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When operators go under
Block charter and jet card programs can be great options. Not only do they simplify the booking process, they also provide benefits, such as discounted fees and, on occasion, guaranteed airplane availability and upgrades.
Buying into these programs involves risks, however. If the company goes under or files for bankruptcy protection- a definite possibility in this market-there is a chance you'd lose your money. "It's a nightmare scenario," said Steve Courtiss, vice president of charter broker A-List Jets. "You invest hundreds of thousands or even a million dollars, and suddenly it's gone. And it wasn't like you put that money in the stock market. You were expecting a service."
Clients of Miami-based charter broker JetNetwork experienced this exact "nightmare scenario" in 2007, when Florida's secretary of state administratively dissolved the business and the IRS seized its assets, according to documents filed with the U.S. District Court in the southern district of Florida. Now shipping company DHL Express, a former client of JetNetwork's FlightCard program, is suing to recoup the $500,000 it lost when the government seized the company's assets. Other JetNetwork creditors and clients have filed claims totaling nearly $24 million.
Unfortunately, there are no FAA or DOT regulations to prevent such a scenario. If a charter company were to go under-and take your money with it-your only recourse would be to file a lawsuit with the civil courts, a process that could take months or years to resolve. However, there are steps you can take before signing on to such a program that might protect you and your investment.
Know the company: The most important thing is to know the company you're working with. "This business is all about trust," Courtiss said. "Get to know your brokers. Have a face-to-face meeting with them. Do research on them."
Put your money in an escrow account: You should also place your block charter or jet card money in an escrow account with an FDIC-insured bank. The account should be under your name, so you can pull the money out at any time if the services aren't up to par. Most charter companies automatically suggest this type of account. "Other programs will have this as an option if the customer requests it, and if they refuse, this should be a red flag," advised Nate McKelvey, CEO of Jets.com.
To withdraw the funds, a charter company would have to abide by the terms of the escrow agreement approved by the bank, the client and the charter company itself, according to Greg Johnson, president and CEO of charter broker OneSky Jets. If the charter company withdraws funds outside of the terms of the agreement it would be guilty of fraud or misappropriation of funds, not just bad business, he explained.
Know the financial institution: Once you decide to establish an escrow account it is extremely important to know the history of the financial institution in which you plan to deposit your money. For example, "Make sure it doesn't have a significant number of mortgage-backed financial obligations," advised Jeremy Castonguay, CEO of Charter Logic.
Pay attention to the agreement: You should also pay close attention to the agreement itself. "Our escrow agreement plainly states that the client is due his money should we go into bankruptcy or fail," Castonguay said. "Essentially, that money belongs to the client and he can pull it out. We would recommend that clients get a copy of their agreements. Have an accountant look at them. Really understand who controls that money should the company fail. Read your contract before you sign it."
Use ad hoc charter instead: If you're still worried, the best option would be to simply avoid block charter and jet card programs. "If people are concerned, I would tell them to take their money out of these accounts," Courtiss said. "They can set that money aside and budget it for future trips and pay on a trip-by-trip basis as opposed to having a charter company having access to it."
Air Royale president and CEO Wayne Rizzi agreed. "Charter customers aren't getting better deals or better pricing when they pay for these jet cards or membership programs," he said. "And just look at the fly-by-night brokers or operators in the last decade who've taken people's money in advance, only to go out of business. Given our current economic crisis, I would warn any customer to think twice about paying hundreds of thousands of dollars in advance to any company selling 'future' flight hours."