If issues pertaining to legal ownership and taxes are solved, then fractional ownership structure can offer significant benefits to Indian customers
Fractional ownership of business aircraft has been a major contributor to the growth of business aviation industry, specifically in the USA, where the business model in its current form was launched in the late 80s. Prior to that, business aircraft users either had to purchase a whole aircraft or had to charter one, based on their requirements. Either of those models has problems. Purchasing a whole aircraft meant that an owner had to incur a huge outlay of upfront capital expenditure and set up a fully equipped flight department just to manage and operate a single aircraft. On the other hand, there were issues with the quality and consistency of service on a chartered aircraft.
Fractional aircraft solution solved these problems. In this model, multiple owners purchase a share (usually from 1/4 to 1/16) in the whole aircraft. The aircraft usually is managed by a fractional company which maintains several aircraft of the same type, which are also sold to multiple owners. Thus, every owner of a shared aircraft has access to “blocks of usage” on the entire fractional company’s fleet per their share entitlements.
WHILE ON ONE HAND A COMPANY SAVES TAX, THE COMPANY ALSO SAVES SIGNIFICANT EXECUTIVE TIME AND HELPS INCREASE COMPANY PRODUCTIVITY BY USE OF AIRCRAFT FOR EXECUTIVE TRAVEL
Fractional aircraft model thus reduced upfront acquisition cost, provided convenient access to good and consistent quality of business aircraft without all the hassles of managing aircraft operations. The business model also reduced the threshold of companies that could afford to purchase share in an aircraft. This helped expand the market of business aircraft to include companies that could not become owners earlier.
India is at a similar stage in which potential business aircraft users have only two ways in which they can use business aircraft – either they purchase a whole aircraft or use charter services. The challenges in each of the cases still remain the same as mentioned earlier.
REGULATIONS IN INDIA FOR FRACTIONAL ASSETS
Current regulations in India do not clearly allow fractional ownership of movable assets such as aircraft or yacht. This creates a few challenges. First, there is no legal structure that allows multiple ownership titles on a single aircraft. In a standard business model, a fractional aircraft owner can claim depreciation benefit on the value of the share size in an aircraft. As there are no clear multiple titles on a shared aircraft in India, this depreciation benefit cannot be claimed. Secondly, having a clear title allows an owner to sell the piece of the asset at a pre-determined price to the fractional company after a certain tenure. This form of exit is not currently possible in India.
A few initiatives have been taken in the past by aviation companies who planned to offer some form of structure to formalise fractional ownership in aircraft assets. One such structure was company structure in which fractional aircraft shareowners form a company and they become the shareholders of the company. The fractionally-owned property becomes a property of the company and shares are issued according to the share size of the individual owner. This model has inherent problems. First, the company still needs to establish a flight department and comply with regulatory requirements. This is no easy task. Secondly, it is very difficult to calculate price per share in a company that has a depreciating asset. This challenge typically comes up after four to five years when a new owner wants to purchase a share in the company from an existing shareholder and the aircraft has lost more than 30 to 40 per cent of its value. Third, owners become directors in the company and are subjected to liabilities of a typical aviation company. The company must also comply with the provisions and regulations of the Companies Act.
These challenges are considered too much of a hassle for any potential aircraft owner who aspires to buy a fractional share in an aircraft. Therefore this model has not been successful in India.
OPPORTUNITY FOR AIRCRAFT FRACTIONAL OWNERSHIP IN INDIA
Any company with an annual revenue of 1,000 crore and above which requires its executives to travel to destinations not well served by airlines can become a potential customer for fractional aircraft. That represents a sizeable market for aircraft fractional ownership in India. A main attraction of the fractional industry has always been that it offered lower barriers to entry for new business aviation users and an easy way to add lift for companies and owners that didn’t need another full airplane.
Further, if issues pertaining to legal ownership and taxes are solved, then fractional ownership structure can offer significant benefits to Indian customers. Some of them are as follows:
IFSCA, GIFT CITY COULD PROVIDE A PLATFORM TO REGULARISE AIRCRAFT FRACTIONAL OWNERSHIP
The Government of India established International Financial Services Centres Authority (IFSCA) at the GIFT City in Gujarat to enable aviation companies to provide innovative business models to Indian and foreign customers. As a Special Economic Zone (SEZ), IFSCA provides an ideal platform from which aircraft fractional ownership services can be launched. This requires that the Ministry of Civil Aviation not only sees the value of this business model but also promotes this to other ministries such as Ministry of Finance to provide depreciation benefits and Ministry of Law to provide clear titles on shared movable assets.
Small European countries such as Malta have become a hub for serving private aviation solutions for large European and UK markets. In the same way, India is at the crossover of a potential on-demand aviation revolution. Through aircraft fractional ownership model, we can create an aviation market for India and for the global market.
The author is the Chief Operating Officer of JetClub Europe, a leading aircraft fractional ownership company.