FBO Survey 2002 - A home away from home for passengers and crew
The state of the aircraft service industry eight months after September 11 can best be described as guardedly optimistic. Thanks largely to the success and publicity of fractional programs, the public has never been more aware of the benefits of business and personal aviation. At the same time, airlines have proven themselves less and less capable of meeting the travel needs of top-level executives and so-called “high net worth” individuals. FBOs in some parts of the country are reporting record levels of general aviation traffic, but strategic pockets of restricted ramp- and airspace have paralyzed other airports and brought general aviation traffic to a standstill.
At the AS3 convention held in Indianapolis in late March, NATA president Jim Coyne expressed his prime areas of concern for the FBO industry in the coming months. These areas include, but are not limited to, the unknown effects of upcoming security regulations and the state of the overall economy. As he told AIN in a pre-convention interview, “Our industry has never faced as much change as it does right now.”
The Security Wild Card
Possible new security regulations are by far the biggest wild card for Coyne and NATA’s members. The nascent Transportation Security Administration (TSA) is expected to grow from sea level to 50,000 employees (including security screeners at airports) within the next 12 months. Within the turf-war battle zone inside the Washington beltway, that constitutes a sweeping blitzkrieg, upsetting the balance of power. The FAA will be among the most prominent federal agencies to have significant segments of its operational authority modified, if not challenged outright, by the new agency.
For NATA and the general-aviation service industry at large, the character of the TSA as it develops is of great concern. As Coyne pointed out in his state of the industry speech in Indianapolis, “The culture of this new agency is dramatically different from that of the FAA.” While the FAA has always communicated and worked closely with industry to resolve regulatory conflicts, the TSA is showing an attitude of distrust and isolation, he said. Coyne feels that the FAA has traditionally tapped into the real-world, day-to-day experience of NATA members to gain an accurate perspective on issues of safety. He is fearful that the TSA is adopting a “180-degree reverse position” and operating in a rulemaking vacuum.
“They may be experts on security,” said Coyne, “but they don’t have the expertise in our field that is available to them from our industry members who have spent their entire careers in this business.”
Local Influence and Control
While NATA has great concern over the centralized control of the federal TSA, its members are equally concerned over state, county and local authorities exerting restrictions on general aviation. With the home-front war on terror such a political hot button, lower-level municipal authorities have heavy political incentives to exert their influence.
Coyne said: “Every local community thinks it has the answer to security concerns at its own airport.” He is concerned that this will lead to wildly divergent standards and practices from location to location, noting that he has already experienced a sharp diversity of security levels in his own flying.
In fact, much of the hallway conversation at the NATA Convention centered on the various local security measures adopted as a result of September 11 and the January suicide crash of a teenager into a Tampa, Fla. downtown office building. “What is the threat?” is the resounding question that the FBO industry has for those who would look to pile on security measures at FBOs.
William Barkhauer, airport director for DM Developments, manager of Morristown (N.J.) Municipal Airport (MMU), said it is unrealistic to try to convince lawmakers and authorities that general aviation is not any threat at all. Despite the minimal damage inflicted by the Cessna 172 that crashed into a building in Tampa, the so-called “marshmallows thrown at a window” argument goes only so far. Barkhauer said it’s important to recognize that general aviation will never be viewed politically the same as it was before September 11.
Other FBO executives recommended a proactive stance with local authorities. Jeff Baum, operator of three Wisconsin FBOs, said he approached local law-enforcement officials and asked what the police chief suggested they could do together to improve security. “While I find it hard to believe that downtown Juneau, Wisconsin, would be a major terrorist target,” he said, “we’ve been keeping aircraft locked and hangared whenever possible. By asking the local police chief to increase patrols at the airport, I believe we have done a lot to bring them into the loop and ensure the lines of communication stay open.”
Addressing a gathering at the NATA Convention, Bob Showalter, chairman of Showalter Aviation at Orlando (Fla.) Executive Airport (ORL), summed up the fears of many NATA members. He said, “My biggest concern is that our industry is going to be regulated out of a major part of our functionality without a meaningful increase in security.”
While security concerns represent serious potential pitfalls for general aviation, ironically public concern over the safety of airline travel coupled with cutbacks in service, increased delays and the indignity of airport security procedures have been a boon to business-jet travel. Direct beneficiaries of this windfall, so far, have been the charter industry and fractional operators (at least in terms of business inquiries). FBOs live and die by fuel sales, so when business jets fly, the service industry prospers. The effects for FBOs have been inconsistent across the country, representing the best and worst of the effects of September 11.
