Kate Sarsfield/LONDON
From a staggering peak of 12,000 fixed-base operators (FBOs) in the US aviation services market in the early 1980s, industry consolidation has forced the number down to about 3,500. The trend towards acquisition and consolidation looks set to continue well into the 21st century.
Signature Flight Support, owned by UK industrial group BBA, has dominated the consolidation drive with its deep pockets. The spending frenzy took off in 1992 and, just last year, the Orlando, Florida-based company snapped up AMR Combs' eight-location FBO chain for over $100 million, becoming the largest network worldwide, with 49 bases.
Signature chief executive Bruce Van Allen says: "This market has become extremely competitive, with all the major industry players [including Piedmont Hawthorne with 34 FBOs, Mercury Aviation with 17, Million Air with 11 and Jet Aviation with 14 FBOs and handling bases] looking to buy sound companies, which are situated in the best locations, usually close to a major commercial centre."
Van Allen claims that in the past five years, BBA has "reinvested" $70 million in its global aviation services, infrastructure to expand and improve its range of services.
Kim Showalter, co-owner of Showalter Aviation Services, one of the oldest family-owned FBOs in the USA, says these investments place enormous strain on many small independents. While they outnumber the chains, she adds, many are struggling to finance the necessary investment to keep pace with the new trends. She comments: "As the industry has evolved to meet the changing needs of the business aircraft customer, many 'Mom and Pop' businesses have not had the capital to invest in the necessary infrastructure upgrade. So when a profitable opportunistic company makes them an attractive offer, many decide to sell up."
Gillian George, partner of aviation market research company Highline and agent for international FBO directory AC-U-KWIK, confirms this: "The FBO chains have had an increasing hold on the market, with a high number of acquisitions and rationalisations reducing the overall number of facilities during the recession [of the late 1980s and early 1990s]." Along with a decline in the number of FBOs, the number of active aircraft fell as well. George estimates that 60,000 aircraft are regularly used for business, with about 11,000 in the jet or turboprop category. In the early 1980s, the FBOs served more than 220,000 active aircraft.
Orlando, Florida-based Showalter Aviation, which has been operating since 1945, believes the new, large chains, while bringing uniformity and price co-ordination across their bases, do not offer the same enthusiasm for the industry. Showalter adds: "The independents offer a hands-on, team-driven approach. This passion can survive for decades until the company is passed on to someone who has neither interest nor understanding of the business. It then becomes ripe for a take-over. With our heritage and expertise, we have become an acquisition target and are contacted on a weekly basis."
Franchise company Million Air, which began operations in 1964, believes many companies will only consider an outright sale as a last resort and it is not always the best solution. Following the recent reluctant sale by the owner of its former Tulsa, Oklahoma, base to competing chain Mercury Aviation, Million Air introduced a part-sale programme giving FBO owners the opportunity to sell a share in their business. Million Air vice-president Sue Sommers says: "The capital can be used to reinvest in their company, while enabling the owners to remain in charge and enabling its executives to continue at the helm."
Although the option of outright sale or franchise is available, Sommers expects that the "part sale" alternative will be a popular alternative for cash-strapped FBOs.
Fractional influence
Like its counterparts, Addison, Texas-based Million Air claims to be "simply responding to market forces". Sommers adds: "The FBO business can be very profitable indeed if a company is placed in the right hands." Signature's Van Allen agrees: "The last decade particularly has been a hotbed of activity. FBO companies have begun to realise that fuel and handling are not the only services their customers require." He cites the introduction and subsequent surge in fractional ownership as one of the single biggest influences on the FBO industry. "Fractionals have introduced more individuals to business aviation than was ever imagined - around 80% of their customers are concept buyers who, in the past, would never have imagined owning or maybe even chartering an aircraft", Van Allen says.
Fractional ownership's knock-on effect, driven in the main by four US-based programmes, has been startling. Last year, fractional pioneer and market leader Executive Jet, which operates nearly 300 aircraft worldwide in its NetJets fleet purchased 40 million USgal (151 million litres) of jet fuel; 325,000 maintenance hours; 23,000h of charter; $6 million of catering; arranged 25,000 cars and limousines and flew to 1,250 airports in the USA alone. Furthermore, a typical fractionally owned aircraft flies around 1,200h a year - nearly four times higher than the average business aircraft.
James Hayes, founder and chief executive of aviation consultancy The Aviation Group, believes fractionals have helped improve business aircraft's negative image. "Although the aircraft were regarded by some as business tools as early as the 1960s, they never really gained acceptance among the corporate community until the last decade. Businesses are now realising the time and, often, cost-saving benefit which a business aircraft can bring."
This view is supported by the US Federal Aviation Administration Aerospace Forecast for 2000 to 2011. It predicts average general aviation jet-powered aircraft utilisation will be around 525h a year in 2011, compared with 380h in 1999 and 250h in 1991.
Van Allen concedes: "The growth in business aviation has brought about a radical change in the service offered by FBOs. Gone are the days, no less than 20 years ago, when the companies provided only fuel and handling. We now have to offer a diversified and impeccable service, including everything from maintenance to meeting rooms." A recent study by US consulting firm Aviation Resources Group indicates that customer service - and not the price of fuel - is the main consideration for pilots when choosing an FBO. This has intensified competition between companies, particularly those based at the same airport, which compete on the basis of services and amenities.
