By John L. Enticknap and Ron R. Jackson, Principals, Aviation Business Strategies Group (ABSG)
Consulting with various FBOs over the years, we have discussed a strategy for improving bottom line performance that several FBOs have utilized with positive results.
In a nutshell: Mind your fuel margin, and don’t be afraid to raise your fuel price.
At first blush, this seems like a no-brainer. After all, if you raise the price of fuel, then you’d think that, naturally, you would have more revenue going toward the bottom line.
But most FBO owners and operators would argue that if you raise the price of fuel, especially in a competitive marketplace, then you would lose customers and, thus, fuel sales volume would drop.
Yes, raising the price of a gallon of fuel could cost you some customers. But chances are these will be low-volume, non-loyal customers that flit from FBO to FBO looking for the lowest-priced fuel. These same bottom-feeding customers come with a lot of baggage. They usually are hard to please, take up a lot of your time with complaints and demand rock-bottom prices.
We say it is possible to have better bottom line performance with fewer customers if you manage your fuel margins better.
Let’s Do the Math
Scenario No. 1: You sell 10,000 gallons of Jet-A this week at an average price of $4.14 per gallon. Your cost per gallon is $2.68, which includes all fees, taxes and labor to fuel the aircraft. The price and cost leave you with a gross margin of $1.46. In this example, the gross revenue is $41,400 on the 10,000 gallons sold, cost of sales is $26,800, and gross margin is $14,600.
Scenario No. 2: You raise the fuel price 41 cents to $4.55 per gallon but sell 9000 gallons in a week. Gross revenue is now $40,950. Your cost of fuel remains $2.68 per gallon, so the cost of sales is $24,120. This results in a gross margin of $16,830. You made more money for less work!
Many times we find FBOs discounting their fuel in an attempt to gain more customers. Our tip is to compete on customer service, not on price. As previously stated, the types of customers you draw with lower prices are not worth the hassle. Plus, you’re also discounting to your regular loyal customers, a practice that will further erode your margins and bottom line performance.
Here’s what happens when you discount. Using the same previous fuel costs, you decide to discount the price of a gallon of fuel by 7 percent. Your price would now be $3.86 per gallon on 10,000 gallons for a gross revenue of $38,600. The cost of sales at $2.68 does not change, which results in a total cost of $26,800.
Your gross margin is now down to $11,800, which means you have to sell another 2,372 gallons just to make the same money before the discount. That’s almost 24 percent more gallons. Is your FBO growing at a 24 percent rate?
Yes, there are many factors that enter into your pricing decisions and how they affect fuel sales. The trick is to create balance. Pricing cannot be so high that sales do not occur, or so low that you can’t remain in business. Our advice is to be very cautious in offering discounts and to have a set schedule for volume pricing.
Also, educate your line service staff and CSRs on the art of upselling fuel at the point of transaction, when you’re hooked up to the aircraft and your cost to add fuel is virtually zero. Reserve your volume discounts for this event so you can incentivize customers to add more fuel.
As we often tell our clients, we’re in the FBO business to make money, not as a hobby, so don’t give it away.
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ABOUT THE BLOGGERS:
John Enticknap has more than 35 years of aviation fueling and FBO services industry experience and is an IS-BAH accredited auditor. Ron Jackson is co-founder of Aviation Business Strategies Group and president of The Jackson Group, a PR agency specializing in FBO marketing and customer service training. Visit the biography page or absggroup.com for more background.
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