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Don’t Look Now...

FBOs continue to grow and consolidate worldwide.

For an industry barely beyond its first century of existence- you’d expect aviation to have found equilibrium- to have settled into a stable form that reflects its near-constant function: the efficient movement of people and goods by air.

Instead of stability- however- aviation continues to exist as an industry in flux – whether commercial- where the airlines’ financial crisis continues- or in general aviation- where fractional programs account for an ever-larger share of corporate aircraft operated. Even the realm of the Fixed Base Operator faces its own state of change- much of it through the seemingly conflicting acts of expansion and consolidation. Even as the number of FBOs has continued to grow – up about 13 percent in the past 15 years – consolidation has changed the landscape by bringing under a national umbrella more FBOs. And the number of umbrellas has declined slightly- as well.

Today somewhere nearing 3-600 FBOs operate from about 3-200 airports with at least one paved runway of 3-000 feet or longer. In 1990- fewer than 3-200 FBOs operated at just under 3-100 airports with that same 3-000-foot piece of pavement. It’s a long way from what one might believe after casual observation. With airport numbers under constant challenge and a slump in flying in the early part of this century- times seemed tough for many FBOs.

Interestingly- it’s outside investment groups that helped revive many a struggling FBO – and they dominate the consolidation the FBO community has seen. Today nearly three times as many FBOs are operated by umbrella companies as a decade ago. And what’s in store for the coming years? Would you believe- more of the same?

Well- based on the forecasts- predictions and observations of several groups and companies- the expansion business and private aviation now endures helps drive forces that continue to launch new FBOs and other independent aviation service providers – and private equity and investment firms continue to look for opportunities to grow their FBO holdings- through individual acquisitions and mergers of stand-alone FBOs- as well as through the acquisition and merger of chains- regional and national.

So it seems the early 21st Century would be a good time to be in the FBO investment business.

A long way in a Century…

'Fixed' Base Operations took on that name in the first decade of aviation in the early 20th Century as a way to differentiate the 'FBO' from what existed before – the 'mobile' base of operations. You see- once the Wright Brothers succeeded in inventing the airplane- the first FBO didn’t just spring up to support the Buckeye State Brothers. Likewise for runways and airports. No- for years what passed as support for transient aircraft more closely reflected the mobile support units used to maintain combat aircraft in World War I.

When an aircraft dispatched for somewhere down the road- a mechanic (or two) would head for the same destination – by motor vehicle on the ground. These mobile maintenance operations typically carried with them the spare parts- fuel and oil needed to service the arriving aircraft.

And since the typical aerodrome of aviation’s early years amounted to little more than a field a half-mile square- almost any non-urban location worked as a rendezvous point. Such a system worked well – briefly. When the ground speed of the airplane barely matched the cruise speed of a car or truck of the same vintage- the pilot seldom had to wait long for his support team to arrive on the scene.

This system lasted only as long as it took for airspeeds to move into multiples of a car’s typical road speed. Quickly- the practice of dispatching a support crew by ground fell victim to aircraft flying at 70- 90- even 100-plus mph – far faster than the autos- trucks and roads could accommodate in the same time period.

According to popular history- the first 'Fixed' Base Operations opened in the 1914 to 1915 timeframe – and aviation spawned yet another new business to go with aircraft manufacturing and pilot training. Aircraft maintenance and fueling fit together like engine in cowl. And thus- the FBO community took off.

By the time general aviation hit its high water mark in the late 1970s- FBOs numbered in the thousands. Indeed- by 1980 it was a rare airport that didn’t offer at least fuel and ground handling – still the dominant business lines at FBOs today.

Uniformity:

linch-pin of the FBO chain

Let’s step back a little- though- to when savvy entrepreneurs began to realize in the 1950s that business and corporate FBO clients valued the uniformity of finding the same services- same fuel and same prices at FBOs on different airports. This was when FBO consolidation began in earnest.

Regional chains- national chains and- today- international chain continue to expand in depth and pure numbers thanks in large measure to those same saleable traits.

The difference today is that the ground services offered through chains of all sizes extend far beyond simple fueling. Rental car connections- for example- became a staple of larger FBOs almost as quickly as the rental-car industry established itself as a commodity in the aftermath of World War II.

