Story ID: 
AINsight: Aircraft Fractional Shares 101
By: David G. Mayer
Caption: Fly privately on your own aircraft for less
Word Count: 1444
Would you be interested if you could buy a portion of an aircraft or rotorcraft as if you acquired it all but at a fraction of the price? If you plan to fly more than 25 hours per year but do not need or want a whole aircraft, an aircraft fractional share may make sense.
Whole aircraft demand constant attention whether you use them or not. For example, you still must monitor and pay constantly for the operations, maintenance, insurance, crew, management, scheduling, and taxes associated with them.
Although a fractional share may entail premium costs over other travel options, the overall economics may work when you analyze your anticipated “missions” compared to other flight options, including owning, chartering, buying a jet card, or leasing a whole aircraft. A mission refers to your specific and/or general expected plans for business or personal use, including the passengers you bring on board.
Like air charter, fractional share program aircraft can provide supplemental or primary lift, as well as security and privacy. Compared to operating your own whole aircraft, fractional use may mitigate the risk of intruders tracking your program aircraft using publicly available flight-tracking technologies.
What Is Fractional Ownership?
FAR Part 91K applies to and regulates management services and operations of a fractional ownership program. Program managers may, and often do, operate the aircraft under Part 135 (commercial operations), with higher safety standards than Part 91 (private flights), where the program manager has “operational control” but may instead allow a fractional owner to exercise operational control under the FARs.
Aircraft fractional programs allow you to use the same or different aircraft types in a program fleet. A fractional share program consists of two or more airworthy aircraft with one or more fractional owners, but one program aircraft must have more than one owner.
As a core principle of fractional share programs, you acquire an “undivided interest” in a “program aircraft”—a type of property interest that can be leased or purchased. You can buy with cash only and/or with a loan. Each interest carries an agreed number of hours annually corresponding to the size of the share.
For example, based on a total of 800 flight hours per year per aircraft, an owner or lessee can acquire as small as one-sixteenth interest in a “subsonic, fixed-wing, or powered-lift program aircraft” for 50 “occupied hours” (hours in a seat traveling) and a fractional ownership interest of at least one-thirty-second interest of at least one rotorcraft program aircraft for 25 hours.
How a Fractional Share Program Works
Due to fleet planning by the program manager, you usually will not fly on your aircraft because it will be operating for another owner or the program manager. Unlike whole aircraft ownership, you may not have the same flight crew. Applying your allocated hours, you may have the flexibility to use more than one aircraft per day and upgrade to a larger aircraft or downgrade to a smaller aircraft. These negotiable rights are handy for businesses and families traveling on different schedules and/or missions or for security or secrecy.
The fractional program may charge you for aircraft use by the day rather than by the hour and set rates for a particular service area such as the 50 U.S. states, with upcharges for travel beyond the service areas.
A fractional ownership period typically lasts for five years, but programs may allow, at a cost, early terminations starting as soon as the 24th to the 36th month. The sooner the termination, the higher the exit cost. Absent another purchase extension, at the end of the five-year ownership, the program agreements require owners to sell their owned shares back to the program for the then “residual value” to be paid by the program manager plus a remarketing fee of about 7% and other payments.
Importantly, your early termination or expiration rights create flexibility to move up to whole aircraft ownership, exit a program, reduce travel costs, or select a different program aircraft.
Lease Versus Buy
Multiple factors influence whether to buy or lease an interest in a program aircraft. If you use cash to buy a share, you reduce funds you otherwise could deploy in your business or investments.
As an owner, you may be able to take depreciation and deductions for business use and accept residual value risk whereas lessees do not. However, as a lessee, you have 100% financing, no residual value risk, and the deductibility of business use costs. You may also have more flexibility for a term and early terminations.
Program Documents
Each program agreement contains material terms. They consist of the purchase agreement, an owner’s agreement for owners, and a lease for lessees. All parties sign a similar management agreement and a dry lease exchange agreement modified for a lessee. You can expect a program manager to refuse to negotiate terms that must be consistent among owners to ensure smooth aircraft fleet planning and operations. The larger the interest or combined interests, the greater the privileges and bargaining power.
The purchase agreement covers the interest share you buy with corresponding hours for each share size. Usually, your deal lasts five years, subject to various termination rights, including early terminations that often start around the 30th or 36th month, the program repurchase fee, and limits on transferring interests.
Under the management agreement, the program provides comprehensive services to owners and lessees, which cover items such as management fees (which can escalate yearly), pilot training, insurance, hangaring and administrative costs, usage deposits, aircraft upgrades and downgrades, credits for long-haul flights, and negotiable services such as notice periods and priority to program aircraft, usually dependent on larger share size (the larger, the better).
You pay a monthly management fee, increasing with the larger interest sizes. Your occupied hourly rate, the rate you pay for sitting in a seat while traveling, covers the direct costs of operating your aircraft, maintenance, engine reserves, pilot fees, catering, and other costs you should carefully scrutinize.
A dry lease exchange agreement, a central document to fractional sharing, enables owners to use or exchange aircraft with each other without crew.
Owners may enter into an owner’s agreement to align their interests with the other ownership interest holders regarding the usage of their specific aircraft.
Finally, a lease document authorizes a lessee’s use and possession of one or more program aircraft for a term of two to five years in exchange for rent. You also pay a security deposit, management fee, and related costs during a lease term, including a federal excise tax (which may be avoidable). You should check if state sales and use tax may apply to rent and consider the restrictions on transferring your interest.
Before You Decide
Before you decide on your preferences, compare fractional share programs to each other and those programs to charter costs, jet cards, and membership programs to determine which one will help you best to accomplish your missions. In all cases, discussing your missions and aircraft preferences with an aviation consultant is highly advisable. For more, see “Four Affordable Ways to Fly Privately.”
Final Thoughts
Purchasing a fractional share of an aircraft has become a well-accepted and popular way to travel the world. For those who elect to acquire a fractional share, you can travel on particular days with advance planning at a cost that pales by comparison to that of owning or leasing a whole aircraft.
Although the documents entail some complexity, a vetted program with stellar service and management will elevate your private aviation experience in your choice of aircraft. If you select carefully, you will join thousands of satisfied owners and lessees in programs that fit their needs at a rational cost.
The material in this blog is not intended to be, nor should it be construed or relied upon as, legal advice. The comments, recommendations, and analysis expressed in this blog are those of the individual author, David G. Mayer, and may not reflect AIN Media Group’s opinions. Using or relying on this blog does not create an attorney-client relationship between you and the author or his law firm. If specific legal information is needed, please retain and consult with an attorney of your selection. David G. Mayer practices law in the global Aviation Practice Group at Shackelford, McKinley & Norton, LLP in Dallas.