The Future of Fractional Ownership
by
Charles M. Finkel, Esq.
Have you noticed people are getting taller? I'm 6'3", my oldest son is 6'5", and it appears my youngest son will soon pass him up. Whether it is genes, or the Miracle Grow we used to fertilize are garden vegetables fed to the children when they were young, I am not certain. Regardless, people seem to be getting taller. Conversely, coach airline seats are getting smaller, narrower, and closer to the seat back in front, which is sure to recline smack onto your knees, which are already sore from being smashed into by the oversize bags carried by the throngs of travelers, all rushing to board first so there will be an overhead bin to store their monstrosities! Maybe this is why an airline pilot job is so desirable; pilots get to sit up front.
Allow me to get back on track, since this article really isn't meant to bash the airlines, as badly as their seat backs bash my knees. Rather, we are on the verge of discussing what has become one of the biggest things to hit aviation since frequent flier programs - fractional ownership. Perhaps none of us have recently put in an order on a G-V, or other regally suited business jet, but if you have, you've probably noticed the backlog of orders. Fractional ownership programs have become so popular, many jet manufacturers are realizing Titanic size profits, the likes of which have never been seen before.. However, along with this burgeoning industry comes many uncertainties and gray areas, which are sure to keep regulators and lawyers very busy for years to come. Professional pilots should be acutely aware of many of the issues concerning fractional ownership, since they may concern their livelihoods.
For those do not wish to hob nob with the lower classes who frequent crowded airport lounge areas and jetways, yet don't have the funds necessary to fully purchase a jet, there are two ways out of the commercials: 1) Charter an aircraft as needed; or 2) Purchase an interest in a jet under a fractional aircraft ownership program. Opting for the later, an "owner" purchases a share of the jet, and makes monthly payments. A company such as NetJet, a division of Executive Jet, acts as a management company that manages and maintains the aircraft for those participating in the program. The owner is guaranteed a set number of hours per month or year, dependent on the size of his interest. While not guaranteed the same aircraft on each flight, the owner is usually guaranteed a similar make and model delivered when needed.
Under the fractional ownership program, several agreements must be adhered to. There must be an agreement among the owners of the aircraft. The owners must have a management agreement with the management company. There must also be a master interchange agreement between all owners with the management company's program.
Recent tidbits from the Internet pertaining to fractional ownership include the following:
"NetJets is designed for individuals or companies whose utilization of a business jet does not justify the purchase of an entire aircraft. NetJets is also ideal for flight departments who require supplemental lift but cannot justify the purchase of an additional aircraft.
Under Executive Jet's NetJets concept, an owner purchases a portion of a specific aircraft based on the number of actual flight hours needed annually and contracts with Executive Jet to manage the aircraft. Owners have access to their aircraft anywhere in the continental United States on as little as four hours notice (six hours for the Gulfstream IV-SP), for substantially less than the cost of owning an entire plane. Executive Jet sells fractional interests in business jets in one?eighth increments.
The NetJets fleet is made up of over 25 Citation S/Ils, 13 Raytheon Hawker 1000s and 25 Citation V Ultra aircraft, deliveries of which began last month, and the Gulfstream IV-SP (GIV-SP). Gulfstream's very successful intercontinental GIV-SP 'wide-inside' aircraft, with a range of 4,200 nautical miles, is the latest aircraft to be included in Executive Jet's rapidly growing NetJets shared ownership program."
"Paris, France, June 15, 1997 - Today Cessna Aircraft Company and Executive Jet, Inc. announced an order for 50 new Citation Excels. This represents the largest number of units ordered at one time in business aviation history. The aircraft will be added to Executive Jet's rapidly growing NetJets fractional ownership program.
'We are very proud to announce this agreement,' said Cessna Chairman Russ Meyer.
