FBOs' business challenges predated September 11

 - June 18, 2008, 10:10 AM

Even before last month’s terrorist attacks, FBOs faced formidable business challenges. Those challenges may have changed significantly in the past few weeks, but they have not disappeared.

Almost all FBOs rely heavily on fuel sales for their bottom line health, so as business aviation traffic goes, so goes the measure of FBOs’ financial success. But other factors certainly affect the delicate balance. For instance, during the stock market stampede during most of the last decade, business aircraft flew an unprecedented number of hours. Charter and fractional operators couldn’t buy enough jets and fuel to supply the travel demands of Wall Street’s new e-money dot-com elite. Owning an FBO was like a license to print money, and for a while, the business became extremely lucrative, even drawing in new blood as it traditionally has during boom times.

About the only segment of the economy that suffered during those wild years was the petroleum industry, which soon took action to take up the slack. Fuel prices began a steep climb that put the speed brakes on FBOs’ profits. Margins were trimmed, but sufficient volume continued to increase the ultimate bottom line in the aviation services industry. Still, most of those directly involved in FBOs had been in the field long enough to remember the bad old days of the mid-1980s, when they had to start charging ramp service fees to keep up with the utility bills and insurance premiums. In the long run, maybe the wet blanket of higher wholesale fuel prices was a blessing in disguise, stemming the tide of wildcat investors in the FBO industry and leaving it more stable, if a little less rich.

The Fractional Factor

Even more significant, for better or worse, has been the phenomenal growth of fractional-share operations that have changed the face of business aviation forever. According to David Brinson, general manager of Piedmont Hawthorne at Washington Dulles International Airport (IAD), “Fractionals are not traditional corporate aviation and they’re not airlines. Where they fall in between has everything to do with what pressures will be brought to bear on the FBO industry.”

According to Brinson, the recent economic downturn has caused fractionals to turn to their operations side with an interest in fine-tuning costs. “With the bump in the road,” he said, “there hasn’t been as much gross profit from aircraft sales to overcome high operational costs. The issues of maintenance, crew hotels, catering and fuel costs are being brought to bear, directly or indirectly, on FBOs. The largest segment of our growth, the thing that has been our prosperity for so long, is beginning to be squeezed. It’s starting to become our nemesis.”

Brinson said he could see a time when half the FBOs’ business could come through fractionals. He said, “That means two things to the FBOs. They have to get on the bandwagon of simplification of communications via electronics. And the second thing, of course, is price.”

FBOs have recovered much of their fuel price margins, said Brinson. “We’ve tried to establish a baseline pricing, so when wholesale pricing is up, we’re not hurt too bad, and when pricing goes back down, we can make up a little bit more of what we lost. By establishing a baseline, we try to avoid the cycle of prices changing every one or two weeks.”

But what if wholesale prices were to take another skyrocket ride? “If prices were to shoot through the roof right now like they did 18 months or so ago, I think it would devastate our industry. We are a little on the fragile side right now.”

Brinson’s model for evaluating the health of business aviation involves a matrix of new aircraft sales, a five- to 10-year history of aircraft orders and the number of hours operated by the current fleet. “Our industry is fed by two things, airplane sales and total hours of operation.”

His advice for success over the next few years?

“The landscape is changing. Anyone who says, ‘We’ve never done it that way before,’ may as well cash in their chips right now. You’ve got to bob and weave. Be proactive in everything you do, whether it’s instituting safety programs, going after new business, trying to recruit new people to work for you–you’ve got to be innovative. You’ve got to think outside the box, but not so far out that you can’t sell your ideas.”