FBO Fuel Pricing: Seeking a Silver Bullet
/Ever since the Lone Ranger first loaded his trusty six-shooter with silver bullets, I’ve been intrigued with the idea of formulating a single straightforward solution for pricing fuel at FBO operations I’ve managed over the years.
This search for the silver bullet is a subject we discuss at our FBO Success Seminars, and FBO managers in attendance often voice their concerns about how to effectively price fuel. On one hand, they’re concerned about the bottom line. On the other hand, they don’t want to price themselves out of the market and lose valuable customers in the process.
Indeed, it’s a two-edge sword. The trick is to maximize both cutting edges. Let me explain.
Maximize Your Customer Value Proposition
FBO managers are no different than any other business manager that sells a service or product. The same rules apply. Every FBO sells fuel — both Jet A and 100LL are the same specifications from all the manufacturers — so trying to differentiate your business on product is almost impossible. Same goes for quality control: Either it’s done well, or you’re going to be out of business.
What you need to look at is maximizing your Customer Value Proposition (CVP) — the facilities, the delivery (customer service) and the selling price. We’ll discuss the delivery aspect in future blogs. For now, let’s concentrate on the one factor many managers forget, or do not consider enough, and that’s the pricing equation, which requires putting some effort into research and calculations.
So let’s do the math. There are generally four types of pricing:
- Cost-Plus pricing
- Demand pricing
- Competitive pricing
- Mark-up pricing
Before we decide which type of pricing methodology we use, we need to determine our costs. We need to know what it costs to get the fuel truck with clean fuel to an aircraft on our ramp with a trained line service technician. (Let’s not get into a discussion here on fixed and variable costs. That’s another blog.)
Next, let’s look at our fuel cost from our supplier, including mark-ups over Platts (or rack price), plus transportation, plus fed taxes, plus flowage fees, plus state fees (not sales tax) and any other local fees. In today’s marketplace, that number is greater than $3 per gallon for Jet A.
Now we need to look at your cost of labor and overhead and covert the number to a per gallon rate.
After that exercise, let’s say we have our fuel cost at $3.10 and our cost of labor and overhead of $0.55 per gallon. So our cost is $3.65/gallon. (This example is for Jet A.)
But before we start talking about which pricing method to use, we need to do some research on your FBO marketplace. If we look at various publications and web sites, like acufuel.com, we can determine local and national fuel selling prices.
One current survey for national and regional pricing shows the following:
- Average high selling price: $6.66/gal. (range of over $7 to just under $6)
- Average low selling price: $3.64/gal. (range of over $5.40 to a low of $3.16)
This translates to a national average selling price of $5.05. In addition, find out what the local posted fuel pricing is at your competitor FBO and within a 50-mile radius of your base.
The other research question you need to tackle is: What are the contract fuel selling prices in your local area? Once you have this data, then we can look how we put a retail price on the fuel.
Maximize Your Profit Position
One of the most important tasks we must keep in mind is maximizing our profit position. Profit is our friend. Profit is our goal.
In order to maximize our profit position, we rely on a standardized fuel pricing method. We think it is fair to say most FBOs use either cost-plus pricing or mark-up pricing. Cost-plus means you want to make a certain “plus” above your cost. For example, your cost is $3.65, and you want to make $1.00 per gallon. Selling price would be $4.65; a profit of 21.5 percent on sales.
Mark-up pricing, on the other hand, says you want to make $0.90 per gallon. Your selling price would be $4.55 or just short of a 25 percent mark-up on cost.
Both of these methods are common in the manufacturing business arena. The difference in these two methods lies in the difference in margin and mark-up. This can be a lengthy discussion, but suffice it to say, a thorough understanding of your costs of operation to include labor, facilities, other income, overhead, etc. affects what margin you use to show a profit, which in turn, allows you to calculate what mark-up percentage you must use to get to the intended profit level.
Demand Pricing
We might suggest a demand pricing method. Service industries use this pricing methodology consisting of:
- Labor & Material
- Overhead and
- Profit.
You start by knowing what goal you have for gallon sales for the month. Establish your competitive average sale price within the range of the market of, say, 50-100 miles. Look at your fuel sales, each day, each week, and adjust your pricing on a daily, monthly or discount-per-individual-sale basis to meet your goals at the end of the month. Keep in mind, of course, what your financial break-even point is so you don’t end up selling for below cost. Demand pricing models are very complex and are used by firms such as airlines, cruise lines, freight carriers and others who sell perishable services.
Competitive Pricing
Competitive pricing comes into play with the contract fuel market. This trend has accelerated in the last couple of years. It has led to decreased margins on fuel sales. Has it increased your fuel sales to make up for the lost margin? That is always the claim from the contract fuel suppliers, which now include the major retail suppliers — a building dilemma for the FBO. At the FBO Success Seminars, we have a complete class on this important issue.
What’s Your Silver Bullet?
In the end, the Lone Ranger always prevailed and got his man. He did his homework, scouted the trail and, of course, he had his trusty six-shooter loaded with silver bullets.
For the FBO owner and manager, the silver bullet is knowledge. Know your customers, and know your business. It’s a thorough and detailed understanding of your FBO cost structure.
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.