On FBO, two FBO’s, three FBO’s, four…

By September 10, 2018Uncategorized

A phone call we received this week from a potential client, asking us to please evaluate and hopefully sell their FBO, was routine. We receive at least one phone call a week with the same request. But as we asked questions about the proposed FBO operation we realized this was yet another example of One FBO, two FBO’s, three FBO’s, four . . .

This potential client had built a brand new state of the art FBO less than eight-years ago. They had done all the right things, and perhaps some not necessary, trying to fill every potential need and sparing little expense.

The client had built more than adequate, right sized hangar space to complement their FBO. They created a warm but functional reception area, pilot lounge, computer area, everything.

After we determined the specifics of the physical FBO we then began our inquiry of the metrics of the market.

How many annual Jet-a gallons at the airport? Approximately 4,000 Jet-a gallons was the answer. So far so good. (We don’t typically ask about Avgas sales for obvious reasons.)

Length of longest runway? 7,000 feet. Good as well! Manned tower, major metropolitan population area, strong local economy, reasonable sized number of based jet aircraft; check, check, check!

How many FBO competitors? One FBO, two FBO’s, three FBO’s, four . . . ?

SIX FBO’s! Yikes!

We were shocked. This was not Van Nuys, Teterboro, or Hobby for example where the sheer volume of general aviation activity generates tens of thousands of gallons of Jet-a annual fuel sales. This was a medium market city. How could this market support SIX FBO’s?

The answer? Not possible.

FBO Advisors has learned over our 40 year history that as an average rule of thumb a typical FBO needs to have a Jet-a fuel sales volume of at least 1 million gallons per year to have any chance of profitability. Of course there are many factors that influence the ability to generate a profit, competition, fuel discount programs, seasonality, airport fuel flowage fees, etc. But for the basis of our commentary let’s agree that the minimum 1 million gallons per year is a good minimum threshold.

Now back to our real life client. Our client is one of six FBO’s. Simple arithmetic (which does not apply but is just used to illustrate as an example) dictates that if you average the 4 million gallons per year divided by six FBO’s that the average per FBO would be 666,666 gallons per year. Not even close to our minimum 1 million gallons per year threshold for profitability.

We all know that this calculation method cannot be used to accurately predict or estimate the fuel sales of each FBO. We can however reasonably postulate that two of the six FBO’s will be selling the minimum of the 1 million gallons per year threshold, perhaps a little more. So for our example let’s assume that the two top-selling FBO’s dispense a total of 2.5 million gallons between themselves. That leaves 1.5 million gallons to be spread amongst the remaining four other FBO’s.

In our example the two top-selling FBO’s will be making a reasonable amount of profit, perhaps the next FBO, the third FBO, will be close to breakeven profit wise. But the remaining three FBO’s will not be making money at all and will be struggling to make payroll. A sad but all too common experience at many airports in the US today.

How is this possible? How did this happen?

Let’s start at the beginning. You decide that you want to build an FBO at your airport. Step one should be, is there enough fuel volume to support the existing FBO’s? Remember, the minimum fuel volume sales of 1 million gallons per year. If the airport has two FBO’s currently and 2 million gallons of annual Jet-a fuel sales then there is no practical room for a profitable third FBO. Sure, you could open a third FBO and cannibalize some of the fuel sales from the two incumbent FBO’s but the likely outcome will be something close to dividing the 2 million gallons of annual Jet-a fuel sales now among three FBO’s. Nobody “wins”, and all will report decreased individual fuel sales volume. It’s inevitable.

But such simple logic and common sense frequently does not apply… Why?

Because instead of focusing on the total market of fuel sales volume currently, many future FBO owners mistakenly believe that if they build it “they will come”. That is rarely the case. In our extensive experience in the industry we have rarely seen an example of a new FBO is added to an existing airport which then suddenly drew 1 million gallons of new airport fuel volume per year. (Now there are some circumstances where a major chain with contract customers, flight departments, fractional providers, can offer their customers service at a new underserved location that’s very much in demand, but these opportunities are extremely rare.)

Then who encourages the new FBO? … The airport!

Under the widespread misconception that if the airport currently has two FBO’s then three would be better. If it has three FBO’s then four FBO’s would be better. Remember the misconception, “build it and they will come”. There will be very little “new” volume because you have built an “unnecessary” third (or fourth) FBO. More than likely you will just be cannibalizing the existing airport volume from the existing established FBO’s.

And why would the airport do that, encourage more FBO’s?

Their argument will of course be that competition is good for the marketplace and that is difficult to argue against. Competition spurs competitive pricing and the purchaser benefits. Hard to successfully argue against that premise.
But the airport has its own agenda and its own personal objective which benefits only itself, the airport. The airport generates income from mainly a few sources, fuel flowage fees and ground rent fees. (We are excluding larger airports that have food concessions and terminals, and airports the charge FBO’s and all others a percentage rent of gross or net sales; these are typically larger airports and so such airports are different.)

The fuel flowage fees, baring any significant increase in fuel volume sales, will be about the same. What won’t be the same, will be ADDITIONAL new income to the airport which will be more ground rent received from the new FBO operator, who has just leased vacant airport land which heretofore has not generated any income for the airport. The airport puts unused assets to work by charging ground rent to the new FBO. The more ground the airport can lease to anyone, in this case another FBO, the better for the airport.

Not good for the financial health of the FBO’s.

So beware, the Airport in this case is not you “friend”. Their self-serving interest is to lease as much ground and generate the maximum ground rent. Buyer beware.

 

FBO advisors fixed based operations consultant

FBO Advisors, LLC
Serving the FBO industry for more than 40 years

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Since 1975 we have successfully served the best interests of our clients by focusing on their specific FBO needs. By having a diverse staff, combined with being exposed to a wide variety of FBOs and aviation businesses with unique situations, we’ve cultivated a focused and high level of FBO expertise and resources.

We are specialists, not generalists, and we take pride in offering the best solutions and providing the highest level FBO services to our clients. We serve FBOs, aviation businesses, and airports:

 

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