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:
- Ramp transportation
- Over the road transportation
- Baggage handling
- Lavatory service
- A handling fee for collecting navigation fees
- A handling fee for collecting landing and over-flight fees
- Lounge fees
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 firstname.lastname@example.org or email@example.com. 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.
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