MARKET ANALYSIS

Can FBOs remain competitive in their local markets? How will the actions of airport sponsors affect the industry?



By Gene Condreras
Pres, Panorama Flight Service


Panorama Flight Service was host of the 2011 NBAA Northeast Regional Forum held at HPN (White Plains NY). It will host next year's event on Jun 6, 2013. (Inset) Panorama Pres Gene Condreras.

These are challenging times for our industry, and how we proceed will define where we are headed in the future.

I believe that maintaining an ongoing dialogue that addresses the issues we face is integral to achieving our collective success.

We continue to find ourselves reacting to industry events as they unfold—and, indeed, after they have unfolded—rather than preparing for and confronting them in advance. I am of the opinion that we need to steer our own destiny or we will find ourselves in the position of having little or no future choices other than those that we have allowed to evolve.

I myself prefer "driving" as opposed to simply "going along for the ride," so I make sure to tell my industry breth­ren to keep their "eyes wide open and their hands on the wheel" by being proactive rather than reactive. I suggest that as an industry we start looking ahead, for I fear that we are headed down a road that presents tremendous risks to our financial viability.

Airport sponsors and their evolving industry role

The airport sponsor is actually the owner and operator of a given airport. Since airport funding comes from the federal government (ie, FAA) and the state (ie, DOT), the airport sponsor ends up being the local municipality—county, city or both—which operates the airport through these funds.

Airport sponsors accept funds under the terms and conditions of the federal, state and local jurisdiction's guidelines. Additional revenue sources are generated through rent from tenant leases and user fees that include fuel flow and landing fees.

Airport sponsors play a significant role in their FBO tenants' pricing structure for services that are charged to the airport's flightline consumers. They do so by the manner in which they structure and administer FBO lease agreements and impose fees. Recent trends in this regard are having a profound effect on the pricing consumers experience for aviation services at airports around the nation.

The result is a mixed bag that represents "the good, the bad and the ugly." I will discuss these effects in greater detail below, but without naming specific airports or service providers.

Perspectives vary according to one's role in the industry (eg, airport sponsor, FBO tenant or airport user/consumer). In addition, short and long-term effects of our col­­lective actions must be considered thoroughly while looking at a series of very complex issues that are driving industry action and the motivation behind them.

Airport sponsor-owned FBOs' proprietary right

Showalter Flying Service at ORL (Exec, Orlando FL).

FAA notes in Advisory Circular (AC) 150/5190-6 that most airport sponsors recognize that aeronautical services are best provided by profit-motivated private enterprises.

However, there may be other situations—such as when revenue potential is insufficient to attract private enterprise and the airport sponsor wishes to exercise its proprietary right to be the exclusive provider of any or all aeronautical services at the airport.

The sponsor of a federally obligated airport is the only entity entitled to hold an exclusive right to perform aeronautical services. For the sponsor to exercise this right, commercial aeronautical services must be performed by the sponsor's employees, using the sponsor's own equipment and resources. A sponsor may not grant an exclusive right to perform these services to any other individual or entity.

And therein lies what may be considered a very vague and gray area. How is it determined that the revenue potential at a given airport is not sufficient to attract private enterprise? And who makes this determination?

Once an FBO has been established as an airport-sponsored proprietary right FBO, does the airport give up its right—and the subsequent revenue—associated with being the sole service provider, as overall airport traffic volume and sales grow over time? Having looked at a number of airports around the country where this has occurred, I have to say no—it does not.

One could make the argument that there is a trend in numerous areas of government whereby government looks for additional revenue sources, instead of looking to improve services.

Under these circumstances, government is in a unique—and unfair—position to create its own monopoly by structuring contracts to suit its own needs. Is it not possible that the airport sponsor might issue an RFP that makes no business sense in order to justify implementation of an airport-sponsored proprietary right FBO?

Over the years, airport-sponsored proprietary right FBOs have gained a generalized reputation for charging on the high side of market scale while providing inferior services and value to their customers. Since they provide the only services available at their airport, there's little or nothing the airport user can do other than avoid the airport and take its business elsewhere if there happens to be a convenient alternative that fits their travel mission profile.

Recently, a certain airport-sponsored proprietary right FBO in a busy and popular business aviation market area has made a name for itself by providing exceptional facilities, service and pricing to the users of their airport.

Aviation consumers are very pleased, as is the airport sponsor, and it would seem that everyone is happy. Everyone, that is, except for the competition located at nearby airports that compete for the same consumers' business.

These competitors question whether perhaps the airport-sponsored proprietary right FBO is factoring capital improvement costs as a line item when formulating its consumer pricing and reviewing its subsequent profits and losses. From the consumer perspective this is of little concern—after all, pricing, service and facilities are their criteria, their focal point for comparison.

Only time will tell how these competing FBOs in the surrounding market area will be affected, and whether future changes of general manager at the airport-sponsored proprietary right FBO or changes in the local political landscape that dictate the airport's financial protocol will have any bearing on consumer value received at this location. At present, this is one of the very few airport-sponsored proprietary right FBO success stories in the US that GA and corporate aircraft consumers speak about.

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