Private fuel farms are not an easy answer to high fuel prices

 - September 20, 2006, 12:41 PM

There’s nothing like a spike in jet-A prices to cause aircraft operators to investigate new money-saving strategies. Last year’s surge in prices to more than $5 per gallon after Hurricane Katrina raised discussion of the usual economy measures, including private fuel farms. What could be better than topping off at home base at wholesale rates and tankering through all those FBOs that are charging two or three dollars more per gallon?

Even FBOs acknowledge that there is no competing with an operator that has a hometown fuel farm. Bruce Sagnor, director of FBO operations for JetDirect at Chester County (Pa.) Airport, said, “Often, I can turn a 250-gallon courtesy uplift to a 2,500-gallon sale just by opening my mouth. But there’s no way I can compete with a fuel farm back home.”

Naturally, there are other conditions and ramifications. Otherwise, everyone would be lining up to install 20,000-gallon fuel tanks beside their hangars. For most operators it simply doesn’t make economic sense to take the leap. But Craig Sincock, president of independent fuel supplier Avfuel, told AIN, “After a price fluctuation like this one, there are always a few more who make the move. But it’s usually an emotional response. Sometimes it works out for the operator, but other times they really wish they hadn’t gotten involved.”

So, for an operator who might be wooed by paying wholesale prices, there are a few areas of due diligence to consider. Depending on its relationship with the airport authority and the local fire marshal and office of environmental protection, there might be more than a few.

And finally, there is the long-term effect on the entire business aviation service industry. FBOs have been struggling with a business model centered on fuel sales. An influx of new fuel farms would be another assault on that business strategy, resulting in a further move to unbundled service charges, ramp fees and menu pricing for services rendered.

First, consider how much control the airport authority has over who has fuel farms. Bill Weibrecht, former airport manager at Martha’s Vineyard Airport in Massachusetts, told AIN that, under FAA regulations, the airport authority cannot dictate who may or may not have a fuel farm. But he agrees that if an airport authority does not want private fuel farms incorporated into its master plan, it has significant influence to see that it doesn’t happen.

Consider that most airport authorities are political animals, working within the same system as the local EPA office and the local fire marshal. Both of those offices have clear authority on what is permitted, or forbidden, on the airport. It should come as no surprise that the municipality’s strategy would be supported across the board by local officials. If the airport manager doesn’t relish private fuel farms, the fire marshal is likely to be on his side.

Safety Regulations

If the airport is an FAR Part 139 facility, there’s yet another wrinkle. From the FAA’s Web site, under frequently asked questions: “[FAR] 139.321(b) requires an airport operator to establish and maintain fuel fire safety standards for fueling operations on the airport. This requirement is not specific to air carrier fueling; rather, it applies to all fueling operations that occur on an airport certificated under Part 139. Further, airport operators certificated under Part 139 must also ensure that such general aviation fueling facilities are incorporated into the airport operator’s emergency plan [see Part 139.325(b)(4)].”

Speaking of emergency planning, environmental officials and fire-protection officials are often on opposite sides of the debate when it comes to above-ground versus below-ground fuel tanks. The environmental side of the town office is usually dead-set against underground tanks, while the fire marshal’s office has concerns about the vulnerability of above-ground tanks. At most airports these days, it seems the fire marshals are fighting the losing battle, as above-ground fuel farms have proved to be much more prevalent.

A third arbiter in weighing the fate of an aircraft operator’s plans to build a fuel farm could be the local zoning board. They vary in clout from city to city and town to town, but in any situation they are a force to be reckoned with–even if only to take the time to fill out the forms and pay for the permits.

Then there is upkeep and inspection. When comparing the cost of private fuel-farm jet-A with that of the FBOs on the road, most often people look at only the wholesale cost of the fuel itself. There are collateral costs, including personnel to perform the fueling, conduct daily quality-control testing, maintain the pumps and other moving parts, arrange for suppliers to replenish the tanks and the additional administrative costs associated with ordering and paying for the fuel from the supplier.

