The famous mangled quotation attributed to the late New York Yankees catcher Yogi Berra might apply to the tepid state of the FBO industry for this year and last. And yet, there are signs that this service industry is improving slowly but steadily in some quarters.

Several FBOs have expanded their facilities and report they are pumping more Jet-A than last year. Some, like Atlantic Aviation, have grown through acquisition over the last year. Traffic is up but the level of business is nowhere near where it was in 2007, the year when FBOs reported their strongest earnings.

Argus International Inc., which tracks monthly business aircraft flight activity in the U.S., showed an uptick in flight activity for most business aircraft from March through July 2015, compared to the same period in 2014. That’s a positive sign.

And yet, sales of jet fuel at FBOs were mixed earlier this year, according to a mid-year survey conducted by the Aviation Business Strategies Group (ABSG), which tracked the first six months of 2015 compared to 2014. The survey seems to suggest a partial recovery at best.

Seventy-one percent of FBOs reported rising or flat sales of Jet-A, ABSG reported. The survey compared fuel sales for the first six months of 2015 and 2014. Forty-five percent of the FBOs reported sales were up from the year earlier period while 26% said sales were the same. Conversely, 29% report that Jet-A fuel sales were down in the first half of 2015 compared to the previous year.

Over 50% of the respondents said their average price per gallon of Jet-A over the last six months was between $4.00 and $5.00; 2% reported their Jet-A price was under $3.00 per gallon.

Oddly, the relatively low cost of fuel has not yielded a corresponding revenue benefit for FBOs. “This has not really increased flight hours, which is the key for more fuel sales for FBOs,” said John Enticknap, cofounder of ABSG.

The volatility of the stock market and the lukewarm state of the businesses for which business aircraft operate is holding back the recovery. “Everyone is waiting for the big jump,” said Enticknap. “Unfortunately, the U.S. economy has yet to jump.”

Regardless of the current cost of fuel, FBOs must find ways to maintain a profitable margin. At its National Air Transportation Association (NATA) FBO Success seminar, ABSG advocated a target margin of $2 per gallon. Yet that is rarely achieved due to heavy discounts demanded by operators or third-party fuel providers.

What’s to Be Done?

“FBOs are no different than other businesses,” said Ron Jackson, ABSG cofounder. “They must modify their business model or die.”

FBOs can no longer afford to give their services away for free, he added. Labor costs must be passed on to the operator, from marshalling an aircraft to parking, unloading baggage and towing.

A year ago, ABSG asked FBOs if it was time for a new business model, which would be based in part on the European version, where fees for service are commonplace. Aircraft operators using FBOs must contribute in some meaningful way to their revenue streams.

To increase their margins, some FBOs are charging a facility fee as well as the once-feared ramp fee for those aircraft operators that don’t purchase fuel. (Signature was the first chain to introduce a ramp fee in the mid-1990s.)

“Change is slow and it has taken this long for ramp fees to become a fairly universal practice throughout the industry,” Jackson said.

If generating revenue is so tough for FBOs, why do investors – larger chains and investment capital firms – still invest in them?

Because there is money to be made in servicing business aircraft. The growth-through-acquisition strategy insulates larger FBOs from market fluctuations.

“When chains purchase an independent FBO, they typically consolidate some of the departments under the corporate umbrella, such as accounting, purchasing and human resources,” said Jackson. “In addition, the chains bring in more marketing horsepower, standardize training and basically run a more-efficient operation.”

BBA to Buy Landmark Aviation

A major competitive concern of small independent FBOs and midsize chains – and expected to be a major topic at NBAA this year – is the proposed $2.065 billion acquisition of The Carlyle Group’s Landmark Aviation by BBA Aviation plc, parent of Signature Flight Support.

The top FBO chain is attempting to acquire the No. 3 chain in what is being described as the largest acquisition of its kind. At present, Signature has over 100 locations worldwide, followed by Atlantic Aviation with around 68 and Landmark with 60+, according to ABSG.

“There will be repercussions from this deal felt throughout the FBO industry,” said Brian Foley, president of Brian Foley Associates, an aviation consultancy. “This deal could make it tougher for mom and pop FBOs to compete.”

There also will be competitive pressures on smaller chains with the merging of these two leviathans, Foley added.

Enticknap said the proposed acquisition is a sign of continued consolidation “of viable FBOs,” typically by a larger well-heeled chain.

ABSG defines a “viable FBO” for possible acquisition as one located on an airport that has a 4,000-ft. or longer hard-surface runway. The FBO also must pump at least half a million gallons of fuel per year. Between 1,400 and 1,500 FBOs fall into the viable FBO category in the U.S. and Canada presently. Of that number, chains of varying size, which constitute approximately 17% of the viable FBO market, operate 250 FBOs.

While indicative of continued consolidation, the proposed sale of Landmark also demonstrates the growing value of FBOs in the marketplace. This is the second time Carlyle has owned Landmark. Carlyle repurchased Landmark in 2012 for an estimated $700 million and is now about to sell it for significantly more money.

This is not all “pure profit,” noted Foley, because Landmark made numerous acquisitions during the 2012-2015 time frame, including the $375 million purchase of the Ross Aviation chain.

