Rising fuel prices squeeze charter operators, FBOs

 - April 1, 2011, 8:10 AM

For a pilot worried about whether the next bump in operating costs will be one more incentive for the boss to sell the airplane, recent volatility of oil prices and rising jet-A prices must be disturbing. Retail jet-A prices have climbed significantly since the beginning of the year, and rapidly changing events in the Middle East and Japan’s triple terrors–earthquake, tsunami and nuclear powerplant disaster–seem to encourage oil speculators to drive prices to new heights.

However, widespread improvements in the global economy during the past year have also been fueling demand and inflating the price of oil. European charter operator London Executive Aviation reports that its fuel prices have climbed by 68 percent, to an average of $3.82 per gallon (March 16) from $2.27 on June 15, 2009. 

For such operators, the raw cost increase is a double whammy because the operating cost of, for example, the company’s Citation Excel runs an extra $379 per hour, slicing yet more off already razor-thin profit margins in the charter business. Competition is fierce and customers are unwilling to pay the additional amount to cover rising fuel costs.

Airport information provider AirNav reported on March 17 that the average price of jet-A in the U.S., as submitted by 2,498 FBOs, was $5.15 per gallon. The low was $3.03 and the high $8.35. One FBO, Long Beach’s JetFlite International, told AIN that it offers the lowest price in Southern California, at $4.76 a gallon (as of March 17).

FBOs See Price Spikes

Dave Ivey, vice president of Wilson Air Center, a Shell fuel retailer with FBOs in Memphis, Tenn.; Charlotte, N.C.; and Houston, said that his company’s wholesale fuel costs have climbed 48 percent during the past year, and 21 percent of that increase took place in the past three months.

Of course, Ivey added, “Retail price isn’t really what pilots look at today. Nobody pays retail.” Younger-generation pilots are assiduous users of contract fuel suppliers, constantly using their smartphones to shop for the best prices. So even though costs have gone up for FBOs, he said, “retail prices haven’t gone up proportionally.”

FBOs can’t just mark up their fuel to maintain a set profit margin, Ivey explained, because there is usually competition not only from FBOs on the airport but also from those at other airports. And so many airplanes can tanker fuel efficiently that they don’t always need fuel everywhere they land. Other factors, too, affect what an FBO has to charge for fuel. Wilson Air’s Hobby Airport FBO in Texas has a relatively low retail price of $5.78, but there is no state tax in Texas. At large metropolitan airports, he pointed out, some FBOs have to pay 25 percent of every dollar earned to the airport authority, “which drives up tremendously the price of fuel.”

Wilson Air is holding its own, Ivey said, and operations during 2010 were higher than in 2009, although the Hobby operation has not returned to the higher levels it enjoyed in 2007 and 2008.

Gene Condreras, president of Westchester County Airport-based Panorama Flight Service, has plotted his FBO’s retail fuel prices against oil prices and traffic at White Plains, N.Y. Airport, where he competes with multiple FBOs. In February 2008, crude oil was $101.84 per barrel and Panorama’s jet-A price was $5.68 per gallon. There were 6,348 based and tenant corporate operations that month at the airport. In February 2009, those numbers were: oil $44.76 per barrel, jet-A $3.58, and operations 5,468. Crude jumped to $79.66 in February 2010, jet-A to $4.44 and operations were 5,252. For February 2011, oil was $97.88, jet-A $5.69 and operations reached 5,730, still not as high as the peak in 2008.

Market Volatility

Lately crude oil prices have topped $100 per barrel. Condreras consulted with an aviation fuel supplier, who wishes to remain anonymous, and this supplier explained, “Right now volatility is driving the market and speculators are behind such movements with futures contracts. When volatility is injected into any market by news-driven events [real or perceived], big money is made and speculators are the gamblers.”

Pilots who are seeing big price swings when they pull up on FBO ramps are seeing not only the results of the oil price volatility, but also local effects, which may result in both stable and volatile pricing, according to the supplier. Some FBOs set their prices based on what they paid for the last load of fuel, and if the fuel doesn’t move too fast, the price remains stable. An FBO that turns over inventory faster has more exposure to fast-changing wholesale prices and might change retail prices more often.

“Overnight the posted airport or FBO pricing could change 30 to 40 cents for a pilot or aircraft operator,” noted Condreras. “It goes from being stable to volatile in the blink of an eye. It is also worthy to point out that some FBOs do not have the ability to inventory any significant amount of fuel while others do, and this can have a profound effect on product pricing for FBOs that are geographically similarly situated.”

Since April 2010, Kansas City-based Hangar 10 has raised jet-A retail prices from $5.35 to $6.30 per gallon, according to general manager Brad Chandler. His competitor’s retail prices at the airport (Signature Flight Support) have climbed to the most recent number of $6.96 per gallon, up from $5.90 in April 2010.

Fargo, N.D.-based Fargo Jet’s retail jet-A price was at a low of $4.72 per gallon on Feb. 2, 2010, but it had climbed to $6.00 on March 15.

Farther east at Banyan Air Service, Fort Lauderdale, Fla., jet-A was $4.98 per gallon in March 2010 and $6.00 in March 2011. According to Banyan director of FBO services John Mason, “Retail pricing for 2010 compared to 2011 doesn’t really show the true picture for fuel prices. Our retail average has increased an average of 16 percent, but the true picture is our costs. The average cost of fuel during that same period has increased at an average rate of 35 percent for the same period.

“FBOs have seen tremendous pressure from customers on their margins. It is a time when you have to give concessions to them to retain their business. Customers experiencing the latest increases are putting the pressure on the FBOs to reduce their margins and extend better prices. At a time when the costs to do business are escalating, this is a difficult position to be in.

“The increase in fuel costs is making business for 2011 a major challenge. Customers still want to receive the best service and now demand your best price for fuel. To be truly successful in this environment, you still need to deliver great service, but now you have to balance that with a competitive price for fuel. Offering additional services not provided by other FBOs on the field is another way to remain competitive in this environment,” Mason said. o