Essential Fuel Supplier Agreement Elements: Quality Control/Training, Marketing Support and Credit Card Processing

Detailing the 10 Essential Elements of a Favorable Fuel Supplier Agreement, Part 3

By John L. Enticknap and Ron R. Jackson, Principals, Aviation Business Strategies Group

Publisher’s note: Our bloggers, John Enticknap and Ron Jackson will be discussing these topics and others affecting the FBO Industry at the next NATA FBO Success Seminar, March 8-9, New Orleans.

Previously, we talked about six of the 10 essential elements of a favorable fuel supplier agreement: Term of agreement, pricing methodology,  transportation and delivery, terminal locations, credit terms and taxes. A favorable fuel supplier agreement is one of the six intangibles that can build equity in your FBO.

For this blog post, we'll break down three additional elements of the favorable fuel supplier agreement and provide insight and tips to help you protect your business while adding intrinsic value.

Quality Control and Training

Putting safety first is paramount in developing a good relationship with your fuel supplier. Often your fuel supplier will have resources to help you train your employees in all aspects of the fuel delivery process to help insure not only safety but the quality of the product as well. Your fuel supplier agreement should detail what type of training program they will provide. It may include their own program or supplement your own in-house safety and quality assurance program such as NATA Safety 1^st. Determine during your fuel contract negotiations what quality program your fuel supplier will provide. For example, will they come to your facility for training or just conduct an audit? Will they complete quality assurance seminars and at whose expense — yours or theirs?

Marketing Support

Many fuel suppliers offer support for marketing your facility and their brand of fuel. This support often comes  in the form of a co-op program that creates a marketing fund based on your fuel volume. Like many parts of your fuel agreement, the terms or percentage of fuel sales put into these funds by the fuel supplier is somewhat negotiable. We suggest you have a well thought-out marketing program in place to help your negotiations.

Credit card processing

If you want to have a real impact on your bottom line, watching your credit card processing fees is a very important factor. Here are a few tips to keep in mind when you come to this part of your fuel agreement:

1. These fees are negotiable.
2. Do your research on what your fees are prior to negotiating with your fuel supplier or local bank.
3. Train your CSR staff to ask for the no-fee card or card with the lowest fee.

Keep in mind that there are many factors and nuances, and we will not be able to expound on all of them in the framework of a blog. Therefore, we encourage you to attend our next NATA FBO Success Seminar, March 8-9 in New Orleans, where we spend additional time and discussion on these important topics as well as others.

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About the bloggers:

John Enticknap has more than 35 years of aviation fueling and FBO services industry experience. Ron Jackson is co-founder of Aviation Business Strategies Group 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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When Negotiating the Best Fuel Supply Agreement, Preparation Is as Important as Price

“You hit home runs not by chance but by preparation.” – Roger Maris

Your fuel supply agreement is one of the most important contracts in operating a successful FBO. Your lease with the airport authority is what puts you in business, but your fuel supply agreement is what keeps you in business.

Because your fuel supplier agreement regularly comes up for renewal, do not just go out and get a “free” dinner with a fuel supplier and sign on the dotted line! If you want to know whether or not you have a competitive agreement, you’ll need to prepare, do some research and maybe invite several suppliers to submit proposals. As Roger Maris said, preparation will help you hit that home run.

There is a lot more to a fuel supplier relationship than just purchasing fuel. You are dealing with substantial costs that affect operating expenses and have an impact on your:

• Cash flow
• Balance sheet
• And, most of all, the profitability of your business

Yes, profit is great. That’s why you are in business. Don’t forget your fuel supplier is in business to make a profit too. You need balance in your agreement to ensure a winning contract for both parties.

In our NATA FBO Success Seminars, we teach a course about negotiating a favorable fuel supplier agreement. In this course, we also discuss how and when to buy aviation fuel. Here is an overview of some of the elements to address in a fuel supply agreement.

