Advice From Two Experts

We talked with two longtime consultants about how they help clients get the most for their bizav dollar.

FractionalLaw’s Daniel Herr

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Asked in 2002 to review NetJets invoices for a friend’s parents, Daniel Herr discovered numerous overcharges and questionable fees. “I wound up saving them a significant chunk of money,” he recalled.

Sensing an opportunity, the former NetJets pilot launched a consultancy for fractional shareowners. However, “It became clear that if I really wanted to help my clients, I needed to be there when the contracts were written. So I signed up for law school.” In 2005, juris doctorate in hand, Herr “morphed the consulting business into FractionalLaw,” which he has operated as a sole practitioner since.

Friendly, soft spoken, and precise with his words, Herr met with us at Lehigh Valley International Airport in Allentown, Pennsylvania, where he bases his King Air 350.

What do you do for clients?
I spend only about a third of my time on the legal aspects—contracts, the liability associated with fractional ownership, insurance, the structure of ownership, tax issues, depreciation, and personal use.

The rest is the same consulting I did when I started—residual-value projections; finding the best plane for the budget. For clients with vacation homes in Colorado, the single-engine climb gradient of the airplane is an issue, and you have to dig relatively deep into the weeds of the performance manuals. Some clients charter for supplemental lift when they’re short on fractional hours, so I help with that.

Who owns a fractional share today?
People who find value in the consistency, convenience, and safety of the fractional industry. There seems to be a misconception that fractional owners are idiots who don’t know they can save a lot of money by buying a plane or jet card, but that’s largely false. They know shares are a premium product and they’re willing to pay for it. Despite what the industry says about fractional being a stepping stone to whole-aircraft ownership, I’ve had only one or two clients go from fractional to whole ownership.

What percentage of fractional owners seek professional representation?
Most don’t. My clients tend to be more cautious, more detail oriented, more involved, and maybe more business savvy. Most owners don’t realize their name is on the FAA registry as the aircraft operator under Part 91 Subpart K, and they have just as much liability as a whole owner—maybe more.

What benefits could fractional owners be missing without representation?
They may not be getting the right airplane or the right program for their mission; and they may not realize the impact their own operational needs or quirks have on the program costs. A particular short leg they do, or a particular series of flights they make on a regular basis may be treated very unfavorably in the fractional boilerplate contract, but you might be able to get an exemption. And there are always variables, such as length of the contract term, special upgrade or downgrade ratios, short-leg waivers, and flexibility on the number of hours that can be used each year. Without help from someone who knows the industry and understands the contract and what’s possible to be tweaked, people probably are not getting full advantage of their fractional program.

How do you charge for your services?
Largely on an hourly basis, at $400 per hour. When I started, I billed invoice auditing on a one-third [of recovered charges] contingency. That was very profitable in the early years and is very unprofitable now. The computer systems have more controls in place; there are not the systemic errors I used to see. 

The time needed to review and negotiate a fractional contract is widely variable. A boilerplate contract can go quickly. In other scenarios, the cost of the aviation or business analysis is two or three times the legal fee. I’ll talk to new clients and find out which category they’re in and give them a ballpark. Even a 50-hour fractional share for a light jet, if you bake in all the expenses, costs at least $7,000 an hour, so it doesn’t take much on that budget to find some tweak that pays for my legal bill several times over.

Do you foresee additional players joining the fractional space?
The ferry costs and operating costs are through the roof until you achieve economies of scale, and that takes a lot of investment. I don’t see any rational business case for investing the capital to scale up a fractional program when the profitability of the fractional industry has historically been pretty lousy.

What has changed in the fractional arena since the 2008 financial collapse shook the industry?
In 2009 and 2010, I would get phone calls from clients saying, “Free catering isn’t what it used to be,” or, “The standard champagne isn’t what it used to be.” While my role is to promote my clients’ interests, my advice was, “The industry has lost a lot of money. You will not be treated well on much bigger issues if the industry continues to lose money, so this is your new reality.”

