Helium Report broke the news recently of difficulties at Tanner & Haley’s fractional destination club, a situation which has since deteriorated to bankruptcy. T&H was the first fractional destination club, and is the second largest, behind Exclusive Resorts. Its bankruptcy represents the first major failure in the market, and has other players holding their breath: will consumers view this as an isolated failure of management, or as a systemic indicator that reduces confidence in the entire category?

Helium Report’s analysis suggests the former. T&H faced a number of unique problems. As the oldest club, they continued to carry legacy members on unprofitable terms. Management turnover has been higher than average, and certain decisions around leasing and member guarantees were more aggressive than the consensus business model would advise. While other destination clubs may falter, it will be for reasons typical of most general business problems: management mis-execution. While Helium Report urges prospects to do their own due diligence, we continue to view the category as viable and attractive. We’ve long advocated for greater transparency, and following the T&H bankruptcy, ER has increased its disclosure and proactively reassured members of the club’s financial position and policies.

But what about the fractional jet business? Could it happen here? There are some similarities to fractional residences, but these are overwhelmed by the differences:

- Jet ownership contracts have defined terms of five years. With residences, membership never expires. So as long as the jet company has enough capital to survive five years of unfavorable contracts, it can set its lawyers redrafting and hunker down til more profitable terms prevail.

- Unlike most fractional residence programs, with fractional jets you actually hold title to a chunk of a jet. If the company goes belly-up, you still own that asset, independent of claims against the company.

- Fractional jet programs have been around longer – much longer – than residence programs. All the current players can learn from NetJets experience through economic expansion and contraction in the last 20 years, and with the challenges of frothy peak usage, rising fuel prices and fluctuating aircraft values.

- Each of the major four fractional jet companies is backed by substantial corporate owners with deep pockets. CitationShares by Citation; Flexjet by Bombardier, FlightOptions by Raytheon and NetJets by Berkshire Hathaway.

On the other hand, no fractional jet company enjoys sustained bottom-line profitability. It is an immensely complex business in terms of operations, and financial and legal structure. The expenses, oversight and liability are substantially higher, and unlike residences, planes always depreciate. It’s no coincedence that in fractional residence programs you typically don’t hold title to property, while in fractional aviation, you always do.

Helium Report is confident in the fractional jet programs represent a safe and appealing proposition. As with residences, we strongly suggest you perform adequate due diligence and retain experienced counsel in negotiating and signing your agreement. Our upcoming 50-page Decision Guide to Private Aviation will include a comprehensive and objective rundown of the strengths and weaknesses of each category of private aviation, with a corresponding list of due diligence questions. Reserve your free copy here.

Note to Readers: Halogen Guides is the new name of Helium Report.