FBOs explain sky-high fuel prices

 - July 7, 2008, 5:17 AM

In just one year, the price paid at the refinery for jet-A in the U.S. has climbed 92.7 percent, reaching the $4-per-gallon mark early last month. The refinery price is a good place to start looking at fuel prices because it roughly equates to the cost of jet-A paid by FBOs before various fees, taxes and markups are added to decide the retail price. The refinery price doesn’t change a lot around the U.S., but the taxes, fees and markups do vary and are the reason for disparities in retail prices.

Respondents to AIN’s fuel cost survey at AINonline.com last month indicated that they are worried about fuel costs and numbed by jet-A prices at major metropolitan airports. They also expressed bafflement at how prices can vary so much between large- and small-airport FBOs and noted that the higher prices don’t necessarily correspond with high-level service. One pilot wondered if the big chains, some of which are owned by private-equity firms and others publicly held, have such a lock on their markets that they don’t have to compete on price and are simply inflating their margins to generate higher revenues for their financial backers.

The fact is, one FBO pointed out, “In today’s world of BlackBerrys, the Internet, FltPlan.com and more, the FBO does not just compete with [other FBOs] on the field; it competes with every airport that corporate aircraft are flying to, even the home base of the pilot, as aircraft can tanker for long distances.”

asked FBOs to provide details of what they pay for jet-A, the costs that they add and how they arrive at the retail prices. Two FBOs–one with facilities in major and large markets and the other at an airport that provides a lower-cost alternative to a major city’s airports–responded to AIN’s request, and AIN agreed not to identify them.

While the refinery price is relatively similar across the U.S., by the time the jet-A reaches the FBO, other charges affect the final wholesale price the FBO pays. Some FBOs, for example, receive fuel through a pipeline from the refinery to the airport, which lowers transportation costs. Many airports have no pipeline and fuel is delivered by truck from the nearest rack or pipeline terminus, which adds cost because of the elevated price of highway diesel fuel.

“My price,” one FBO told AIN, “delivered to my facility on June 5 was $3.9846 before taxes.” This is the price from global energy information provider Platts plus a 15-cent markup by the fuel company (in this case a major independent fuel distributor). The transportation cost to the FBO is included in the $3.9846 per gallon figure, but wasn’t itemized.

Airport flowage fees, according to another FBO, typically range from five to 10 cents per gallon. (The above FBO has a pretty good deal with its airport.) But some airports charge concession fees as a percentage of gross revenue–not the wholesale or Platts fuel price–instead of flowage fees, and this can raise the costs to the aircraft operator considerably.

The concession fee at a major single-FBO airport is an astounding 26 percent, the FBO noted. When fuel sold for $5 a gallon, the airport extracted $1.30 a gallon to pay for the FBO’s use of airport-provided facilities. Now with fuel at that airport around $8 a gallon, the airport is making a lot more money–$2.08 a gallon–without having made a single improvement to the FBO facilities.

Let’s say that in this particular state, the refinery price, transportation, state and federal taxes, but not the flowage fee, add up to $4.75 a gallon. And the FBO needs to charge a relatively high price to cover its costs and to pay the concession fee, so it retails the fuel for $8 per gallon. Subtract the $2.08 per gallon fee and the $4.75 per gallon “wholesale” cost, and the FBO is left with $1.17 cents per gallon, which has to cover the cost of paying employees (in an extremely high cost-of-living area), utilities, free coffee, ice and newspapers, crew cars and so on. Even with $8-a-gallon fuel, this is not looking like an especially remunerative business, and it’s no wonder that many FBOs are charging ramp fees to operators who don’t buy fuel.

At the lower-cost airport, the “wholesale cost” is about $4.42 per gallon and the retail price only about one dollar more, so both FBOs are actually marking up their fuel at about the same amount. You can guess which FBO generates more complaints about high fuel prices.

The Price of Discounts

For FBOs there is another problem. As fuel prices rise, there is enormous pressure to offer discounts, and no FBO gets retail prices 100 percent of the time. One of the FBOs that provided information for this article pointed out that more than 90 percent of his customers buy fuel at a discounted price. While conducting financial planning, he looks at gross margin, or what revenue would be generated if all fuel were sold at retail prices, and net margin, which is the actual revenue for fuel sales after discounts are taken into account.

“The number I see at month end is the net margin,” he explained. “As you can clearly see, net margin is the true number for an FBO.” And with discount programs through fuel providers, contract fuel companies and non-profits such as the Corporate Aircraft Association, as well as discounts offered to volume buyers, fleet operators, regular customers, based tenants and so on, the net margin is not always a high number.

One more “gotcha” adds to the challenge of being in the aviation business. FBOs have to pay a processing fee to credit-card providers, unless that provider is the fuel company itself. When you use your MasterCard or Visa to pay for 1,000 gallons of jet-A, you’ve just cost the FBO 2.5 percent of your tab (if fuel is $7 a gallon, that’s $175 for Visa or MasterCard). And since it is a percentage, that fee rises as fuel prices climb. Your FBO might be more amenable to a discount if you use a credit card that doesn’t entail processing fees.

Fuel costs are a critical issue for this industry, and FBOs are trying to maintain a viable, long-term business while not scaring away customers. Pilots and aircraft owners are grumbling about fuel prices and exercising their right to take their business elsewhere. As one of the FBOs said, pilots can fly elsewhere without too much trouble or tanker lower-cost fuel as much as possible. “I seriously believe,” he said, “that the FBOs need to let the pilots know that if this continues and our margins keep eroding, something is going to have to give. The FBO business is not rocket science when it comes to profit and loss.”

Meanwhile, NBAA, the American Association of Airport Executives, Air Transport Association, International Air Transport Association and Regional Airline Association are holding a one-day summit in Washington, D.C., on July 10 to address the cost of fuel. The FAA, DOT and congressional leaders are also expected to participate.