A Changing FBO Business Model: You Can’t Give It Away

Submitted by: John L. Enticknap & Ron R. Jackson, Aviation Business Strategies Group

For many years, the FBO Business Model in the United States has been fairly simple and straight forward: markup fuel to cover all the operational business expenses; the greater the margin, the better the profit.

When fuel prices were fairly stable and the old inefficient heavy iron aircraft were commonly seen on ramps, this worked out pretty well.

But as singer-songwriter Bob Dylan so poignantly penned, “The Times They Are a-Changin’.”

From the last quarter of 2008 we’ve seen some real changes in our industry including political bashing and a prolonged recession. As we struggled through 2009, we saw the ‘average’ FBO experiencing a 20 to 25 percent drop in business sales with some losing more than 50 percent of their fuel sales. In 2010 there was some recovery with an encouraging increase in charter activity and the resulting increased fuel sales.

Now in 2011, we are struggling with ever higher fuel costs and a general business malaise. Just as we are writing this article, we experienced more unfortunate politics conveying a negative image for business aviation. And we are seeing the restart of the continued consolidation of the FBO industry; some failures; and most of all, much continued pressure on fuel margins.

The cost of fuel peeked in the first week of May and has dropped .40 cents to early July; now it’s on the way back up. Just about the time we sell the high priced inventory in our fuel farms and look for some stability, the higher prices are again reality.

Changes in operator fuel purchasing habits

Over the last few years we have seen a strong push from corporate customers towards a utilized alternate fuel purchasing strategy, rather than the traditional retail fuel purchase. Of course, the full retail fuel purchase has always been a myth – purchasers of Jet A fuel expect and get discounts off the posted price.

The trend over the last 15 years, especially within the last few, is to pre-negotiate fuel purchasing with many of the contract fuel sellers prior to arriving at your FBO. Calling ahead for the best discount available or changing plans to get the best overall operating costs are all tactics for reduced fuel costs and gallons purchased. This is savvy cost control for corporate operators.

Add to this the fact that corporate aircraft operators are getting more sophisticated in their flight planning:

  • Using fuel tankering models
  • Pre-established fueling points
  • Better ATC routing for weather and flight planning to minimize fuel costs
  • The purchase of more fuel-efficient aircraft

FBO profit misconceptions

Today’s FBO business model has not changed much over the last 30 years. It is still highly dependent on the retail fuel sale. The successful FBOs look for the fuel sales – retail, contract, or other – to essentially support the entire FBO operation.

But do all the aircraft that taxi onto an FBO ramp purchase fuel? NO THEY DON’T! Yet the cost of doing business goes on, including exposing your FBO to potential insurance claims should the customer’s aircraft get mishandled. This has given rise to the Ramp Fee which is still a controversial subject in some aircraft operator’s minds.

Again, there is this misconception by many in the aviation business that FBOs are super-high profitable organizations and are “ripping off” the flying public. This, of course, is highly exaggerated.

There has even been a string of emails lately that draws attention to the continuing misunderstanding of the FBO business. These emails contend FBOs are making more than $4.30 per gallon gross margins and, after fuel cost and lease expenses, are earning $334,000 per week before labor and other expenses.

In reality, margins are running more in the $1 to $1.50 range while insurance costs alone can run $1,000 per day. So the operator who comes onto the FBO’s ramp and doesn’t contribute to the income stream is not cost free to the FBO> To be sure, the FBO business is still a good business to be in. If an FBO chain or individual location can make 10 to 15 percent EBIDTA, then it is a very good business. In perspective, look at the oil companies who may be earning in the nine percent range; on the other hand, a general consumer company like Coke is running 25 percent plus.

Changes in the wind

However, today’s FBO model in the U.S. is destined for change. As mentioned, fuel margins are being squeezed from both ends. At one end is the higher cost of fuel which drives up the base price. At the other end is the more savvy aircraft operator trying to drive down the posted price. In the middle is your margin, being squeezed like a lemon in a juice press.

So how do we make lemonade out of the tart extracted juice? Here are a few observations to ponder.

Having operated FBOs in both the U.S. and in the Middle East, we are very familiar with the European FBO Business model where fuel is not part of the income equation. Rather, fixed base operators in this part of the world depend on revenue generated solely by fees associated with providing various services common to an FBO operation:

  • Marshalling
  • Handling
  • Parking
  • Ramp
  • Ramp transportation
  • Over the road transportation
  • Baggage handling
  • GPU
  • Lavatory service
  • Customs/visa
  • A handling fee for collecting navigation fees
  • A handling fee for collecting landing and over-flight fees
  • Lounge fees
  • Catering

We are not suggesting that you should follow this model, at least in its entirety.  However, as margins get squeezed, you need to get creative in shoring up your bottom line by creating other streams of income.

Don’t give it away!

Our advice is:     DON’T GIVE IT AWAY!

In operating Mercury Air Centers, we looked at every aspect of our business to see where we could recoup some of our expenses.

If a customer doesn’t buy fuel, or at least doesn’t buy a minimum quantity for the type of aircraft being flown, why not charge a facility fee for use of the ramp, including labor for safely parking and towing the aircraft and repositioning for passenger loading?

If aircraft operators want a significant discount off the posted price, why not charge for taking out the trash, cleaning the lavatory, servicing the galley with ice and coffee or hooking up the APU?