Certainly representing the worst is Signature Flight Support at Ronald Reagan Washington National Airport (DCA), which remained closed at press time except for fueling limited numbers of government aircraft. Once Signature’s busiest location, DCA has seen some of its general aviation traffic (and personnel) diverted to Dulles International Airport (IAD) and Baltimore Washington International (BWI) Airports, but the financial loss for Signature is devastating. The airport closures in the weeks and months after September 11 were harder on other, smaller FBOs that did not have the support of a parent-company network. “In effect, the lights went out for a matter of weeks, or even months,” said Coyne, and a number of aviation flight schools and other small businesses were sucked under by the financial black hole.
Conversely, other locations have seen significant increases in traffic. Showalter told AIN that the last three months of last year set records for fuel sales at Showalter Aviation. Other FBO operators shared similar stories, though, understandably, none wanted to appear to be reveling in profits generated by the September 11 atrocity.
The Insurance Challenge, and a Silver Lining
One area where almost all aviation businesses have been dealt a major blow is their collective insurance bill. Many FBOs saw war-risk insurance evaporate altogether at any price. Most have seen significant increases in regular premiums as much as 20 percent overnight. Coyne attributes the increases to the insurance industry attempting to recoup some of the devastating losses it suffered on September 11.
While insurance providers across the board took massive hits, the aviation segment was hit hardest, with the airlines suffering tremendous losses. Coyne believes that insurers may be shifting some of the burden from airlines to general aviation businesses, and he doesn’t think that’s fair. The rank and file at the NATA Convention agreed.
At the same time, Coyne expressed hope that artificially high premiums could lure new insurers to the aviation field. Underwriters who may not have considered aviation businesses in the past may be tempted by the high prices, and discover in their due diligence research that aviation businesses overall are a good insurance risk. With new blood in the market, the competitiveness would increase, theoretically leading to lower premiums.
The insurance dilemma is complicated by the fact that much of the financial damage was done to the re-insurance market–those insurers who back up underwriters when a claim exceeds a certain ceiling. Since most claims resulting from September 11 were so large, it was the reinsurers who suffered the worst financial loss. Since their business is spread across a wide spectrum of the market, reinsurers are inclined to try to recoup their losses from all market segments rather than just the industries that suffered the direct loss. Some general-aviation business operators believe that they are shouldering more than their fair share simply because their line of business may be viewed by the reinsurers as a close cousin to the airlines.
Future Visions of a Healthy Economy
For a glance forward at business aviation over the next year and beyond, Coyne and other NATA officers look to the state of the overall economy. Coyne has said that if, indeed, we are in a recovery, general aviation is well placed to benefit from the economic upswing. While reports are spotty on increased charter activity, greater interest in fractional sales and higher traffic levels for Part 91 travel, Coyne feels there is a groundswell of need for the product only general aviation can deliver.
“The airlines are not going to be getting better anytime soon,” he said, referring to the schedule cutbacks and decreased levels of service systemwide, not to mention the inconvenience and frustration passengers feel with inconsistent and burdensome security measures. With a pent-up demand for travel and general aviation gaining more and more of the public eye, the result could be a strong growth curve over the next 12 to 18 months, Coyne said.
In the long term, a lot could depend on the wholesale cost of jet fuel. Over the last month, Venezuela has sharply reduced its output of crude oil due to widespread political instability. The reduction in output deprives the U.S. of a double-digit percentage of its current foreign oil supply. At the same time, Iraq reduced production in protest over the fighting in Israel, cutting off a further 9 percent of the U.S. foreign supply.
Two major factors mitigate the effects of these cutbacks. First, world oil markets have become increasingly competitive in the past few years, with Russia challenging Opec’s status as the world’s leading producer of crude oil. North Sea and South American contributions have also combined to produce record-low prices on crude (when adjusted for inflation). Second, the effects of any decrease in supply are buffered by surpluses held in place to prevent precisely the kind of panic caused by the Arab oil embargo of the early 1970s. It will take some time for any real “shortage” to cause any slowdown in the delivery of petroleum products such as jet fuel, home heating oil and gasoline (avgas or auto fuel).
But the emotional response to news such as that of the Venezuelan upheaval can artificially spike crude prices and, by extension, wholesale fuel prices as suppliers react by trying to prepare for the anticipated increases. Depending on how long it takes for more accurate underlying market forces to normalize prices, there could be an increase in retail jet-A prices, but probably not for several months.
