Understanding shakeups in the evolving FBO industry

Oct 6, 2011 4:23 PM

76 PROFESSIONAL PILOT / October 2011
GROUND SERVICES
an editorial opinion
Understanding shakeups in the evolving FBO industry
Some well known names in the oil business
are disappearing from airport fuel pumps.
By Gene Condreras
President, Panorama Flight Service
Lineman refuels a Learjet 35 with Chevron Jet A at Million Air TUS
(Tucson AZ) in Aug 2010. Chevron withdrew branded aviation products
in Oct 2010 in all but 13 states across the US.
Photos by Jack Sykes
78 PROFESSIONAL PILOT / October 2011
At times the landscape of the general aviation industry appears to be changing rapidly. Or it may
merely reflect the same challenges we’ve faced before together with new ones resulting from evolving
industry expectations. It makes sense to look at our past in order to evaluate the present and thus project where we may be headed in the future. Hot topics among my industry associates include the oil companies’ branded withdrawal from the marketplace, fuel distributors assuming FBO support roles, the future of Avgas, FBO pricing models and the European FBO and private aviation business model.

Oil companies’ branded withdrawal

Probably the simplest explanation for the major oil companies’ branded withdrawal from the corporate/ GA marketplace is that the move is driven by profit and loss. Industry associates tell me that refined aviation fuel (Jet A and Avgas 100LL) sold to US commercial airlines, military and corporate/GA represents less than 10% of all refined petroleum fuel. If we exclude sales to the commercial airline industry and the military, the aviation fuel sold to the corporate/GA sector is less than 10% of all aviation fuel refined. Effective administration of branded product support programs for FBOs—such as credit card processing, signage, fuel trucks, marketing, product integrity, product liability extension to dealers—is enormously expensive. Therefore, it’s no wonder that an oil company would find it more cost effective and profitable to focus its efforts “upstream” to locate and refine product and, in turn, sell it at fair market value to fuel distributors and have them assume the rest of the workload required to deliver it to (and subsequently support) FBOs “downstream.”
Although oil companies have deeper pockets at present because of inflated crude prices, they continue to fine tune their business decisions in an attempt to improve bottom lines. Industry associates point out to me that the more things change, the more they remain the same. Between 1999 and 2001, we saw Chevron buy Texaco and Conoco buy Phillips 66 (which had already merged with Tosco). Prior to these events Exxon had merged with Mobil, while BP and Amoco had combined forces in the early 1990s. It was a period of big oil mergers with the big getting bigger, driven by competition.
Ten years later, we see Chevron divesting itself of Texaco markets that were not productive enough for it to maintain, as well as changing its strategy in the overall market. ExxonMobil has announced that it wants to take its signs down and not support US marketing efforts. BP is ending its exclusive agreement to supply its fuel distributor Epic and Air BP brand in 2012. And Conoco Phillips announced recently that it will be splitting the company into separate companies and issuing stock in order to drive shareholder value.
The only difference between then and now is the names and players. History cannot repeat itself, but actions or behavior can. Ten years later, the big oil companies want to streamline operations, while at the same time distributors emerge and take over the “downstream” distribution and support services for FBOs.
What this means to FBOs and our flight line consumers—and what it will mean in the future—is that FBOs will now look to their new fuel distributors for focused support services that can be used to create efficiency and thereby cost effective value for their customer—the flightline consumer. Whether today’s fuel distributors will do a better job of this than the large oil companies have done in the past remains to be seen. I personally think they will because the corporate/GA market is the focal point of their business model and not a fraction of their overall business as it was for the large oil companies
with whom FBOs worked directly in the past.

