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.
If an FBO wants to discount fuel prices to tenants, it should be based upon a sliding scale that ‘kicks in’ when the customer actually reaches the volumes that they promised when they negotiated the lease and fuel deal.
Better yet, charge full price and subsequently discount money back to them once they reach a certain purchase plateau. This scenario can result in the pleasant surprise of the customer making an effort to reach that magic point where they get a discount or get money back.
Cost of fuel = tankering
In today’s marketplace, new aircraft are getting more fuel-efficient, and aircraft operators are getting more savvy in their fuel buying habits. The cost of fuel has created a tankering environment which creates additional challenges to FBOs with the loss of the higher margin transient fuel sales.
This was certainly one of the driving forces behind the implementation of facilities fees by many operators. (Be careful about calling them ramp fees.) However, most FBOs will waive the facilities fee if the customer buys a certain amount of fuel. There are several potential problems with this model.
Whether or not the customer buys fuel, they are still using the FBO’s facilities, flushing the toilet, watching the new flat-screen TV, eating the popcorn, using the crew car, and the list goes on. Why have FBOs adopted the philosophy that as long as the customer buys fuel, they can use the facility for free? The FBO still has the same cost of operating and maintaining the facilities — and incurs additional liabilities and expenses when refueling the aircraft.
In addition, it is probably fair to say that most FBOs not only will waive the facilities fee if a certain volume of fuel is purchased, but will also discount the price of that fuel. Just like with the office and hangar rent example above, the FBO is facing the dreaded “double whammy” in lost revenues.
Facilities fees should be imposed on transient aircraft whether or not they buy fuel. The fee is for what the pilot gets when they use the FBO ramps, bathrooms, heated or air conditioned lobbies, flight planning facilities, various “free” amenities, and so on. If they get fuel, they should have to pay extra (and by extra, I mean full retail less any volume discount).
The FBO industry is a service industry that happens to offer a commodity. For too many years, the focus has been on the commodity and less on the service.
The FBO of the future could easily be one that generates the majority of its revenues from sources other than the sale of fuel. There is already evidence that a focus on real estate is making headway, with several aviation-only real estate interests out there.
In fact, there is some evidence that it might make more sense for some FBOs to focus on those other revenue sources, and simply sell fuel on more of an into-plane basis. In other words, the customer buys fuel at cost, plus a fixed or per gallon fee to pump it into the aircraft. This allows the FBO to better address the costs and risks associated with providing that fuel, without worrying about the costs associated with paying the electric bill, airport rent, or customer service personnel.
The cost of fuel does not vary significantly from one FBO to another, so why does the price of fuel to the customer? Some would argue that it is associated with the greed of the FBO owner. However, I would argue that it is associated with the cost to build, operate, and maintain the operation in certain locations.
The current system of rolling virtually all of the revenue requirements of an FBO into the sale of fuel creates the necessity for outrageous prices that drive many customers to buy the minimum amount necessary to get them from point A to point B safely.
Most corporate operators choose an FBO not because of the price of fuel, but either because they do not have a choice (there is only one FBO on the airport) or because of the facilities and services of the FBO. Why not capitalize on this selection criteria?
If an FBO builds new facilities or offers greater services or amenities, would it not be easier to justify an increase in a facility fee than in the price of fuel?
A step at a time
While this model will probably be a long time coming, and will not work at every FBO, some changes are necessary if the industry is to remain financially stable.
Most FBO owners are going to have to take baby steps in the implementation of any changes, while other smaller FBOs will probably have to take a “wait and see” approach relative to the acceptance of a modification in the traditional FBO business model.
Obviously, any proposed changes like those discussed face the daunting challenge of dealing with a significant recreational pilot population. This segment of the market will always challenge any changes in the status quo, and has no problem with the dreaded “double whammy”, as long as it isn’t coming out of their pocket.
If we are not careful, the FBO industry could end up like the legacy airlines. We all know how well things have worked out for them and their business model.
* * *
Michael A. Hodges, MAI is president and CEO of Airport Business Solutions, a Tampa-based aviation valuation and consulting company. During the past 20 years he has assisted FBOs with a variety of lease, operational, marketing, and valuation issues. He is also managing director of ABS Aviation Management Services, a sister company that provides contract FBO management services.