Some fuel suppliers feel that with current crude prices unrealistically low, a reasonable price correction would be a stabilizing influence. But that would not likely happen unless the overall U.S. economy shows signs of a real sustained recovery.
Retail Fuel Prices and the Great FBO Dilemma
One of the most vexing dilemmas for some FBOs is how to balance profit margin with an ever- changing overhead-cost structure. The practice of bundling most or all of an FBO’s profits into the revenue generated by fuel sales goes back a long way, but represents a significant problem in today’s business climate, to say nothing of what the aviation-services industry will be like five or 10 years from now.
Today’s fundamental FBO business model dates back to business jet travel in the early 1960s. In that era, JetStars, Sabreliners and 20-series Lear Jets (before mergers contracted the company name to Learjet) chug-a- lugged jet-A at a rate that caused pilots to keep a weather eye on their fuel gauges from spool-up to shutdown. A cross-country trip meant at least a pair of pit stops.
Even short, round-robin missions involved topping off at virtually every airport or running the risk that an unanticipated holding pattern could generate a low-fuel emergency. Wholesale military-surplus jet fuel was available to FBOs for as little as 12 cents per gallon, so drastic markups still made the FBO look like a flight-department sugar daddy. Airport managers, politicians and chambers of commerce gushed at the prospect of big-spending, jet-setting company executives using the local airport as a gateway to their communities. A visit by a corporate jet could mean a shot in the arm to the local economy, corporate tax revenue, new jobs and more votes for the politicians who brought them in.
For FBOs, cash flowed every time one of those thirsty jets bellied up to the pump. It’s no wonder they bent over backwards to coax pilots of these sexy new business jets onto their ramp, using every imaginable seductive force. Besides some of those more obvious attractions, expensive pilot giveaways, loaner cars, golf privileges and palatial facilities tempted savvy left-seaters to plan their fuel stops accordingly. Pilots with empty fuel tanks were treated like rich relatives from out of town–and they got used to it.
In fact, selling jet fuel generated so much profit that some wised-up airport authorities began writing into lease contracts that FBOs must provide other aviation services such as aircraft sales, maintenance, flight instruction, charter and aircraft rental. Without those lease requirements, profit-hungry FBO execs in many locations would ignore the relatively skill- and labor-intensive low-margin services and go straight for the jet-fuel jugular, leaving the airport and the community with no other aviation infrastructure.
Back to the Present
In short, FBO veterans universally agree that the early days of the business jets were “like a license to print money.” But that was then and this is now.
To say that the business has evolved would be to understate the massive shift over the past four decades. Most of the original financial incentives have reversed themselves, while much of the culture remains. The two opposite dynamics make today’s FBO business much more challenging.
For instance, consider this change in financial incentive. New-millennium turbofan engines are much more efficient, and fueling today’s airframes offers much more flexibility. Jet spec sheets today list separate range figures for full-tanks with fewer pax, or shorter range with all the seats occupied and the tanks less than full. In 1947, Beech boasted that the Bonanza could fly with full tanks and a full-size adult in every seat. In today’s world, that would be considered a strategic design flaw.
With this fuel efficiency and flexibility, pilots began using their jumbo-size fuel tanks to avoid buying fuel at higher-priced FBOs, tankering through until they got home to their private, discounted, fuel farm, or to some out-of-the-way location where, for a variety of reasons, fuel prices were lower. Gone are the days when a jet has to top off at every stop.
Another fiscal reality: with wholesale jet fuel prices watched and managed much more closely today, the days of “buy incredibly low, and sell high” are also gone. Margins on jet fuel may not be readily known on a day-to-day basis, but it’s a safe bet that no one is slurping up surplus military fuel at token, giveaway rates.
‘Haves vs Have Nots’
Politically, business jets are far removed from the welcome attitudes they enjoyed in the booming 1960s. Sociologists study different societies’ “tolerance for disparity of wealth,” meaning how readily the lower socio-economic groups accept the fact that those in the upper socio-economic levels have greater privileges. Needless to say, in a Horatio Alger-inspired “anyone can make it rich” democracy such as America’s, such tolerance is much lower than in some Asian and Middle East caste-oriented cultures. In Western society we tend to root for the gutsy little guy to work hard and be successful–just not too successful.
As a result, citizen groups and local politicians are more likely these days to join forces against an influx of business-jet traffic, rather than roll out the red carpet. Passengers on business jets are still seen as the elite few who enjoy privileges unavailable to the rank and file.
