In his May 2006 “Inside Fractionals” column, Shaircraft CEO, James Butler, takes stock of how the fractional industry has evolved and explains how its business model has fundamentally changed. Butler recalls that early on, when the providers bore most of the variable cost risk, owners enjoyed “relative cost certainty and guaranteed liquidity.” Increases in variable costs were capped, fuel costs were stable and many providers guaranteed a minimum price for buying back shares. “Thus, it was fairly easy to determine what flying fractionally would cost.” However, as Butler explains, increases in maintenance, pilot, insurance and other costs, as well as a down market in preowned aircraft values made it difficult for providers to turn a profit, while still guaranteeing relative cost certainty to owners. This reality prompted providers slowly but surely to shift the variable cost risk to the owners, by instituting various operating cost surcharges and by eliminating guaranteed resale valuations. Butler notes, however, that consumers have reacted to this cost shifting. “[T]he rising popularity of jet cards reflects the willingness of owners to pay a premium to shift the variable-cost risk back to providers,” says Butler. He predicts that “[T]his tango of shifting costs between owners and providers seems likely to continue,” and advises fractional owners to “stay on their toes.”
Download: “Where is the Fractional Industry Headed?” (PDF)