Cebula outlines avgas pricing theory

 - May 21, 2008, 11:00 AM

When he left his vice president slot at the National Air Transportation Association (NATA) earlier this year to become senior vice president of government and technical affairs at the Aircraft Owners and Pilots Association (AOPA), Andrew Cebula had to change his point of view along with the alphabet initials on his business card. NATA is the trade organization for the FBO industry and AOPA is a consumer group, and the two associations are apparently on opposite sides of some emotional debates.

One of the issues Cebula faces at AOPA was punctuated at a recent “town meeting” of pilots hosted by AOPA president Phil Boyer outside Teterboro (N.J.) Airport. During the Q&A session, a pilot pointedly asked, “Why is it that FBOs raise their prices on avgas when auto fuel gets more expensive, but they don’t ever lower them when the prices come down at the corner gas station?” Boyer assured the pilot that now that Cebula is on board at AOPA after 18 years with NATA, we’d get some answers to that question.

AIN asked Cebula how he is responding to that challenge. He candidly shared what he knows about fuel pricing, but also made the disclaimer that there were some aspects that he could not know, even from his position at NATA. “In all my years there,” he said, “I never would presume to ask FBOs how they run their businesses. It was not my function.”

He also emphasized that the market for jet-A is “an entirely different animal” compared with avgas. While the price of crude oil directly affects all petroleum products eventually, other highly significant influences on jet-A prices include airline activity and weather.

If the Northeast has a hard winter, shortages of home heating oil will have a direct effect on the cost of jet fuel. Neither of those issues affects the cost of avgas, which Cebula characterized as a “boutique fuel.”

“Avgas is a unique commodity in that it is not mass produced,” he said. “Whatever amount of fuel that is already in the pipeline will hold its value for a lot longer than automotive fuel. So there is definitely a lag in price fluctuations with avgas, compared with mogas.” Another AOPA spokesman told AIN that there are fewer suppliers of avgas today than ever before–a reflection of the small volumes of production. The spokesman added that the industry is fortunate those suppliers have stayed with general aviation.

When asked if avgas prices are slower to rise than the posted prices at the corner gas pumps Cebula said, “One thing I can tell you is that price increases at the wholesale level are passed on a lot more quickly than price decreases.” But, he added, that doesn’t necessarily mean FBOs are gouging.

Other factors, he said, could come into play. For instance, infrastructure prices–rent, heat, electricity, salaries and benefits and other fixed costs–go up, as any homeowner or business operator knows only too well. If an FBO retains higher retail fuel prices after wholesale numbers ease back down, it could be a matter of catching up with shrinking profit margins due to increases in costs elsewhere.

“Generally speaking, most FBOs link the retail price of fuel with the wholesale price, adjusted for whatever margin is in the business plan,” said Cebula, although AOPA numbers indicate, over the past six months, wholesale prices have moved up 3.2 percent while retail prices have risen 4.1 percent.

Another confusing fact is that, for some FBOs, fuel profits represent much less of their bottom line. They may be a maintenance base first, or a flight-training facility, charter operator or derive their primary income from some other area. If their profits from fuel dwindle, they are much less severely affected than another operator, for whom the lion’s share of profits, or losses, comes from fuel sales.

A recent report on National Public Radio indicated that auto fuel prices have dropped an average of nine cents per gallon nationwide over the past few months, with prices in the Midwest down an average of 21 cents per gallon. As the summer wears on, if avgas prices fail to follow any downward trend seen at the corner gas station, it’s a safe bet that Cebula and other AOPA officials will be fielding these complaints more regularly.