Today I see fractional owners accorded less and less respect, and getting closer to being treated like glorified cardholders. The industry was always leery of giving too much pride of ownership. I think they didn’t want to tie owners to a particular tail number. I can see the rationale for that. The owner says, “Oh, my airplane has a new interior, and I haven’t flown it.” But it’s gotten to where the purchase of the asset is looked at as the entrance fee to join the club, and the owners aren’t treated the way a management company would treat an owner. That sense of appreciation for what the owners have put up seems to be fading.

Where does the fractional model go from here?
If the industry continues to believe its customers owe it a certain level of profitability, and the programs focus on setting their rates or selecting aircraft to achieve a certain profitability target rather on operational efficiencies or giving customers products they want, it runs the risk of killing the golden goose. If a certain chunk of the clientele say, “We’ve been pushed as hard as we can,” and goes to less-expensive alternatives, and it gets to the point where the fractionals lose their scale, than it unravels. The customer base is pretty tolerant of paying a hefty premium, but I’d say there’s a limit to that, and we don’t know where that is.

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Daniel Herr’s Résumé

Born: June 13, 1966 (age 52) in Flemington, New Jersey

Position: Founder/principal, FractionalLaw

Education: B.A., economics, Princeton University, 1988; J.D., Rutgers Newark Law School, 2005

Personal: Lives in Murray Hill, New Jersey. Married, two children. Enjoys fixing antique tractors and making ice cream with an antique churn. Owns and flies a King Air 350; has type ratings for Cessna Citation 500 series and Fairchild Metro/Merlin.

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Shaircraft Solutions’ James Butler

In 1997, James Butler was practicing contract law at his own Washington, D.C.–area firm when a sports agency asked him to investigate “a newfangled investment called fractional air travel, because a couple of the clients were looking into it.” Butler subsequently represented those clients in negotiating their fractional-ownership contracts with NetJets.

That experience led Butler to found Shaircraft Solutions. “I came to believe,” he says, “that there was a business opportunity in pulling together legal and aviation expertise to represent fliers in this new private-aviation area, which I call the shared-use space. By that, I mean fractional ownership and leasing, jets cards, and anything else short of whole-aircraft ownership.”

A graduate of the University of Chicago Law School, Butler clerked for a federal judge in the Windy City for a year before accepting a position with Arnold & Porter in Washington, D.C., where he specialized in transactional law. He started his own firm in 1992 and still maintains it, though he says that “most of my efforts now are directed toward the Shaircraft business.”

Based in Bethesda, Maryland, Butler has a wide smile and speaks in a calm, deliberate voice that clients likely find reassuring. His staff includes administrative assistants and a marketing coordinator. “It’s a small operation,” says Butler, who wrote about the fractional field for BJT from 2005 to 2009. “I answer my own phone. I work one-on-one with every client.”

 

Who should seek legal advice when buying a jet card, fractional share, or other private-aviation access product?

There’s almost no part of this business that wouldn’t benefit from having a legal-eye view. Even if it’s simple charter and you want a deadhead leg, you need to understand the cancellation policies and commitments. The providers have been shrinking contracts to make them look like boilerplate, but they’re fairly complex legal documents. As you go up the chain through fractional and leasing, there’s been an evolution in the contract documents as the providers allocate more of the variable-cost risk of operating from the operator to the customer.

So the contracts are fairly one-sided, and having a legal eye in negotiating certain issues can add value for the customer. Even a $25,000 one-off charter involves a lot of money, and it’s worth making sure of what the pilot experience is, the vintage of aircraft you’re getting, what the avionics are, and that it’s a safe trip that meets your expectations.

What common mistakes do business aviation consumers make?
One of the biggest is buying too many hours. The salespeople are incentivized to sell you as much flight time as they can, and when you get to the end of your fractional investment—say, after five years—if you have 25 hours remaining, they will disappear, and that really changes the per-hour cost.

