Are we endangering traditional flight departments with fractional ownership?

By Dan Kormanik, ATP. Falcon 900B. Captain, International Paper

Are fractional shares a generally positive force for business aviation or are they the proverbial "fox in the hen-house?" This is a question on the minds of many associated with business aviation these days. While fractional ownership certainly has its place there are pros and cons to ponder on this issue. Also, the question of whether or not NBAA, our industry representative, should be such a staunch supporter of fractional share programs arises.

Both NBAA and the FAA seem to support placing fractional operations under Part 91 even though FAR 91.501B5 says business aviation falls under Part 91 only when company employees, guests and directors are using the plane. When others use the aircraft who do not have a business relationship with the said company this FAR says you are not in operational control. As written, the FAR leads one to question the appropriateness of the fractionals falling under FAR Part 91.

FAA supports fractional shares as Part 91 activities. I believe that NBAA may have misinformed FAA as to the consensus of opinions of its membership regarding their support for fractional operations under FAR Part 91. For example, IRS has ruled fractional ownership to be a commercial operation that must pay an 8% Federal Excise Tax on their occupied hourly charge plus $2 per leg.

NBAA recently made the decision to accept fractional shareholders as members. NBAA President John Olcott appears to have given his endorsement to such fractional ownership membership. My concern is that NBAA's endorsement was done without officially polling NBAA members in their entirety. While the NBAA director's vote was carried, it was not unanimous and not representative, in my opinion, of the majority of the members. As someone who has been an NBAA member and supporter for over 25 years, I have a concern with this and have not, to date, received any satisfactory explanation from my queries to NBAA.

This is an estimated actual comparison. It shows how many fractional shares and related costs it would take for a fractional provider to provide 900 hours of executive travel flown by fictitious XYZ Company's flight department annually, including 10 European trips with cabin service provided for the larger aircraft. XYZ Company has an older GIII and a leased Falcon 2000. Average flight segment is 2 hrs. Deadhead time is 4%, which is 36 hours. It would take a "half share" of a GIVSP and a 5/8ths share of a Falcon 2000 to equal the 900 hours flown by XYZ Company on a billed basis. Since most fractionals add 12 minutes per flight segment on an average 2 hr flight segment you would lose 10% on your real flight time. So, 4500 hours billed would equal 4050 hours actual flight time. Information contained in this analysis was obtained from Conklin & de Decker, NBAA, Aviation Methods, Wayfarer Aviation, Air Charter Guide, Executive Jet and various flight departments. Chart courtesy of Conklin & de Decker

Fractional concerns

Fractional share owner members of NBAA are allowed a full vote. This vote is given even though they are only renting time on an airplane without the responsibilities of real flight department ownership and management. Given this, many questions arise. Are NBAA members paying to support an organization that no longer supports them? Is NBAA putting the same effort into making the case for traditional flight department formation and utilization as it is in supporting the fractional ownership option?

I recently asked Jack Olcott these questions and was told that his organization represents corporate management rather than pilots within flight departments. In the past, NBAA, which is now called National Business Aviation Association, never endorsed charter companies or management companies so why the transition?

My contention is that when you consider the often higher costs per flight hour of fractional ownership compared to traditional corporate flight departments, the fractional route is often not the most economically viable option. But in the last analysis, what is my real concern? That concern is that low-utilization corporate aircraft, say under 300 hours per year, will be sold off and dedicated pilots will lose their jobs.

I have seen misleading sales letters. Companies selling fractional ownership send aviation managers one letter claiming they wish to help by supplementing traditional corporate flight departments. Then they send the same letter, or a similar letter with an extra paragraph, to the company CEO that says "look at our experience representing so many companies. We can do it better and cheaper."

Just remember, the fractional sales reps are in it to make a handsome profit. Why else would Warren Buffet be interested? He does not enter into business deals to earn just 5% or 10% returns. So, while those fractional sales presentations appear attractive there needs to be a healthy degree of caution and skepticism. Remember to heed the old adage "Numbers and statistics are like a bikini. What they reveal is interesting but what they cover up is vital."

Plain vanilla comparison based on 400 hours annual use without landing fees, ramp fees, catering, crew expenses or cabin service. Note: International trips on fractionals would be subject to positioning fees and surcharges. Information contained in this analysis was obtained from Conklin & de Decker, NBAA, Aviation Methods Inc., Wayfarer Aviation, Air Charter Guide, Executive Jet and various flight department.

Hidden costs of fractional share programs

Vital points are often omitted from the fractional share sales presentation. Shared ownership companies buy the aircraft at high discounts and then sell the aircraft to fractional share owners at full list price. You will not be assigned a regular flight crew and maintenance of the aircraft will be done on an outsource basis and not controlled or overseen by your company. There are a number of hidden charges. Some fractionals charge a cancellation fee of $3000 if they are not notified within six hours before scheduled departure. NetJets adds 12 minutes per flight leg. For a corporate flight department with an average 1.9 hour stage length, and owning half a share of an aircraft, this means that you will be billed for 400 hours when your actual flight time is only around 360 hours. There's also an issue of liability in that everyone who owns a share is a named insured on each aircraft of the provider.

Many seasoned corporate pilots and aviation managers advise that a great deal of caution must be exercised when weighing the fractional share option. Capt Al Jones, who I flew with for seven years and who retired as dir of aviation for US Steel, feels that locking your company into a five year fractional share contract does not make a lot of economic sense in many corporate circumstances. Capt Bill Correll, a retired Fortune 100 aviation manager, feels that "Probably the most important point when considering fractionals is corporate security. That is, keeping one's moves and business decisions confidential and secure. This could become a real problem with fractionals. Consider that EJA NetJets is ultimately owned by Warren Buffet, one of the wealthiest investors in the US. Do you want him to know your every move via your itinerary and complete passenger list?"

NBAA's support of the fractional cause

While fractional programs are here to stay, they best serve companies who have never owned an aircraft and want to experience the benefits while flying 100 hours to less than 300 hours per year. These programs have a place within the business aircraft community, but how this issue was handled by John Olcott and the NBAA Board, I feel, does not show good faith with his paying membership.

Why did the NBAA Board refuse to officially poll all members including the aviation department managers and chief pilots with votes counted by an independent agency such as Price Waterhouse? It's one thing to be sold down the river by an unscrupulous politician whom you may or may not have supported. It's an entirely different matter to be undermined by someone whom you are paying, via expensive dues, to represent you and the business aircraft community.

I feel there needs to be an assessment of membership commitment on this important issue and then abide by the majority vote of the membership. We must call on NBAA to do more to promote the economic argument and merits of the traditional flight department. I believe this would best serve the membership and our industry while helping to preserve economically viable corporate flight departments.

It appears to me that NBAA feels that in the long term there may be more business aircraft as a result of today's fractional programs. The immediate damage towards the traditional flight department, however, is hardly worth it if the real purpose of all this is just to increase NBAA membership.

In conclusion, I question the path NBAA is on with regard to fractional ownership. I feel it is detrimental to the traditional flight department. Let's put it to a popular vote that includes the chief pilots of NBAA member companies.

Capt Dan Kormanik has been in corporate aviation 33 years with 18,000 hours TT flying with four Fortune 100 companies; US Steel, McDonalds, Motorola and International Paper. He currently captains a Dassault Falcon 900B for International Paper Co.

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