Partnerships: Panacea or Purgatory?
With aircraft less affordable today than ever, there is a resurgence of interest in partnerships and other fractional ownership arrangements. While some of these pacts work out well, others turn out to be nothing but trouble from day one. Here's a look at how partnerships go awry and what can be done to avoid the pitfalls.
Partnerships for those seeking to buy airplanes can be the solution to aircraft ownership for some, while for others they are nothing but trouble from the very first day. Why do some succeed and others fail? The reasons vary with the individuals involved, but the problems with most unsuccessful aircraft partnerships usually revolve around money and scheduling the use of the airplane. Often those problems occur because little thought was given to the operation of the partnership before it was begun.
The more partners you have in an airplane the harder it is to get along. Generally speaking those who fly for business want to use the airplane during the week while those who fly for pleasure, with some exceptions, are usually weekend flyers. That can work out good for a two-partner operation where you have few conflicts regarding the scheduling. But, this type of partnership can run amuck when it comes to paying for the use of the aircraft especially if one of the partners puts more time on the airplane than the other.
For example, the business partner is likely to put far more hours on the airplane than the pleasure flyer. If the partnership is arranged as a "split," where everyone pays for their own fuel and the rest of the expenses are split down the middle, the pleasure flyer is likely to take it on the chin, at least until he or she gets wise to what is going on.
When a partnership is begun some accommodation must be made for hourly use if the partners do not expect to fly an equal number of hours per year. Probably the easiest solution is an hourly charge based on the direct operating costs of the airplane minus the cost of fuel which each can pay for as it is needed. Engine and propeller reserves should be included so the partner who flies the most is paying the appropriate share of the depreciation on those items as it occurs. Some partnerships treat indirect operating costs (like hangar and insurance) the same way, while others do a split on those items.
Some partnerships are not an equal split among the owners. I ran across one recently where three people carved up the ownership of a Cessna 210. One person owned 60 percent, another owned 10 percent, and a third owned 30 percent of the aircraft. The person who owned the 60 percent share flew the most.
The ownership breakdown does not have to affect the hourly cost of operating the airplane, though this type of partnership may have some restrictions on how many hours per year each partner may fly it. That's a very difficult breakdown to do in advance because deciding who is entitled to a given number of hours can remove the flexibility of ownership. And how do you guarantee that at the end of the year the percentages work out right?
Another way of looking at an asymmetrical ownership arrangement is that each partner pays his or her percentage when the aircraft is purchased, pays for the hourly use of the airplane as he or she flies it, then splits the proceeds from selling the airplane when the partnership is dissolved according to the percentage of ownership. That seems to work as long as one of the partners doesn't fly the airplane so much more than the others that the sale price of the airplane is affected.
Let's say the Cessna 182 fleet averages 130 hours per year. If your Cessna 182 averages 200 hours per year over its life there will be a "high-time" deduction from its value when an appraiser evaluates that airplane. If one partner contributed more than the others to the high average the partners may elect to divvy up the high-time deduction according to the number of hours each flew the airplane rather than according to the percentage of ownership. The person who flew the most would wind up paying a percentage of the deduction to the others to compensate them for the extra depreciation.
It's in calculating items like this where partnerships often go astray. If one partner feels he shouldn't pay more than the others, bad feelings can erupt into big problems that wind up with the partnership dissolving. I remember one potential partnership that went bad when the insurance company stuck an extra charge on the bill because the lowest time pilot of the group had no experience in the airplane they were buying. The low time pilot came into the partnership after the others had already done most of the calculations that included an insurance quote. One of the original partners demanded that the low-time pilot pay the extra charge for the insurance since it was due solely to his lack of experience. That partnership never got off the ground.
Scheduling the airplane is often contentious in partnerships. Weekends are "prime-time" for non-business flyers, and if some arrangement isn't made to allow each partner weekend use, it won't take long for the partnership to fall apart. The best situation is a two-partner arrangement where one flies mostly during the week and the other mostly on weekends. But when everyone wants to use the plane on the weekends, watch out.
Even if a rotating schedule is established to determine which weekends each parner has use of the airplane, what if one partner winds up getting weathered out for three months in a row? We can't do much about Mother Nature, but if that person doesn't get to fly the airplane he won't look too favorably on the partnership. There has to be flexibility built into the partnership to insure that each party gets to actually use the airplane a reasonable amount.
So, how do you resolve problems like this? In my experience, the only solution is to find partners who are attuned to each other's needs. If one of the partners is skillful at negotiating, he or she can often hammer out agreements that make partnerships work. But if each person has only his own interest at heart, then the partnership is probably doomed from the beginning.
