Special Report: The State of Fractional Ownership

Even as America struggles to cope with one of the deepest recessions in half a century, fractional ownership continues to hold its own, leading long-term analysts to conclude the various shared-ownership programs are filling a growing need for new travel options. Furthermore, it is clear that at least one (and perhaps two) of the major fractional companies -- NetJets, Bombardier Flexjet and the merged Flight Options/Travel Air operations -- has achieved the coveted status of "critical mass," where shareholder base is sufficiently large that management fees can sustain the operation and generate profit without the necessity of selling more shares.

While the "dot-com" collapse initially resulted in some defrocked entrepreneurs redeeming their shares en mass, 2001 still saw the combined fleet of the "big three" fractional-ownership providers increase by 25 percent and shareholders by about 30 percent from the previous year, despite the ongoing economic cliff-fall and aftereffects of the September 11 terrorist attacks.

At the end of first quarter 2002, the total fleet of this trio stood at 642 aircraft and shareholders at 5,156 (up from 4,854 in 2001). Airframe manufacturers refuse to reveal the customer breakdown of their backlogs; however, it's estimated that as much as 20 percent of firm orders on business aircraft OEMs' books represent fractional ownership purchases. In the last six years alone, industry leader NetJets' aircraft purchases have totaled more than $19 billion.

According to the Aviation Resource Group/U.S. (ARG/US), which statistically tracks the fractional ownership industry, share redemptions (i.e., selling back to the fractional provider) among the three major fractional players for the first quarter of this year stood at 3.51 percent. Were this figure to remain constant through the year, it could equate to a total of slightly more than 14 percent.

When compared to previous years, ARG/US President Joe Moeggenberg observed, the extrapolated bail-out rate for 2002 is double digit but somewhat lower. "For 1999, the total redemption rate was 19.74 percent; for 2000 it was 17.66; [and] for 2001, it was 18.25," he said. "So I really can't say that this shows a trend of increasing redemptions."

Prevailing in Difficult Times
The fractional-ownership industry as a whole went through "a difficult time" in 2001, Bombardier Flexjet marketing director Steve Phillips reported from his office in Dallas. Nevertheless, Flexjet still increased its sales by approximately 10 percent. "What we are seeing this year is the whole segment coming back in a strong way," Phillips said. "We anticipate the growth necessary to exceed what we experienced last year, somewhere in the area of 15 percent-and that's a conservative number."

Meanwhile, NetJets, the fractional provider that in all likelihood has achieved "critical mass," will announce a major initiative at the NBAA Convention to place shares among corporate flight departments seeking airlift to supplement their in-house aircraft. The Columbus, Ohio-based fractional-ownership pioneer predicts that its fleet of 13 different aircraft types will reach 540 airframes by the end of 2002. Also this year, NetJets expects to log more than a quarter-million trips worldwide with its shared-ownership fleet.

Just as in the charter business, the most popular aircraft type currently among the majors is the light jet, e.g., Bombardier Learjet 31, Cessna Citation Ultra and Raytheon Beechjet, accounting for almost 36 percent of the combined fleet. Furthermore, ARG/US is forecasting that entry-level aircraft will continue to lead sales in fractional ownership.

One of the reasons for fractional's popularity is heightened awareness among the general public, particularly the upscale business travel segment, of its existence as a travel option. The NBAA's government affairs director, Doug Carr, credited "the print media" for this education, since the major fractional providers frequently advertise in mainstream business publications like The Wall Street Journal, Forbes and Business Week.

"What we're seeing is that within the traditional flight department arena there is steady interest in fractional ownership as a travel option," Carr said. "More and more flight department managers are getting information and briefing their superiors about fractional ownership and what it can mean to their operations."

Desperately Seeking Subpart K
In efforts to keep fractionals from being regulated as a commercial operation, the NBAA played a major role in helping to formulate the draft Subpart K of FAR Part 91, which would ultimately govern fractional-ownership activities. As the NBAA Convention convenes in Orlando, the FAA's Subpart K promulgation process has ground on for some 30 months since the Fractional Ownership Aviation Rulemaking Committee (FOARC) presented Administrator Jane Garvey a draft notice of proposed rulemaking.

The FAA originally expected to release the final rule in July, however, its publication will more than likely not be seen until early 2003, since the DOT and Office of Management and Budget each have 90 days to review the document. The agency has been attempting to fine-tune the final rule to accommodate "real-world experience in the industry," a process that got delayed in the wake of 9/11 when security regulation took a higher priority.

While fractional ownership has apparently found its niche in the United States, it has taken longer to catch on in other parts of the world. In Europe, the big hurdle is the regulatory climate. "It's incredibly convoluted," Moeggenberg said, "making business very difficult, which explains a lot of the problems NetJets and Flexjet have experienced, especially taxation rules and regulations."

NetJets has scaled back its European program, while Flexjet in March pulled out altogether, substituting an upscale charter service on the Continent dubbed Jet Membership. "We think we got in there too quickly with our fractional program," Phillips admitted. "The business environment over there is different from the U.S., and what we learned is that people are really looking for high-quality charter operations."

In the near future, the big three may have some competition from increasing numbers of small regional fractional ownership programs. "Our growth forecast published at the beginning of the year reflects regional fractional programs popping up that are taking a small percentage of the majors' business away," Moeggenberg said. What is apparently driving fractional users to abandon major providers for small regional programs is the realization that, while their travel patterns are essentially regional, they've been paying for nationwide service, ARG/US determined.

Moeggenberg even predicts the emergence of a type of code sharing between the smaller fractional operators and the major players, "where occasionally someone in a regional program would need a transcontinental ride and could get it though an interchange agreement between the fractional companies."

By David Esler