FBOs: Industry in Transition

May 16, 2005
The changing face of FBO ownership and leaseholds leads the discussion during NATA's annual convention. Editorial director John F. Infanger reports from Aviation Industry Expo in Las Vegas.

LAS VEGAS -- At this year's annual convention of the National Air Transportation Association, part of the Aviation Industry Expo supershow, key discussions focused on undercurrents that have the potential to change the fixed base operator industry for years to come: airports potentially getting into the services sector at their facilities; the changing face of lease terms; and, the growing influence of outside money. In addition, a special post-convention FBO/Airport Symposium highlighted issues facing airports and tenants in their ongoing daily business.

Over the past 20 years the, FBO industry has been undergoing a transition due to the attrition of many of the key players from the World War II era who initially built the nationwide foundation for the services sector. Through consolidation and buyouts by outside investors - exemplified by Signature Flight Support and Mercury Air Centers - the FBO industry today looks significantly different. And it appears more change is forthcoming.

Meanwhile, airports are under pressure to be self-sufficient at a time when the airline industry is in disarray, leaving that revenue source highly volatile. As airports look for more consistent sources of revenue, or any new revenue streams for that matter, some are considering getting into the aircraft services business, either on an exclusive basis as permitted by FAA or as competitors to the existing services providers (see sidebar).

New money

The concept of new players entering an industry strictly from an investment standpoint - versus a love of it, per se, as is the history of FBOs - has been a dominant part of American business for some time. However, it's fairly new to the aviation services sector.

The eventual fallout of this trend is uncertain. Will it lead to a buying and selling of FBOs that leads to instability and inconsistent services? Will it lead to more economic stability and viability in an industry earmarked by low margins? Could it lead to airports taking over the FBO services because of inconsistency in quality, which some airports have experienced through the years? And, should airports be concerned that the signatories on the leasehold actually never set foot on the leasehold? These are among the questions being asked at this year's convention.

While this discussion was taking place, a proposal in Congress was calling for a requirement that leaseholds on airports should be 75 years in length. Asks David Bennett, director of safety and standards for FAA's Office of Airports, "If you're an airport operator, why would you want to lose control over your property for 75 years?"

Jim Haynes is president of The Aviation Group, a consulting firm which advised Macquarie Bank, an Australian firm, during its acquisition of Avports and its mini-chain of FBO Avcenters. He is also a former chair of NATA and FBO owner.

Comments Haynes, "It's only very recently that private equity firms have gotten interested in the FBO market." He sees international investment as a next step in the evolution of the U.S. FBO market.

Peter Clare of The Carlyle Group, an investment firm that has acquired Piedmont-Hawthorne and Garrett, among various aviation interests, says a key reason outside investors are interest in the FBO market is due to the growth in business aviation. "We certainly want to find more and expand," he says.

NATA president James Coyne projects that as many as 40 private equity firms are looking at the FBO sector today.

Lease terms

On the topic of what an ideal FBO/airport lease should look like, along with the associated rates and charges, the discussion focused on long-term leaseholds - albeit perhaps not 75 years - and what is fair when it comes to fees.

Comments Robert Olislagers, director at Denver's Centennial Airport, "Don't tell me how to lease land and I won't tell you how to sell fuel."

NATA's Coyne, who says 25 years is a reasonable average for a lease term, comments, "We understand that we don't want a situation where airports lose the incentive to lease their land."

John Enticknap, president of Mercury Air Centers, says, "Our investors expect to get a return on investment. We need 20 years to get a reasonable payout."

Regarding fees, Enticknap says, "We break out the fees [on customer receipts]. I want our customers to know we're a tax collection agent for the government." Rising fees, he adds, are a concern.

FAA's Bennett and various FBOs also stress the importance of minimum standards at an airport to ensure an equitable business environment. Such standards, they say, help maintain competition while helping to protect the investment of businesses already on the airfield.

FBO/airport symposium

During the post-convention symposium looking into FBO/airport issues, lease terms and fees dominated the discussion, along with the EPA's recent announcement that it is going to require secondary containment for refuelers (see page 20).

Eric Peterson, director of the Santa Clara County (CA) Airports, says that a potential "big benefit" of long-term leases for airports is that they can help keep a general aviation airport from closing, a pressure many have faced. He cites the example of San Jose's Reid Hillview Airport, under fire for years because of its close location to the city proper and the high value of real estate. A key part of the decision not to close the airport, he says, was the high cost required to buy out leaseholds.

Regarding the subject of rates and charges for operators, Paul Meyers, principal in charge of Denver-based Aviation Management Consulting Group, says that his firm is "not a big fan" of basing rates on gross receipts. Fees are designed to recover costs; rents are fair fees for occupying land and/or facilities, he says. "Rents are rents; fees are fees."

Meyers says that some airports are incorporating an Airport Economic Index that serves as a gauge that will float with the market, in lieu of an annual CPI (consumer price index) adjustment.

He also cautions that, as fuel prices escalate in today's uncertain market, a percent of fees rate could have a damaging effect on fixed base operators.