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.

Building Long-Term Profitable Customer Relationships, Part 2: Do You Feel Lucky?

While my business partner, John Enticknap, reveals in his blog posts the methods and tools used in building a more profitable FBO, I’ll be writing about the often overlooked but equally important process of building long-term profitable customer relationships.

My first blog on this subject, Part 1: Are You the Restaurant Owner? was published on Feb. 10.

The following is the second installment:

Part 2: Do You Feel Lucky?

We’ve all seen Clint Eastwood’s Dirty Harry scene when he aims his seemingly empty .44 Magnum, “the most powerful handgun in the world,” in the face of the bank robber and taunts, “You’ve got to ask yourself one question: ‘Do I feel lucky?’ Well do ya, punk?”

FBOs shouldn’t have to feel lucky when putting together their marketing plans to attract new customers, yet during our NATA FBO Success Seminars, I often sense the frustration FBO owners and operators verbalize when we discuss this very subject.  

Over the years, FBOs have tried all sorts of things to attract customers. Wine, steaks, bobblehead dolls, free this and free that. Sometimes they get lucky, but mostly they’re just shooting blanks!

Many FBOs, when facing seemingly stiff competition, have done the unthinkable to attract customers. They resort to lowering their price of fuel beyond reason. Yikes! 

To be sure, an FBO should always manage its fuel price in order to be competitive and as a component to provide a customer value proposition (CVP). However, nothing good happens when you subjectively lower the price of fuel just to attract customers.

Attracting the Wrong Customer

Besides messing up your profit margin when you arbitrarily lower your price of fuel, you ultimately attract the wrong customer.

Are there really wrong customers in this trusty world of general and business aviation? You bet your .44 Magnum there are.

In my first blog, I wrote that the lifeblood of any FBO is building loyal customer relationships. The success of these relationships can be measured in two ways:

1. Are they long-term, and
2. Are they profitable?

When you randomly lower fuel prices you get neither long-term customers, nor profitable customers. What you get are bottom feeders, looking for the deal of the day. They tend to flit from one deal to the next. Sure, you may increase your fuel volume for a short period of time, but over the long haul, you’ll be scratching your head, wondering where these newfound customers went.

If you divide your available customer base into thirds, you’ll probably find the following:

• Upper third: Extremely loyal, likes your FBO, knows a good value and pays a fair price for fuel.
• Middle third: Although loyal, is value-conscious, wants a good deal and keeps you on your toes to make sure this value is received.
• Lower third: Bottom feeders. Price is everything. Complains about everything. Flits from one FBO to the next. Famous catch phrase: “What have you done for me lately?”

So where should your focus be? Which piece of the pie do you want?

First of all, getting Loyal customers to leave their present FBO is probably not going to happen in the short term. You may flirt with them a little, but getting a loyal customer to try something new is very difficult. An FBO competitor would have to stub its toe pretty hard to get a loyal customer to leave.

(Note: If you currently have a core of loyal customers, make sure you don’t lose them. Remember why they came to your FBO in the first place, and do everything you can to take care of their needs, wants and desires. Be the restaurant owner.)

Second, more than likely, you’ll get most of your customers from the Somewhat Loyal group. If you are looking to expand your loyal customer base, go fishing in the green pond, not the Bottom Feeder pond.

The Customer Value Proposition (CVP)

So how do you attract these Somewhat Loyal customers to your FBO? Give them a sense of delivering a real customer value proposition (CVP). Done properly, the CVP is the right combination of clean and attractive facilities, fair fuel prices/fees, and good old-fashioned knock-your-socks-off customer service. (We’ll further explore the CVP in another blog post.)

Lastly, it’s critical you get the word out about your CVP. And the way to do that is to deliver it consistently to every customer with whom you have contact. Let them soak it up and remember it, and they will faithfully spread the word.

The general aviation industry is relatively small compared to other industries. Word-of-mouth is a very strong channel of communications, and if you are “lucky” enough to have a customer recommend your FBO to another potential customer, you’re on your way.

Someone once told me you create your own luck, that luck is really the result of working hard, of doing something right consistently over the long haul.

I think that’s pretty good advice.

Next Blog: Building Long-Term Profitable Customer Relationships, Part 3: Don't Forget the Cheese!

Ron Jackson

Ron Jackson is co-founder of Aviation Business Strategies Group and president of The Jackson Group, a PR agency specializing in FBO marketing and CSR training. He is the author of Mission Marketing: Creating Brand Value and co-author of Don’t Forget the Cheese!, the ultimate FBO Customer Service Experience.