Avantair laid its cards on the table on July 3. That was the day it told its owners just how much trouble it was in.
The company, a fractional ownership aircraft management company based in Clearwater, Fla., had grounded its fleet of 56 Piaggio P180 Avantis on June 6 before completely shutting down operations and furloughing employees on June 28. In its filing with the Security and Exchange Commission, the company said it would seek “alternative financing arrangements [to] enable it to resume operations as quickly and efficiently as possible.”
The July 3 letter put a number on Avantair’s situation.
“The most equitable approach to ensure all aircraft are returned to an airworthy condition for all owners is to provide a fleet wide solu- tion,” wrote acting company President David Haslett. “This will entail all owners being assessed a one-time fee of $25,000.”
At the time, more than 600 individuals owned a fraction (mostly one-sixteenth) of an airplane managed by Avantair. Reports indicated the company needed 300 of its customers to buy into its plan for it to work, and even then it would have to cut its service area by more than half.
Somehow, the aircraft management company had let a nearly $8 million maintenance bill accumulate. And that’s in addition to its multi-million-dollar liabilities.
“They had taken parts from some aircraft and used them in others,” said an employee who requested anonymity. “Some airplanes didn’t have engines. It was not a good situation.”
The Bankruptcy Court has since come in to sort things out—Avantair was forced into involuntary Chapter 7 in August. The outcome of the situation is still very much up in the air, but there is some indication as to why it all happened.
“The biggest problem in my mind is they weren’t transparent with their owners,” said Elite Air CEO Gray Gibbs. “They were never clear on which monies were being spent on what, and eventually that is going to catch up with you.”
What Is a Fractional?
Avantair wasn’t all that different from a lot of aircraft management companies. It provided a 135 certificate to its owners, it managed its owners’ aircraft maintenance, it insured its owners’ airplanes, and it scheduled all flights on the 56 turboprops it managed.
Avantair managed 56 Piaggio P180 Avantis owned by more than 600 different individuals. Each owner held a fraction of one aircraft.
What was unique about the company, along with a few other players in the fractional market, is each airplane in its portfolio was owned by as many as 16 different individuals. In some cases, owners held only 1/32 of a Piaggio P180, bringing even more owners into the mix; in other cases, owners held more than 1/16. What’s more, the ownership arrangements were for the most part made by Avantair, meaning many of the owners didn’t know one another. In some cases, the owners didn’t even know which of Avantair’s 56 aircraft they owned.
“I blame a lot of the problems on the owners,” said another former Avantair employee who asked that his name not be revealed. “Some of them didn’t do their due diligence.”
For Avantair’s part, it didn’t matter which owner owned which airplane. Its goal was to provide 50 hours of guaranteed flight time per year to each owner of a 1/16 share in whatever aircraft it could. And the maintenance budget drawn from each owner’s “dues” was spread across the entire fleet.
The Difference Is in the Details
According to individuals knowledgeable of the company, Avantair was engaged in a few practices that eventually doomed it. Because it is a privately held company, the industry may never know the whole truth about its demise. But following are a few key differences between the way Avantair did business and how other management companies operate that could offer some clues.
Commitment without contract. Because of the nature of their ownership arrangements, fractional operations typically require their customers to enter into a long-term contract of at least five years. Non-fractional managers place their owners’ aircraft on their 135 certificate with no up- front special assessment and no long-term contract. If the partnership isn’t working for either parties involved, the relationship can be dissolved.
Your money, your aircraft. All of the money that is paid to most management companies goes into the operation of that owner’s aircraft. What’s more, the use of the funds is detailed each month to the owners. That means you know exactly how much of your money is allocated to management fees, how much is used for maintenance, how much is spent on fuel, etc. Avantair charged its owners dues and put all of the funds into a single pool before deciding how best to use the money to continue providing its owners their contracted services.
Transparent, pre-negotiated management fees. Before entering into a management agreement, an aircraft owner and the manager must decide on a management fee that will allow the ongoing viability of both members of the partnership. That fee should then be disclosed monthly as part of the aircraft’s operating budget.
Bearing overruns (or under-runs). While Avantair guaranteed a certain number of flight hours to its owners, it did not have a contingency plan in place for situations where costs exceeded revenues generated from monthly fees. Management companies typically require that their owners bear the cost of budget overruns in the course of maintaining service. This is critical to ensuring the long-term viability of both parties in the partnership.