Fractional Management Agreements
One of the realities of life is that all good things come to an end. The relationship between the fractional sales team, the tax man and the spreadsheet you are subjected to as part of the sales process is about to change fundamentally. While it would overly simplistic to say so, the primary driver of this change was accelerated by the populist backlash against private aviation that reached its peak with the “GM goes to Washington” debacle.
NOT LIKELY TO CHANGE
When a lot of companies bleed red ink it is really tough to justify the private jet and fractional ownership. What is even tougher is to justify the tax benefits under Part 91 rules that are most likely going to be eliminated through IRS and SEC pressures to make private use taxed at cost. (For a quick refresher of aviation law, Part 91 is considered private use – such as fractional ownership, which is regulated, viewed and taxed differently than Part 135.)
During the birth and growth of fractional ownership, management agreements that allowed one to fly fractional also provided nifty benefits that seemed too good to be true. You could get nice amounts of depreciation and when you did use it for overtly private use, the taxable benefit was kept artificially low.
PART 135 TO THE RESCUE?
The Part 135 charter management relationship is timeless because it is simpler, smells more like a legitimate business and can even subsidize some of your private use. And the tax man likes it, which doesn’t hurt either.
With the rise of fractional ownership in popularity, however, the typical small charter management firm lost its way and ability to compete with the incredibly powerful brands of manufacturer financed fractional ownership companies.
As a fractional owner, the ideal management relationship you’ll want to look for in the future is one that has the following traits:
- a) the aircraft are operated exclusively under Part 135.
- b) the revenue generated via card programs, chartering of your aircraft or the share in the aircraft is something you’d like to know more about – if not get a percentage of (it is your asset after all.)
- c) the line in the sand with respect to operational control is clear – you are just the owner, and you are looking to the manager to put your aircraft to work when you aren’t using it.
LEGITIMACY IS CHIC
When the following criteria are met and you sit with your accountant at year end to discuss how much use was personal, the fact that you paid what the aircraft can be chartered for (in essence, back to yourself) you’ve crossed the threshold into what the future of private aviation will most likely look like 5 years from now in the US.
If you have further questions about fractional ownership, the landscape of private aviation, etc. don’t hesitate to contact us via email.