Fractional Buy-Ins

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If a new airplane is a must, small-aircraft fractional ownership systems, like those from OurPLANE and AirShares, deserve a look. Depending on your flying habits, it could be cheaper in the long run. But as the editors of Aviation Consumer recently explained, put a sharp pencil on the numbers.

This article appears in the June 2002 edition of Aviation Consumer, and is reprinted here by permission.


Buying any airplane -- never mind a new airplane -- is an exercise in fiscal insanity. For the average workaday schmuck, which most of us are, it's like buying an extra house that you sleep in twice a month but that you can't really rent because the insurance company won't allow it.

Most of the time, there it sits, a ticking time-bomb, waiting to detonate and vaporize what's left of your checking account. Some years it requires only modest funds to support; other years it consumes a good portion of the kids' college-fund contributions.

And so owners look to defray ownership costs with various schemes, ranging from buying "right," to taking on a partner, or joining a flying club and giving up ownership entirely. An attractive combination of the two -- clubs and partnerships -- may be shaping up as GA enters the new century with fresh designs and what we hope are new ideas.

The notion of fractional ownership -- which is quite the rage in bizjet circles -- has once again trickled down to the piston set, in the form of companies offering fractional buy-ins for new aircraft. Here's a look at some sample offerings compared to sole ownership and partnerships.

How It Works

Fractional Ownership

Commercial fractional ownership of light aircraft isn't all that new. Various attempts have been made at it before, including a nationwide aircraft rental program that popped up during the 1970s and just as quickly fizzled. Fractionals in small GA aircraft have proven a tough nut to crack.

On the other hand, a successful partnership or club is nothing but fractional ownership by another name. The concept is to toss a pile of money into a pool, buy an airplane, and share both the fixed costs and use of the airplane, thus defraying the cost of ownership at the expense of some loss of access.

When partnerships have the right people and the right airplane, they can be a dream, offering 90 percent of the access for half or less of the cost. Clubs are similarly hit-or-miss; good when the group clicks, a disaster when one or two members make life miserable for the rest of the bunch.

The downside of partnerships and clubs is that someone has to do the work: dealing with the bank, overseeing maintenance, tending to scheduling details, greasing the hangar door, and so on. When these duties are shared, the fractional arrangement may run like a well-oiled watch. But when only one partner shoulders the load, the watch goes south.

This is where the "new" fractionals come in. As with a conventional partnership, you own a share of the airplane -- either an actual share or leasing/access rights -- and, along with other partners, you have access and can use the airplane as you please within constraints imposed by the group. But the major departure is that, rather than the partners sharing the management, they pay a company to manage the airplane professionally, tending to all the pesky details that make ownership a joy or a nuisance, depending on your point of view.

OurPLANE

OurPLANE was founded by Canadians Graham Casson and Mike Huffman, who launched the concept in Toronto four years ago, with an eight-member group in a new Cessna 182.

OurPLANE is clearly married to what many in the industry view as a modest resurgence in new light-aircraft manufacturing. During a recent interview in nearby Danbury, Connecticut, where OurPLANE has established a fractional set-up with another new Cessna 182, Casson told us the company will purchase any new aircraft the local ownership-group is interested in, from a Cessna 182 to a Cirrus SR22 to a Beech Baron, all of which are either already ordered or under consideration by OurPLANE.

The OurPLANE approach is highly structured, with what appear to be well-tested models of how many members are required to make a working -- and profitable -- fractional group. Based on the Toronto experience, says Casson and Our PLANE's director of sales, Greg Marlo, the magic number is eight members, although the Toronto group has operated with as many as 12.

"So we know that eight is absolutely the right number. With 12 people, we had no access issues at all," Marlo told us.

The magic in allowing uniform access to a single airplane for a group this large is what Casson calls "the difference between intention and reality." The typical sole-owner has this revelation when confronted with the invoice for a $6,000 annual and realizing that the airplane was flown only 40 hours the previous year.

The intent is to use the airplane more often; the reality is that many owners don't have the time to fly much, the wife and family would rather go by car, or something else intrudes to reduce flying activity.

Multiply this factor times eight, says Casson, and you end up with about 95-percent access for a group of eight moderately active pilots. Some will obviously fly more than others, and OurPLANE has a solution for that.

