April 8, 2000

Maintaining Margins

The upward spiral of wholesale fuel prices has retailers scrambling

By John Boyce, Contributing Editor

April 2000

Although it is far from universally true, it seems clear that FBOs are less inclined to absorb fuel price increases during the current upward spiral in wholesale fuel cost than has been the case historically.

The new, tougher attitude is exemplified by John Gudebski, general manager of Patterson Aviation in Sacramento, CA. As an indication of how much his fuel cost is rising, Gudebski jokingly says that his fax printer runs out of paper because his supplier faxes price increases so frequently.

"We began noticing significant price increases in about December," Gudebski says, "and it really accelerated in February....We're getting two or three changes a week. Sometimes it's avgas, sometimes it's jet product, sometimes it's both. We have not got any decreases, obviously.

"At first we were a little reluctant to (pass along the increase) because we thought it was getting ridiculous. But then we said why should we bear the brunt of these kinds of decisions; they're not ours to make and we're not about to be the cushion."

Gudebski says that he has learned from experience with past upward trends in fuel cost. Feeling guilty about passing along increases as he did in the past is not good business nor good sense, he says.

"We did feel guilty," Gudebski says of past price increases. "We felt the flying public couldn't possibly afford this kind of stuff. But I got over that this year. In the past we ate it (increase). If we got a two or three cent increase we'd try to moderate by putting it up a penny at a time. Then we realized that we were underwriting the public's flying. The refiners weren't, the distributors weren't; it was the retailers."

The feeling of guilt about raising prices is not uncommon. Robert Reid of Royal Aviation in Mesa, AZ, says that in the past few months his wholesale cost has risen 50 cents but he waited three months before raising his price. Overall, he has raised his retail price only 30 cents because he sympathizes with his customers.

"Stupidity," Reid laughs when asked why he hasn't passed along the full 50 cents. "I felt sorry for my customers. We service a lot of flight schools and these guys are just barely scraping along as it is. I just hated to raise the prices to them. I didn't want to put them out of business. (But) now that we have had to raise them they are very understanding.... If it goes down I will try to make up for my earlier losses."

Rex Hinkle, president and general manager at Cook Aviation in Bloomington, IN, takes a different approach. He has decided to absorb the increases. He sees this as a strategic investment in the future.

"We try to treat everyone with a price that will continue to make them come back and to make general aviation feasible for the flying public. If they're not flying, we're not making any money, we're not doing any business.

"I guess if our costs increase dramatically we might have to do a little bit (increase retail price) but at the moment we're trying to keep things down as competitive as we possibly can to try to excite people to fly. I mean, that's the number one cost of aviation is the fuel. If we can keep it competitive and people experience the uncompromised quality we give, then I hope they will remember us and come back to us as return business."

Profit margins in the current pricing trend can erode quickly for many FBOs, for whom fuel sales are a primary income producer. Although the past decade has seen FBOs become more cost conscious, there is, according to industry veteran Bob Showalter of Showalter Flying Service in Orlando, FL, still a tendency to simply not pay attention.

"I don't know about everybody," Showalter says, "but I do know about us.... Every time it (fuel price) goes up, we lose margin. We don't pass on every penny. We either screw up and forget or something. And every time I've ever seen it and all is said and done, we end up with the the price being 50 cents more than it used to be and we don't make as many pennies per gallon as when it was 50 cents cheaper. Because we somehow missed one or two increases. That's true this time, I know. We are making less per gallon, in pennies not percentage. We're certainly making a lot less in percentage."

To protect his margins, Showalter passes along increases but not right away. He explains, "At our FBO if we get an increase today, the increase goes into effect when we start selling today's fuel. If we have yesterday's fuel in the tanks for two more days we won't raise the price for two more days. It works the other way; when the price goes down, I sell the expensive fuel first — then I lower it when I start selling the less expensive fuel.

