FBOs need to step lively to stay in stride with the times

Aviation International News » June 2005
October 16, 2006, 12:28 PM

To paraphrase the sentiments on a popular plaque, FBO owners in these changing economic times need the courage to change business practices that need to be changed; the serenity to accept those that cannot be changed; and the wisdom to know the difference.

Speaking at a forum during the recent Aviation Industry Week, Mercury Air Centers president John Enticknap added a fourth desirable quality for those who would prosper in the FBO arena. He said they need the vision to look for new profit-producing opportunities in a fast-evolving aviation services picture.

Fixed-base operators have seen a severe turnaround in their business model over the past two-and-a-half decades. The first business jets, including Learjets, JetStars and Sabreliners, had thirsty, short-range engines that needed fuel at virtually every stop along the way.

Airport authorities at most cities and towns were flattered to see jets on their ramps and would encourage FBOs to serve the kerosene burners. Often they would subsidize FBOs with low rents, free or reduced utility bills and a host of other incentives. In many instances even those that did not receive subsidies had rents that were low to negligible because airport property was not considered prime real estate.

Wholesale jet fuel was cheap. Some operators have told AIN they could buy surplus jet-A from the Air Force for as little as 11 cents per gallon in the 1960s and early 1970s. Fat profit margins prevailed as aircraft operators in pre-Excel spreadsheet days were not so inclined to squeeze deep discounts.

The result was high returns for the FBOs, which often reinvested those returns in plush facilities and enticing amenities for passengers and crews–the better to attract even more fuel business.

A Changing Paradigm

All those variables had shifted inexorably 180 degrees by the turn of the millennium. Today’s fanjets are capable of tankering enough home-base (discount) fuel to complete most round trips without a pit stop. Wholesale fuel prices have ratcheted higher and faster than retail pricing can support, so once-fat profit margins have been reduced to anorexic levels.

Airport neighbors, almost universally, now view private jets as noisy, polluting, dangerous parasites. That political reversal has bred tougher access to airport property, higher rents, increased flowage and other fees and a host of other burdens for a once popular industry.

There are other issues FBOs face every day. Besides flight departments and/or individual aircraft operators negotiating for lower fuel prices on the road, contract fuel brokers have stepped into the middle. In the worst case, FBOs see them exacting high fees for questionable benefit. Even in the best case (where they bring in new customers) there is added complexity for the FBO in dealing with a third party as part of a fuel transaction.

Finding and keeping good employees isn’t what it used to be. In the early days, an FBO could select the pick of the local workers who were eager to work with airplanes. Today, much of the sheen has faded from general aviation careers at a time when equipment has gotten more complex and training requirements are at an all-time high.

Insurance providers are promoting more sophisticated initial and recurrent training for line techs and customer service representatives–and enforcing higher standards of ramp safety by raising deductibles for those expensive fender-benders. Speaking of insurance, employee health benefits are more costly than ever.

Environmental concerns can be a major expense, whether it’s cleaning up leaking underground fuel tanks, treating waste-water runoff or disposing of old oil and fuel residue. Often, the FBO is on the front line of the public relations battles fought over noise issues, with public concern over exhaust emissions a looming issue for the coming years.

Attracting Investors

All in all, it doesn’t sound as if there’s much fun and profit to be had in the FBO business these days, so one would assume it would be a buyer’s market. In fact, the opposite is true. At a panel discussion at Aviation Industry Week, representatives from several private equity firms expressed strong interest in today’s FBO business model.

Sales of business jets are up, and forecasts predict they will continue to improve. Prospects for the new class of very light jets (VLJs), with several types slated for deliveries next year, also have private equity fund managers looking favorably on the FBO industry.

But perhaps the most attractive aspect of the business of servicing business aircraft is its fragmented nature. The largest player (Signature) has less than 10 percent of the market.

Private equity buyers feel that economy of scale and base-to-base synergy are strong reasons for consolidating FBOs. A single billing system, for example, is thought to be a major benefit compared with each of as many as 60 operations generating their own systems. Also, human resources infrastructure (paychecks, benefits and so on) could be centralized at significant savings overall, according to proponents of the strategy, such as Bruce Pollack of Centre Partners. His firm is backing Ross Aviation, which recently made its first acquisition at Jefferson County (Jeffco) Airport outside Denver, following up by adding the Santa Fe (N.M.) and Scottsdale (Ariz.) Air Centers to its stable. Pollack also suggested that a large chain would have negotiating power with fuel suppliers and other vendors.

The largest investment in FBOs from private equity managers is the 35-FBO Piedmont Hawthorne chain (recently merged with Garrett Aviation) backed by Carlyle Group. The investment group’s aviation division is heavily involved in aviation, with 10 companies representing some $8.6 billion in sales.

