AsiaticAir.in : Ales Airlines Ashima Sharma's FPO Report

Ales Airlines Ashima Sharma's FPO Report

FBO Business Model

What Is A FBO?

Fixed Base Operator, or FBO, refers to the

private jet services available at an airport. In some cases, this can mean a small VIP lounge within the general airport terminal, or it can involve a large facility built specifically for private jet usage, offering a range of services for private jet customers, aircraft, and crew.

Where Does The Term FBO Come From?

The term FBO, or fixed base operator, dates back to the days of unregulated civil aviation in the USA in the 1920s.

Aircraft were relatively inexpensive to come by in these post-war years, with a surplus of ex-military aircraft available, so transient pilots, known as “barnstormers”, took advantage by using the aircraft to offer passenger flight, aerobatic displays or air shows for the locals. These “barnstormers” would travel all over the US, landing in farmers’ fields at the edge of town, rather than at airports, and charging whatever the local market would pay for their services.

The transient nature of their jobs and lives meant that these aviators moved around with the aircraft and had no fixed business location.

What’s New In FBOs?

Since the recession in 2008, the private jet industry has changed in many ways, with the ownership of FBOs taking a particularly noticeable shift. In the 1990s, there were lots of smaller, independent companies running FBOs. Now we are seeing much more consolidation. It’s a competitive field and known brands are now evolving to compete.

But bigger doesn’t always mean better when it comes to owners of FBOs. Each FBO will have its own niche. Some look to compete on fuel pricing, others for exceptional VIP services for royalty, heads of state or other high profile travellers.

Integrated FBO Business Model

In the first installment of this topic we discussed the components of a potentially integrated FBO business model—Fixed Base Operations (FBO), Maintenance Repair and Overhaul (MRO) and Aircraft Charter and Management (ACM). Each of these business segments can stand on their own, and there are both large national companies which provide excellent specialized service as well as smaller independent operators who also offer a compelling value proposition to the customer. Each segment has its own structural and competitive characteristics which influences how easy it is to grow to scale, either at a single airport or at multiple locations.

Each segment has also has its own financial profile. FBOs generally have the highest profit margins, although since a large portion of their revenue is based upon fuel sales which are constantly changing these percentage margins are not as meaningful. FBOs usually consist of a campus of facilities, which requires significant capital both for the initial outlay and subsequent upkeep. MRO companies margins tend to be lower, largely due to an increased regulatory burden and the fact the demand for their services is less geographically specific then FBOs. The may own their own facilities or lease from another leaseholder at an airport. ACM margins are similar to MRO and for the same reasons; ACM companies managing a significant number of heavy jet aircraft with international Operations Specifications (OPSPECs) face the highest regulatory burden.

Given that these businesses can be profitable and well run as specialized service providers, why would they be better off run as parts of one business? In the integrated FBO model, value is created through a few different streams. The first is consistent multiple service offering to the customer, e.g. one stop shopping. If an FBO provides first-rate line service, chances are the customer would likely use the FBO for other services if everything else is equal (the FBO provides the service, is FAA/OEM approved, has local capacity, etc.). This simplifies the transaction for the customer, which creates a competitive advantage for the service provider. Next, it creates a closer relationship with the customer. As an example, an ACM operator who manages a customer’s airplane usually has a trustworthy relationship with that owner; the operator can influence the owner’s other buying decisions. If the same operator also provides additional services beyond ACM, their customer becomes more important in some respects. If an ACM operator advises taking some maintenance requirements to an affiliated MRO company, that MRO company will generally place a greater sense of urgency on their mutual customer than one which is an unrelated third party. Last, the integrated business model can provide greater scale and diversity than a narrower focused specialized service. Scale is important is greater size provides stability and the ability to better weather inevitable downturns. Diversity goes back to classic asset portfolio theory—since not every operations will consistently grow according to plan, asset diversification (especially among the business segments) mitigates the risk of significant adverse results all at once.

The answer? The only reasonable conclusion is that owners and managers of general aviation services businesses should operate a business model with which they feel comfortable—regardless of which segments that business model entails. Specialized service providers offer just that, and the classic “full service” FBO model offers one stop shopping for its customers which see value in the integrated model.

Ashima Sharma

Director Training

Ales Airlines Inc. USA

www.alesairlines.com

info@alesairlines.com

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