Is it the right time to exit your fractional share?
We are often asked to analyze the consequences of terminating a client’s fractional shares and find a replacement service. Flying commercial is as frustrating as ever…soon you’ll have to deposit a quarter to recline your seat or access your tray table (presumably to work on your laptop because no one seems to serve food anymore).
One of the procedures of our analyses would be to conduct an impartial needs assessment. This needs assessment should be completely objective and determine your need and subsequently consider your wants. We also like to conduct a trend analysis to determine future needs.
Once you complete the analysis, you need to review what your current costs are to fly your aircraft. You should consider all the costs including, cost of capital for the money tied up in the fractional share to compare apples to apples. Many other options in today’s marketplace require very little capital to qualify for their best rates. You must also weigh the exit costs such as tax implication, early termination penalties and remarketing fees.
In the past the options available to fractional owners to replace their service were somewhat limited. Today there are many very safe, high quali ty options like super charter brokers who find the “lift” from a select group of operators and complete historical safe ty checks multiple times prior to the flight all at a pre-determined guaranteed rate. At last check there was only one charter broker whose safe ty checks were certified by Aviation Research Group, Jets.com. I’m certain others will follow suit because it is a good program.
If you conclude that terminating your fractional share is your best option, you should immediately put in your exit notice…most managers will allow you to rescind your exit notice for a period of time if you change your mind but confirm that with the manager first. The more you delay, the more time before you receive your money.
Once you receive your exit package, seek a second opinion on the value of your aircraft. There is clearly a conflict of interest when the manager who benefits most from you receiving a lower return is advising you on the value of your aircraft. This is not to say that all companies try to be aggressive on their valuations, in fact with some companies we have found quite the opposite, they give their exiting owners a fair valuation. Some companies take a much shorter view of the future potential of happy clients and try to “low ball” their valuations and tell their clients “it’s a tough market out there.”
The sale of an aircraft may have some tax implications depending on the depreciation schedule employed. Also remember the remarketing fee of typically 7% will be deducted from the exit value. There are other less obvious expenses that can be incurred such as over flown hours…these hours can be extremely expensive often 3 times the typical hourly rate. The other fees you could incur are early termination penalties that come in the form of monthly management fees (possibly 24-30 months minimum from contract start date). Remember, you may have the right to sell your share to an unrelated third par ty who can pick up your contract where you left off…therefore saving you significant penalties. Also know that if you trade your balance in on your share for the manager’s card program, you may save the fees so check with your provider.
There are many moving parts to exiting a fractional share so be careful and seek a second opinion about the value of your share. Challenging the valuation is a process that requires management and objective thinking. If a company is underpaying you by a million dollars (whole aircraft), that may only be fifty thousand dollars for your share less the costs for the appraisal process…so by all means analyze your options and look at the up side potential vs. the costs. We have seen the appraisal process net one client nearly $150,000.