Peter Clare, managing director of the division, told AIN Carlyle is in the acquisition mode and currently has six business aviation-related companies in its portfolio, including Piedmont Hawthorne and Associated Air Center. Clare also spoke to the issue of establishing coordinated marketing plans among related companies. For example, a regular fuel customer at Piedmont Hawthorne could receive a good deal on maintenance from Associated, or vice versa.

The bottom line for FBO owners is that, if they’re interested in selling their business, now might be the time. Businesses are trading at up to nine times their EBITDA (earnings before interest, taxes, depreciation and amortization) numbers–a healthy sign. However, all the private equity managers agreed that they were interested only in what they considered the top 500 or so among some 3,600 FBOs that sell jet fuel.

What the current trends in FBO ownership and consolidation mean for aircraft operators is less immediate and less clear. Pilots have long criticized Signature for its inflexibility in fuel pricing. While standardized pricing policy can help with consistency, some say the authority to negotiate price on the spot gives FBO general managers the freedom to entice aircraft operators to buy larger uploads.

Wolcott Blair, general manager at Ronson Aviation, Trenton, N.J., said his customer service representatives have approval to negotiate, to a point. “We regularly recalculate what it costs us to upload a gallon of fuel [including wholesale cost and all overhead expenses].”

That makes it clear how much Ronson can discount its price and still generate acceptable margins for larger quantities. While it may seem to be simple arithmetic, unexpected fluctuating costs for labor, insurance, equipment and other basic infrastructure change the formula.

Profits from fuel sales remain FBOs’ most significant income, and veteran pilots and dispatchers know that they are paying for FBO services rendered by buying fuel. Most have a good measure on how much fuel they ought to buy to compensate an FBO.

For example, if an airplane needs to sit on a ramp for several hours (or be moved several times), the crew uses a crew car and the passengers need a lift in the courtesy van, most pilots will maximize their so-called “courtesy” fuel upload. Conversely, if an FBO’s regular customer has a quick dropoff but buys fuel on most other visits, the general manager is most likely to be understanding.

Not-so-welcome Guests

Just as there are some FBOs that overcharge for poor or nonexistent services, there are abusers of FBOs’ hospitality. Most have heard the stories of jet operators that repeatedly occupy valuable ramp space, run their loud APUs all day and otherwise make nuisances of themselves–and never buy fuel. Savvy FBOs will use the “hand on the shoulder” method of persuasion to entice the customer to buy fuel when possible. Sometimes that method proves ineffective, and FBOs have been known to introduce a ramp-fee policy on the spot when their patience is exhausted.

The subject of ramp or handling fees is a sensitive one, and most disagreements stem from incomplete communication as to what it costs the FBO to host the airplane on its ramp. FBOs that boast they never charge ramp fees might be subsidized by the airport authority. That makes it easier to be magnanimous.

But the FBO that is paying heavy rent and utility bills–and just signed an agreement to build a new $3.5 million terminal as a condition of extending its lease–may feel a justifiable need to ensure that an aircraft operator who wants to buy fuel will not be turned away from the ramp because there’s a non-paying “customer” taking up prime space.

Speaking of real estate, there is a school of thought that the FBO business model should be all about location, location, location rather than fuel, fuel, fuel. Harvard-educated developer and airport business consultant Win Perkins has a background in Manhattan commercial real estate. His passion for aviation led airport businesses to solicit his opinions on their real estate issues. Perkins’s opinion is that, at least in areas of the country where land values are high, FBOs often mistakenly put the fuel cart before the real-estate cash cow.

FBOs have unique concerns when it comes to the land they sit upon. Few own that land. Most lease it from the airport. But the FBO is, nevertheless, often contractually required to build its terminal and hangars on land it doesn’t control. Obviously, long-term leases are a virtual necessity. Even with a 20-year term, an FBO still has a difficult sell when talking to the bank about a construction loan. As a result, such loans typically come with significantly higher interest rates than construction loans for more conventional businesses.

Those who would finance an FBO’s construction costs also must consider the issue of limited alternate uses for hangars and other airport buildings. Hangars, with their specialized doors and utilities, make for very expensive warehouses.

Perkins believes FBOs should focus on the real estate value of hangar rental space– at least in high-rent geographic areas– rather than on profits from fuel sales. He told AIN that some high-profile FBO executives have said they would low-ball the rent they charged tenants in exchange for agreements to buy fuel.

He believes that’s backward, since fuel revenue can be highly variable, while rent checks constitute stable, predictable cash flow. Other FBO managers have expressed similar opinions, though high monthly rent can be a tough sell for tenants, even with low-priced fuel as a lure.

