Fractional Insider, a six-month-old Dallas company formed to provide assessments and recommend- ations for fractional aircraft owners and potential owners, claims its new share-exchange program can save buyers and sellers hundreds of thousands of dollars in brokerage, remarketing and penalty fees.
“Until now, the only viable option for a share owner seeking to end its contract has been to sell back to the original provider,” said Fractional Insider president and CEO Mike Riegel. “Selling a share typically takes 90 days or more, during which time owners continue to pay monthly lease and management fees. In addition, providers charge a remarketing or brokerage fee that ranges from $50,000 to $150,000 per share sold.”
Riegel told AIN that his fractional-exchange transactions are taking an average of two to three weeks, “simply because before we make the share available we’ll do a quick review of the contract so we have a package ready to show anyone who takes a look. There are no changes to the contract because it’s a straight assignment. If a buyer likes what he sees, then we work through the provider to get a fresh set of documents drafted.”
Why wouldn’t the provider just do this themselves and be able to do it quickly? “The provider has a different motivation,” according to Riegel. “Its aim is to buy shares back and then mark those shares up by a usually significant amount for resale at their current retail pricing levels. What we’re doing is taking the share someone has, with the hourly and monthly fees that were contracted two, three or four years ago [that are well below current levels], and then making that available to someone else.”
For an exchange to happen, however, the provider’s support is needed. So far, Riegel said, two of the four biggest national programs allow reassignment of an existing contract. A third provider is taking a look at each proposed exchange, case by case. The fourth one won’t allow an outright exchange. Riegel prefers not to name which providers are doing what, but the four he’s referring to are CitationShares, Flexjet, Flight Options and NetJets.
Riegel said, “Yes, providers are forgoing an opportunity to remarket the shares at higher monthly and hourly rates, but on the flipside the cost of getting new clients for fractional ownership is going up all the time. It’s probably between $150,000 and $200,000 in marketing costs. So, under our arrangement, a provider gets a new client at minimum expense.”
Fractional Insider’s main business is doing assessments and evaluations for both existing share owners and potential share owners to recommend both a provider and an aircraft. Often, an aircraft share available for an exchange assignment matches the requirements that came out of the assessment, Riegel said. “We see ourselves as a dating agency, putting the buyer and seller together once the provider says it’s OK. The share owners like it because they avoid a 90-day delay and having to pay a 7-percent remarketing fee, and the buyer saves a great deal because he is taking over the lower fees of the existing contract versus a higher fee schedule as a new client under a new contract.” Over the last seven years, the frax monthly and hourly fees have gone up well ahead of the consumer price index, according to Riegel.
But Riegel isn’t giving away his services. “We charge a registration fee of $2,000 to an owner who chooses to make the share available to us. The potential buyer is normally a client who goes through a full assessment and evaluation process for a flat rate of $7,500. At the end of that process we will make a recommendation in terms of provider and aircraft.”
Riegel, who spent several years in marketing at Bombardier Business Aircraft and later at its Flexjet fractional program, noted that an owner may sell his share or shares at any time during the contract period, but there is a penalty for doing so within the first two years. For instance, he said that if you sell within the first two years “with NetJets and Flexjet, in addition to a remarketing fee that ranges from about 4 to 7 percent (of the aircraft’s original purchase price), you will pay on top of that liquidated damages that could be as high as 20 percent. Once beyond the first two years, an owner just pays the remarketing fee and then has to wait whatever the requisite period, which in many cases is 90 days, before the deal can be finalized.”
If a shareholder who has been in a contract less than two years can find an exchange through Fractional Insider, the owner could save the penalty cost and the remarketing fees. Under the exchange process, Riegel explained, the new owner picks up the existing contract of the seller with no increases in fees. “We’ve seen one provider that’s now imposing a $5,000 transaction fee, but outside of that we have not seen any other fees applied to the transaction.”
Riegel said, “We recently closed an exchange on a midsize jet. The buyer saved about $170,000 in terms of the capital costs of the share versus purchasing a new share. Further, we’ve estimated that over the next three years the buyer will save another $130,000 in monthly and hourly charges. So his total savings are about $300,000 compared with purchasing the same share new. We did that deal in about a month, so the seller saved about two months of management and hourly fees, which would have totaled about $60,000. And he avoided a 7-percent remarketing fee, which was another $50,000, so he saved a total of $110,000.”
Shareholders themselves can do this on their own, but Riegel said Fractional Insider has access to many more people and many more shares. The company has been involved in several hundred assessments and transactions in the six months it has been in business, Riegel said. “In the six months that Fractional Insider has been operating, it has had nearly 2,000 inquiries and we have nearly 300 clients.”
Share transactions in the first nine months of last year were down about 20 percent over the same period in 2001, according to Riegel, but he pointed out that there is usually more intense buying in the last couple of months of a year. “We also look at redemptions [the number of shares sold back]. By August we had seen as many redemptions in 2002 as we had seen in the whole of 2001, with the busiest part of the year to come.” Redemptions typically constitute about 10 percent of total market volume, Riegel said, but he believes they will account for about 20 percent for the year 2002.