Fueling rumors
Before discussing the evolving FBO and flightline consumer markets, I asked industry associates about rumors that Avgas production would be phased out. I was told that 2 of the major oil companies make more money selling Avgas than they do selling jet fuel to FBOs for
corporate/GA. So why would they want to stop making such a profitable product?
Whether we agree that the US market is 230 million gallons of Avgas annually or another figure, Avgas 100LL is a diminishing product—as opposed to jet fuel, which
represents 1.4 billion gallons for the corporate/GA market.
Demand for Avgas has decreased from 330 million
gallons 10 years (or so) ago to the current numbers—a
drop of almost 30%.
Why? First, Avgas is always under attack by EPA because of its lead content. Regulators want a change but don’t know how to effect one without affecting the existing
fleet of aircraft that use Avgas.
Second, it is a recreational and training fuel. Training makes up the majority use of Avgas, while recreational flyers are less than 20%. Business aircraft users make up the remainder, but many of them are moving to different aircraft and looking ultimately to light jets or turboprops.
Third, aircraft have changed—they are more efficient. And, last but not least, the market demographics have changed. Today’s piston aircraft are more efficient—and more expensive. This means that there are fewer aircraft owners or operators who can afford a piston aircraft that
costs $300,000–$600,000.
The bottom line is that it’s the market that’s leaving Avgas 100LL, making it a diminishing product. Right now, only about 6 refiners in the US make Avgas 100LL to meet the demand of 230 million gallons annually. The annual domestic jet market for corporate/GA is 1.4 billion gallons. If an oil company makes as much (or more) money selling Avgas than jet fuel, why would they want to stop producing Avgas? We can’t blame the oil companies. If we need to blame someone, we should blame the market of regulators, aircraft owners, insurers, aircraft manufacturers and personal pilot preferences.

Evolving business models
Thirty three years ago, when I started my aviation career at HPN as a line service tech, the FBO business and our customers’ needs were very different from those of today. For example, an FBO’s credit card sales were subsidized by the oil company that supplied them with their branded fuel. They extended the FBO’s customers’ credit and processed the sales at zero cost to the FBO. In today’s market, using an average processing cost of 3%, when an FBO sells fuel for $5.00 per gal, 15¢ per gallon of “margin” is used to process the sale (18¢ per gal when sold at $6.00). This processing fee becomes part of the cost of the sale and is passed along to today’s flightline consumer.
In 1978 at HPN, there were no associated FBO expenses for CSRs, passenger or pilot lounges, complimentary newspapers, snacks or beverages. Heck, we didn’t even have a catering refrigerator—when catering was delivered it went straight onto the aircraft for storage. At that time, an FBO provided coffee and ice, fuel, escorted ramp access, APU, parking and towing services and maybe a
teletype weather machine.
An FBO’s labor expenses were limited to line techs and a facility manager. The flightline consumer was responsible for ordering passengers’ catering, arranging their ground transportation and/or rental cars, loading and unloading baggage, placing newspapers that they purchased on board the aircraft, and so on. Flightcrews would typically spend a layover splitting time betweenthe airport terminal coffee shop and their aircraft.
Aircraft were far less fuel efficient, and an FBO sold more gallons commanding a smaller “margin” while at the same time incurring significantly less expense while servicing their customers. In general, FBOs of the 1980s did not mirror the fit and finishes of plush hotels but rather the ambiance of dank airport terminal buildings.
The old adage that you get what you pay for seems an appropriate way to describe the many differences from yesterday to today. What has not changed through the years is that a flight department’s most valuable assets are its staff, equipment and passengers/customers. In order to be successful it must offer safe, time efficient, cost effective service.
An FBO’s most valuable assets are the same. To be successful, the FBO must be able to generate enough revenue to perform ground services safely in support of customers, pay staff, maintain equipment and facilities, and turn a profit. An FBO must meet the customer’s service expectations, but in doing so it cannot afford to degrade its profitability. The only way it can succeed in this is through precise communication, an understanding of each other’s needs and challenges, and an ongoing willingness to work with one another.
Industry reports state that 20% of GA aircraft, which are flying actively, are consuming 80% of the overall volume. The challenge within our industry is how FBOs should compete when 20% of the aircraft consume 80% of the fuel. Clearly, there is not much opportunity to expand the customer base or the volume, other than to take away market share from other FBOs. Demand is quite inflexible—
additional supply or competitive pricing will not increase demand for aviation fuel but only cause the
demand to shift from one provider to another, eg, a new FBO or a different airport. A flight department operator is not going to fly more hours than the mission calls for merely because fuel or services are less expensive. (This doesn’t apply to the light GA recreational flyer.) As an industry we must recognize that competitive prices and additional supply do not drive profitability when demand
is rigid. It is the quality of service achieved through standards and profitable practices that allows investment in the businesses and owners’ motivation to realize a return on investment.

