Getting share price down for flying clubs

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RogerWilco

Filing Flight Plan
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Roger B. Wilco
I had an economics question for anyone with experience running a flying club. I've been doing research into starting a nonprofit flying club in my local area and had a question regarding different to structure their buy in and monthly expenses.

Club 1: They own two planes roughly 100k value each and a bit in the bank. With 15 members they calculate a share price of $16,500 for the buy in (it's full equity). Monthly dues are 250/month. Expensive for the buy-in and relatively expensive monthly dues and it can take quite awhile to recruit new members when somebody wants to sell, due to the big upfront cost and relatively high monthly expense.

Club 2: Has 3 nicer planes with values 250-350k each and good financial reserves. 40 members share the 3 planes and their monthly costs are the same, about 250/month. The big difference is the buy in (refundable when you leave the group) of only $3500. They have a multi-year waiting list to join.

So the question is, can Club 1 make the transition to function like Group 2? Or how did Club 2 grow to be functional that way? If Club 2 calculated their buy-in based on actual equity of the club it would surpass $25,000 and they would likely find it more difficult to sell shares and recruit new members. The excess in equity obviously came from somewhere. Can a group make that change and how could that work in practice? How would an equity based club functionally lower the price of a share for new members?

Thanks for the advice!
 
RogerWilco said:
I had an economics question for anyone with experience running a flying club. I've been doing research into starting a nonprofit flying club in my local area and had a question regarding different to structure their buy in and monthly expenses.

Club 1: They own two planes roughly 100k value each and a bit in the bank. With 15 members they calculate a share price of $16,500 for the buy in (it's full equity). Monthly dues are 250/month. Expensive for the buy-in and relatively expensive monthly dues and it can take quite awhile to recruit new members when somebody wants to sell, due to the big upfront cost and relatively high monthly expense.

Club 2: Has 3 nicer planes with values 250-350k each and good financial reserves. 40 members share the 3 planes and their monthly costs are the same, about 250/month. The big difference is the buy in (refundable when you leave the group) of only $3500. They have a multi-year waiting list to join.

So the question is, can Club 1 make the transition to function like Group 2? Or how did Club 2 grow to be functional that way? If Club 2 calculated their buy-in based on actual equity of the club it would surpass $25,000 and they would likely find it more difficult to sell shares and recruit new members. The excess in equity obviously came from somewhere. Can a group make that change and how could that work in practice? How would an equity based club functionally lower the price of a share for new members?

Thanks for the advice!
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You may have answered your own question. The math doesn't math. 40 people times $3500 is only $140,000. How do they own $1,000,000 worth of aircraft and reserves? Obviously $3,500 is not buying you 1/40th share of the value of the Club, so someone else has that equity. If Club 1 had one person that wanted to pay $200,000 for their share, then the other 14 could get away with $3,500 buy in.

One other variable not mentioned is the hourly rate I assume each charges. Usually monthly dues cover the fixed costs, hangar, insurance, etc., while the hourly rate covers the variable costs, maintenance, tires, etc.
 
Both clubs are real clubs I know about. Both own their airplanes outright. Club 1 calculates a share based on their equity and it comes out to $16,500. The other has been a club for a rather long time, over the years everything has been paid for, and now they just charge a refundable "share" fee to become a member. I guess in essence they must have paid off the original members and transitioned to a non-equity club that owns its planes. Maybe asking it a better way would be this... An equity club wants to have nice planes but be able to recruit new members and provide an out. Would this just involve the current members buying themselves out? Trying to figure out how that would look in practice.
 
Well well well…it seems that I have a doppelgänger.

Unfortunately this Roger Wilco has no experience running a flying club either. But you might reconsider your moniker so as to avoid any confusion with yours truly—what with my being the object of much loathing and derision.
 
midwestpa24 said:
You may have answered your own question. The math doesn't math. 40 people times $3500 is only $140,000. How do they own $1,000,000 worth of aircraft and reserves? Obviously $3,500 is not buying you 1/40th share of the value of the Club, so someone else has that equity. If Club 1 had one person that wanted to pay $200,000 for their share, then the other 14 could get away with $3,500 buy in.

One other variable not mentioned is the hourly rate I assume each charges. Usually monthly dues cover the fixed costs, hangar, insurance, etc., while the hourly rate covers the variable costs, maintenance, tires, etc.
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How? The club bought a brand new 182 and 172 in 1980 for $65,000.
 
There are a million ways to structure a club.
 
Clip4 said:
How? The club bought a brand new 182 and 172 in 1980 for $65,000.
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So Club 1 has dramatically undervalued their equity. That is why the two aren't comparable. That is like a company selling their stocks cheap, because "That is what they always were".
 
RogerWilco said:
I had an economics question for anyone with experience running a flying club. I've been doing research into starting a nonprofit flying club in my local area and had a question regarding different to structure their buy in and monthly expenses.

Club 1: They own two planes roughly 100k value each and a bit in the bank. With 15 members they calculate a share price of $16,500 for the buy in (it's full equity). Monthly dues are 250/month. Expensive for the buy-in and relatively expensive monthly dues and it can take quite awhile to recruit new members when somebody wants to sell, due to the big upfront cost and relatively high monthly expense.

Club 2: Has 3 nicer planes with values 250-350k each and good financial reserves. 40 members share the 3 planes and their monthly costs are the same, about 250/month. The big difference is the buy in (refundable when you leave the group) of only $3500. They have a multi-year waiting list to join.