How do you work with clients?
First, we want to understand everything about their requirements: how often they fly, from where and to where, how many people they travel with, their budget, how far in advance they schedule trips, and any special needs. Once we understand, we’ll put out our RFPs to providers we think are safe and financially strong and provide the kind of service our client would benefit from. When we get those responses back, we’ll go through them with the client and choose one or two options to pursue further, negotiating along the way and finally coming up with business terms. We review and negotiate the contract from the legal side and put it to bed.

We can do all that or we can do a piece of that, depending on what the client needs. Sometimes a client says, “I know I’m going to buy a 25-hour jet card with XYZ. Just review the contract for me.” Other clients will say, “I have all these brochures, and I have no idea which is best—I want you to handle this, soup to nuts.

“Sometimes a customer will say, ‘Just get me everything.’ But there’s a basket of concessions that may be available based on the size of the deal, and how valued they are by the provider. We want to pull out of the basket things that add value for you; if we pull something out that’s not of use, you’re no better off. Say the customer often will fly on peak travel days. We may ask if it benefits them to have a guaranteed upgrade for those trips. That’s an example of tailoring contracts to add value.

We know where there’s room to negotiate, and we know what’s not negotiable, so we can focus on areas that are beneficial and where changes have to be made.

Who are your customers?
We have first-timers, and we have developed quite a return business with customers who’ve done one deal and come back for another as their needs have changed. We have a fair amount of business from folks who have done a deal on their own and realized that they didn’t negotiate the best terms. It’s not uncommon for me to get a call from someone who says, “The contract looked short and the salesperson said it’s not negotiable, so I just signed it. Now I understand there’s a lot of room for negotiation, and I want you to make me a better deal than I made myself.”

Do you hear from corporate flight departments looking for supplemental lift?
Yeah. We’re also seeing midsize and even small companies reconsider the cost and the bandwidth that it takes to maintain a flight department and looking more toward outsourcing that to fractional providers, because it’s a distraction from their core business. And whereas years ago the options were one-off charter or ownership, now there’s a spectrum of options. So you can tailor the investment to your needs. What some of these companies really need is transportation. They don’t want to own aircraft. A lot of companies are looking toward taking advantage of third-party operators.

Membership programs are the latest option in shared access. Your thoughts on them?
From a business-model perspective, it’s good if you can get customers to pay upfront and offer them as a membership the thing you would have offered them anyway—dress it up with special events and concierge services, and fancy words like platinum. Our clients tend not to be so taken with the bells and whistles that go with some of these programs, but we’ll see how those pan out.

I think the last 20 some years tell us there is not a lack of imagination in terms of new business models and ideas about private air travel, and that provides opportunities and also cautionary tales. When there’s underutilized capacity and you have aircraft sitting on the ground, you’re going to continue to see someone come up with a program with a catchy name to make use of that capacity. That’s a source of a broadening of the private jet business model and also a cause of concern, because there are so few barriers to entry. You can find yourself in trouble if you don’t look behind the slick brochures and cool apps and ask questions: Who’s operating the aircraft? What’s the vintage? What’s the safety equipment? The pilots’ experience?

What future do you see for the shared-use space?
I see no indication that commercial flying will be anything but horrible in the next five to 10 years, in which case there will certainly be interest in shared private flights. Another factor is fuel prices. But I think we’ll see more democratization of the private air travel business, more opportunities, more niche programs. As aircraft evolve and improve, we’ll see more individuals and companies get into private aviation. I think it’s got a bright future, but subject to how the economy does.

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James Butler’s Résumé

Born: Sept. 28, 1958 (age 60) in Washington, D.C.

Position: Founder/principal, Shaircraft Solutions

Education: B.A., Colorado College, 1980; M.A., political science, London School of Economics, 1982; J.D., University of Chicago, 1985

Personal: Lives in Bethesda, Maryland. Married, two children. Enjoys golf.

These interviews have been edited and condensed.