In a recent blog I touched on the finances of fractional ownership and have had several requests to give a more detailed explanation of how fractional ownership works.
Before going into the details of fractional jet ownership it is worth considering the alternatives. When choosing to fly privately there are basically three choices available:
Owning Your Own Aircraft
With the cheapest new jet costing close to $10 million and the latest long-range aircraft about $70 million, this choice is for only the very wealthiest or large corporations. When you buy your own aircraft you assume 100% of the ownership costs, 100% of the running costs and 100% of the depreciation.
You’ll need to have the aircraft managed at further cost and a factor often overlooked is that, even after parting with many millions of dollars, your aircraft will not always be available. It will break down, or it will need to go into maintenance, or the pilot will be sick, or for any number of reasons it will not be there when you need it. So you will need to have an alternative in place on those occasions, either by chartering or in many cases owning a fractional jet share for your back-up.
“Class aptent taciti sociosqu ad litora per conubia nostra, per inceptos himenaeos .Aenean non turpis vitae ligula tristique sagitt isras varius erat pulvinar eros pretium”
Chartering a private jet is the normal first choice for the majority of people who want to fly privately. It has the advantage that it is transactional and you need book only one flight. A jetcard from a charter broker is simply charter repackaged to look like a fractional product, but it isn’t, as they don’t own or manage the aircraft.
The main disadvantages of charter are that you have little or no control over the quality of the product and pricing can be erratic. Typically a broker offers you a list of aircraft that are owned by third parties and normally the choice is made on price.
When price is the main deciding factor, many other things that should be taken into consideration are often ignored. Most customer will know nothing of the service standards of the operator, the maintenance procedures, the experience of the pilots, or any of the other vital ingredients that go into making a private flight both enjoyable and safe.
There is also an active ‘grey’ market for charter, where airscraft that do not have commercial licences to carry passengers are used, frequently with pilots who also do not have the correct qualifications for commercial operation. It is an area that the European aviation authorities are taking an active interest in.
Fractional Jet Ownership
Safety is a factor that is often either overlooked or taken for granted, yet recent events such as the tragic crash involving the a premiership footballer off Guernsey show that things can go wrong, with disastrous results.
Because fractional fleets are owned and managed in-house, operators are able to control all aspects of the operation of the fleet. From the quality of the pilots, to the maintenance of the aircraft to the operating procedures of the company, they are able to ensure the highest standards of operational safety.
As Warren Buffet, NetJets owner famously said, “When you go into hospital do you choose the cheapest brain surgeon, or the best brain surgeon?”
“When you go into hospital do you choose the cheapest brain surgeon, or the best brain surgeon?” – Warren Buffett
Similarly because you are a member of an exclusive club where they know your own personal likes and dislikes each flight can be tailored to your specific preferences.
Cost is obviously one of the most important considerations when choosing how to fly.
The biggest single cost of owning a whole aircraft is depreciation. An aircraft will typically depreciate approximately 50% over a five year period, obviously depending on the market conditions, but it is a realistic rule of thumb.
Looking at the light jet end of the market, let’s consider the Embraer Phenom 300, NetJets entry level jet. The Phenom 300 sells for approximately $10 million. Therefore if you buy your own aircraft you can expect to lose approximately $5m in depreciation over 5 years, before you’ve put any fuel in it or flown anywhere.
A typical usage for an aircraft owner is approximately 100 – 200 hours per year, and a lot more flying than most people think.
If an owner flies 100 hours per year for 5 years that is 500 hours, which means a depreciation cost alone of $10,000 per hour. On top of that you are liable for 100% of the ownership costs such as management, insurance, maintenance, compliance etc, plus 100% of the operating costs such as fuel, crew, landing & handling, parking, cleaning etc.
Let’s compare that to buying a 100 hour share from NetJets. NetJets operates an aircraft for approximately 800 hours per year, so your 100 hours is a one-eighth share of an aircraft, which for the same Phenom 300 would cost you about $1.25 million. Over five years you would experience the same percentage depreciation on your share as on the full aircraft, i.e. 50% or approximately $612,500. That’s $1,225 per hour in depreciation, or a saving over five years of $4,387,500.
That alone explains the attraction of owning a fractional share in an aircraft rather than a whole aircraft.
Now let’s look at flying costs. At today’s fuel price your flight hours will cost about €6,000 per hour. Remember that is an occupied hour, with you in the aircraft, from take-off to landing anywhere in Europe or the United States. It includes fuel, landing & handling fees, empty legs, crew, insurance, management, maintenance, etc. 500 hours over five years will cost you about €3m or about $3.4m.
As you can see, your total flying cost for 5 years, including depreciation is less than the depreciation cost of owning your own jet. If you apply the same savings to a jet costing $70 million dollars you can see why fractional jet ownership works and why the biggest private jet operator in the world is a fractional fleet.
In addition to the three keys benefits, Safety, Service and Cost, there are many other less tangible benefits to being part of a fleet.
For example you can swap into smaller and larger aircraft as required, so you always use the most cost- effective aircraft for a particular flight. If your aircraft should have a technical problem, NetJets has the capacity to send you another aircraft. You have no down-time for maintenance, you are guaranteed an aircraft 365 days a year at only a few hours notice. These are just a few examples of the benefits of the ‘fleet effect.’
In summary, compared to the alternatives available in the market, Fractional Jet Ownership offers many important advantages.
In comparison to owning your own aircraft it offers substantial costs savings and much greater flexibility. You know that the aircraft are stringently maintained, that the pilots are highly experienced and that you are flying on a professionally managed fleet.
In comparison to charter it offers more consistent levels of service, but ultimately what you are buying is certainty and peace of mind.