Strategic Evaluations

Strategic Evaluations

Aviation business operators meet to learn principles for evaluating their companies

BY John F. Infanger, editorial director

September 1999

EVANSTON, IL — The National Air Transportation Association had hosted management conferences for airport-based businesses before. Northwestern University's Transportation Center has had a growing presence with sessions related to other aviation segments. The intent for the first Strategic Management for Fixed Base Operators workshop held here in August was to bring about a defined economic model for an airport-based business — a model built on NATA's understanding of FBOs and Northwestern's knowledge of management and training. It was a good start.

Noticeable by its absence was a real-life FBO model from which to build — not necessarily mandatory for the exercise.

The three-day conference was attended by some 30 owners and executives of FBOs from around the U.S., and was led by Kellogg Graduate School of Management and Transportation Center officials, with an outline of the FBO business today by Dean Harton, president of Piedmont-Hawthorne Aviation, based in Charleston.

It touched most specifically on methods for evaluating the health and worth of a business, opportunities for increasing profits, and the technique of becoming an effective negotiator. These were particularly poignant topics, considering today's buy/sell environment among FBOs. Other topics discussed: marketing; employee stock ownership plans; estate planning; managing change; and, the future FBO business.

Some principles which stood out: Forget multiples (almost); cash flow is king; cutting costs may be easier than increasing revenues, thus boosting profits; and, value is not merely a numbers game.

Here are selected highlights from the conference.

Some Core Concepts
From Harton comes the following definition of an FBO:
A person operating under a written agreement for the use of land, buildings, or facilities at the airport for the purpose of providing to the public services required under written agreement including, without limitation ... the sale of aviation fuel, ground handling services, aircraft rental and sales, (etc.).

Pilots and technicians once represented the core business leaders for the aviation service business, but today business management personnel and large investment companies play key ownership and management roles. FBOs have moved from being companies that fly to ones that serve those that fly. Sub-leases and subcontractors play an integrated role in services provided at a particular location; traditionally, the FBO offered a nine-course dinner variety of services. Such companies tend to be better when specialized, says Harton.

He offers three basic examples, using arbitrary numbers, to demonstrate the financial models of a "core service" FBO and one with maintenance operations (charts at right, below). (Harton also offered ones with charter and airline services and a full-service FBO.)

Harton, whose own company is aggressively seeking FBO acquisitions, talked of factors that add value to the company:
• EBITDA (earnings before interest, taxes, depreciation, and amortization) and potential EBITDA
• Addition of incremental revenue opportunity already negotiated (prior to sale of the company) • New airline in town
• Evidence of excessive spending
• Fuel cost savings/insurance savings
• Strategic planning.

Regarding the last point, Harton says strategic planning sets the tone of the company, allowing management to put in place the mechanisms over time that fit into a 5-10 year plan. It adds value.

Excessive spending, he says, is "one of the things we look at as a buyer because it means expenses can be cut." It becomes part of a process he calls recasting: A seller's recast is offered by the owner to put the company in one light; a buyer does the same; and, the negotiated value is somewhere in the middle. (An example is a general manager's salary that may be inflated beyond industry norm because the GM is also the owner.)