Contract Fuel: The Rewards and Risks

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When it comes to reviewing the contract fuel section of your fuel supplier agreement, please remember that there are two sides to every coin. On one side there are the rewards that need to be examined. On the other side, there are potential risks that need to be weighed.

The contract fuel program section should be reviewed and tailored in such a way that makes the most sense for your FBO. Too often, FBOs accept, without question, what is written in the agreement.

Here is a quick review of both the rewards and potential risks.

Evaluate the Rewards/Value Proposition Provided by Contract Fuel Programs

  • They pay in full with no discount for your fuel and fees.

  • Payments are usually very quick, normally within 48 hours, so you don’t carry account receivables.

  • Typically there is no processing fee.

  • Some providers want to put fuel in your tanks at no cost (until you sell the fuel).

        Questions to consider:

o   Will this lower your cost of doing business?
o   Do you have the storage space?

  • Their value proposition: Increase your fuel uplift with “minimum” discounts.

        Questions to consider:

o   Will the program make your FBO a designated uplift station for their end user customers?
o   Will the program help to minimize tankering through your FBO?
o   Can their program increase traffic of ‘fractional’ customers using your FBO?

Weigh the Potential Risks

  • Contract Fuel Providers do not like a discount-off-retail program that many FBOs provide their base and transient customers.

  • Instead, they want an indexed-base price with an add-on; essentially a cost-plus formula which is based on a Platts-based price.
    o   This can put flexibility constraints on the FBO by limiting the ability to manage fuel margins.

  •  Consider carefully the into-wing price you offer the contract provider.

    o   Considerations include what it costs you to pump a gallon of fuel to include taxes, flowage fees, differential, freight, federal tax, overhead and a reasonable profit.

  • If the contract fuel provider has negotiated with their customer a deeper discount than what you normally provide off retail, then your margins are compromised.

  • The direct relationship with the customer can be diluted since the FBO essentially becomes a third-party in the fuel transaction.

Consider Potential Outcomes

  • Are you going to be selling more fuel with a contract fuel program, or about the same amount of fuel you were selling prior, but now you are discounting further?

  • Will you be increasing your market share of transient customers, or just selling a deeper discounted fuel uplift to a set of customers you already serve?

  • Which business model works best for your operation: Your own discount fuel program or a contract fuel program?

  • Prior to signing your fuel supplier agreement, ask yourself: Does the program improve the profitability of my company?

Seven Tips to Keep in Mind

1.     Knowledge is key. Do your homework. Know the number of gallons you are pumping to contract customers. Are they based customers, all transient, fractionals such as NetJets or Flexjet, FAA Part 135 operators, or something else?

2.     Determine what margin you want to receive for all your labor and cost of delivery. That means you must figure out what it costs you to pump a gallon of fuel. Use a simple formula by adding up all of your line service costs, and divide that number by your total fuel pumped.

3.     Keep your contract fuel agreements short, no longer than one year. The market is ever changing and one-year contracts, to some extent, force you to reevaluate your pricing structure.

4.     Make sure you are being paid according to the contract including being paid promptly and no fees for processing.

5.     Contract fuel suppliers do not operate for free. Before you establish your pricing, ask the question: What additional fee(s) are being added on to your already established FBO fees for a final price to the end customer? Extra fees can be substantial.

6.     If you have based customers on a contract fuel program, it might be more profitable for you to negotiate your own discount rate and, in the end, make a better margin.

7.     Maintain a before and after record of noncontract fuel sales versus contract fuel sales. Are you selling more gallons at a reduced margin? If so, how much? Sometimes it’s beneficial to sell less fuel at a greater margin by reducing or eliminating contract fueling altogether. The key is to do the math and tailor your fuel discount programs to benefit your organization.  

In many ways, we have just touched the tip of the subject of contract fuel programs. As we teach in our segment on Negotiating Fuel Supplier Agreements at our NATA FBO Success Seminar, we go into greater depth on this subject as well as fuel pricing strategies, pricing theory and how these issues affect your business.

This blog is the last post regarding fuel supplier agreements. Next up, we’ll be discussing how to create advantageous hangar contracts/agreements.

ABOUT THE BLOGGERS: John Enticknap (404-867-5518) has more than 35 years of aviation fueling and FBO services industry experience and is an IS-BAH Accredited auditor. Ron Jackson (972-979-6566) is co-founder of Aviation Business Strategies Group (ABSG) and president of The Jackson Group, a PR agency specializing in FBO marketing and customer service training.

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