So the question is, can Club 1 make the transition to function like Group 2? Or how did Club 2 grow to be functional that way? If Club 2 calculated their buy-in based on actual equity of the club it would surpass $25,000 and they would likely find it more difficult to sell shares and recruit new members. The excess in equity obviously came from somewhere. Can a group make that change and how could that work in practice? How would an equity based club functionally lower the price of a share for new members?

Thanks for the advice!
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Not all equity is created equal. The capital structure is important.

If we have a club slinging memberships for $3500 to only 40 members yet they "own" 1m$ in aircraft then I think one of three things is going to be true:
1) The bank owns the planes in club 2, not the members. They're making use of debt. Their equity costs less because they... have less equity in the aircraft. Some of their monthly dues go to debt service.
2) At least one of the members owns substantially more (or all) of the ownership shares in the aircraft than others and ponied up more money which made this club possible. There may be 40 members but 1000 shares, and 1+ of the members owns the wide majority of them.
3) They bought these planes for nothing and then they appreciated, yet they still sell memberships for nothing.. Seems highly unlikely to me.

But in Club2 you're almost certainly not buying 1/40th of 1m$ in assets (plus whatever the reserves are) for $3500. That's close to an 85% discount off its tangible value.
 
I have run a club similar to #2. The short answer is that it is a for-profit club, and really a flight school in disguise with lower volumes and (hopefully) better pilots. Whoever holds the equity is pocketing any upside, or at least intending to. :)

We used ours to provide our flight school graduates access to better aircraft once they hit insurance minima. Adding, say, a Bonanza to flight school insurance is a non-starter.

Alternatively, they might be leasebacks just like a flight school would run, and someone somewhere is getting a trickle of cash, a river of write-offs, and a tsunami of asspain.

Running XC capable aircraft (no idea if that's what is being discussed here) tend to dramatically cut your volume and increase your insurance cost and headache. Finding the sweet spot is a moving target, but people still try.

$0.02.
 
Folks, if these are non-profit clubs, a member can only be refunded the amount of their membership share purchase. The per equity doesn’t mean anything.
 
The transition from the original members who bought the plane to new members coming in is tough if the original members up significant cash to do so. Still, I think that I would from ground zero establish what the buy-out is and original members accept they're not to going be made whole if they leave. I've been in two clubs where I got my buy-in back ($1K) and this latest club where my buy-in is gone if I leave ($3,500).

As the treasurer of my current (and last since we're where we're living the rest of our lives finally) I would suggest structuring dues and hourly costs such that the dues cost is sufficient to cover all the expenses to keep the airplane in the hangar current and ready to fly then the hourly costs go into your other buckets of money for engine/avionics/paint or however else you want to divvy it up.

For us that's $135 a month dues and $115(wet) an hour to fly it. We could actually cut the $135 some but not enough to matter and sit gives a little extra in case of increased inflation or an unexpected large expense.
 
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RogerWilco said:
Both clubs are real clubs I know about … nonprofit flying club
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For example numbers, might also be worth having a look whether useful info on Form 990. e.g. revenue (for monthly dues + flying charges); balance sheet assets (for aircraft, etc.)

Search by ‘organization name’ (or for broader list, try “flying club” to yield more examples).
https://apps.irs.gov/app/eos

Tip: More info on Form 990; skip (any qualified for) Form 990-EZ.

In case helpful as part of your research, for consideration …
 
Clip4 said:
Folks, if these are non-profit clubs, a member can only be refunded the amount of their membership share purchase. The per equity doesn’t mean anything.
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I can understand your point, but what happens if and when the club is dissolved and the assets are disposed of? Is it divided among the current members?
 
midwestpa24 said:
I can understand your point, but what happens if and when the club is dissolved and the assets are disposed of? Is it divided among the current members?
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It depends on which of the million ways the club is structured
 
Salty said:
It depends on which of the million ways the club is structured
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And why it dissolved. I was in a club that had a fatal mishap and when they bought a new plane they dissolved the old club and started one fresh. The insurance money funded the new plane.
 
I used to belong to a club whose members' share prices were set by the people they bought them from. That is, when I joined, I bought a share from a departing member. When I left, I sold it to someone else. Share prices were much less than the calculated equity, but they sold for what they sold for. If a required number of members were to vote to dissolve the club and liquidate the inventory, they'd all make a decent profit, but they wouldn't have airplanes anymore. If the OP's Club #1 would sell shares this way, they'd get members from Club 2's waiting list and have a higher cash flow, which is what the club should be concerned with. Provided the club owns the airplanes outright, the actual value they'd have if sold completely is irrelevant.
 
The monthly expenses for Club 1 seem very high at 45000 a year especially since they already have a substantial amount in the back.

What you don’t list are the hourly costs and that could make a big difference. Are you only paying for gas in Club 1 and if not then what does that $45,000 go towards each year? Plunking down 16k and another 3k every year after that doesn’t seem like a very good deal unless the hourly operating costs are very low.
 
What Club 1 doesn't understand is that a 1/15 share of two airplanes doesn't approach 1/15 of the airplanes' value. Dealing with 14 other shareholders, rules, etc., diminishes the value considerably.
 
The difference between the two clubs is that #1 is an equity club and #2 is a non-equity club. In #1, all of the equity is owned by the members and is tied up in the aircraft. In #2, the equity is owned by the club and the club owns the aircraft outright.

In order for #1 to become more like #2, they have to slowly buy back equity owners from club funds until reaching the point of the lower buy in. How to do that is the rub. There are lots of options, but ultimately it's up to the members to decide to take cash out over time. It has to be rationed lest the club falter.
 
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