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Entries in oil prices (3)

Monday
Apr302018

FBO Operations Tip: Managing Your FBO Fuel Prices in a Volatile Market

No doubt you have noticed the increase in fuel prices. Since the beginning of year, Jet A has increased by more than 20 cents per gallon.

The impact on your FBO can be felt in cash outlay. For instance, if you recently purchased an 8500-gallon load of Jet A, you probably paid $1700 more than in early January.

If you haven’t been diligent about tracking fuel prices and adjusting your posted price along the way, a $1700 hit to the bottom line is substantial. What about increasing those contract prices that always seem to be too low?

Click to read more ...

Friday
Aug122011

When Negotiating the Best Fuel Supply Agreement, Preparation Is as Important as Price

“You hit home runs not by chance but by preparation.” – Roger Maris

Your fuel supply agreement is one of the most important contracts in operating a successful FBO. Your lease with the airport authority is what puts you in business, but your fuel supply agreement is what keeps you in business.

Because your fuel supplier agreement regularly comes up for renewal, do not just go out and get a “free” dinner with a fuel supplier and sign on the dotted line! If you want to know whether or not you have a competitive agreement, you’ll need to prepare, do some research and maybe invite several suppliers to submit proposals. As Roger Maris said, preparation will help you hit that home run.

There is a lot more to a fuel supplier relationship than just purchasing fuel. You are dealing with substantial costs that affect operating expenses and have an impact on your:

  • Cash flow
  • Balance sheet
  • And, most of all, the profitability of your business

Yes, profit is great. That’s why you are in business. Don’t forget your fuel supplier is in business to make a profit too. You need balance in your agreement to ensure a winning contract for both parties.

In our NATA FBO Success Seminars, we teach a course about negotiating a favorable fuel supplier agreement. In this course, we also discuss how and when to buy aviation fuel. Here is an overview of some of the elements to address in a fuel supply agreement.

Be Prepared with Platts Oil Price Data

First, of course: What is the fuel going to cost? In order to answer this question we need to understand how world fuel markets work.

No doubt you hear all the time on the news what the price of crude oil is doing. As you know, it has been all over the place but mostly up, up, up — with an occasional downward correction. The price of crude drives jet fuel prices, but it is also affected by supply and demand, speculators, inventory, etc. So how do all the world buyers keep track?

The Platts Oilgram Price Report published daily by McGraw-Hill includes the Platts Jet Fuel Index. The fuel price indices are published worldwide with nine regional segments in the United States alone. There are also indices for Europe, Middle East and the Far East.

For general aviation, each week, the daily U.S. Jet A index prices are averaged. The change in the average price for the week generally is posted on a Tuesday, and your Jet A fuel price changes are calculated by the change in the average change for the week. You may purchase a  subscription to this information from McGraw-Hill. (It is expensive.) A free source of Jet A pricing information and changes is the IATA web site, which maintains the Jet Fuel Price Monitor and Fuel Price Analysis.

Making the Numbers Work

Because jet fuel is priced based upon a Platts index, ask your potential supplier to quote a fuel price based upon a nearby index. For example, we can choose the Gulf Coast, New York, Los Angeles or another available index.

Given that the fuel supplier needs to make some money, it will quote a price based upon a Platts index, plus a differential (the supplier’s profit margin). Ask several suppliers to quote a price based on the same Platts fuel price index for a specific date, plus a differential. Now you can measure each quote on an apples-to-apples basis.

Say your business is doing $5 million per year in fuel sales, and you are paying anywhere from $125,000 to $185,000 per year in credit card fees that can range up to 4 percent or higher. How would you like to save $10,000, $20,000 or even $30,000 per year on these credit card expenses?

Believe it or not, you can realize this kind of savings when you negotiate your new fuel supplier agreement. Yes, you may negotiate the best arrangement for credit card fees paid vs. payment terms. We like to call this free money! This savings goes right down to your profit line.

In addition, did you know that until recently, you were paying on average $0.41 per transaction for each debit card transaction? This fee just dropped to $0.21 in July!

When you ask various suppliers for a fuel proposal, credit card fees and payment of due amounts are part of the competitive nature of your agreement. By getting better rates on your credit cards and educating your employees on the best card to use, you can save substantial money for this expense. Again, free money!

Creating Cash Flow

When you have to purchase a load of jet fuel, you either need to have cash in hand or, in short order, the cash to pay for the load. That’s $25,000 or more.

If you have collected your accounts receivable and reconciled your credit card payments, then you’re in pretty good shape. However, if it happens to be Friday, the payroll is due, and your insurance payment is due, then, all of sudden, you’re short on cash.  

As part of your fuel supply agreement, you need to negotiate favorable credit terms. Of course you need to provide financial statements to support a credit line, which is no different than when you apply for credit from your local bank.

These are just a few of the terms that affect your profitability. You should also prepare to negotiate these other components that are part of a comprehensive fuel supply agreement:

  • Marketing support
  • Equipment leasing and maintenance
  • Incentives to make a change in suppliers
  • Pricing for 100LL fuel
  • Transportation fees
  • Contract fuel and other issues vital to your success

All these issues affect the cost and benefit to you and your fuel supplier. As the FBO owner, you should evaluate proposals from various suppliers to get the best agreement. Remember Roger Maris. Preparation is the name of the game when working toward a balanced fuel supply agreement.