An interesting sidelight on that issue came from Marci Ammerman of Avfuel. She said that most of the cost burden following Hurricanes Katrina and Rita involved trucking expenses. She told AIN, “There was actually plenty of fuel available, but transportation issues were the major bottleneck.” So while fuel sitting in corporate fuel farms was not subject to the same added cost as the fuel that replenished FBOs’ tanks more frequently, the difference would eventually affect private fuel farms as well as those of FBOs that pumped much more fuel in a month.

In fact, fuel suppliers agree that wild fluctuations like those experienced after the hurricanes are transitory. Once the dust settles, wholesale prices stabilize across the board so the private fuel farm customer is paying the same as the FBOs. What remains to be seen is whether the operator’s overhead expenses are lower than the difference in price per gallon paid to an FBO. And since many FBOs are not accurately tuned in to what it costs them to deliver a gallon of jet-A to the wing of a customer’s aircraft, it can be that much more difficult for a private operator, for whom supplying fuel is a sideline, not a core business.

An airport’s business philosophy regarding private fuel farms shapes the character of the airport and can have a profound effect on its overall operations. For example, Centennial Airport near Denver has a strict policy of restricting operators from establishing private fuel farms. The result of the airport’s stance is that all three FBOs on the field are successful and highly rated facilities, and transient traffic makes up a significant portion of the airport’s business plan.

Contrast that with Trenton-Mercer County Airport (TTN) in New Jersey, roughly halfway between the Philadelphia and New York metropolitan areas. Trenton is home base to several major corporate flight departments, five of which operate their own fuel farms. There is one FBO on the field, Ronson Aviation, that operates an active maintenance and avionics shop as a substantial part of its business plan. It is probably safe to say that transient traffic at TTN is not nearly what it would be if Ronson were charged with supplying fuel for many or all of those corporations’ flight departments. A second FBO tried to open at TTN in 2000, but failed after about a year.

Ironically, TTN is the site of one of the largest existing fuel farms–the former Naval jet propulsion laboratory. The massive 200,000-gallon fuel farm sits idle, and is probably beyond reclamation, according to Wolcott Blair, v-p of operations at Ronson Aviation. The county had the opportunity to activate the fuel facility after the Navy turned it over in the 1960s, but, said Blair, “The county wasn’t interested in getting into the fuel business.”

Industry Challenges

Beyond individual airport boundaries, any development that encourages more fuel tankering will ultimately have an effect on the overall FBO network. The 4,500 or so FBOs in the U.S. have long depended primarily on fuel sales for the lion’s share of revenue. As wholesale prices have gone up and margins whittled down, there is increasing pressure to break out of the current model and establish profit centers that do not rely solely on fuel sales.

Increasingly, there is talk of “unbundling” FBOs’ revenue streams. Rather than relying on dollar-per-gallon fuel profits, FBOs have been inching toward ramp fees as a means of enforcing courtesy fuel purchases and of ensuring some income from visiting “customers” who can fly to cheaper fuel elsewhere.

As time goes on, FBOs could assume a business model closer to that of their European counterparts, who typically rely on weight-based handling fees for their subsistence. Another school of thought calls for so-called menu pricing, charging á la carte for every service performed.

Another airport-service business strategy involves establishing an equity relationship with customers, rather than relying on fuel profits for subsistence. In effect, the “customer” pays a monthly charge, not unlike rent, for the right to use the airport facility–ramp, passenger lounge and lobby. In return, the customer is entitled to fuel at a fixed into-plane rate above a published and established wholesale fixed price.

The so-called “Private Terminal” at Morristown (N.J.) Municipal Airport is such a facility. The object is to leverage the real-estate value of an airport property and stabilize revenue. Receiving regular “rent” checks from aircraft operators holds some advantages over suffering the ups and downs of the fuel industry.

In many ways, jet-A is fading as the “currency” of the transaction between FBO and aircraft operator. If private fuel farms were to proliferate, operators would benefit in the short term, certainly in times of wildly fluctuating wholesale fuel prices. But if aircraft operators continue to eschew fuel purchases at the FBOs they visit, those FBOs will either go out of business or develop new mechanisms for getting the aircraft operators to pay for the services rendered. If an aircraft operator chooses to install a fuel farm, and commit to all that that entails, he could find that within the next few years, his savings could be offset by FBOs’ handling fees anyway.