Showalter concedes that the current climate, while bringing new opportunities for her FBO, has also forced a change in company ethos at Showalter Aviation. "We were initially just a weekend business providing fuel and hangarage for the leisure and private flyer. While we continue to service the light aircraft market, an increasing amount of our revenue comes from the business aircraft market." She adds: "These customers often require top quality services without excuses or delays. If this requires washing a customer's aircraft in the middle of the night, we will do it. If you say 'no', they will go elsewhere".
As well as the traditional aircraft handling and fuelling services, the typical FBO offers a cornucopia of facilities, including aircraft charter, management, sales and servicing. "Companies try to be one step ahead of each other by identifying and exploiting market trends," says the Aviation Group's Hayes.
The advent of the new generation of ultralong-range business jets - the Airbus A319 Corporate Jet, the Boeing Business Jet (BBJ) and BBJ2 - poses a costly challenge for FBOs, with many having to increase hangar height, strengthen ramp areas and acquire large handling equipment, such as tugs and ground power units. Signature claims the BBJ is "an integral part of its strategy", while Rifton Aviation Services, based at New York's Stuart International Airport, spotted the niche in the late 1990s and announced plans ahead of its counterparts to build a facility suited to for airliner-size aircraft.
A 930m² (10,000ft²) hangar, designed to house four "BBJ-size" aircraft simultaneously, along with maintenance shops and executive terminal, will open next month. "We are one of only a handful of FBO's equipped to handle large business jets. The aircraft can only be handled marginally at the smaller general aviation airports as it is restricted to an 8,000ft [2,440m) runway for maximum take-off," says Rifton vice- president Kim Boller.
Market comparisons
The bulk of USFBOs' profits, particularly for chains like Signature, stem from fuel sales. Handling is usually free of charge. Rising fuel prices in some regions, particularly in the north east, are squeezing profit margins, however, and many facilities are seeking alternative revenue sources to boost their income. "The regional swing in price can vary by as much as 20%, from less than $2 to $3 a gallon, which encourages many operators to fuel up in the cheapest areas to avoid paying the higher tariff," says Allen.
Highlife/AC-U-KWIK's George claims that a national debate has been under way in the USA for several years. She says: "Many FBOs want to adjust fuel prices to 'unbundle' those services which have generally been offered for free, thereby recovering these costs separately."
She points to increasingly stringent environmental regulations which strain FBOs' overheads. Coupled with the imposition of airport authority service fees "which are squeezing margins further-the US corporate operator will almost certainly have to pay more for the level of service to be preserved".
By contrast, Europe's 173 FBOs make their profits from handling charges, as the fuel is usually supplied by the airport authority or directly by the fuel company "at prices considerably lower than those offered in the USA". George adds: "In the past, business aircraft in Europe paid more for a lower level of service - now with competition clearly increasing there are signs that the level of service is improving". A typical European FBO will provide charter, management, handling and fuel services.
Jet Aviation owns one of the region's oldest and foremost FBO chains. Developed around the Swiss company's charter and management business in 1967, Jet Aviation has a growing inventory of 11 European FBOs and small handling facilities (in addition to 19 in the USA and the rest of the world). Its largest FBOs are in Geneva and Zürich.
Robert Whitehead, Jet Aviation's station manager at Zürich Airport, believes that the European market is a key growth area for FBO investment. "Business aviation in Europe is really taking off," he says. "Our Swiss bases, which were non-existent 20 years ago, now handle 6,000 business aircraft annually".
Whitehead concedes that the industry still faces obstacles over airport and airspace access and a lack of satisfactory reliever airports, which may previously have discouraged investment. But surges in business aircraft sales have led to increasing activity in the FBO market, notably the recent purchase of London Luton Airport-based Magec Aviation by the Lynton Group of the USA. He says: "Fractional ownership [while still a fledgling enterprise in Europe], economic prosperity, an increase in global travel and the eradication of border controls throughout mainland Europe have helped produced a burgeoning business aviation market over here".
The continent is providing rich pickings for US chains that are "snapping at the heels of established companies" in an attempt to expand their brand across the Atlantic, Whitehead says.
Roberto Quarta, chief executive of BBA group, which acquired UK training and FBO company Oxford Aviation for $52 million last year, to add to its base at Zürich Airport, admits the mini-conglomerate seeks to expand its network globally. He says: "We intend to be a total nose to tail provider offering everything our customers need under one roof. Our success to date has been in the USA, but there is a whole world out there and we intend to roll out our [Signature] model globally."
BBA forecasts an increase in annual turnover from $1 billion in 1999 to $3 billion in 2002. "We will remain focused on the high-transit, high-volume areas worldwide, notably in the UK, Germany and Italy through the acquisition of existing companies," adds Quarta. The London, UK-based company is eager to expand its Asia-Pacific ties beyond its base at Hong Kong's Chek Lap Kok Airport and plans to introduce its service throughout South-East Asia and China. Quarta says: "China has huge potential, if we set up bases in commercial centres like Shanghai and Beijing, but we shall approach this region with caution until we have developed a greater understanding."
Expansion is the buzzword across the industry. Jet Aviation, Rifton and Million Air all claim to be eyeing new markets, while the small independents seek to expand their existing facilities to fend off the acquisition hungry chains.
The Aviation Group's Hayes says: "From the USA to the UK, FBOs will continue to change hands and the wave of consolidation looks set to continue well into this century."
Source: Flight International
