Airport Operator Options for Delivery of FBO Services (2018)

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SUMMARY AIRPORT OPERATOR OPTIONS FOR DELIVERY OF FBO SERVICES Overview of the Synthesis There is little doubt that the fixed base operator (FBO) industry is experiencing a gen- erational shift marked by new fuel-efficient aircraft; the retirement of many older sin- gle-engine piston aircraft; and mobile technologies that make it possible for pilots and dispatchers to plan routes, assess tankering strategies, and easily identify fuel and service stops ahead of a trip. Emblematic of these changes, in the 1980s an estimated 10,000 FBO locations served general aviation (GA) aircraft across the country. In 2016, approximately 3,500 FBOs were operating in the United States, and 47% of these locations were owned and operated by airport sponsors. These changes, while dramatic, also reflect a nimble and solution-driven industry. Today, both airport sponsors and private FBOs represent differ- ent segments of the FBO industry. For airports that can support a private FBO or multiple FBOs, sponsor and FBO relationships are interdependent, relying on each other’s business strategies to ensure joint success. This synthesis will describe the various delivery options for FBO services and the tools that airports use to evaluate which options work best. Broadly speaking, an airport sponsor can deliver FBO services with traditional third-party leases or by engaging a contract man- ager, or the airport can self-operate the FBO. Decisions about which model is appropriate hinge on an evaluation of an airport’s unique local economic conditions, the details about the area’s GA market, and the level of interest private FBOs express about operating at a particular airport. The synthesis will discuss the local considerations that inform a decision about how best to provide fueling, flight continuation services, maintenance, and concierge services and, if a traditional lease approach is selected, how to proceed with a procurement process and include key real estate leasing and development provisions in lease agreements. The audience for this synthesis is airport operators, FBOs, and other industry stakeholders. Methodology To expand the knowledge base of different ways to provide FBO services, the synthesis explored the experiences of 10 airports that have recently changed FBO providers. The research team interviewed airports that • Self-operate their FBO • Own FBO facilities but contract with a private FBO manager to oversee day-to-day operations • Own all or most of the FBO facilities and hangars but lease them to a private FBO, with a 5- to 10-year lease (often with renewal options) • Lease land, property, or both to one or several FBOs on the airport with long-term leases that include provisions for the FBO to invest in and develop new or improved facilities.

2 The research team also interviewed and profiled the business strategies of three FBOs: a single-location independent FBO, an FBO network focused on smaller commercial airports and GA airports, and a large FBO network that specializes in business aviation. Table 1 lists participants in the case study research. TABLE 1 CASE STUDY PARTICIPANTS Airports Type FBO Situation Southern Illinois Airport GA Airport-operated FBO Fort Wayne International Airport CS Airport-operated FBO Appleton International Airport CS Airport-owned facilities, contract management Capital Region International Airport CS Lease airport-owned facilities to a single private FBO Coleman A. Young Municipal Airport GA Lease airport-owned facilities to a single private FBO MBS International Airport CS Lease airport-owned facilities to a single private FBO Boeing Field/King County Int’l Airport GA Three private FBOs Tampa International Airport CS Two private FBOs, recent acquisition experience Van Nuys Airport GA Four private FBOs Washington Dulles International Airport CS Two private FBOs FBO Interviews Avflight Small to medium-size airports, usually sole FBO D.C. Metro Aviation Services Single-location independent FBO Signature Flight Support/Signature Select Large airports, focus on business aviation Source: Prepared by KRAMER aerotek inc. Note: FBO = fixed base operator; GA = general aviation airport; CS = commercial service airport. In addition to the case studies, the research team performed a literature search of reports, presentations, and articles about the FBO industry. The team acquired and analyzed data from the North American AC-U-KWIK Airport/FBO Directory. Individual team members contributed their knowledge and experience with FBO procurements, contract negotiations, and lease terms. Last, the ACRP panel that represents airports, industry organizations, and FBOs contributed to a lively discussion about the synthesis and its content. Chapter Organization Chapter 1 presents an overview of the FBO industry. Chapter 2 discusses local consider- ations that will help determine whether an airport self-operates the FBO, pursues a tradi- tional lease, or engages a contract manager to run the FBO. If an airport sponsor decides to pursue a traditional FBO lease or contract manager, chapter 3 provides a framework to solicit requests for information (RFIs), prepare a request for proposal (RFP), and evaluate responses to the RFP. Because a lease is a complex legal document that creates rights and obligations that will affect an airport sponsor and FBO tenant for many years, chapter 4 discusses the most important elements of an FBO lease. Chapter 5 presents the results of the case studies, which include many different perspectives on the FBO industry. Chapter 6 offers concluding remarks and suggestions for three additional research projects that build on this synthesis. Findings from the Research and Case Studies • Because the provision of FBO services usually involves a long-term commitment, case study respondents suggest that airport sponsors considering a change in FBO business model start preparations early and to select a business model that considers the local market, the demand for aviation services, and the airport’s organizational capacity.

