MARKET ANALYSIS

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






Pentastar PTK (Pontiac MI).

Some may find it ironic that the FBO forced to compete against its landlord collected a portion of the aforementioned taxes from the fuel that they'd pumped as an airport tenant, only to have those taxes used at a later date to build the airport-sponsored FBO facility that now competes against it.

I believe that the airport CEO's statement that "the temporary loss is covered by significantly increased net operating revenues in other areas of the airport" has to be alarming to anyone who currently operates a privately-owned FBO.

The letter from the US House of Representatives to FAA may be expressing this very concern when it states, "We believe the temptation for the airport sponsors to advance their own business interests, with the aid of taxpayer subsidies, to the detriment of privately-owned FBOs, may lead to abuse and unnecessary waste of increasingly limited taxpayer dollars. Therefore, we respectfully request that the FAA put controls in place to ensure that conflicts do not arise when airport sponsors assume the dual role of regulator and competitor."

Just such a case may occur should an airport sponsor, as regulator, demand leasehold renovations on the private FBO's facility but not allow for an adequate term of the lease to provide an opportunity to achieve a return on investment.

It is reasonable to assume that, at the aforementioned airport, taxpayer dollars are now being used in order for the airport-sponsored FBO to be able to continue to operate at a loss. This leaves the privately-owned FBO at a tremendous disadvantage.

Aviation has been built on the application and execution of safe and professional service standards. To ensure the proper and consistent implementation of both those principles I believe it requires investment of capital and reinvestment of profits.

Competition in aviation should be motivated by increasing safe and professional services to users of an airport—or it should be market-based, depending on the demand needed to support those profit-driven services. Gauging the success of competition in a given market by basing it on the decrease in average fuel price to the consumer falls far short of the mark when it comes to the criteria needed for intelligent consideration of how the airport's actions will affect its users in both the near and long term.

Airport sponsor practices, imposed taxes and fees

Are private FBOs placed at a disadvantage when the airport sponsor deems that non-FBO tenants have the right to store and dispense their own fuel? Are they placed at a disadvantage when the airport sponsor allows non-FBO tenants to sublet their facilities or portions of their facilities to other non-FBO tenants? And do the aforementioned practices diminish revenue-generating sources for their FBO tenants?

The taxes and fees that an airport sponsor imposes on the airport's users and tenants has a direct effect on the cost of services that consumers pay at a given airport location. For example, the New York metropolitan market has a significant number of airports in close proximity to one another. They are located in 3 different states (New York, New Jersey and Connecticut) and all are competing for the Manhattan private aviation consumer market.

It's worth noting that New York's aviation fuel tax structure is significantly higher than that of New Jersey and Connecticut. As of Aug 22, 2012, based on current market cost and pricing, the tax on jet fuel (either direct to the consumer or included as part of the FBO's cost) in New York was 42.10¢ per gallon higher than in New Jersey and 22.64¢ per gallon higher than in Connecticut. (New York's taxes are based on a percentage of the retail sale price of the fuel, while Connecticut's taxes are based on the wholesale cost and New Jersey's are fixed.)

A New York FBO must decide whether to lower its margin to compensate for the reduced taxes in the neighboring states, thus allowing it to remain competitive with those FBOs. Airport-specific fuel flow fees charged by the airport sponsor can further increase the gap between pricing to the consumer, depending on the airport's geographical location and fee structure.
Airport sponsor lease agreements with their FBO tenants also have a profound effect on pricing to the aviation consumer. For example, many airports around the country require that a fuel flow fee be paid directly to the airport sponsor.

Further, some airport sponsors also require that a ramp fee and possibly landing fees be paid. As a matter of practicality as well as reality, the fees that an airport sponsor charges its tenants and users of the airport have a direct effect on its FBO tenants' ability to be competitive with other airports and FBOs in the surrounding area.

Let's face it. Pricing differences of up to $2.00 a gallon at airports just 34 nm (about 10 min) apart—because $1.80 of that difference is being paid directly to the airport sponsor in the higher-priced market—will surely drive a significant amount of business away from the higher-priced airport and its FBO tenant.

The same holds true with regard to ramp and landing fee mandates that result in significant pricing differentials between area airports. Again, an FBO tenant must decide whether to pass these costs along to the consumer in its pricing or remove them from its margin in order to remain competitive.

Aviation consumer perception

We are often told that consumer perception is the same as reality when it comes to business. Why is this? Because the consumer's perception becomes its own personal reality and often cannot be changed by a third party. As an FBO business owner—and someone who is genuinely passionate about the industry and concerned with where we're headed in the future—I asked more than 700 business associates from my contacts database 2 questions to help me gauge their perception of airport sponsors and their evolving influences on our industry.

I asked them, "Is it the industry's perception that an airport authority's ownership of an FBO ultimately raises or lowers the cost of services to the consumer in the long term?" I also asked, "Does the industry realize that the state and local tax structure, fuel flow fees and ground rents at a given airport have a direct effect on that airport and its tenants to compete effectively with the surrounding airports located within relatively close proximity?"

I received 35 detailed responses. Most were from other FBO owners and FBO general managers whose opinions were pretty close to those of my own. It was the flightline consumers' responses that truly surprised me—not so much because they were not in favor of single-FBO airport locations but instead always favored competition, but because they were so dead set against government's involvement and influence on our industry.

Let me summarize with my 2 favorite responses.

The first is regarding airport sponsor-owned FBOs. "My flight department flies in excess of 450 hrs per year in an all-Part-91 environment. We are a national company with over 600 locations in 47 states, so we fly to all airports large and small, privately run [airports] as well as those regulated by the airport authority. Any time an airport authority gets involved with regulating how and where FBOs do their business we as customers suffer greatly."

The other refers to the effects of airport sponsors' taxes and fees. "I have seen several very competitively run FBOs in very busy airports lose control of their bottom line. Our flight departments are forced to find alternative airports and/or our uplifts are drastically reduced. This creates a snowball effect.

The airport authority sees lower revenue streams due to decreased traffic and fuel uplifts. This produces the need to raise pricing, flowage fees and taxes, thus creating a continued cycle and the slow destruction of the businesses and the airport."

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