Choose partners wisely
I have owned two airplanes with partners, and both partnerships worked out well. Often the partners flew together, sharing the flying time. That is one potential advantage of a partnership. If you are looking for someone to fly with, and if your partner has the same interests you do, you'll often get a flying buddy in the process.
It can be very difficult to find the right partner. You probably want to base your airplane at a particular airport, but that might not be convenient for someone who is considering being your partner. Your usage patterns may conflict, or your maintenance philosophies may be radically different. You should take the time to get to know anyone you contemplate as a partner to be sure that you understand the other person's needs, and that he or she understands yours.
You might meet someone who is looking for a partner, but wants a more complex or higher-performance airplane than you do. Don't jump into more airplane than you need or can afford simply because you have a partner for it. The costs of owning and operating the larger airplane are likely to create problems for you early on. Buying into a partnership, finding out that you are over your head, and then trying to get out of it will cost you money and grief all the way through the process.
Be careful about buying a share of an airplane where one person has owned it for a long period of time, and he is to be a partner. That person, while needing someone to help him defray the costs, may not treat you like the owner you are. You should be very careful about negotiating exactly who is going to do what in that kind of a situation and expect the other person to live up to the agreement he or she makes with you.
All agreements should be in writing. Verbal partnerships can be very tough to enforce if push ever comes to shove, because one person can always claim that he or she meant something other than what you understood. If the entire agreement is in writing, it is very difficult for either party to backpedal when it comes to a financial matter or other decision that has to be made that will affect each of the partners. The agreement should be as clear and straightforward as possible and leave no ambiguity about who is responsible for what. It is always best to have a lawyer who is familiar with airplanes write the agreement around the partners' desires.
Maintenance is another sticking point for some partnerships because one party has a different view of the level of maintenance that should be done and who should do it. Something as simple as an oil change can start a war between the partners. If one partner is a stickler for making certain the oil change is done exactly on time, while another thinks it's fine to run a few hours past the time when it is due, friction between the parties may result. The same is true of work a mechanic is willing to defer during an annual inspection: if one partner wants to defer the work to later in the year to avoid a large annual bill, while the other wants it done during the annual, problems may result unless a suitable compromise is made.
That's why it is vital that you find a partner who shares your views on operating and maintaining the airplane. Chances are that the first person who comes along and offers to become your partner is not going to be a match unless you have known that person for a long period of time and are familiar with his or her philosophies regarding airplane ownership. You must take the time to understand how a potential partner views his role as your partner before making an agreement with someone that neither of you will live with.
If you have several partners in an airplane and one wants to sell his or her share, there are several ways to go. Every partnership agreement should state that the rest of the partners have the right to accept or reject a new partner. If the rest of the partners decide to buy out the share of the one who is leaving, how is the value of that share to be determined? The agreement should specify this.
I'm a professional aircraft appraiser, and for many years I have done appraisals on certain partnership-owned airplanes every time there is a change of ownership. That protects interests of all partners. The person selling the share doesn't feel that he or she is not being adequately compensated, and the rest of the partners will not feel that they are overpaying for the share. The appraisal reports the actual market value of the aircraft, and that number is divided by the number of partners involved (or the ownership percentage in the case of an unequal partnership) to determine the real share value.
Some people think of flying clubs as large partnerships, and technically they may be just that. But flying club airplanes can be just as difficult to schedule as an FBO's rental airplanes. Usually flying clubs will take on a certain number of members per airplane. In theory that is not a bad idea, but in practice it sometimes leaves people in the lurch. If one of the airplanes in the club is newer than the others and has a great instrument and avionics package that the others lack, you know which airplane everyone else is going to be scheduling. It will be booked months in advance, especially for weekend trips. Some members get frustrated when they have to book the airplane three or four months ahead to be sure of a weekend trip, especially when the long-awaited day arrives and the weather is not suitable for flying.
Plan ahead, write it down
Partnerships can be a good thing for those who want to buy an airplane they cannot afford alone. But the partners must be flexible so that everyone concerned is happy with the result. When the bills come in is not the time to decide who is responsible for what. Those decisions must be made as the partnership is formed, and they should be put on paper before the airplane is purchased. If it is necessary to define the terms used in the agreement, do it...so later on one partner cannot say he or she did not understand exactly what was meant by a certain paragraph. From there it is a matter of living up to the agreement that everyone has signed.
Most people entering into legal agreements intend to live up to them. But it doesn't take much for one person to get on another's nerves over some minor detail that one is a fanatic about. Each partner must respect the other's viewpoints and some heavy-duty negotiations may be necessary at the beginning to insure the rights of all the partners. In fact, the negotiating may continue throughout the life of the partnership if it is to remain healthy and viable.