'Since its introduction, the Excel has been an outstanding addition to our Citation family of products, and now NetJets owners will have the opportunity to take advantage of all the Excel has to offer. Clearly, the market acceptance of the Excel is exceeding our most optimistic expectations and we couldn't be happier." The value of the Excel purchase package is approximately $400 million. Executive Jet will accept delivery of the first Citation Excel to its fleet in the year 2000 with subsequent deliveries spanning a five-year period.'
'Cessna's outstanding reputation for customer service and its worldwide Authorized Service Center network were key factors in our decision,' said Executive Jet Chairman Richard Santulli. 'What we offer is guaranteed availability, 24 hours a day, 365 days a year, and we need aircraft that can help us meet our customers' demand. This purchase agreement further demonstrates the success of our NetJets fractional ownership and the Citation Excel is another example of our strategy to continually offer NetJets owners the best light, mid?size and large cabin aircraft in the world.'
Of considerable legal concern is the issue of whether these types of operations really should fall under the purview of Part 91. Consider the many advantages to operators and pilots for keeping the aircraft operating under Part 91. Weather minimums differ, as do runway length requirements. There are no onerous duty-time limitations in fractional ownership programs. Drug and alcohol testing programs are not mandatory, and aircraft equipment requirements are lessened. Pilot training programs are more lax, as are the paperwork requirements. And of course, the fractional ownership operators are not required to abide by the terms and conditions of the Pilot Records Improvement Act.
With things this good for fractional ownership management companies, you can bet on change. In fact, the FAA is as I write hard at work analyzing the answer to the question: Who is providing the air transportation service, the owner or the management company? According to an article in Business and Commercial Aviation, which cites attorney Sheryl Israel, "They [FAA] have made it clear that they are not comfortable with fractional ownership under Part 91 - there are too many owners to be under Part 91."
FAR Part 91.501(c)(2) defines an interchange agreement as, "An arrangement whereby a person leases his airplane to another person in exchange for equal time, when needed, on the other person's airplane, and no charge, assessment or fee is made, except that a charge may be made not to exceed the difference between the cost of owning, operating and maintaining the two airplanes." Presently, the FAA is determining whether fractional ownership programs really fall into this category. They are also looking at FAR Part 91.501(c)(3), which defines joint ownership as "an agreement whereby one of the registered joint owners of an airplane employs and furnishes the flight crew for that airplane and each of the registered joint owners pays a share of the charge specified in the agreement." Under this definition, the management company would also have to be an owner in each aircraft it manages.
It should be no surprise to anyone that the IRS has already stated its position on the issue. According to Private Letter Rulings 8052082 and 8148032, a properly executed joint ownership agreement is noncommercial for tax purposes. This is because each of the co-owners pays there share of all of the operating expenses when they are on board the aircraft, as well as their pro rata share of the fixed costs. A very important point brought out by the IRS in their letters is the fact that the co-owners maintain control over the pilots, outside of safety issues that is. For instance, on a Part 135 flight, the pilot dictates hours, routes, etc., pursuant to its approved operational program. On a fractional ownership flight, if the owner wants to switch routes in mid-flight, so be it.
Now, how does all of this affect pilots? Most importantly, any pilot working for a company that deals in both part 135 operations and fractional ownership programs, must make certain he or she is clear as to the specific flight parameters. If such pilots are used interchangeably, make absolutely certain that all paperwork reflects the specific operation, and whether it is to be conducted under Part 91 or Part 135. Should any readers be fortunate enough to have an ownership interest in a fractional jet, make certain that the agreements entered into are valid and worded properly. Liability is definitely something to be concerned about, and there should be ample insurance to cover the worst case scenario. The owner is also now responsible to assure that the aircraft operation is legal, even under Part 91. While indemnification and hold harmless clauses can shift the burden to the management company, the owner must always cast a wary eye to make sure the operation is legal.
Fractional ownership has been a boon to the aviation industry as a whole. It has increased manufacturers' profits, and provided jobs to aspiring pilots. Time will tell as to whether operations will continue to be permitted under part 91. In the meantime, pilots should keep abreast of any changes to the regulations which may ultimately affect them.
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