Changes in the fixed base operator sector may warrant a change in the typical business model. For years, the FBO industry has generally adopted the same model: heavy discounts or giveaways in exchange for the revenues that come with the accompanying sale of fuel. This model applied to office and hangar space, as well as use of the ramp and other facilities and services. Several years ago, the concept of “unbundling” was introduced with equal fanfare and resistance. Most of the resistance was tied to the fear of the loss of the customer to the competitor that refused to go along with this trend. As a result, it never really reached a level of full acceptance that allowed it to meet the goals envisioned.
However, with the current state of the industry and economy, I think it is time for many FBOs to reassess the way they run their business.
Although there are many opportunities for change in the traditional FBO business model, the greatest opportunity probably lies in the handling of office and hangar rents, facilities fees, and the accompanying fuel discounts.
For years, FBOs have heavily discounted rents for office and hangar space in exchange for the promise to buy certain volumes of fuel. The problem is that they discounted the price of the fuel too. As a result, the FBO was losing potential revenues on both ends of the arrangement.
To further add salt to the wound, many of these tenants failed to achieve the anticipated volumes of fuel on a consistent basis. Sometimes customers sold one of their airplanes, or changed to a more fuel-efficient one. In many cases, it was simply the result of a change in the way the company or individual utilized the aircraft.
Regardless, the deal that the FBO thought it was getting was no longer such a great deal after all.
Based customers: a double whammy?
Whether a based tenant or transient customer, FBOs cannot demand that someone buys fuel. This is significant in dealing with the based tenant, since based customers are often counted on to cover much of the overhead of the operation. As such, the FBO can suffer the dreaded “double whammy” when they discount office and hangar rents, but do not get to make up the difference in fuel sales. In other words, they “enjoy” the loss of potential real estate revenues and fuel revenues too. Because of this scenario, things need to change.
The occupancy of office and/or hangar space by a tenant occurs whether they buy fuel or not. Although most FBOs over-lease their hangar space to offset some of the potential loss, the reality is that if it is leasing space at a below market rental rate; the FBO is foregoing the opportunity to lease that space at a market rate (or more) to someone else that needs it more — and is willing to pay for it.
A lease of space is for the right to occupy that space for a period of time at a specified rate. If that rate is discounted because the FBO expects a tenant to buy a certain amount of fuel to make up the difference, and they do not for any reason, the operator loses. The customer is still occupying the office and hangar space, and the operator still incurs the operating expenses associated with having that space (utilities, liability insurance, repairs, maintenance, etc.).
Why is it the FBO’s responsibility to subsidize a tenant’s operation?
Discounts - the sliding scale
In a perfect world, a fixed base operator should get market rent for office and hangar space, as well as full retail on the sale of fuel. (Ask the local service station for a discount on the price of gas if you fill up and see what kind of response you get.) At the very least, every FBO should be getting a non-discounted market rate for its office and hangar space.
Discounts should only be associated with factors realized in the general real estate world. For example, a tenant leases a much larger area; is willing to commit to a longer lease term; or is willing to take an office in its current condition without additional tenant improvements — in such circumstances, a lower rate may be appropriate.