The Truth About Fractional Aircraft Shares
Pity the poor frequent commercial flyers. Poked, prodded and herded by airport security, they find themselves sardined onto overcrowded flights and living at the mercy of capricious airline schedules. Many of these business people and the companies that employ them are turning to the relatively new concept of fractional aircraft ownership as a way of regaining control over schedules while at the same time making an astute investment.
But like any savvy investor, individuals considering buying shares in what is essentially amembership airline should carefully investigate both the businesses they are considering putting their money into and the individuals who counsel them on the transaction.
The Need for Credible Advice
The economic challenges earlier this decade had a negative impact on virtually every sector of the aircraft industry. Just as hurricane damage serves as a magnet for construction contractors—some credible and some unscrupulous—the recent recession resulted in no shortage of “experts” dispensing advice about the aircraft industry as it adjusted to the tough times.
How can owners and potential buyers make knowledgeable, well-informed decisions when ready to purchase, upgrade or sell shares in this promising market segment? The most important recommendation readers should take away is that proper due diligence is critical both when selecting aircraft options and when selecting the consultant who will help them make the decision. One should always contact an accredited appraiser educated in aircraft valuations when making decisions of this magnitude. While there is currently no governmental requirement for accreditation for aircraft appraisers, accredited appraisers follow standards set forth by the American Society of Appraisers(www.appraisers.org), an independent organization that provides accreditation and standards for professional appraisals and subscribes to the Uniform Standards of Professional Appraisal Practice (USPAP). These standards set forth an objective market comparison methodology most commonly used for valuing aircraft.
Typically there are two different audiences for appraisals—in-house (company requested) and out-of-house (potential/current owner requested). Regardless of the type of appraisal requested, the valuation methodologies are identical. Therefore, aircraft appraisals should remain fairly constant regardless of who requests the appraisal. Some potential owners may request multiple evaluations for more thorough comparison. Though up to 10 percent variances may be considered acceptable by some appraisers, there should not be more than a 3–5 percent variable between two USPAP-accredited appraisers. Wider valuation percentages are more often found when nonaccredited appraisers provide the valuations. It is difficult to determine why the valuations are different because nonaccredited appraisers often do not subscribe to USPAP standards and methodologies. Therefore, doing a little homework before selecting an appraiser can prevent many surprises.
Short-Term Snapshot Is Inadequate for Evaluating Investments
Though frequent travelers increasingly are becoming fed up with the long lines at airports, lengthy security check-ins, limited airport availability, crowded flights and limited flight times experienced when traveling on commercial flights nowadays and many are turning to fractional jet ownership as a viable option—this has not always been the case.
Fractional ownership is an industry that has seen significant growth only in the past few years. Until recently, aggregated historical information about the industry was hard to come by. Shares bought during the industry’s growth spurt in the late 1990s are maturing and owners are considering their options, occasionally finding that their shares are not worth what they anticipated.
“Historically, the market was high in the first quarter of 2000 when fractional companies were just becoming mainstream,” said Carl Janssens, ASA, associate editor of Aircraft Bluebook–Price Digest. “Then the market began softening as did many other financial markets with the market bottoming in 2003. We are finally seeing price stabilization and a balancing of supply and demand in the market,” he added.
Over time, shares mature and many complaints about valuations are more related to the timing of the share transactions than how the valuations are conducted. In other words, annual utilization has been blamed for decreased values while the actual reason has to do more with the diminishment of values the industry has suffered over the past several years in the market itself.
Supply and demand is a simple economic concept that can have a profound impact on markets and on the people engaging in those markets. The impact of supply and demand in the fractional aircraft ownership market is no exception. By understanding market dynamics as well as the historical factors and the buying process, potential owners can find great opportunities to make smart investment decisions and meet their travel needs through fractional aircraft ownership.
Aircraft Appraisal: Only Half of the Equation
To ensure that fractional aircraft owners know what they are buying and are getting exactly what they are paying for, potential owners must understand that there are two separate aspects to evaluating a fractional ownership proposal—the aircraft appraisal and the business value.
