Cost-Effective Corporate Aviation
For many executives, using a corporate jet is no longer a luxury, but a business
necessity. Thats because flying commercially today is at best a lengthy ordeal;
at worst, its a waste of precious time complicated by delays and cancellations.
Increased security measures and restrictions, fewer flights to fewer cities,
and more connections than ever have increased the amount of time necessary to
make even the simplest business trip.
Many companies are turning to private aviation. Options include establishing a corporate aviation department, purchasing a single aircraft, or using an aircraft charter service. However, there are drawbacks to all of these options.
Corporate aviation departments are complex to run and expensive to operate. If you own only one plane, what do you do for backup when it is grounded for maintenance? With charter, the quality of operations varies from operator to operator.
Fractional Aircraft Ownership
Private aviation provides a service that is just too valuable to do without for many companies, and companies have traditionally been reluctant to cut costs in this area. So how does a company reduce aviation costs, remain flexible, and gain efficiency without giving up the corporate jet? The answer is fractional aircraft ownership. With fractional aircraft ownership you can fly privately when you need to, with consistent quality, while reducing your aviation-related expenses considerably.
Although fractional aircraft ownership has been in existence for the past 16 years, it is being discovered by many companies as the best way to gain financial control over travel costs, reclaim productivity, and increase flexibility and efficiency. Instead of committing large amounts of capital toward buying a full aircraft, fractional aircraft ownership frees up your capital and enables your company to devote valuable resources and energies to its core business.
The Basics
To become a fractional owner, your company pays an initial acquisition fee for an undivided interest in a specific, serial-numbered aircraft. Shares are structured so that you purchase only the number of flight hours your company needs, starting at 50 occupied hours of flight time per year.
After you give your fractional provider a certain amount of notice, usually four to 10 hours based on the aircraft type and share size you own, the fractional provider then offers certain guarantees, principally that there will be an aircraft at your disposal 24 hours a day, 365 days a year. The company provides you with either your own registered aircraft, a comparable aircraft from the same fleet, or a larger aircraft, which is then dispatched to your chosen departure city. Your provider charges for your occupied time in the aircraft and assumes all administrative, maintenance, and management activities connected with the aircraft.
Most fractional providers structure their fees in much the same way, consisting of four cost components:
- Acquisition cost, which represents the one-time purchase of the asset;
- Monthly management fee for indirect operating costs, including pilot salaries,
training, hangar usage, insurance, and owner service support;
- Occupied hourly fee (that is, the amount of time between take-off and landing,
plus one-tenth of an hour added to the beginning and end of each flight to
allow for taxi time) to cover direct operating costs including standard fuel,
maintenance, catering, and landing fees; and
- Miscellaneous fees, which include a variable fuel surcharge, international fees for travel outside the United States, as applicable, and a 7.5 percent excise tax on the occupied hourly fee.
Advantages
One of the biggest advantages of becoming a fractional aircraft owner is the increase in flexibility, both financial and operational, your company will realize. Some typical benefits resulting from this approach include:
Better Use of Capital and Cost Control
Whether you own a fleet or just one plane, buying a fraction of an aircraft is more financially prudent than buying a whole one because you purchase only the number of flight hours you need. Acquiring an aircraft outright is a costly undertaking. The price of a new, fully equipped Cessna Citation Excel is approximately $10.25 million. The acquisition cost of a one-eighth fractional interest in that same Excel would be approximately $1.28 million, a significant savings. In addition, off-balance-sheet leases and financing alternatives are also available.
Figure 1: Fractional aircraft ownership tailors your costs to meet your needs.
With fractional aircraft ownership, you have liquidity for your investment should you choose to sell it. The fractional provider guarantees to buy it back, giving you a ready buyer regardless of market conditions.
Fractional ownership can help manage and control costs since the fractional aircraft company contractually commits to what they will charge you over the entire life of your contract. Whether your company already owns one aircraft or a fleet of them, you know that there are often unpredictable costs of several hundred thousand dollars or more for overhauls and unscheduled maintenance, and you can measure the resulting downtime for your aircraft in days or weeks. Under a fractional ownership program, the provider is responsible for these unplanned expenses.
Focus and Flexibility
A strong argument for using fractionals is that most companies want to focus on what they do best. Managing even a one-plane flight department is a time-consuming effort and not usually a core competency for most CFOs. Even for the well-run corporate flight department, there are times when the company needs additional aircraft to get executives or board members to important meetings.
Having a fractional share available gives you flexibility to meet your companys needs without spending millions to own and support extra aircraft. Many companies have found that having a supplemental fractional share significantly increases the efficient use of their wholly owned aircraft by freeing them to fly the most cost-effective schedules.
Many fractional providers also have interchange agreements permitting you to choose the most efficient equipment for each flight. Having the option to choose from among different aircraft types for a particular trip ensures that you can get the right size of aircraft for the number of passengers and length of the trip.
Most fractional aircraft ownership companies also allow you to use multiple aircraft simultaneously. Large company or small, imagine the options. Access to multiple aircraft the same day allows you to fly the board of directors in from different cities across the country; pick up customers from various locations for face-to-face discussions and get them back home in time for dinner; meet the travel needs of a CEO, a CFO, and a sales executive all going in different directions on the same day. The list goes on.
And if you own aircraft or charter them, ferry flights — flying an aircraft empty so that it can be in position to pick up passengers — are an unavoidable cost of operation. Fractional flights originate wherever you need them, with no charges for empty flight legs.
In addition, by using a fractional aircraft instead of flying commercially or even using the corporate aircraft, your passengers and their destination remain totally confidential. For competitive situations, as well as mergers and acquisitions, maintaining confidentiality can be the difference between success and failure.
Conclusion
As your business has changed in the last 20 years, so has the field of aviation. It has become very complex, increasingly more regulated, and more technology-driven than ever before. Fractional aircraft ownership gives you access to the latest capabilities available in aviation today. If you are a small company, focus on your core competency and buy just the aircraft share you need. If you are a large company, theres no need to buy an entire aircraft to supplement your flight requirements when a fractional share can add to your existing capabilities. Whatever your companys situation, it may make sense to investigate fractional aircraft ownership.
