Service Sector Meets in Dallas

DALLAS — Despite Midwest storms that brought DFW International to a standstill and amidst uncertain economic times, some 4,200 service sector representatives met here in mid-March for the annual gathering that brings together Aviation Industry Expo, the FBO Leadership Conference hosted by the National Air Transportation Association, and the new AMTSociety technicians’ program. For the fixed base operator community, the talk at sessions and on the floor was about the weak U.S. dollar and its potential impact on consolidation within the industry; a noticeable drop in jet fuel sales, albeit not dramatic; and, the expected tax increases that many see on the horizon after the November elections.

William D. O’Grady, chief global investment strategist for A.G. Edwards & Sons, cautions that the industry can expect increased regulation of the bond market, which can impact airports and in turn airport tenants. He points out that none of the top three contenders for U.S. president are true free-traders, which could result in higher taxes and regulation.
Much of the discussion on the campaign trail and in Washington is centering around policies that bring with it larger government and more restricted markets. “We have forgotten how tough the ‘70s were,” he comments.

Seeking leadership
NATA president Jim Coyne says that, among the challenges facing the industry, a significant one is with FAA, where he sees a lack of leadership as well as strained labor management relations within the agency. “Over the last seven years the FAA seems to have taken a strategic approach to try to lower labor-management relations to the lowest possible level that they can get,” he says.

“Of course, this is not just the FAA’s fault.” Coyne points out that the current strategy is an attempt to rein in the agency after the Clinton years, which the current White House sees as having “given away the farm.” Even without a change in party at the White House, current Democrats now in control in the Senate are more allied with government agencies, he says.

Coyne relates that internally, FAA inspectors continue to resist moves toward allowing private companies into the safety management business. Government inspectors “want to be the ones to control all the inspections,“ he says. “This is a fundamental regulatory question: Are the regulators going to be solely government union employees? Or is the government going to create regulatory standards that then private sector employees can participate in?”

He says the industry tends to favor a combination of both, with private companies better at managing peaks and valleys in the workload and with meeting deadlines.

Taxes will remain a hot button in the coming years, Coyne says, with reauthorization no longer the sole concern. In fact, he maintains that reauthorization will likely fade into the background, with little hope of a solution until sometime next year.

“I think, frankly, the tax challenge that our industry faces has been easier over the last three years, for we only had really one opponent — the airlines,” Coyne comments.

He says all taxes will be in play soon — from taxes on general aviation aircraft to income and capital gains taxes. Current campaign rhetoric emphasizes increasing taxes for everyone but the average American, the focus of the candidates’ message.

“This will be the first time in a long time when the American people will be having a referendum about how much more we should raise taxes on the wealthy,” Coyne says. Taxes on wealthy Americans might go up as much as 100 percent, regardless of whether a Democrat or Republican wins the White House, he cautions.

“That fraction of America’s taxpayers that will be paying significantly more taxes will be our customers,” Coyne says.

Coyne also sees increased regulation in general aviation’s future — “Ironically, at a time when our industry has never been safer.”

A shift in public sentiment against trade and globalization could also end up hurting general aviation, Coyne says. “Our industry has had huge growth in sales to overseas, more and more traffic across the borders.
“If we start getting into a corporation and trade war because of policies our government refuses to address, we will see retribution from other parts of the world.”

Global warming is another issue that will begin to hit home even harder. Says Coyne, “We are in the crosshairs of that debate. There are many people who believe — especially in Europe, where this issue is a couple of years ahead of us — that it’s almost immoral for a person to fly a private aircraft.”

FBOS remain optimistic in a changing market
Despite the turbulence in the U.S. economy since the beginning of 2008, fixed base operators for the most part remain optimistic about the marketplace, though not perhaps as bullish as in recent times.

A number of FBOs contacted related that they have been seeing a drop in gallons pumped in the first quarter, with a representative from one major chain seeing some outlets off as much as 10 percent. Several officials highlighted the fact that they are seeing more price sensitivity in the market, with corporate operators pressing harder for fuel discounts. Yet, as one fuel provider points out, that has created an opportunity for some of his seasoned dealers who have dealt with downturns in the past. Some of the newer customer service recruits in the service sector who have not before experienced a downturn may not know how to react to pressure from a corporate customer, he says.

[It almost does not need to be reported that avgas sales are off. One observer’s guess: See what in-season traffic brings.]

Discussions on the floor suggest that FBOs can expect to see an increase in the cost of money; thus, they should keep their eye on receivables. “In tight times, be efficient,” is one recommendation.

As the value of the U.S. dollar continues a downward slide, the dramatic influx of capital into the domestic FBO market by foreign investors is expected to wane. BBA, a London-based investment firm, owns Signature Flight Support. Macquarie Infrastructure, with roots in Australia, owns Atlantic Aviation. Dubai Aerospace has rapidly become a major player in the aftermarket. As one chain head intimated, the financial opportunities at present lie in Asia and the Middle East. What that means for the U.S. FBO market seems uncertain.

On the subject of FBO buyouts, Bernard Carroll, senior vice president for Macquarie Group Ltd., comments, “It’s hard to imagine a period that will be as active as the past three to four years.

“We’ve probably seen the bulk of the consolidation.” Now, he says, it’s about increasing brand presence and growing marketshare. On the subject of foreign money’s commitment to the U.S. market, he says, “Of the 120 or so investments through the years [made by Macquarie], we’ve sold about five.”

Carroll adds that “the credit crunch is certainly affecting firms everywhere,” and echoes the sentiment that the China and Middle Eastern markets have suddenly become more attractive.

Day to day managing
Mark Chambers, managing partner for Aviation Resource Group International, who led a session on FBO financial benchmarking, comments, “2008 is looking like a very challenging year.”

He says FBOs at times don’t do a good job of managing their real estate — that is, FBOs frequently tie fuel charges into based hangar costs instead of pricing facility costs unrelated to fuel.

NATA’s Coyne suggests that FBOs might consider their leaseholds the equivalent of “beachfront property.” Airports generally have limited acreage with which to expand; so, Coyne recommends operators rethink their property and consider other opportunities that may be available.