Aircraft ownership valuation is a very tangible assessment that is made on a specific type of aircraft and is commonly derived via several credible resources on valuation. One of the most prominent resources used is the Aircraft Bluebook–Price Digest. End users of the Aircraft Bluebook include financial organizations, insurance organizations and industry participants (OEM, consumers, consultants) as well as government agencies. "The Aircraft Bluebook does not editorialize or make assumptions,” states Janssens. “It provides objective, nonopinionated market valuations and a timely snapshot of the market.” The Bluebook has specific instructions and tables, which allow for adjusting the value of an aircraft regarding its condition and airframe time. Since the Bluebook bases these adjustments on an average of both corporate and fractional aircraft airframe time and midtime on engines, higher-than-average usage usually will result in a diminished value while lower times usually would add value. Adjustments to paint, interior, modifications, conversions, avionics and other upgrades are also provided to the user. While the Bluebook provides the most detailed information about aircraft valuation, it is an historical snapshot and should be used as one of the appraisal tools when analyzing fractional shares. The Bluebook does not breakdown or analyze by fractional shares; it only provides whole aircraft valuations. Independent parties or potential buyers must break down the whole aircraft valuation to the fractional aspect they are considering.
Janssens provided an anecdote to help clarify this point, explaining that “when you consider investing in a race horse, which often has several owners, you don’t value the mane, tail and hooves—you value the whole horse.”
Don’t Overlook the Intangibles
Fractional jet ownership is an investment. As with any other investment, clients should research all their options including the value add that the fractional provider brings to the equation. But there are several critical factors that all potential buyers should consider when selecting a fractional aircraft provider. These are considered the business valuation aspects and include staffing, flight management, pricing options, operating costs, liquidity, safety and customer service. Each of these aspects clearly contributes to the overall value of the equation, but to each individual they hold a separate and distinct value. While paramount to one customer may be the value of 24/7/365 customer service, another customer may more highly value pricing flexibility or guaranteed operating costs. Some customers may place a heightened value on having the widest variety of aircraft types and sizes because their needs are varied.
Each owner must determine what his or her own individual needs are before effectively comparing fractional ownership options. Take, for example, Flight Options, which entered the market in 1998. To help potential owners understand the business valuations, the company works with them to create a unique transportation profile, provides facility and aircraft tours and even provides a 30-day satisfaction guarantee for their fractional service. Ultimately, it’s about individual need, choice, reliability, trust and value—all elements that are hard to quantify but are equally critical aspects of any service business.
In summary, fractional ownership can be valuable for many individuals and corporations seeking air travel options. For some, the opportunity cost alone derived from the convenience that fractional service offers in reduced time spent flying commercial can be the payoff needed to make the investment. The key to getting the maximum value for an investment is to ensure that the potential buyer is well-informed and clearly understands all aspects of the buying decision from the tangibly valued market dynamics and aircraft valuations to the more intangibly valued factors such as options, safety and convenience. Both tangible and intangible aspects are critical factors that make fractional ownership a valuable flight option. The advice of a trained aircraft valuation professional is a critical component in deciding whether or not to invest.
Published with permission of Ken Dufour, ASA; Wade L. Young, ASA; and Carl M. Janssens, ASA
Ken Dufour, an Accredited Senior Appraiser (ASA) with the American Society of Appraisers, holds a designation in Machinery and Technical Specialties–Aircraft. He can be contacted through his office at Aviation Management Consulting Inc., in Rockford, Ill. Wade L. Young, ASA, is designated by the American Society of Appraisers in Machinery and Technical Specialties–Aircraft. He maintains his practice in Wichita, Kan. Carl M. Janssens, ASA, is designated by the American Society of Appraisers in Machinery and Technical Specialties–Aircraft. He can be contacted through his office at AC-U-KWIK Aircraft Appraisals in Overland Park, Kan.