Establishing a Favorable Fuel Supplier Agreement is Arguably the Most Important Agreement an FBO Can Have With Any Vendor
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Multi-Part Series: The 7 Immutable Elements of Building Equity in Your FBO Enterprise ©
Second Element: Favorable Fuel Supplier Agreement
By John Enticknap and Ron Jackson, Aviation Business Strategies Group
Recently we concluded our discussion on Developing a Favorable Airport Lease, the first element in our series on The 7 Immutable Elements of Building Equity in Your FBO Enterprise©. Next up is a discussion on the 2nd immutable element: A Favorable Fuel Supplier Agreement.
Establishing a favorable fuel supplier agreement is arguably the most important agreement an FBO can have with any vendor. Done properly, it can add real intrinsic value to your business and, quite possibly, make or break your bottom line. As we often say, aviation fuel sales is a penny business. For instance, if you sell 500,000 gallons of Jet A in a year and were able to get one more penny per gallon, that’s $5,000 added to your balance sheet. So a penny here and penny there can really add up.
Over the years, we've reviewed many fuel supplier agreements and have coached FBOs on the intricacies of arriving at a favorable agreement. As we teach in our NATA FBO Success and Management Seminars, your initial approach and mindset to developing a favorable fuel supplier agreement is one of partnership. Working as partners with your fuel supplier will provide a win/win agreement where both parties want the other to succeed and are willing to work in concert to that important end.
With this in mind, here are the ten essential components of a favorable fuel supplier agreement:
Term of Agreement
Pricing Methodology
Transportation & Delivery
Terminal Locations
Credit Terms
Taxes: Federal, State, Local & Flowage Fees
Quality Control & Training
Marketing Support
Credit Card Processing
Contract Fuel Programs
For this blog post, we’ll discuss the first two components: Term of Agreement and Pricing Methodology:
Term of Agreement
As you grow your business, and in particular your fuel volume, you can gain leverage by keeping the term of your fuel supplier agreement within a three-to-five-year period. You may find that you can obtain a better fuel price by a longer term agreement, but you may lose the desired flexibility that a shorter term provides.
Pricing Methodology
Understanding fuel pricing methodology will increase your odds of negotiating a favorable agreement. If your FBO is pumping at least 300,000 to 400,000 gallons per year, you should be able to get a contract that has an index-based pricing formula. That way, you can negotiate the differential fee to be paid to your supplier. The differential is the profit margin that the supplier will be receiving on each fuel purchase by the FBO. Unbundle your pricing structure so you know each cost element. For example:
Index price
Differential
Transportation
Federal taxes
State and local taxes
Flowage fees at the airport
This pricing formula applies to Jet A purchases. Avgas pricing, on the other hand, is determined at the time of purchase.
In our next blog post, we’ll examine the next set of components in developing a favorable fuel supplier agreement. Please leave any comments you have about this blog post below. If you have any questions, please give us a call or send us an email: jenticknap@bellsouth.net, 404-867-5518; ronjacksongroup@gmail.com, 972-979-6566.
ABOUT THE BLOGGERS: John Enticknap has more than 35 years of aviation fueling and FBO services industry experience and is an IS-BAH Accredited auditor. Ron Jackson 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. Visit the biography page or absggroup.com for more background.
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