If a fuel broker drives a hard bargain, why not charge for the courtesy vehicle or the newspapers? (This often entails a requested set for the pilots and a set for the passengers.)

If, during the course of a transaction, your fuel margin is significantly compromised in any way, why not consider a facility fee for that clean restroom which is kept tidy by paid staff? Or how about the nicely furnished and well equipped conference room; or pilot and customer lounges that often include the coffee and cookie bar that is kept well stocked throughout the day?

Perhaps you don’t need or want to charge for everything you do, but you need to analyze your various income streams and make sure you are not giving your services away. Your business deserves to make a profit – and that is not a bad word! Your business should not subsidize corporate aircraft operating companies, or subsidize your airport sponsor. If you do that, your business will not survive and you’ll lose your investment. Profit allows for growth, sustainability and the continuation of your business.

Here is a short checklist to consider moving forward:

  • Stabilize your selling prices and your margins. Don’t be all over the place. Customers will notice and your employees with be confused.
  • Use a consistent discount program that is easy to understand for the FBO and your customer – and stick to it!
  • Don’t discount your hangars. Make sure you know the true cost of your real estate.
  • Don’t give away all your other services unless you get the ‘right’ fuel sale that protects your margins. More fuel sold equals more ‘free’ services. No fuel sale; customer must contribute to your revenue.

No one can predict the future of the FBO business, but it is possible high fuel prices are here to stay which, out of necessity, will cause change to the way we do business. It’s how we prepare ourselves for this change that’s important. By developing our own consistent approach to our FBO business model, we can make ends meet before someone else decides to move the ends for us.

Let us know your thoughts – email us at jenticknap@bellsouth.net or thejacksongroup@earthlink.net. Ron and John developed NATA’s acclaimed FBO Success Seminar Series curriculum. Click here to learn more about the upcoming FBO Success Seminar on November 8-10, 2011 in Atlanta

This blog post originally appeared on ACUKWIKAlert.com, The FBO Connection.

To visit or return to NATA’s site, visit www.nata.aero.

One Response to A Changing FBO Business Model: You Can’t Give It Away

  1. John Koenreich says:

    Good article. I doubt that you will get any argument from FBO operators as to the daily trials and tribulations of being in the business. However, in my opinion, we need to get more industry support out there from organizations such as NATA, NBAA, AOPA, EAA, about how pilots should act and what customers should reasonably expect from FBOs. There is no doubt that FBOs are dealing with these issues because they have put themselves in such a precarious position. Customers (primarily pilots) have learned to leverage pricing in exchange for their business because FBOs have allowed it. Where else can one go and haggle over price as successfully as in the FBO business? Pilots do this in part to demonstrate their ability to save their employer money and thus keep their jobs. FBOs allow themselves to be put into a position where they are constantly insulted by the driver of a $60 million airplane over spending $500 like they were stealing food from their baby’s mouth!
    Contract fuel companies pressure FBOs into giving huge discounts to their customers as if they were driving all the business to the FBO. The truth is that most airports are destination airports. Very few stops are technical refueling stops meaning that the boss is flying to ABC airport for a reason. The down side is that once one FBO decides to sell his soul to the Devil, the others must follow suit in the spirit of the free market and laisser faire economics.
    Back to my original comment: what could really help the FBO industry is to educate aircraft operators in the U.S. and let them know how good we still have it here. There is no free lunch as much as one would like to believe that there is. Just as it requires fuel to make a turbine or propeller turn, it takes money, in one form or another, to keep FBOs open and profitable. There should be more forums at aviation conventions dedicated to educating pilots and aircraft owners about the reality of being able to go somewhere, get world-class service, and then paying a fair price for products and services.
    I regularly hear from air ambulance operators how they should not have to pay facility fees of have to take minimum fuel uplifts because they are an “Air Ambulance”. FBOs are just supposed to take it in the shorts because there is a sick person on board the airplane. Yet, at the same time, Beechcraft is not donating the King Air they are flying, the pilot is not giving up his/her salary to fly the infirm, and the “Air Ambulance” company is surely charging a premium for the service to the individual, or the insurance company that is paying for the flight. “But we are a non-profit organization”! Really? Why is it the FBO is the only piece of the formula expected to not get paid?
    Here’s another good one: “We have our own fuel farm and we get fuel at cost! Can you match that?” No, we can’t Captain Dumass! Not and keep this awesome facility open so you have a nice place to go next time you are in towm. And exactly how are these flight departments getting fuel “at cost”? Do they not have to pay for the fuel farm to store their cheap fuel? Do they not pay someone to pump the fuel into their airplane so the precious pilots don’t smell like Jet A all day and ruin their uniforms? Do they not have to pay for safety training like the rest of us and pay for regular filter changes and daily sumps on the fuel farm? Do they not have to tie up their valuable cash in inventory to store the fuel in their tanks?
    The point is, truth be told, most of these BIG operators who have their own fuel farms are more than likely paying more per gallon at home that they are if they paid full retail at FBOs on the road!
    How about: “We were here less than an hour to drop off a passenger and did not use any of your services. Why should we pay anything?” Well, basically, for the same reason you still have to make a full car payment every month even if you don’t drive it for a day or two.
    FBOs need to fight back and the industry needs to stand behind them!
    Here’s an awesome video to watch. It says it all: http://www.youtube.com/watch?v=e7Xq2KEDAnY&feature=youtube_gdata_player
    Enjoy!

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