Tiered Ownership

Cirrus SR20

Each OurPLANE fractional has four levels of ownership access: bronze, silver, gold, and platinum. Here's how the numbers work out for a new Cirrus SR20 based in the New York area. Each fractional has one platinum owner, three silver owners, three gold owner, and one bronze owner.

As you might imagine, the tiers are graduated in both price and access. The SR20, as spec'd by OurPLANE, invoices for $282,760, equipped with the Cirrus IFR package that includes a WX-500 Stormscope and a BFGoodrich Skywatch, plus a pair of Garmin 400-series navigators.

A bronze ownership costs $32,900, with a fixed monthly fee of $317 and a $116/hour cost, wet. A maximum of 25 hours a year is permitted, and there's no option to buy more time.

At the silver level, the buy-in is $37,900, $423 a month, with up to 50 hours available at $116/hour. After that, "premium price" hours can be bought for $146/hour. Stepping up to gold level, the buy-in is $42,900, the monthly is $529, with 100 hours allowed at $116/hour, and premium hours also available beyond that. A platinum owner pays $47,900 to buy in, $635 a month, and has unlimited hours at $116/hour.

In addition to these charges, there's a $3-per-"non-flown"-hour charge, which is essentially a penalty for booking the airplane but not flying off the booked hours. The maximum non-flown charge is $21, or seven hours a day. The flying you actually do is credited against that, so the non-flown charge is modest. Nonetheless, we don't like this much. Any owner who ponies up monthly charges and a big-dollar buy-in shouldn't be penalized, in our view. He is, after all, an owner.

All new owners are required to complete six hours of ground school and 15 hours of initial flight time in the airplane, at a cost of $1,399 plus flight time, variable with type of aircraft.

The ownership term for OurPLANE fractionals is five years, after which the shared airplane is sold off at market value and the shareholders divvy up the proceeds, just as a partnership would. They can also expect to see their share values diminished by depreciation, just as a partnership would. OurPLANE says it "guarantees" the value of the shares, but it's fair to point out that the shares are valued according to the market value at the time of sale, not at the time of buy-in.

Theoretically, if the airplane appreciates in value -- unlikely -- the shareholders will enjoy the windfall. OurPLANE marks up the aircraft sale price to shareholders at buy-in, and the residual payback also returns a depreciated portion of that markup.

Similarly, at any time during the term of the ownership, an OurPLANE shareholder can sell out -- again, at market value -- to an incoming owner or back to OurPLANE. So although there's bound to be some erosion of capital, the investment is at least somewhat liquid, which we think is a good idea. Although OurPLANE shareholders aren't named on the title, they're protected against the company folding by automatically filing an FAA lien at the time of the buy-in.

If the group decides to hang together at the end of the five-year period, a new airplane can be purchased, and the shareholders pony up the additional money to pay for full-price shares on the new aircraft, assuming the old one didn't appreciate enough to pay for a new model, a virtual certainty.

To the Hangar, James

Hangar Pullout

As noted in the promotional material, the OurPLANE concept is better likened to membership in an exclusive country club than a traditional airplane partnership. All of the aircraft management grunt work is handled by OurPLANE, which retains local FBOs and other resources to take care of the details.

All shareholders have to do is schedule, show up, and fly. Even hangar pullout and back-in is provided. With warranty coverage for at least the initial period on new aircraft, OurPLANE should have an accurate handle on maintenance costs. In any event, shareholders aren't liable for any expenses beyond their monthly fees and flight-time charges.

OurPLANE retains local CFIs to handle recurrent training, which is required twice a year. To encourage that, each shareholder is given two free hours of flight time, a good idea and an advantage OurPLANE has over traditional flying clubs, in addition to offering new, well-equipped aircraft.

Although OurPLANE's Casson assures us that with eight shareholders, the Toronto experience -- and other operations in California and Canada -- has proven that scheduling isn't an issue, we're somewhat skeptical. This depends entirely on the makeup of the OurPLANE local group.

But OurPLANE has an intriguing solution to the access issue, however. At as many of its sites as possible, two aircraft will be available, and shareholders in one can use the other through a feature OurPLANE calls PlaneLINK. We were told that a second 182 was on order for Danbury, for example.

Moreover, assuming the same type of aircraft is involved or the shareholder has been checked out in another type, shareholders can schedule use of an OurPLANE aircraft in another city, a real plus.

