United States with minimal notice and depending on the program, all over the world.
• Aircraft management is provided by the program manager.
• A buyer can purchase the fraction of an aircraft that best reflects current or projected annual travel needs, and later increase or decrease the ownership percentage to reflect changing travel needs.
• A fractional owner is entitled to a corresponding depreciation deduction when permitted by IRS regulations.
• Depending on the size of the fractional interest purchased, a fractional owner may use two or more aircraft simultaneously.

A major disadvantage of fractional ownership is that the total cost of aircraft ownership and operations, on a per-hour basis, may exceed the costs of other forms of ownership. The fractional program charges a fixed monthly management fee, plus an hourly rate for all flights. Further, the hourly rate and possibly the management fee are subject to an 8% federal transportation excise tax (commencing October 1, 1998), not so in connection with the ownership or leasing alternatives. Finally, state sales tax may be due at the time of purchase of a fractional ownership interest, whereas the ownership and leasing options may often be structured to avoid state sales tax on the purchase or lease.  There is also the very personal issue of developing a sense of ownership, which must be assessed.