Catering for the aircrew and passengers became another FBO staple- along with expanded maintenance- storage- even flight-management services. And with business aviation a bona fide interstate community- offering the consistency of services across multi-state FBO chains became even more attractive and consolidation continued. All indications are that growth will continue- both in the number of FBOs established and in the move toward consolidation of many FBOs under the umbrella of a single brand name.

A Signature for the Millionaire

There have been several instances in which private equity firms invested heavily in FBOs and other general aviation service industries in recent years- among the most notable The CapStreet Group- Carlyle Group and Macquarie Bank.

Among the most-ambitious of the investors- The Carlyle Group last fall began to single-brand its collection of acquired FBOs- among them Piedmont-Hawthorne- Standard Aero- Associated Air Center- and Garrett Aviation. The newly dubbed Landmark Aviation stands as an exemplary example of what a savvy non-aviation company can do when it has the foresight to see where business aviation is going – as well as the resources to do it right.

And from all indications- this trend appears to be closer to its beginning than to its end. For all independent FBO owners who have slaved long years to build a successful business selling jet-A- now might be the time to cash in your chips and book that extended vacation to Tahiti. The past year has seen a dynamic expansion of a trend. Private equity funds have found a lot to like in the FBO business- and their buying habits have reflected that favor.

For example- the FBO at Aspen (Colorado) Base Operation last year became part of the new and expanding Trajen FBO Network – itself a network underwritten by another private-equity firm- CapStreet. Trajen reportedly made an offer that could not be refused – a price somewhere around a dozen times higher than the FBO’s earnings would otherwise command.

Then there is Centre Partners- which undertook FBO acquisitions in Denver- Scottsdale- Arizona- and Santa Fe- New Mexico. And we can’t overlook the Macquarie Group U.S.- the North American operating entity of Australia’s financial giant- Macquarie Bank. Indeed- with the absorption of the Mercury Air chain – itself the product of the Flying Tigers Line – and the targeting of other chains- don’t expect consolidation to taper off anytime soon.

What’s the appeal?

So why are FBOs suddenly such hot commodities for equity investors – and who exactly are they? More often than not- the money and people are one in the same – wealthy individuals seeking returns higher than available through more-conventional investments in Wall Street stocks or mutual-fund portfolios- despite the potential for higher risks. With so many growth options limited by other constraints- the prospective gains of consolidating once independent FBOs – or other so-called fragmented industries – rests in the potential of eking out larger profits by consolidating management- oversight and accounting of the independents- as well as from the lower prices available through negotiating purchases of goods in bulk.

In theory- at least- an FBO chain with a dozen or more locations can be run less expensively through so-called economies of scale. By consolidating and then cutting staff for accounting- billings- and other non-site-specific chores- the company can reduce those costs.

Likewise- in theory- that same chain can lower its costs for consumables – fuel- oil- food- parts – by negotiating with suppliers on behalf of all 12 locations. Buying for 12 should be- in theory- less costly than buying for one. Ditto for such intangibles such as insurance- legal services- and other items.

For some investors- cherry picking ripe fruit from among the vast variety of FBOs means scooping up some existing chains- national and regional- and blending their service offerings into new marketable packages.

For other investors- the path to making a small fortune in aviation takes the form of several non-affiliated FBOs- then blending those along some logical lines. And there should continue to be instances in which FBOs buy out other FBOs for the same general purposes – lower costs- increase buying power- and grow profits.

Where does it end? It doesn’t… Expect consolidation to be with the business aviation community for years to come- and for those blends to reflect the growth of business aviation- itself.

One of the great things about the FBO business is the extreme variety of forms it can take – reflecting the extreme variety of airport communities they serve. That condition also means there shouldn’t be a headlong rush for all FBOs to affiliate or merge for the simple reason of merging or affiliating.

The general aviation market outlook for years into the future seems to bode well for both the independent- small- unaffiliated FBO- as well as for the large- multi-state chain and international chains. Just as each aircraft strata meets a market need- so- too- does each level of the FBO community target a part of that market.

But where an FBO appears particularly successful- but where its growth potential is limited by capital and imagination- it’s easy to imagine the business growing onto the radar screen of an investor looking for ways to make more.

And where one FBO gets absorbed by another- don’t be surprised if another entrepreneur shows up- ready to start anew. That ensures us all of a lively- vibrant and competitive FBO community for years to come.


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