ENROUTE
an editorial opinion

Aviation fuel price volatility, pricing and stock market performance—their effect on corporate and GA flight operations activity

Rising operating costs lead to growing uncertainties for FBO businesses.


Operations Coordination Center (OCC) in Dhahran, Saudi Arabia—part of Saudi Aramco's Oil Supply Planning & Scheduling Dept. The OCC display wall serves as a nerve center for all Saudi Aramco operations and displays all activities in real time.

Some observers, including my colleague, say that the jet commodity market has gone up with such volatility because of speculators playing the futures markets. The fundamentals of pure supply and demand are not driving the volatility.

Demand is still flat at best. From an industry fundamental perspective, the assumption that fuel prices remain fairly stable is incorrect. As an FBO owner, I know that managing price swings of 20¢ per gallon some weeks is challenging, to say the least.

Imagine being a retail gas station owner or distributor and having your price change daily. Gasoline, diesel and jet fuels have all experienced the same volatility in the past 3 months. As consumers, we know and feel volatility and we don't need an expert to tell us otherwise.

Second, as my colleague points out, FBO retail aviation fuel prices are anomalies—in other words, they are unusual or unique, and represent a discrepancy or deviation from an established trend or pattern. This describes our industry's FBO retail/ discount pricing perfectly.

FBOs do not seem to be scientific about their pricing models, often allowing oil companies and third-party resellers into their business and, in many cases, letting their competition dictate prices. If you look at 25 FBO prices in a small region, there is no rhyme or reason to any of the methodology because of varying factors.

Factors that cause FBO prices in a given area to be so skewed or volatile include lack of business, pricing off inventory costs and not recognizing true associated operating expenses that dictate a true operating margin. These often cause great gaps (thus the volatility) between one airport/FBO posted price of Jet A or Avgas 100LL and another at an airport just 25 miles away, or in some cases even on the same field.

An FBO's prices and pricing methodology can be both stable and volatile. For example, pricing off inventory cost and the volume of business conducted at that specific airport is vastly different than another FBO which turns over inventory faster if the FBO changes its posted retail and discount prices only when it orders another load of fuel.

This pricing method may provide the FBO's customers (pilots and operators) with pricing stability between orders. For example, the FBO's posted price for Avgas 100LL might be $4.90 for 8–12 weeks.

In winter in the northeast US, the posted price of Avgas 100LL may last for 4–6 months because of reduced demand and ample inventory if priced in this manner. During this time, the pilot has likely seen the price of the gasoline at the local gas station go up or down 10¢, 20¢ or even 30¢.

However, this same price practice can be quite volatile once the FBO orders new inventory that is considerably higher or lower than its last inventory cost and then applies its standard methodology of operating profit margin. Overnight the posted airport or FBO pricing could change by 30–70¢ for a pilot or operator, thus going from being stable to volatile in the blink of an eye.

It's also worth pointing out that many FBOs do not have the ability to keep any significant amount of fuel in inventory, while others do—and, as pointed out previously, this can have a profound effect on product pricing for FBOs that are similarly situated geographically even if they both price off cost of product in inventory. Many FBOs turn over inventory on a daily basis, while others may have a 3 to 6-month supply.

Effects on flight ops activity

Using the month of February for the years 2008–11 as the study period, I researched corporate and light GA flight activity data from my airport, HPN. I did this to try to ascertain the effects that fuel pricing variation had on overall flight activity, as well as the effects stemming from the strength and stability (or lack thereof) of the DJIA.

My initial assumption was only partially correct—which of course means that it was also partially incorrect. As can be seen from the data in the table on p 84, fuel pricing seems to have had little or no direct effect on flight activity, while the strength and stability of the DJIA seemed to be a significant factor.

Conclusion

So what does this all mean in terms of pricing volatility to me as an FBO owner? It means that it is not so simple when you truly analyze the issues and decide if the state of affairs for our industry is necessarily so good—or so dire—based on the price of fuel alone.

It means that the business of private and business aviation is driven by the overall strength and health of our nation's businesses in general. It further means that, although the price of fuel may not have a profound effect on the overall volume of flight activity, it does affect my customers' buying habits as they attempt to manage their rising fuel cost budgets and the practice of tankering fuel becomes increasingly prevalent.

Hence, wholesale and retail/ discount pricing practices of various FBOs become quite volatile, and it has never been more challenging to run an FBO than it is today.
Crude price volatility, fuel pricing practices and strategies, and the stability and strength of the DJIA as they relate directly to the overall volume of corporate and GA flight ops are all very relevant to today's aviation marketplace.

While I have a much better understanding of how and why this is, the question still remains of what will happen when it comes to future crude pricing, the stability and strength of world business markets and overall flight operation activity. But one thing seems certain—flight departments and FBOs alike should be rooting for steady growth and stability for the DJIA. I know I am.

Gene Condreras is president of Panorama Flight Service at HPN, a family-owned and operated FBO that employs a support staff of more than 70. Condreras's aviation career began at the age of 19 as a line service technician for a competing FBO at HPN.


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