- The Real Cost of Fractional Ownership
- Some of the Benefits of Using Business Aircraft
- Tax-Free Exchanges of Aircraft Under Section 1031
The Real Cost of Fractional Ownership
By Roy Norris, Aviation Consultant

Much has been written about fractional ownership over the last year. Few subjects in aviation have produced as Much polarization and strong feeling in the aviation community, pro and con, over a method of use of business aircraft. The picture has been clouded by questions as to whether fractional ownership aircraft are commercial operators under the definitions in the Federal Airworthiness Regulations, concerns over the threat to conventional flight departments which fractional ownership represents, and the unfortunate lack of business ethics some fractional ownership companies have displayed in the marketing of their product. There has been much miss-information provided on both sides of this issue.

Fractional ownership has deeply divided the National Business Aviation Association and threatens to wreck this critically important voice for business aviation. With emotions running so high and most commentators on the subject potentially having their own interests either threatened or served by fractional ownership, it's been difficult to determine the real facts on fractional ownership: its real costs, benefits, and pitfalls.

My observations and analysis presented in this article are based on my experience with fractional ownership companies both selling a lot of aircraft to them and overseeing the startup of Raytheon Aircraft's Travel Air program while I was president of Raytheon Aircraft.

On the surface, fractional ownership seems like a great idea and, in certain situations, it can be. It has great promise as an important new method of delivering the benefits of business aviation to a much broader sector of the market by allowing customers to buy a part of an airplane and then operating it for them for compensation. But customers who's annual flight time requirements would not justify the ownership of a full airplane, or customers that just don't want to be bothered with the administrative burden of setting up and managing a flight department have been led to believe that fractional ownership is a low cost alternative to traditional full aircraft ownership supported by a flight department. In some restricted situations, it is. But in most cases for corporations, it is far more expensive than traditional full ownership. However, one cannot ignore the fact that of recent times fractional ownership has been the fastest growing segment of the business aviation industry.

There are a number of factors that take the bloom off this rose. There are hidden costs that are never pointed out by some traditional fractional ownership companies that dramatically change the cost equation. Further, such misleading statements by some fractional ownership companies as "no deadhead costs," their misrepresentation of some of the costs of full ownership, and the insincere approaches made to many flight departments under the guise of "supporting their operations" when their real intent is to replace those flight departments in their entirety, make an otherwise useful addition to the spectrum of aviation services take on a rather schlockish nature reminiscent of "junk bond" salesmen.

Fractional ownership can be a good thing. But it requires honesty in the presentation of the real costs involved and ethical behavior by the salesmen representing shared ownership companies that has been sadly lacking with some of the independents.

Fractional ownership companies offer a wide range of models giving users the ability to match an aircraft to their pocketbooks.

  Some of the Benefits of Using Business Aircraft  
as offered by NBAA

Saves Time -- Business aircraft not only reduce flight time by providing point-to-point service, they decrease the block or total travel time because they are able to utilize smaller airports closer to final destinations. Also, the office environment of a business aircraft allows travel time to become productive time.

Flexibility -- People who travel by business aircraft do not have to alter their schedules to conform to those of commercial carriers. Consequently, they have the freedom to change course en route and leave and arrive according to their own schedules.

Reliability -- Business aircraft are engineered and built to the highest standards, and companies that maintain their own aircraft have complete control of the readiness of their fleet.

Safety -- In recent years, businesses aircraft have compiled an outstanding safety record that is comparable to or better than that of the airlines.

Improved Marketing Efficiency -- Business aircraft not only extend the reach of a sales force, but they can quickly and easily bring customers to the point of sale.

Facilities Control -- Business aircraft help management extend its control by facilitating personal visits to remote company sites.

Personnel and Industrial Development -- The mobility that business aircraft provide company employees can accelerate training, orientation, and teamwork.

Privacy and Comfort -- Conversations on business aircraft are confidential, and cabins can be configured to accommodate virtually any special needs of the passengers.

Efficiency -- Business aviation enables a company to maximize its two most important assets: people and time.

The National Business Aviation Association ( NBAA ) represents the aviation interests of over 5,000 companies which own or operate general aviation aircraft as an aid to the conduct of their business, or are involved with business aviation. NBAA Member Companies earn annual revenues in excess of $4 trillion - a number that is about half the gross domestic product - and employ more than 19 million people worldwide. The NBAA Annual Meeting & Convention is the world's largest display of civil aviation products and services. More information on NBAA and business aviation can be found on NBAA's Web site at http://www.nbaa.org .

Tax-Free Exchanges of Aircraft Under Section 1031

The Internal Revenue Code ("IRC") provides a special exception to the general taxation of sales of property. Under IRC § 1031 (all § references herein are to the IRC), business property may be exchanged tax-free for other business property if both properties are of "like-kind." The rationale for this rule is that, when a business exchanges old property for new property of the same kind, the investment in the new property is somehow a continuation of the owner's investment in the old property. While this transaction is referred to as tax-free, it would be more accurate to call it tax-deferred. Taxable income from a like-kind exchange is effectively postponed until the new property received in the exchange is subsequently disposed of in a taxable transaction. If the new property is itself exchanged later for a third piece of like-kind property, the income may be postponed continually. On the other hand, if a like-kind exchange is not executed, a taxable event occurs and the tax basis of the property received is increased by any gain that is recognized, up to its fair market value. The like-kind exchange is therefore a powerful tax-planning device, but one that requires careful attention to many specific and technical requirements.

Hereafter, the old property disposed of in a like-kind exchange will be referred to as "relinquished property" and the new property acquired in a like-kind exchange will be referred to as "replacement property." The person (e.g., corporation, trust, partnership or individual) engaging in the exchange transaction shall be referred to as the "taxpayer".

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