When the Airport Eyes the Fuel

Jan. 8, 2005
While the transition to an airport-run FBO may be beneficial, it is not for everyone; and more importantly, it is not as easy as it looks.
Some airports, it seems, are choosing to get into the FBO business. It appears to be a trend that is being explored more and more by airport management throughout the industry, and not just at the smaller general aviation airports. While the transition to an airport-run FBO may be beneficial, it is not for everyone; and more importantly, it is not as easy as it looks. A few of the reasons given by airports that have chosen to get into the business of being the fixed base operator: - fuel prices are too high; - poor service levels; - a desire to gain more control of business activities at the airport; and - to generate additional revenue in an effort to become more financially self-sufficient. The common misconception of airports -- when it comes to their FBOs -- is that everything is driven by price. That is, if you have the lowest fuel price, you will have the most and happiest customers. As such, airports may jump into the FBO business with a plan to cut fuel prices to increase volumes. However, price is secondary to the most "important" customers at an FBO. By important, we are not only referring to the corporate operators, but to all those customers that actually buy fuel and spend money at the FBO. IDENTIFYING THE CUSTOMER What many FBOs discover when they try to implement the "low cost" business model is that the people that complain the most buy the least. Price is not really the issue, but rather their right to utilize the airport's and FBO's facilities at little or no cost. Many of these so-called customers would still find a way to complain if the fuel was free. Service is the key in the FBO industry, and quality service comes at a price. There is a reason that some of the larger and more recognized FBOs tend to have higher fuel prices: their cost of operation is usually higher due to money spent on customer amenities, employee training, and quality facilities. Good service and nice facilities come at a price, and more often than not that cost must be covered within the cost of the fuel.

As noted, there are various reasons that an airport decides to get into the FBO business, although complaints from users and tenants about high fuel prices and poor service are the most common.

An airport considering getting into the FBO business should start by doing a market and feasibility study. The study should probably be done by an outside, objective party, but can be completed by in-house resources. The initial study should be preliminary -- not a full-blown business plan -- and should accomplish a number of specific goals, including:

- What are the real opportunities and threats of operating an airport-run FBO in your market?
- What can the airport do that a privately run business cannot?
- Is the community supportive of the airport, and how would an airport-run FBO impact that relationship?
- Are there any political issues (noise, etc.) that may impact the decision?
- What is the real "net" revenue potential? (Don't forget to subtract existing revenues from rents and fuel flowage fees.)
- What are the risks to the airport?
- What are the start-up and ongoing operational costs of an airport-run facility?
- Does the airport lose any marketing synergies by not having an FBO?
- Can existing airport management and staff be utilized?
- Can the FBO be incorporated into the airport operations or will it be a stand-alone entity?
- Can administrative functions be incorporated into existing airport activities?
- How do we deal with services beyond line service and aircraft storage?
- How will this impact the relationship with other tenants?
- Can pricing decisions be made at a lower management level, or do they require senior management/board approval?

One obvious advantage to an airport-run FBO is the ability to exercise the exclusive right of an airport sponsor to operate the business without any competition on the airport. The FAA permits a sponsor to conduct FBO services without giving the private sector any opportunities.

While this can be a blessing, it can also be a curse for airport sponsors. Without direct competition, some airport-run FBOs become slow to react, too rigid in management and operational procedures, lag in technological advances, provide substandard services, and in some cases offer inadequate facilities. When decisions about pricing or money spent on capital improvements requires city council, county commission, or airport board approval, they often end up low on the priority list.

Airports tend to forget the value that an FBO contributes to the overall operation, as well as the value to the community as a whole. FBOs tend to be the gateway to a community even more than the passenger terminal, at least when it comes to business. For example, an airport that serves a tourist-driven region is reliant on the first impressions offered by the air carrier terminal. However, when it comes to business, the FBO generally hosts more business leaders and influential people than the main terminal.

Does anyone really think that if the chairman of a large corporation goes to an area to evaluate the possibility of locating a major part of their operation in a community, that he is really on that 11:15 AM Southwest flight? No, he's arriving on a chartered, fractional, or company-owned aircraft. That aircraft will taxi to the FBO -- the first impression of a region. Is the airport willing and able to direct the same level of customer service to a flight with three people on board that they do to one with 150 to 200 people on board? Not that an airport-run FBO cannot provide the same level of service, but is it politically possible?

Although the above statements might tend to lead you to believe that we do not support airport-run FBOs, that is not the case. There are certainly a number of situations at airports which dictate that an airport-run FBO may be in the best short- and long-term interest of an airport.

The most common scenario is an airport with limited fuel volumes. After all, fuel is generally the major source of most FBOs' revenues.

Fewer gallons means fewer dollars at the end of the month. In this scenario, the FBO tends to operate "on a shoestring" and does not have the ability to commit the necessary capital to marketing, employee training, facility/equipment maintenance, and/or capital improvements.

Moreover, when an FBO has a more limited revenue stream, customer amenities are the first to go, and unfortunately service levels also tend to decline. This service decline is often attributed to the operator's inability to keep employees long term due to rising personnel costs. Often, the solution is to hire a new employee at a much lower cost, without consideration to the costs associated with training and customer loyalty.

In these instances, with the airport taking over the fixed base operation, it can cross-utilize existing employees as well as take advantage of some of the other operational synergies of the airport.

Another scenario that may generate support for an airport-run is one where there is a relatively high rate of turnover of ownership and/or management at your FBO over a short period of time. High turnover rates can mean a number of things, but may indicate financial difficulties and/or personality problems.

While personality conflicts have to be dealt with carefully, ownership and/or management that has a confrontational approach can negatively impact GA traffic volumes. While these losses have a direct negative impact on the FBO, they also can have a negative impact on airport revenues and activity levels, if the customer chooses not to buy fuel or elects to utilize a competing airport next time around. There are certainly some examples of airports that have experienced this trend, and consequently, have changed their approach to FBO activities.

While other options such as management instead of lease/operating agreements, facilitating competition, or short-term agreements can all serve to enhance FBO standards at airports, sometimes the transition to an airport-run operation is the answer. However, it's not a decision that should be entered into without significant due diligence by an airport. Carefully consider the level of risk that an airport can or is willing to accept.