"It's not a law or anything. A lot of people move the day the price moves and people say you're selling cheap gas for more. Well, if you move down the day it moves then you're selling expensive gas for cheap. So it all works out. As long as you stick to one scheme it ought to be fair to everybody."

Although there does appear to be a more aggressive approach to raising prices, there are still many FBOs continuing to absorb increases due to what they see as competitive pressure. Larry Jessen, president of Great Southwest Aviation in Roswell, NM, for instance, doesn't go up in retail price until he has surveyed his competitors to see what they're doing.

"To be honest," Jessen says, "what I've been doing is checking what the prevailing rate in the area is and adjusting more on that basis. Because I'm a Phillips dealer, I'm not sure what Exxon's doing, or Chevron's doing, or Texaco's doing, or some of the other brands. I don't want to jump out and jump the price if the Exxon dealer hasn't seen an increase yet. I try to stay competitive."

While his retail margins have shrunk, Jessen says that he has many military fueling contracts and contracts with aircraft companies who have test centers in the Roswell area. Because of the nature of those contracts, those margins have not shrunk.

Dean Harton, president/CEO of Piedmont-Hawthorne Aviation headquartered in Winston-Salem, NC, and with 27 FBOs in its network, says the marketplace is also a factor in how his FBOs approach pricing. And how other FBOs monitor their costs might affect his cost-revenue structure.

"If everybody is selling fuel at $2," Harton says, "you have a hard time selling it at $2.10. It's trying to balance what the market indicates as the existing price of the fuel wherever you are with the cost increases you're getting.

"One of the things we think is that some FBOs don't keep as close tabs on their costs as we do. I think most of the larger chains have programs where they know — minute by minute, almost. But most FBOs, I don't think, know that and they may be absorbing a whole lot of their cost increase and not realize it until the end of the month or whenever they look at reports. We find ourselves in the difficult position of knowing our day by day cost but still having to stay within the market, so that we don't price ourselves out of the market in the long term."

Even those FBOs that have increased their retail price penny for penny with the wholesale price have not seen a decrease in sales volume. Jim Rutherford, general manager of San Jose Jet Center in San Jose, CA, who says he has no choice but to increase his price to protect long-established margins, has not noticed any decrease in volume.

"There has been no difference in flying habits," Rutherford says. "Everybody is flying their brains out. Our volumes continue to go up and beyond forecast."

On the opposite coast and throughout the country, much the same is true. Dean Harton at Piedmont-Hawthorne says increasing volumes have been the saving grace for an inability to completely pass price increases along to customers.

"We try to keep up our margins and increase the price as the (wholesale) price goes up," Harton says. "We're not able to do that, totally. We're not able to go up as much as our cost goes up so we're showing lower margins than, say, this time last year. On the other hand, what we have not seen, knock on wood, is a considerable reduction in volumes. Every other time in my career that we've seen extremely high prices, ultimately we've seen reduced volume.

"(In the past) a corporation flying a fleet of Gulfstreams and Falcons and whatever wouldn't, say, go out and sell their airplanes. What they would do is instead of flying this airplane 600 hours this year, they'd fly it 300 hours. They'd sit on the airplane until the fuel prices became more realistic. We haven't seen that.... So we're making less margin but essentially selling the same quantities."

Tom Meisenzahl, general manager of Kansas City Aviation Center in Olathe, KS, tried to head off any flier fuel price revolts by sending each of his base customers a letter. In it, he drew a parallel between the rapid increase of automobile fuel prices and what would be happening with his aviation fuel prices.

We explained "that they're experiencing the same thing at the gas pump that we're experiencing here and we were going to put our pricing on a floating price, so to speak. When the price goes up ours is going to go up accordingly. When it goes down we will reduce the price. So we're trying to maintain a certain profit margin and float with the price.

"Volume hasn't decreased. We have a lot of business aircraft come in here and, you know, they still have to fly.... It seems that they just feel it (price increase) is part of the deal."