The FBO Business Model of the Future Continued from page 13 the end of the day that they really don’t need to buy fuel, or if they do, it will be limited to the minimum uplift. REAL ESTATE Although fuel and facility fees represent potential oppor- tunities for change in the traditional FBO business model, the greatest opportunity probably lies in the handling of office and hangar rents and the accompanying fuel dis- counts. FBOs have typically offered heavily discounted rents for office and hangar spaces to their based tenants and overnight transient customers in exchange for the “commitment” to buy certain volumes of fuel. One of the problems is that FBOs often discount the price of fuel too. As a result, the FBOs lose potential revenue on both ends of the arrangement. To further add salt to the wound, many of the based tenants fail to achieve the anticipated volumes of fuel on a consistent basis. Sometimes the based customers sell one of their airplanes or change to a more fuel-efficient one. In many cases, it is simply the result of a change in the way an operator utilizes their aircraft. Regardless, the deals that the FBOs think they are getting are no longer such great deals after all. This is significant in dealing with based tenants, since based customers are often counted on to cover much of the overhead of an operation. A lease is a legal agreement associated with the right to occupy space for a period of time at a specified rate. The occupancy of office and/or hangar space by a tenant occurs whether they buy fuel or not. Although many FBOs over- lease their hangar space to offset some of the potential loss, the reality is that if it is leasing space at a below market rental rate, the FBO is foregoing the opportunity to lease that space at a higher rate to someone else that needs it more and is willing to pay for it. If that rate is discounted because the FBO expects the tenant to buy a certain amount of fuel to make up the difference, and they do not for any reason, then the FBO loses. The customer is still occupy- ing the office and hangar space, and the FBO still incurs the operating expenses associated with having that space (utilities, liability insurance, repairs, maintenance, etc.). In the general real estate marketplace, if you have a multi- tenant building that is 100% occupied, then the landlord can probably conclude that their rents are too low. The same applies to aviation real estate (especially T-hangars). In a perfect world, the FBO should get market rent for office and hangar space, as well as full retail on the sale of Aviation Business Journal | 4th Quarter 2017 fuel. In a more real-world scenario, it should get market rent plus fuel at a negotiated discount that is only realized once the tenant hits a certain monthly benchmark. Discounts on the office and hangar space should only be associated with factors realized in the general real estate world. For example, the tenant leases a much larger area; is willing to commit to a longer lease term; is willing to take an office in its current condition without additional tenant improve- ments, etc. As such, transient overnight hangar rates should not reflect any discount from the base rate, no matter how much fuel they buy. If an FBO wants to discount fuel prices to based tenants, it should be on a sliding scale that ‘kicks in’ when the customer reaches the volumes that they promised when the lease was negotiated. Better yet, charge full price and subsequently discount money back to them once they reach a certain purchase plateau. This scenario can result in the pleasant surprise of the customer making an effort to reach that benchmark where they get their discount. The most dangerous phrase in the English language is: “We’ve always done it this way.” And while a new business model will probably be a long time coming and will not work at every FBO, some changes are necessary if the industry is to remain financially stable–especially if we experience another downturn like 2008. FBOs are going to have to take baby steps in the implementation of any changes, while other smaller FBOs will probably have to take a “wait and see” approach relative to the acceptance of any modification to the traditional FBO business model. Regardless, change is hard, but is needed to adapt to market expectations. Michael A. Hodges, MAI President/CEO Airport Business Solutions and ABS Aviation Michael is the President/CEO and founder of Airport Business Solutions (ABS), a company recognized as an industry leader in providing valuation, consulting and advisory services related to aviation real estate, airport and FBO management and operations, and FBO business valuation. In addition, he is the President/CEO of ABS Aviation, a company providing contract management of general aviation airports and FBOs for munici- palities. This unique “hands-on” experience offers the ability to better understand and appreciate the challenges of today’s aviation management environment from multiple perspectives. 15