AirShares Elite

AirShares Elite Logo

AirShares Elite is an Atlanta-based operation, with plans to expand this year into Palwaukee, near Chicago, and in Tampa and Orlando. AirShares has 10 Cirrus SR22s in place with 25 more on order, making it the largest single customer for Cirrus aircraft in the U.S. In some ways, AirShares is the most ambitious of the fractionals, with both a national marketing plan and a strategy to stick with a single type, the SR22.

As with OurPLANE, there's tiered access: a silver, gold, and platinum program. Buy-in is $50,000 for a four-year term for a one-eighth share, and $96,000 for a quarter share. Monthly payments are $575 a month for silver, $615 a month for gold, and $650 a month for platinum access. The buy-in, by the way, is a true share: The owners' names appear on the FAA title.

"We have found that buyers want to tangibly own the airplane. It's a big thing to them. It's a little too sketchy to have a title chain with no names on it," says AirShare's CEO, David Lee.

Each AirShare shareholder is guaranteed 75 hours a year at $55/hr wet, plus 10 hours for training and, a nice bonus, five hours for Angel Flight operations. Silver access is la carte -- you bring your own charts and headset -- while platinum access provides the works, including instruction.

Further, says AirShare's Lee, each site will have an exclusive facility for flight planning and passenger lounging. Besides the buy-in, you can also buy a lease at $1,150 a month per one-eighth share, with hourly costs charged on top of that. Unlike OurPLANE, AirShares doesn't have a non-flown hours charge.

SharePlus

SharePlus Logo

SharePlus, based at California's Reid-Hillview Airport in the heavily populated and vastly expensive Bay Area, hopes to eventually expand to as many as 20 aircraft. But its intent is to remain closer to its base in California for now.

Alan Elpel, president of SharePlus, which is a sister company of TradeWinds Aviation, an FBO at Reid-Hillview, told us he may consider licensing or franchising the idea elsewhere eventually, but no plans are in place yet.

Like OurPLANE, SharePlus sells a leasing opportunity; the shareholder's name doesn't go on the aircraft title. Thus far, SharePlus has two aircraft at Reid-Hillview, both late-model Cessnas. The company offers one-eighth, one-quarter, and one-half shares in these airplanes, and may eventually expand to include Piper and Cirrus.

As a for instance, a one-eighth share in a Skyhawk requires $4,500 down plus $350 a month and an annual $1,000 fee for insurance and other fixed costs. At present, the aircraft are not hangared. Each shareholder pays a reasonable $28/hour dry for each hour flown.

SharePlus offers a six-year deal, and at the termination, the aircraft is sold and the shareholder can either re-up for another lease period or walk away. A portion of the down payment is returned, based on market value of the aircraft at the time of sale.

With plans for a mixed fleet, Elpel says SharePlus will offer owners interchange rights so that an owner will have a choice of aircraft capability. "For just flying around the Bay area, a Skyhawk is perfect," he says, "but for a weekend trip with four people, a Saratoga would be a better choice."

This Ain't Cheap

Cash

Fractionals tout shared ownership as the most affordable way to own a new aircraft and we think they're right on this count. That said, however, fractionals aren't necessarily the most affordable way to own any airplane used for business or personal transportation. Nor are they cheap. Further, referring to the chart here will show both a large cost spread between partnerships and fractionals, and between the two leading fractionals themselves.

Clearly, some money is being left on the table here, and we suspect that despite confidence expressed by the fractionals, too little is known about the economics yet to judge whose numbers are right.

As we see it, the equation is driven by two critical questions: how many hours a year you fly, and is a factory-new aircraft of utmost importance? A third aspect -- the fact that a 15-year-old airplane does what a new one does for a fraction of the cost -- exerts relentless economic pressure against buying new.

In general, new aircraft may have marginally more capability than used ones in the same performance category -- say, better avionics and systems, de-icing, better crashworthiness -- but improvements can often be retrofitted to older airframes.

Although you do get the benefit of warranty, thus most maintenance for the initial period of ownership is paid by the factory, the argument that new airplanes are more reliable than old ones is a red herring in our experience. New ones break just as often, and sometimes more often, since new designs may take years to declare their weaknesses.

