FBO industry considers another business model

 - September 21, 2006, 5:22 AM

The value of an FBO to an aircraft operator can be difficult to measure. There’s a temptation among pilots on the road to consider an FBO the equivalent of the corner gas station–the lower the price per gallon, the better.

Back at home base, the relationship between the aircraft operator and the FBO is likely more involved. The FBO might fulfill the roles of landlord, maintenance provider, guest concierge, community relations specialist, political lobbyist and a host of other functions that could take some reflection for the aircraft operator to appreciate.

The business aviation industry is beginning to realize that the network of some 4,500 FBOs throughout North America is undergoing a gradual, subtle changeover. As a result, some of the basic assumptions many pilots make about their hosts on the road are going to have to evolve.

There are those within the FBO industry who over the years have tried to pry their colleagues away from the traditional business model, which focuses on fuel sales as the primary source of revenue. That model assumes that the FBO’s economic value as a business hinges on its ability to market fuel–a business proposition that worked fine when fuel margins were high and jets had to fill up at every stop along the route.

When it came to based customers, FBOs were eager to provide hangar space at or far below what would be considered the norm for a commercial tenant leasing the same square footage, on the assumption that the aircraft operator under the FBO’s roof would be buying a lot of that high-margin fuel.

FBO Margins Squeezed

That view might have made sense years ago, but not now–at least in most cases. Part of the difference is in how profit margins for each gallon of jet-A have been shrinking over the past 15 or 20 years–if not in actual cents per gallon, then at least as a percentage of the wholesale cost. Another reason the climate has changed is that airport real estate has acquired a new image in the minds of airport authorities, lenders and local politicians.

In densely populated parts of the country, the value of airport turf has increased substantially. When property values increase, higher state and local taxes aren’t far behind. The wide open spaces of an airport’s property scream out their potential for far more in tax revenue if they were given over to industrial or residential development.

So airport operators face greater pressure to explain how the airport is a more valuable local asset than all those tax dollars that could be flowing into the coffers. That can lead to a spirit of “making the airport pay its way.”

When the airport authority’s costs go up, in the form of increased taxes, the authority puts the squeeze on its paying tenants. At large urban airports, that usually means the airlines. At general aviation airports, the business most often left holding the bag is the FBO.

The airlines’ financial woes have been a source of concern for the general aviation service industry. Airports that derived the lion’s share of their revenues from airlines have seen their primary source of income compromised as airlines cut back on service–or file for bankruptcy with airport fees unpaid. Even in municipalities where property values are flat, a change in officials on the airport board can lead to a city or county’s altering its mindset toward the airport. Where there used to be an attitude of support toward the facility as an important gateway to the city or county, the new guard could see the airport more as an under-tapped source of revenue.

New concession fees and fuel flowage charges can result, and existing support infrastructure from the municipality, such as snowplowing the airport access roads, can begin to generate invoices for services rendered. When that happens, the airport has little choice but to increase rents to try to offset the new expenses.

A few lucky FBOs escape this vulnerability by actually owning the land they sit on–but it’s a small number, often FBOs operated by owners of smaller airports. FBOs or other airport businesses that sit on “fee simple” land (meaning that it can be owned) outside the airport boundary must have through-the-fence rights to access the airport property. Such arrangements are rare and prized among FBOs and other airport service businesses. The majority of on-airport facilities must negotiate leases with the airport authority.

Though the FBO is considered a tenant on the airport, it is usually expected to build and maintain the buildings and other improvements. That often includes the fuel farm. Capital investments on that level require long lease terms to amortize the investment, and few FBOs would agree to any building project with fewer than 20 years on the leasehold contract.

Leaseholds can be bought and sold, but the airport usually retains the right to approve a new FBO owner. Often, at the time an FBO changes hands, the lease is renegotiated and the new owner might exchange a commitment to build anew or refurbish the facility for improved terms.

An existing FBO will usually begin lease renegotiation several years before the term is set to expire. Again, the FBO could promise to make specific improvements in return for a lease extension. One common sticking point is that lease renewal negotiations might take place during times of relative prosperity–on an upswing of the business aviation cycle when fuel flow and corresponding cash flow is high.

That could prompt an airport authority to press for more rent or higher auxiliary fees that could cripple the business in a down cycle. Smart FBOs present profits and losses covering a long period of time during the leasehold re-negotiation process.

When business is good, selling jet-A can be a lucrative venture. But when the flow of jets onto the ramp slows, survival rewards the resourceful. Some FBOs have sought to leverage their real-estate value as a means of smoothing out the highs and lows.

The strategy might take the form of charging higher rents for tenants in exchange for lower profit margins on fuel. In some cases, FBOs are approaching regular transient customers with proposals to “buy into” the FBO with regular monthly payments in exchange for guaranteed access to a dedicated passenger lounge and fuel at a fixed price above cost.

Shifting the accounts-receivable ledger in this direction produces a more regular cash flow. In addition, when an FBO can show several sources of substantial monthly income, lenders, service providers, insurance companies, fuel suppliers and other vendors gain confidence about the long-term prospects for the business. That can translate into lower finance charges and more favorable credit terms.

Aircraft operators can enjoy a similar leveling of their budgetary fluctuations. It moves some of their expenses from the “variable” side of the ledger into the “fixed” category, which might also have favorable tax implications.

When FBOs leverage their real estate value by asking operators to pay into an equity position in exchange for guaranteed “tenant-like” treatment, they can make their budgets more predictable. It’s not for everyone, but it can work well for the right situation.