Those who would go into business to service such aircraft are painted with the same brush, and often find little cooperation from local authorities–or even outright resistance to any plans for expansion or improvement of their facilities. At FBOs on airports also served by major airlines, it’s not uncommon for airport authorities to begrudge the very existence of a GA facility. This is the prevailing climate for FBOs, a far cry from the attitudes prevalent when the industry was in its infancy.
Pilots’ High Expectations
But the culture remains somewhat intact. Pilots still expect top-level treatment from FBOs. At the very least, they expect their passengers to be afforded the same level of service they enjoyed while on board the aircraft. In some cases, pilots still anticipate the same reception they grew accustomed to in the old days. Even if they aren’t old enough to have flown during those boom years, they have heard the stories and expect to receive their fair share of the plush treatment now that they have found their way into the cockpit of a sophisticated corporate turbine.
And in many locations, the old days never left. There are airports where corporate aviation still is king, and FBOs enjoy the cooperation and support of local businesses and municipal authorities. Rent-free leaseholds with paid utilities and other freebies are not extinct. FBOs in those situations can afford to offer top-level services with low-ball fuel prices to boot. The range of total overhead costs for FBOs–from the lowest to the highest–would span an economic chasm to rival the Grand Canyon.
And yet there remains one source of offsetting those costs and, maybe, earning a profit. Fuel sales remain overwhelmingly the primary source of revenue for FBOs. Only now, because of tankering, a large-city facility with high rent, little support from its airport board and tighter rein on its revenues (not to mention unionized employees) is in direct competition with a down-home FBO in the outback that may operate rent-free and pay little, if any, in flowage fees or other overhead costs.
Pilots all want to save their company money, and buying fuel from the latter FBO could save several hundred dollars on a single trip. We’ve all heard the “guy” jokes about driving cross-town to buy gas for a couple of pennies less per gallon. Saving money on fuel seems to be a national male pastime second only to avoiding asking for directions.
The practice of buying “courtesy fuel” arose from this disparity. Pilots would “reward” good service by taking on a token amount of fuel from each stop along the way. It’s an imperfect system. What may seem like a courtesy fuel purchase to a pilot may barely cover the cost of driving the fuel truck out to the aircraft for a given FBO. The variables are just too great to arrive at a general code of good practice as far as compensating an FBO for providing the service, or maybe even just being there at all.
There seems to be a general opinion that if an FBO is the only facility on the airport, that accounts for its practice of charging outrageous prices for fuel. While there is some truth to this assertion, the full story is much more complex. No one knows exactly what an FBO’s month-to-month costs are to be at a particular airport–sometimes not even the FBO itself. Arriving at a break-even figure for the month is not always a simple calculation. To extend a business plan out several months or years becomes increasingly fraught with uncertainty over the ever-changing variables.
For instance, when business jet travel boomed in the high-stakes dot-com era, FBOs pumped a lot of fuel–but saw double-digit wholesale fuel-price increases at the same time. While most agree it was a good time to be in the FBO business, the steep increases in fuel prices kept it from being the overwhelming windfall it could have been.
Ironically, the jump in wholesale fuel prices may have been good for the long-term status of the FBO industry. Because revenues and profits can fluctuate so much, boom times have traditionally drawn in well intentioned but inexperienced new blood to the FBO business. While such newcomers add spice and new breath to the marketplace, they can also upset the balance by operating with unrealistically low margins that turn good profits in the short term, but can’t survive even a modest downturn in ramp traffic.
If fuel prices hadn’t gone up in the late 1990s, windfall profits would have attracted more of this brand of newcomer to the aviation field. As it was, profits remained modest and the FBO industry retained stability in the face of the much more volatile ride taken by Wall Street.
In summary, most pilots agree that the FBO industry as a whole is doing a good job of keeping business aircraft fed and sheltered and their passengers and pilots similarly cared for. FBOs also perform a vital service in maintaining the foothold general aviation enjoys at some otherwise reluctant airports, while making some locations a true pleasure to visit. Over the past five years, billions of dollars have been invested in new construction and capital improvements at existing FBOs, creating a standard of quality rivaling that of the top hotel chains.
Over the coming decade, FBO executives are challenged with the need to adapt to some challenges from new adversaries. At the same time, the business aircraft service industry is committed to extolling the value of general aviation, hoping to sail along on what is expected to be a prosperous economic sea change.