Learn to Fly Private

Welcome to the 16th edition of "Learn to Fly Private". Today, I'm going to teach you how to do an analysis between chartering, buying a fractional ownership, or a partnership in a jet. The last few weeks we've spent time digging deep into whole aircraft ownership. Full transparency, that is the area that I spend my day job in so much of it was at the top of mind. If you missed any of those, as a reminder you can see all past issues here. Before we dive in, a little pice of housekeeping.

I'm Headed to Main Street Summit!

My friends at Main Street Summit have invited me to come give a presentation October 9th-10th, 2024 on private aviation and how business owners should think about it. I'm very honored to have been invited, and you can come too! Use code EARLYBIRD24 to get 15% off and tell them that Preston sent you. Maybe I'll get a cool t-shirt.

p.s. I have talked about organizing some shared private flights to Main Street Summit out of select destinations. If you're interested in this and in attending, reply to this so I can gauge actual interest before putting in some work.

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Now let's dive in...

Charter vs. Fractional

I want to revisit a topic and go more in depth into the rational behind why someone might choose to charter, why they might own a portion of a jet on a national fleet like Netjets, Airshare, Volato, or Planesense. Today, we're going to talk more about the strategy and the philosophy behind one or the other.

Chartering (And Jet Cards) And Their Typical Owner Profile

Chartering is always the least-committal way to fly private. On a per hour basis, it is the most expensive (unless you find the elusive "Big Foot" aka empty leg charters) but it also is a relationship that is very easy to end. It's also usually the option for people just starting out flying private. Or, it's used in addition to fractional ownership or whole aircraft ownership...

Who Chartering is for

Chartering is best for those who fly less than 50 hours per year on a given type of aircraft. I say specifically a given type of aircraft because you may use charter as supplemental lift compared to your usual trips. If you're taking 10 friends to the Super Bowl this year to sit in the box with Taylor Swift, you will want a heavy jet (Gulfstream G450/G550 or fly like Taylor in a Falcon 7x). You might only need that 2-3x per year, and charter or own a fractional in something smaller like a PC12 or a Phenom 300. Check out these range maps, the first image is the Phenom 300 range in Atlanta. The second is the G650ER range out of Dallas.

This is exactly what I bet Taylor does so that she can make it to the Super Bowl from her show in Tokyo. She owns two jets and neither are a perfect fit for this mission, so she will likely charter a G650ER or similar with a bedroom and a shower. She doesn't need the G650ER for all trips, so she charters when she needs ultra long range. My friend @jrupp says you can make it in her Falcon 7x will make it because you have a tailwind. I guess we'll never know, but let's imagine for the purpose of this illustration she couldn't make it.

Chartering is also great for those who don't want to worry about maintenance or monthly management when they're not flying. These monthly fees exist in fractional, co-ownership, and whole ownership and it doesn't matter how much or little you fly in a given month, you're going to have to pay them.

Chartering is also great for those who don't want to tie up capital or take on debt. Maybe your money is yielding 15% right now and you don't want to increase leverage to keep those credit lines open for expansion. But, you do want to fly private for 30-50 hours per year and write those trips off as a business expense (not tax advice). Chartering is great for you because its transactional and you can be opportunistic with your money when the time does come for expansion. When the time comes, you can buy your own because you will use it to keep expanding your empire.

Who Chartering is not for

Chartering is not for those who want to be on the same plane every time. For that matter, neither is fractional ownership but we'll talk about that later. When you charter, there is no guarantee on who the operator is or which plane you will be flying. The caveat here is if you use one local operator and use only their plane, but there will be times when you want to use it and that specific plane is not available because its already booked or has a maintenance event.

Chartering is also not for those who are looking to fly at the cheapest cost per hour. You will pay a premium above and beyond the cost to operate the aircraft, especially on a blended basis when you distribute fixed costs across the hours flown. To calculate your effective rate, take your annual fixed costs + hourly cost to fly divided by the number of hours flown*. In fractional programs, aircraft partnerships and owners who fly more than 300 hours a year, this cost is usually less.

*If you want to get really particular, you could also factor in depreciation + cost of capital in your annual expenses to get your all-in blended cost. Most people don't factor that though, its the cost of doing business.

Where do jet cards come in to play?

I have a mixed opinion on jet cards or membership programs. On one hand, there are some membership programs that allow you to lower your effective rate. The math on these cards are often just a marketing stunt though, and you're really just paying market rate if you were to call up a charter broker.

Phenom 300 Jet Card

Here's some real pricing from a Phenom 300 card that a subscriber asked me to obtain for them.

• Purchase Price: $110,000
• Cost Per Hour: $4,440
• Express Rate: $3,313 (keep the airplane with you, out and back the same day)
• Total Days-Based Access: 10 days (41 blackout dates)

Let's say you took 10 trips with a 3 hour average trip.