“But, if approved, the sale would be a pretty good return on investment,” said Foley.

It will be months before the acquisition is approved. Anti-trust concerns by the U.S. Justice Department must be resolved before the deal is finalized and the necessary purchase funding is raised.

Despite these challenges, most believe the deal will go ahead, in part because of the parties involved. Both Signature and Landmark have ample experience in resolving anti-trust concerns raised by the DOJ.

Both sold FBOs as part of their growth-through-acquisition strategy to satisfy past anti-competitive concerns. In July 2014, the DOJ ordered Landmark to sell Ross Aviation’s service operations at Scottsdale Municipal Airport as a condition of its $330 million acquisition of Ross Aviation. In 2008, the DOJ ordered Signature to sell its FBO services at Indianapolis International Airport as a condition of acquiring seven Hawker Beechcraft-owned FBOs.

“It is very possible that Landmark will sell several FBOs to alleviate any anti-trust concerns,” said Leonard D. Kirsch, an attorney with McBreen & Kopko. “It would be a smart thing to do.”

Up to eight FBOs could be sold to independent FBOs, sources indicated. Likely candidates for sale would be at airports where Signature and Landmark both operate. Landmark Aviation’s operation at Washington Dulles International Airport is one likely candidate for sale, according to sources.

Fuel taxes remain a concern. They vary widely over the U.S.

Other Industry Concerns

Another concern of FBOs gaining traction is the continued acquisition and assumption of managing FBOs by airport authorities. In some cases, airports hire another FBO to manage the property after it is acquired.

The Airport Authority for the Piedmont Triad International Airport in Greensboro, North Carolina, decided recently to let Stevens Aviation’s lease expire at the end of this year, after which the airport authority would run the FBO.

The same story played out this year in Fort Wayne, Indiana, where the airport authority announced it would take over the FBO managed currently by Atlantic Aviation in January 2016.

“Is it annoying that Fort Wayne did this,” asked Atlantic Aviation CEO Louis Pepper? “Yes it is. We offered to spend a lot of money there and put in a beautiful facility. But they decided they would rather do it themselves.”

This practice gained notoriety years ago when TAC Air became embroiled in a controversy with the Chattanooga Metropolitan Airport Authority over its FBO managed by the Wilson Air Center. TAC Air claimed the airport-owned FBO had an unfair competitive advantage. The rocky relationship with the airport continued for four years until January 2014 when the airport bought TAC Air for $12.37 million.

Some industry experts and FBO leaders find the practice of airport authorities taking over FBOs troubling because it is government taking over private business. Others, however, don’t view this as a major trend or serious threat, particularly for FBOs at larger airports.

“I don’t see a runaway train where this will turn the current FBO business model on its head,” said Foley. “Most municipalities don’t want to get into the fuel pumping business.”

Taxation

Yet another concern of FBOs and related businesses is the revenue-draining state taxes on labor, parts and maintenance as well as federal taxes on aircraft management services. Some states still levy a sales tax for MRO work, while Florida and Georgia and others have removed it.

“This situation often arises from a lack of understanding of common aviation business practices, a distinguishing feature of many proposals developed without stakeholder consultation,” said Bill Deere, NATA’s SVP for government and external affairs.

On the federal level, the ongoing issue is whether aircraft management services companies, some of whom are associated with FBOs, are subject to air transportation taxes. NATA threw its support behind legislation introduced in late September 2015 by U.S. Sens. Sherrod Brown (D-Ohio) and Rob Portman (R-Ohio), which states that the companies are not subject to these taxes. The legislation is in response to the IRS chief counsel’s opinion in March 2012 that aircraft owners employing aircraft management services companies, which allow the aircraft to be chartered, are subject to a 7.5% commercial ticket tax.

Several states exempt maintenance done on non-resident aircraft regardless if they operate under FAR Part 91 or Part 135 regulations, according to Nel Stubbs, VP and co-owner of Conklin & de Decker. Several also exempt work done on resident Part 135 aircraft and some exempt work on resident Part 91 aircraft, said Stubbs.

The federal tax issue was tabled in May 2013 pending further clarifying regulations. NATA said the Brown-Portman legislation would prevent “the double taxation of aircraft owners who seek to defray the costs associated with ownership through the chartering of aircraft.”

Fuel taxes remain a concern of FBOs and business aircraft operators, but the levels vary widely throughout the U.S. and there doesn’t appear to be a concerted effort to reduce them. Wilson Air Center reports a 7.5% state fuel tax at its Charlotte, North Carolina, facility, 4.5% at Memphis and no tax at its Texas FBO. Fuel tax in San Francisco is very high, FBOs there report.

The FBO industry in North America might not be recovering as fast as some would like, but it is far better off than FBOs elsewhere, according to several analysts who track the industry. Currency devaluation, inflation, sagging stock markets and a 50% drop in oil prices have hurt FBOs in South America, Europe and Asia – in China particularly, where traffic is down from last year and business aircraft are viewed as ostentatious by the Chinese government, which is waging an anti-corruption campaign.