Economic storm brewing for business aviation, say operators

 - September 29, 2008, 10:30 AM

As oil soared to nearly $147 a barrel this summer, U.S. airlines began tacking fuel surcharges onto the prices of their tickets. The commercial carriers also began charging for previously free items, such as a second (and in some cases, a first) checked bag, blankets and drinks.

U.S. airlines increased fuel surcharges several times, and ticket prices have gone up as well. Surcharges have hit the $170 range, but the airlines have not reduced or eliminated them as the price of fuel continues to drop. They argue that fuel prices are still far above what they had budgeted for the year.

And while airlines are able to recover–or at least reduce the impact of–high fuel costs, no such easy avenue is available to Part 91 corporate operators. So flight departments look for other means to reduce overhead.

According to NBAA, there is no question that fuel costs are adversely affecting organizations and small businesses that use general aviation. In fact, according to the association, 85 percent of the companies that use business aviation in the U.S. are small- and midsize businesses, representing many different types of industry.

“Rising fuel costs are having the same adverse impact on general aviation, including business aviation, that is being experienced by other transportation sectors,” the association said.

An aviation consulting group recently conducted an informal survey of FBOs at general aviation airports. It found that the vast majority of those who continue to fly cite rising fuel costs as a concern, and are taking measures to minimize consumption. Among those surveyed:

•    28 percent request more direct routings;

•    15 percent have started tankering fuel;

•    40 percent reported flying at lower cruise speeds to save fuel;

•    19 percent have cut back on hours flown;

•    and 76 percent reported customers are switching FBOs to find lower-priced fuel.

In July, NBAA president and CEO Ed Bolen joined industry leaders at a one-day summit in Washington, D.C., to discuss the effect of rising fuel costs on the industry and explore approaches to cope with the crisis.

“This is an important discussion, as these are tough times for all aviation operators,” Bolen said. “For the general aviation community, which has no opportunity for volume discounts, our operators are actually paying twice as much at the pump as the major airlines. A recent informal survey found that 98 percent of our members have had to make major changes in their operations because of rising fuel costs.”

He also noted that many members are spending more hours on flight plans to find the most efficient way to fly.

Charter Activity Drops Off
The National Air Transportation Association (NATA) does not directly track activities of its charter operators, but vice president of industry and government affairs Eric Byer said business is down anywhere from 5 percent to 15 percent nationwide.

“In talking to the people I’ve talked to, we’re seeing for charter business it’s geographical,” he said. “There are still some hotspots around the country where people are doing well. In the Midwest and Chicago area we are seeing some operators that are doing very well. In South Carolina we have an operator that is doing very well.”

Association president Jim Coyne, who travels around the country to his organization’s town hall meetings, believes that the industry experienced the greatest hardship in the May, June and July time frame when people thought oil might reach $200 a barrel. He likened the spike in oil prices this year to the situation in the 1970s when oil was $3 a barrel and then went up to $39 a barrel before retreating to $10 a barrel.

In an article he wrote for NATA’s aviation business roundtable earlier this year, he used the 1970s spike as a model of the trajectory of current oil prices. He estimated that oil that was selling for about $11 a barrel in 2000–when the runup began– could rise to a high of $145 a barrel before dropping to approximately $50 per barrel.

“That might turn out to be the case,” Coyne told AIN last month. “I think we are going to see a continued fall in oil prices in response to the same supply and demand behavior patterns as in the 1970s.” In addition, he said, the nation should see new incentives for oil production and refining, as well as new sources of alternative energy on the horizon.

“I think the good news is that we are down almost $45 from the peak of two months ago and I think it’s going to continue coming down,” he said. “Now that most people are kind of calmed down and the normal supply-and-demand forces are bringing oil prices back to reality, I think most of us in the industry expect our normal growth rate of this decade will come back and we will look at the second and third quarter of this year as a chance when we all caught our breath, because volume and growth slowed pretty dramatically.”

Private aviation company XOJet announced August 12 that, effective immediately, it reduced by 9 percent the fuel surcharge for on-demand flights that it had put in place in response to record-high oil prices. According to Adam Komack, chief marketing officer for the company, which provides private jet ownership, leasing and on-demand travel, “A surcharge is a necessity to offset costs that are out of our control; it is not a revenue stream. If the price of oil goes down, the surcharge should be reduced as well.”