Fractional Jets - The Formal Agreement

The Formal Agreement

Private air travel advisors can be of particular help with navigating and negotiating the so-called "boilerplate" fractional contract. In an article for Halogen Jets, "“Fractional Jet Primer: Navigating the Contracts”", CEO of Shaircraft Solutions, James Butler, discusses the most vital components of a fractional contract:

Binder/Deposit Agreement — If your provider is awaiting delivery of your aircraft, this is the document through which you put up a deposit to hold your share.
Purchase Agreement — This is the document through which you purchase your share from the provider.
Master Dry Lease Exchange Agreement — This is the document that governs the relationship among all fractional owners in the program.
Management Agreement — This is the document that governs the core issues of your investment; it tells you when you can fly, how many hours you can fly and what costs you’ll incur when you fly.

On the last point, owners rarely end up flying the specific aircraft in which they hold shared title. More likely, they will travel on other identical planes in the company’s fleet. This is a natural consequence of the fractional model: since many owners “pull” on the same plane, it’s likely that "their" plane is either in use by another owner, or that another plane is positioned in a more convenient location for deployment.

This fleet flexibility is one of the key benefits of fractional ownership over full ownership. Owners are never stranded when their plane is in the shop for maintenance, and owners enjoy the luxury of upgrading or downgrading to other fleet aircraft for special trip requirements.

Fractional terms are typically five years, after which owners sell their share back to the company for the then-current fair market value, less a 7% “remarketing fee.” The fee may be waived for renewals. You may also lease your share in a variety of configurations, depending on your tax and financial profile.

The “fair market value” calculation is a key consideration, and can dominate the overall cost-benefit analysis of the fractional ownership format. Many fractional owners were burned by the volatile market and geopolitical conditions of the early 2000s. This is an area where candor and transparency are essential in discussion with your sales representative, and all contracts outline an appeals process if you dispute their end-of-contract valuation. In a contribution to Business Jet Traveler's "Inside Fractionals" column, Shaircraft CEO, James Butler, offers advice to owners challenging providers' low share valuations: "“Sometimes Fair Market Value Isn't So Fair"",