New Revenues for FBOs

When Enticknap exhorted FBO strategists to explore new avenues for revenues, he might have been considering airline services as one of those opportunities. The legacy airlines’ struggle for survival continues to make headlines, and the latest round of fuel price increases has steepened the challenge. For many such airlines, part of the answer is outsourcing services. Some in the FBO industry see themselves as the ideal candidate to fill those needs.

It is not insignificant that Sally Leible, new chair of the National Air Transportation Association (NATA), comes with an airline-services background. Her stint on the NATA board started with the association’s outreach to the airline ground-services industry a few years ago. NATA president Jim Coyne said it was a natural fit.

Leible agrees with Coyne. She told AIN that the airlines themselves had the ATA, but the ground-support industry had no representation at the federal level. She said linking up with NATA’s FBO constituency was a natural fit, especially in light of the current plight of the airlines.

Services that general aviation FBOs could provide for airlines include aircraft handling, baggage handling, fueling, security, cleaning, de-icing and maintenance of ground vehicles, to name just a few. The trend has already started. At Newark (N.J.) Liberty International Airport, Signature employees have served as ticket counter agents for airlines that have irregular flight schedules that would not support full-time employees in that role. Also, de-icing trucks can be seen on the ramp wearing Signature livery. At New York La Guardia Airport SheltAir negotiated the rights to perform overflow de-icing duty for airlines when severe weather strains airline resources.

Coyne and Leible both see the interface of general aviation and airline ground support as a good mix. For the airlines, it represents a means of trimming long-term overhead. For FBOs at airports with limited–or even heavy–airline service, filling in the outsourced gaps can represent a new and lucrative profit center.

Other FBOs have chosen to pursue more traditional general aviation roles, such as stepping up their maintenance capability or pressing for more interior completions work. The recent implementation of reduced vertical separation minimums (RVSM) had brought plenty of avionics work to shops that specialize in packages for particular jets or turboprops. With all the work coming due at a common deadline earlier this year, many FBOs’ avionics shops have been working overtime to meet the demand. And several developed their own RSVM STCs for out-of-production airplanes.

Accommodating VLJs

Most FBO executives AIN contacted during and after Aviation Industry Week do not anticipate major retooling of their business plans to deal with very light jets–at least not yet. With the first such airplanes scheduled for delivery next year, it remains a matter of debate how they will affect the marketplace. For the FBO community, it makes a difference whether most VLJs are operated by owner-pilots, air-limo companies or overnight delivery operations.

If the bulk of the first wave of VLJs goes to private owners, they will likely replace high-performance piston aircraft or turboprops. If that’s the case, some FBO operators expect an influx of T-hangar customers who may have kept their previous airplane tied down outside. If most VLJs end up being used by cargo or utility carriers, FBOs don’t expect any great change to their current operations at all.

But should the air-limo concept take root and flourish, there could be a sea change in FBO business strategy. Bob Crandall, chairman of budding air-limo company Pogo, told the Aviation Industry Week audience that he considers his responsibility to end at the edge of the runway. He does not foresee a need to audit the airports or FBOs to which his aircraft will fly.

It would be up to the FBOs and airports themselves to promote their facilities as potential destinations for Pogo passengers. Assuming the concept is successful, the up side would be a substantial increase in fuel sales and companion opportunities on the passenger service side of the business ledger.

Potential pitfalls could include overcrowded ramps leading to unsafe conditions; unhappy passengers who blame the FBO for not having airline-type services available; and a hornets’ nest of airport neighbors aghast at the prospect of jets using the “little” airport in their midst.

The Future ofthe FBO Flight School

Finally, in all the flurry of interest from investors, air-limo operators, maintenance providers and other visionaries, some FBO operators have voiced their concern for the lowly flight school. Most agree that offering flying lessons is the least financially rewarding endeavor in an FBO’s repertoire–especially on a busy airport. Insurance costs, maintenance, scheduling, fast turnover of instructors and countless other factors conspire to make operating a flight school–or even having one as a tenant–one big headache for an FBO.

But Charlie Priester, second-generation head of Priester Aviation (now a Signature facility) at Palwaukee Airport outside Chicago, spoke in support of the flight school. During the Aviation Industry Week forum on private equity FBO buyers, he asked if they would support flight schools and received a bank of shrugged shoulders in response.

But Priester made the point that without flight schools priming the pump and generating interest in general aviation, there would be no industry to generate the short-term profits that the financiers were seeking. “FBOs are built by entrepreneurs,” he said, adding that the love of aviation transcends the profit motive, leading these entrepreneurs to stick by their flight schools and other financial intangibles that make their businesses persevere generation after generation.

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