Ah, but new undeniably smells better, and there's the intoxicating aura of fresh leather, new radios, and tight doors and windows. If new is a must, so be it. We understand the attraction. The claimed costs from OurPLANE show that an ownership position in a new airplane is cheaper than buying one outright as a sole owner.

Considering the SR20 and using OurPLANE's specs, buying it outright will require a capital investment of $282,760. As shown on the chart, if you put down $50,000 and finance the remainder over 10 years, you'll have a monthly nut of about $3,000, plus insurance and hangarage of perhaps another $400 to $600 a month. Let's further assume $30/hour for gas. Any unforeseen maintenance is out-of-pocket as it occurs.

If you fly the new airplane as a sole owner 100 hours a year, you'll spend, in round numbers, $45,528 a year for a five-year total of $227,640.

This total includes neither the initial capital itself nor the lost opportunity of investing it elsewhere, just the real dollar outlay. Nor does it include any maintenance not covered by the factory, nor an engine reserve.

If you bought an OurPLANE platinum ownership position, the same 100 hours a year over five years would cost about $95,500, again, not counting the initial investment. The buy-in share retains value that you'll get back at resale, something that's also true of owning the aircraft yourself. But if you own, you take both the finance charge hit and full depreciation yourself; you don't share it with eight other owners.

The economics may not be a slam dunk, but it's still a compelling savings over owning, nonetheless. When the sale of the share is accounted for, it pencils out to less than the finance charges for a 10-year loan on the same airplane.

Fractionals vs. Partnerships

Partnership

Fractionals lose some of their luster when compared to a successful aircraft partnership, either in a recent-model used airplane or even a new airplane. In this context, successful means two or more partners have been at it for a while, and know they can share an airplane without slitting each others' throats.

If a successful four-way partnership bought into the new Cirrus deal described above, each partner would spend about $89,000 over the five-year period, very close to the cost of the fractional with eight pilots flying it, but requiring a capital buy-in a quarter the size of OurPLANE's asking.

True, at some point, the warranty would run out and the group would be on the hook for surprise maintenance costs, but the majority of these should be covered by the $70/hour wet rate we have stipulated in these calculations.

Pros and cons? Four guys flying a single airplane 100 hours a year is a lot of usage, and they'll have to get along and keep peace in the partnership, something that doesn't always work. But they'll enjoy complete control of the airplane and can horse trade on equipment and upgrades, something the fractional shareholders can't do. Further, four pilots flying an airplane 400 hours a year may allow more access than eight flying it 600 hours a year.

On the other hand, the fractional guys will have interchange use; if one airplane breaks, the other may be available. The four-way partnership will be out of luck if their airplane crumps the day before one of them has an important trip.

Moreover, the fractional shareholders probably get both better insurance rates and coverage than does the partnership, and in the leaseholder arrangement, the shareholders are insulated from internecine squabbles, legal and otherwise. In other words, there's no free lunch here; as always, it's a question of pay now or pay later.

Conclusion

Is, as OurPLANE claims, fractional ownership the future of new aircraft buying? We think it may be one future, but the trend is barely off the ground, and the fact that it's been tried before and failed doesn't give us a warm feeling about betting the farm on fractionals.

On the other hand, OurPLANE's and AirShare's national-program aspirations impress us, as does their nuts-and-bolts approach to the money, scheduling, and marketing of the aircraft for each selected city.

We think their numbers generally hold up to scrutiny -- even though OurPLANE seems too expensive to us, given the degree of shared costs -- and both organizations have a solid feel from this distance. Long-term experience will reveal if their economics make for profitable businesses. The key consideration here is new airplanes, which have always been vastly more expensive than a near-equivalent used model.

If your basis of comparison is a 10- or 20-year-old used model, you may be better off financially in sole ownership, and better off yet in a conventional partnership owning a used airplane.

For new airplanes, long-term fractional ownership smoothes out the bumps, eliminating the ugly and expensive surprises. Fractionals promise the opportunity of making ownership a bloodless, dispassionate experience all but devoid of the light-headed emotional rush of buying a new, very expensive thing of any kind all by yourself. Costs can be predicted and budgeted. You pay for what you use but not much more, and with a little luck, you get something back later.

All things considered, we think that's a very good thing. In our view, anyone lusting after a new airplane should at least consider the numbers in a fractional program before deciding.