Former NetJets Europe executive Chris Moody claims he has helped to bring liquidity back into the market for fractional shares in business aircraft by offering a way to buy and sell shares without incurring what he regards as the prohibitive fees associated with fractional ownership contracts. Moody established his UK-based Fractional Jet Europe company on the very day in September 2008 that the Lehman Brothers bank collapsed–marking what is widely perceived to have been a key trigger point in the decline of demand for business aviation.
“At the beginning of 2008 I could see that the market was going to take a turn for the worse,” said Moody. “We had the beginnings of the credit crunch and also the threat [in the UK] of taxing the non-domiciles, many of whom were my clients at the time. I realized that many of them would be looking to get out of their long-term contracts, and saw an opportunity to create a totally new market that did not exist in Europe.”
According to Moody, the difficulty and expense of getting out of long-term fractional ownership contracts is a key factor in the lack of liquidity in the fractional marketplace and, by the same token, the main opportunity for Fractional Jet Europe to exploit. Generally, fractional share owners can terminate a five-year contract only after three years and when they do they face penalties amounting to around 7 percent of the residual value of the aircraft share as well as three months of fixed costs (management fees and so on).
Fractional Jet Europe assists owners in selling their aircraft shares directly to another person, without incurring these penalties. The new owner simply inherits the remainder of the contract (and, in many cases, unused hours) on exactly the same terms.
The owner is entitled to assign the contract to someone else during the term of the agreement and Moody’s company essentially brokers this process in return for a fee amounting to 25 percent of what the owner would have had to pay to buy himself out of the fractional contract. He claimed to have saved a client selling a Dassault Falcon 2000EX around $274,000 in a recent transaction.
Selling a share entails a certain amount of legal complexity. In theory, the fractional ownership provider does have veto over whether to accept the new share owner but, assuming it accepts the buyer, a new contract is issued once all the liabilities have been calculated.
“The advantage of creating an open market [for fractional shares] is that there is scope to set your own value [for an aircraft share],” said Moody. “The market has picked up lately and the residual value of shares has risen.”
In addition to remarket- ing NetJets shares, Fractional Jet Europe also says it has been involved with clients of turboprop fractional ownership provider JetFly. It is also seeking to broker leases offered by charter operator VistaJet and block-hour packages through Cessna Citation Mustang operator Blink.
Moody told AIN that fractional ownership will have to reinvent itself to emerge from the downturn. “[Fractionals] will have to look at the service they provide. For what fractional ownership offers it is too cheap,” he argued, pointing out that NetJets Europe has recently increased its rates despite softening demand. “Only a limited percentage of the client base actually needs this level of service and so there is great scope to simplify the model for about 80 to 90 percent of customers and get the costs down. At the moment it is a case of one size fits all, and we need some more sizes.”