• 30 hours for $133,200
• + the $110,000 purchase price of the membership (the hourly is on top of the membership cost)
• = $8,160/hour all one way trips or
  $6980 for all out-and-back trips

Is that the better way to fly?

Maybe. There are a lot of variables here like repositioning costs (are they included?), how far you are from the fleet, and what your expectation of service level is. You might be able to get that blended cost down on a per hour basis depending on where you live and how much private air service is there.

There's also a fairly high commitment level, as compared to chartering being a one time transaction. With every membership program or jet card, you want to fully understand the program before signing up. This one has all the major blackout dates you would expect (holidays, Master's Weekend, super bowl, etc)

You're also essentially handing over an unsecured loan to the provider, because your money is not protected and in the event of a failure (there have been plenty), your money is gone. As always, feel free to reach out to me and I'll help give you some coaching on what to look out for. I have already done this for 5-6 subscribers.

P.s. Don't Forget the Tax Man

You'll have to pay federal excise tax on chartering for Part 135. 7.5% to Uncle Sam.

Fractional Programs and the Concept of A Floating Fleet

For the sake of this newsletter, we are going to define fractional programs as one that has multiple airplanes that "float" which means they're not all based at one airport. If they're all based at one airport, you're really joining a hybrid of a fractional program and a shared ownership group, but with a lot less flexibility.

Some Popular Programs Include

• ​Netjets​
• ​Flexjet​
• ​Volato​
• ​Airshare​
• ​Nicholas Air (I don't think a floating fleet though)
• ​flyExclusive​
• ​PlaneSense (Just announced national service yesterday)

Feature: More Depreciation Benefits

Once again, this is not tax advice, but there are some depreciation benefits to owning in a fractional program like the ones listed above. You can depreciate your fractional ownership in either a bonus or a straight line fashion. This is attractive to business owners who want to offset some of the up front cost of the purchase with the tax benefits. Consult your CPA for the best strategy, and its always good to get a second opinion because some CPA's don't understand the nuance of aviation tax law. There are parts of the tax code that apply specifically to airplanes.

Fixed Cost + Lower Hourly = ?

We mentioned earlier about the blended cost of actual hourly flying. Let's use the same airplane, a Phenom 300, with a similar days based model. A note, the days based pricing model works best for 2+ hour trips, and anything under that it usually makes sense to go with another program.

Phenom 300 Fractional Cost

• Purchase Price: $599,000 (Not going to include in hourly though, will explain after)
• Cost Per Hour: $4,130
• Express Rate: $3,079 (keep the airplane with you, out and back the same day)
• Total Days-Based Access: 20 days (no blackout dates)
• Monthly Fixed Expense: $10,500

Again, 3 hour average trip but access for 20 days, so 60 hours.

• 60 hours for $247,800
• + the $126,000 per year for shared fixed expense
• =$6,230/hour for 60 hours, $8,330 for 30 hours
  or $5,179/hour for 60 hours out and back etc.

So, why not add the purchase price?

I would argue that you aren't paying the full purchase price divided across the hourly rate because there is a terminal value at the end of the contract. This particular contract is a 5 year contract (with a CPI inflation adjustment/increase each year on the fixed costs) and then there is a 5% brokerage commission. Here's our assumptions

• 8% cost of capital, 20 year amortization, 5 year term, 80% LTV
• Asset depreciation of 10% per year

Sale value is around $350,000, which is probably a good assumption because the asset you own will get flown a lot, causing higher depreciation.

• $249,000 in actual depreciation cost
• $17,500 in commissions cost
• $171,166 in interest expense
• $437,665.71 of additional cost for 5 year contract

So add an additional $1,458 per hour (300 lifetime hours) to get you to $7,688.88/hour. So you're saving $500 an hour over a 5 year term, don't have blackout dates, and there is some real cash savings that comes with the depreciation and tax benefits. Again, consult a CPA that specializes in this and can evaluate your specific use case.

Now, cost of capital isn't an equation for everyone, but I suggest you at least measure your internal cost of capital when you're doing back of the napkin math. Without interest expense, you're only adding $444, bringing your effective hourly to $6,674, a savings of $1400 and a lot of the expenses are deferred into the future.

The Bottom Line

At the end of the day, you are deciding between you taking on the capital intensive part (the purchase and the monthly shared expense) or the easy one-off or membership based transactions. Depending on your specific situation, it could be a blend of the two. I have talked to a few subscribers who have multiple fractional programs and still charter from time to time.

It's always important to pick the right aircraft for your mission and to pick a provider that has a proven track record of success, especially in times of rising interest rates. The belts have been squeezed at a lot of these operators, and if you have a large deposit on file with them in the form of a membership or a jet card, be sure that they're going to still be in business in 18 months.

Fractional programs offer a higher level of support and no black out dates. Those things are important to consider, especially if you're going to us it for family.

Until next week,

Preston Holland

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