European models

There is growing discussion of the European FBO/private aviation business model in the US. In essence, the model consists of FBOs using very low margins per gallon of fuel coupled with à la carte pricing for everything from parking the aircraft to flight crews and passengers using the restrooms and/or lounges. There’s a charge for coffee,a charge for newspapers, a charge for ice, a markup on concierge services, etc.
Industry associates point out that to report the real story requires a focus on the underlying reasons, issues or concerns in the rationale of the US market. Corporate/GA is different in the US than the markets in Asia, Europe, Africa, South and Central America, Canada, or anywhere else. The US is a capital market driven by the consumer, business and government. The corporate/GA industry is a submarket of the total US market that is again driven by government (airport authorities), business (vendors) and consumers (aircraft operators and pilots).
One could write a thesis on this industry, but the bottom line is that it is a business. The opportunity now is for our industry to grow up, stop making the mistakes of the past and learn from the things that work in maintaining it as an attractive business.
The problem at times is that our passion for aviation clouds our objective business thinking. Learning is the hard part and making the necessary changes is even harder.
The large oil companies’ branded products are just names—players or pawns in the game of business in the GA industry. The real story is yet to be told. And one of the challenges is that you can’t always tell it—you have to do it. In other words, don’t just try it—do it!
What an FBO wants or needs from a fuel supplier in 2011 is vastly different from what it was in 1981—and what flightline consumers want and need today from FBOs is different too. To state it simply, FBOs need tools that can be used to lower their overall cost of operation and thereby create real value for their flightline customers. By doing this, FBOs will not just be more competitive they will also maintain profitability, thereby sustaining a viable business. Reasonable profit throughout aviation also helps to promote safety while improving customer service. As stated previously, it remains to be
seen whether today’s fuel distributors will do a better job of providing these tools in support of their FBOs than the large oil companies have done in the past.

Back to the future
In many ways, the past is a lesson in what not to do. It is not simply about oil and fuel pricing any more. The players or names may change, but the business objectives remain the same. The oil companies want to sell more fuel and bring greater profits to their bottom lines, the FBOs want and need support from their fuel supplierswhile being compensated financially in a manner that provides a reasonable return on their investment, and flightline consumers want to operate their aircraft in a
cost effective manner. Again, the more things change, the more they stay the same.
What is not the same is the array of services and quality of facilities—and the consequent associated expenses— that an FBO must offer in order to satisfy the expectations of today’s flightline consumer. As an owner/partner and promoter of our HPN FBO, I know that we don’t sell fuel but, rather, “value and service.” FBOs are in the service business. They need to make a profit on the fuel they sell and hopefully sell enough to keep their doors open and bring home some value for their shareholders.
An adequate balance for flightline consumers and the FBOs that serve them, in regard to cost of operations versus revenues generated, needs to be maintained, as both entities are equally dependent on one another to achieve continued success. Perception drives or defines the reality of those perceiving. My own perception remains that we must take a good look at our industry’s past in order to evaluate the present and guide us to where we are headed in the future.
If we are to be successful collectively as an industry, FBOs, fuel suppliers and flightline consumers need to make necessary changes and continue to communicate and understand each other’s needs and challenges. Finally, let us not forget the responsibilities of our airport authorities, local municipalities, states and the federal government, which all play a role in the management of our aviation infrastructure. Airport administration imposed fuel flow fees, FBO leasehold rent structures and the number of FBO facilities vying for a certain amount of business at a given location also have a significant effect. They have a bearing on costs and expenses that are directly related to delivering the FBO services required in today’s evolving marketplace. If the oil companies andfuel suppliers are changing and adapting their business to a bigger picture at this moment, the rest of us who make
up the industry should be ready to change as well.

Gene Condreras is president of Panorama Flight Service at HPN, a family-owned and operated FBO that employs a support staff of more than 70. Condreras’s aviation career began in 1978 at the age of 19 as a line service technician for a competing FBO at HPN. Condreras also serves as an FBO advisor to the board of directors of
the Corporate Aircraft Assn, representing more than 90 program FBOs in the US and Canada.

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