3 • Airports considering a change of FBO business model should begin to evaluate man- agement options 2 to 3 years before the existing leases expire, to allow for adequate analysis and discussions with key stakeholders. • Many small airports have no choice but to self-operate. In these instances, the pros and cons of self-operation or contract management models should be evaluated in the context of an airport’s staffing structure and its ability to offer competitive FBO services. • Airport staff emphasized the importance of updating minimum standards, leasing policies, and master plans every 5 years so that new leases reflect the airport’s current goals and objectives. • A collaborative airport/FBO relationship, especially at smaller airports, can enhance the airport’s stature as a gateway to commerce in the community and is usually a productive way to problem solve. • The fueling component of FBO operations, once a cash cow, is returning much tighter margins for a variety of reasons: – The delivered cost of aviation gasoline in full or partial loads is expensive. – Some airports are pricing fuel below cost to attract business. – Jet-A discounts are numerous because of the volume discounts, buying clubs (e.g., Corporate Aircraft Association), contract rates offered by fuel suppliers, and tankering practices on fuel-efficient aircraft. • When evaluating how to deliver FBO services, an airport sponsor should consider assembling a decision team that offers subject matter expertise, the ability to evaluate alternatives, and solutions to specific challenges. • Selection of an FBO business model includes the examination of— – The history of FBO services at the airport – An analysis of airport internals (airfield and landside facilities, fuel sales, level of activity, customer base, prior financial performance, governance, and the status of primary documents) – Regional competitive factors – Macro factors that influence airport activity – Preferences of the local airport community – Projected financial outcomes with different FBO business models – Strengths, weaknesses, opportunities, and threats for each option under consideration • If an airport sponsor elects to engage a private FBO, the sponsor might consider the following additional steps: – Issuing an RFI to gauge potential responses from private FBOs. An RFI will indi- cate the airport sponsor’s goals and requirements for an FBO and provide a good test of the market and level of interest. – If third-party FBO interest is present, then an RFP and timeline for solicitation, evaluation, and procurement should be prepared. – Because a sample FBO lease typically is attached as an exhibit in the RFP, prepa- ration of a draft lease will coincide with the development of the RFP. • Because merger and acquisition activity in the FBO industry is high, some airport sponsors face changes in their FBO providers during an existing lease. Case study respondents offered suggestions for airport sponsors facing lease assignments or FBO acquisitions: – Every takeover or acquisition of a leasehold is unique. Airport sponsors should review each case individually. – Ground leases and improved property leases should each include assignment clauses that allow the sponsor to review the financial fitness of the applicant and the quality of the replacement. – Sunshine laws can affect the disclosure process. Every state has its own laws about a public entity’s transparency. A private corporation may not want its financial data to become public record during the review process.

4 – Obligations from the previous FBOs should carry over to the new tenant. Otherwise, the airport sponsor must contact the old FBO for remedies including environmental cleanup. – When airport assets are included in a lease, a shorter-term lease is appropriate; when significant capital investments are proposed, longer leases make more sense because they give the tenant sufficient time to amortize its investments. – Lease assignment also gives the airport sponsor an opportunity to update certain lease terms, including— ° Environmental responsibilities ° Use provisions ° Insurance requirements ° Prohibitions against revenue-producing activities that would normally go to the airport sponsor (e.g., erecting cell phone towers or large solar arrays on leased airport buildings) ° Changes in FAA regulations, guidelines, and policies ° Changes in the airport’s primary documents (e.g., minimum standards, rules and regulations, and leasing policies) ° Rights and responsibilities of the tenant’s lender in the case of default – Consider including an assignment fee in every lease, based on the transaction value and the number of years remaining on the lease term. – Consider including in the lease a clearly articulated early termination process that protects airport assets from underperforming tenants. The research team hopes that the background information about the FBO industry; the case studies; and the discussions about business models, procurement, solicitation, and lease terms will support further conversations about the provision of FBO services among airport sponsors and the extensive network of private FBOs.