If you would like more information or assistance in developing a favorable fuel supplier agreement, please let me know. In addition, the National Air Transportation Association (NATA) is a great resource. We will be covering this subject in detail at the next NATA FBO Success Seminar: Fuel Summit 2011, Nov. 8-10, Atlanta.

We would like to hear from you. Give us your comments. You can call me at 404-867-5518, email me at jenticknap@bellsouth.net, or go to our web site for more information: www.absggroup.com.

John Enticknap

John Enticknap founded Aviation Business Strategies Group in 2006 following a distinguished career in aviation fueling and FBO management, including as president of Mercury Air Centers. He is the author of 10 Steps to Building a Profitable FBO and developed NATA’s acclaimed FBO Success Seminar Series.

Thursday
Apr072011

The Cost of Aviation Fuel

Why is the price continuing to increase, and what can an FBO do?

“Business, more than any other occupation, is a continual dealing with the future; it is a continual calculation, an instinctive exercise in foresight.” – Henry R. Luce

We think it’s fair to say we are all feeling the impact on fuel price increases over the last six months or so. As a pilot, I’m seeking the best fuel price and am modifying my flying patterns to get the best deal.

Historically, after an initial spike in oil prices, the market tends to settle down. So why haven’t we seen a stabilization in Jet A fuel prices? What’s causing the volatility in the open and spot fuel markets?

Besides the obvious affects of world events, including the disaster in Japan and political upheaval in the Middle East oil-producing regions, there are other underlying dynamics that contribute to rising aviation fuel prices.

What Others Are Saying

Let’s review a few articles that have been written lately.

As discussed in Charles Kadlec’s article, the current Fed policy of keeping the value of the dollar low in the international markets is one of the main influences. Because it takes more dollars to buy a barrel of oil, the low dollar value pressure drives up the costs. It’s not necessary to review the entire article here, but suffice it to say the continued low value of the dollar is not going to reverse anytime soon.

In the article “Oil Spike Prompts Airline Profit Fears,” the authors discuss in detail the increasing cost of fuel and its effects on the airline industry. The airlines anticipated the increasing cost of fuel to be in the $75 to $90 range, but now a barrel of oil costs more than $108 this week. The economics of the airlines are such that a $1 increase in the price of a barrel of oil will increase the costs to the airlines more than $1 billion in a year.

As a result, the airlines are looking at a $10 billion cost increase in 2011 with fuel costs, on average, representing approximately 29 percent of the airlines’ operating costs. In order to gain back revenue, airline ticket prices are going up. Expect to see more fees and reduced flights with higher load factors.

The NBAA article details some similar statistics. They indicate 20 to 25 percent of a turbine operator’s cost of operation is fuel. The article notes, as we have discussed in previous blogs, that corporate operators are utilizing tactics such as using contract fuel providers, discounts with their base FBOs, tankering fuel and other fuel savings measures.

What Does the Crystal Ball Say?

As Henry Luce noted in his quote, in business we are always trying to look into the future. So looking into the crystal ball, what is going to happen with fuel costs, and what can we do about it? With the continued world unrest in the Middle East, oil prices will probably remain volatile.

The wild card in this equation is the Fed monetary policy. If the dollar remains weak, it’s our opinion the price of a barrel of oil is not going to go down anytime soon. Unfortunately, these factors are also going to slow down the economic recovery.

The bottom line: Just as the airlines are dealing with higher fuel costs, the cost of operating your FBO is going to go up and will probably not get any better soon. You’re also going to continue to see increased pressure on your fuel margin as aircraft operators, faced with their own budget problems, seek to negotiate better fuel prices.

So how do you survive during this fuel crisis? First, you must reconnect with your customers. Get out from behind the desk, and be a pro-active owner/operator. Be the restaurant owner!

Get to know your base customers and your transient customers. Learn their needs, wants and desires. By knowing your customers’ requirements, you can negotiate your own fuel delivery program that is customized to their operating parameters. At the same time, you minimize outside influences and maximize your returns. With regards to transient customers, you should already know who is flying into your location, so meet with them, and negotiate a reasonable service fee program which includes your fuel delivery.

Secondly, remember the Pareto 80–20 Principle.

Generally, the Pareto Principle is the observation (not law) that most things in life are not distributed evenly. It can mean all of the following things:

  • Twenty percent of the input creates 80 percent of the result,
  • 20 percent of the workers produce 80 percent of the result,
  • 20 percent of the customers create 80 percent of the revenue,
  • And on and on.

The Pareto Principle helps you realize the majority of results come from a minority of inputs.

As the FBO manager and chief marketing/sales person, this principle can help you concentrate your efforts by identifying your top customers — the important 20 percent that generate 80 percent of your business. That is the best bang for your buck. Know these folks well. This understanding of the vital few is what will make your business successful, and you can manage the change in cost of fuel.

Remember our premise as we forecast for the future. Concentrate on what you can control in a measured and methodical manner. We have little control over world events or what the Fed is going to do with monetary policy.

How are you dealing with the higher fuel costs? I’d like to know. Please email me at jenticknap@bellsouth.net.

John Enticknap

John Enticknap founded Aviation Business Strategies Group in 2006 following a distinguished career in aviation fueling and FBO management, including as president of Mercury Air Centers. He is the author of 10 Steps to Building a Profitable FBO and developed NATA’s acclaimed FBO Success Seminar Series.