On Margins

Sept. 8, 2002

On Margins

By John L. Carlen, Manager, AMPORTS’ FBO AvCenter

September 2002

A numbers man, FBO Avcenter’s John Carlen looks at the parameters
We all know about 9/11. The effects of rising insurance rates — especially terrorism and war coverage, if you can find a carrier that will support your company. If you service airlines, you know that they want lower rates to survive; airport authorities want more money from general aviation as airlines falter and drop borderline flights that are not making any profits. Where does it leave us?

Where does it leave the fixed base operator struggling to just survive, or the FBO that just poured $13 million into a new facility? How do you still make those financial targets that have to grow larger every year as costs go up and employees want raises?

Let us investigate
We know that, overall, fuel sales have been running down an average of 7 percent nationwide. We know that business was even slower to grow immediately after 9/11.
After looking at individual customer purchases over the last nine months, we find fractional companies are flying more than they used to and Part 91s are still a little below normal.
However, I see a trend the last few months that indicates the industry is beginning to go back to normal. There will be new fractional aircraft and new corporate flight departments, while some will cease to fly.
I am waiting patiently for the impact of the smaller, more affordable jet aircraft that will be on the market in one year. On the other hand, I am seeing many more corporate flight departments utilize aircraft over 95,000 pounds.
Speaking of which, will we have to spend more money due to the 95,000-pound aircraft security requirements placed on the aircraft operators? Whom do you think will have to pay its share of the burden? That’s right; the FBO operator. (Just do not absorb the charges yourself; pass them along to the customer.)

The 2002 market
So how do we make money today? Previously, I wrote about how to manage margins by discounting some sales and not others, searching for a breakeven point and targeting the outcome so that the EBIT (earnings before interest and taxes) meets budgeted expectations. Here are some suggestions:
1) Reduce airport costs.
Check your lease for volume reductions on fuel. If there is a MAG (Minimum Annual Guarantee on volume of gallons sold times the airport flowage fee per gallon) that’s due to your airport every month, there is most likely some methodology for decreasing the MAG fee in the following year. Alternatively, just get on your knees and plead for them to renegotiate your lease terms.
2) Reduce FBO costs.
Analyze your operating costs and decrease them any way you can without sacrificing service quality or the integrity of your various revenue-generating products such as fuel, parts, maintenance, and avionics. Observe how your fueling operation functions. Can you get rid of a truck? Is airline refueling worth the additional cost for such low margins? Can you reduce operating staff and overhead?
3) Ramp fees.
If you do not charge ramp fees, begin to do so. If you are just a small business on a small airport, charge $3 to $10 per aircraft, depending on the size. Explain it to your customers and most of them will understand. If you are a fairly large FBO on a busy airport and you are one of many, begin a trend. The others will follow you. Now: Do not violate the Sherman Antitrust Act by discussing this feature with all of the other FBOs on the field. Just be the leader.
4) Fuel margin maneuvers.
Set your margin to meet targeted goals. If volume slips, adjust the retail price to a level where it works for you and manage that spread to maintain the margin.
What? That will make you the highest price on the field? Big deal. Actually, in my experience, that is the best place to be. If you have great service and a nice facility on a good airport, you deserve to be remunerated properly. On most airports, the highest priced FBO sells the most fuel and on down the line if there is a large amount of transient traffic and based customers.
If you are dealing with an airport that allows a numerous quantity of corporate fuel farms, good luck; you may have to provide deep discounts and, ultimately, only one FBO will be profitable or only one will survive.
5) Increase volumes via dis-counts.
Remember the last lesson on discounting and make sure that you place the increased volume at a level where it will make up the shortfall for the loss of margin.
How do you get them to buy? Set up a control sheet for your counter personnel so that they can participate in the sales directly, and earn their own rewards from you for increasing volumes. Give employees a document that is in table form indicating increasing profits at increasing volumes so that they do not make a mistake. Giveaways, Avfuel points, or whatever dealer or company program you have: Push it! Get involved yourself. Talk to your customers. And, most of all, make friends.

About the Author

John Carlen is manager of the Amports’ FBO AvCenter at Pittsburgh International Airport. He is a graduate of Fairleigh Dickinson University with a B.S. in accounting, and has been in aviation management for some 20 years. He has been active in the Pennsylvania Aviation Council and the Airport Area Chamber of Commerce in Pittsburgh, and is the current chair of the Airports Committee for the National Air Transportation Association. He can be reached at (412) 472-6700.