Be Prepared with Platts Oil Price Data

First, of course: What is the fuel going to cost? In order to answer this question we need to understand how world fuel markets work.

No doubt you hear all the time on the news what the price of crude oil is doing. As you know, it has been all over the place but mostly up, up, up — with an occasional downward correction. The price of crude drives jet fuel prices, but it is also affected by supply and demand, speculators, inventory, etc. So how do all the world buyers keep track?

The Platts Oilgram Price Report published daily by McGraw-Hill includes the Platts Jet Fuel Index. The fuel price indices are published worldwide with nine regional segments in the United States alone. There are also indices for Europe, Middle East and the Far East.

For general aviation, each week, the daily U.S. Jet A index prices are averaged. The change in the average price for the week generally is posted on a Tuesday, and your Jet A fuel price changes are calculated by the change in the average change for the week. You may purchase a  subscription to this information from McGraw-Hill. (It is expensive.) A free source of Jet A pricing information and changes is the IATA web site, which maintains the Jet Fuel Price Monitor and Fuel Price Analysis.

Making the Numbers Work

Because jet fuel is priced based upon a Platts index, ask your potential supplier to quote a fuel price based upon a nearby index. For example, we can choose the Gulf Coast, New York, Los Angeles or another available index.

Given that the fuel supplier needs to make some money, it will quote a price based upon a Platts index, plus a differential (the supplier’s profit margin). Ask several suppliers to quote a price based on the same Platts fuel price index for a specific date, plus a differential. Now you can measure each quote on an apples-to-apples basis.

Say your business is doing $5 million per year in fuel sales, and you are paying anywhere from $125,000 to $185,000 per year in credit card fees that can range up to 4 percent or higher. How would you like to save $10,000, $20,000 or even $30,000 per year on these credit card expenses?

Believe it or not, you can realize this kind of savings when you negotiate your new fuel supplier agreement. Yes, you may negotiate the best arrangement for credit card fees paid vs. payment terms. We like to call this free money! This savings goes right down to your profit line.

In addition, did you know that until recently, you were paying on average $0.41 per transaction for each debit card transaction? This fee just dropped to $0.21 in July!

When you ask various suppliers for a fuel proposal, credit card fees and payment of due amounts are part of the competitive nature of your agreement. By getting better rates on your credit cards and educating your employees on the best card to use, you can save substantial money for this expense. Again, free money!

Creating Cash Flow

When you have to purchase a load of jet fuel, you either need to have cash in hand or, in short order, the cash to pay for the load. That’s $25,000 or more.

If you have collected your accounts receivable and reconciled your credit card payments, then you’re in pretty good shape. However, if it happens to be Friday, the payroll is due, and your insurance payment is due, then, all of sudden, you’re short on cash.  

As part of your fuel supply agreement, you need to negotiate favorable credit terms. Of course you need to provide financial statements to support a credit line, which is no different than when you apply for credit from your local bank.

These are just a few of the terms that affect your profitability. You should also prepare to negotiate these other components that are part of a comprehensive fuel supply agreement:

• Marketing support
• Equipment leasing and maintenance
• Incentives to make a change in suppliers
• Pricing for 100LL fuel
• Transportation fees
• Contract fuel and other issues vital to your success

All these issues affect the cost and benefit to you and your fuel supplier. As the FBO owner, you should evaluate proposals from various suppliers to get the best agreement. Remember Roger Maris. Preparation is the name of the game when working toward a balanced fuel supply agreement.

If you would like more information or assistance in developing a favorable fuel supplier agreement, please let me know. In addition, the National Air Transportation Association (NATA) is a great resource. We will be covering this subject in detail at the next NATA FBO Success Seminar: Fuel Summit 2011, Nov. 8-10, Atlanta.

We would like to hear from you. Give us your comments. You can call me at 404-867-5518, email me at jenticknap@bellsouth.net, or go to our web site for more information: www.absggroup.com.

John Enticknap

John Enticknap founded Aviation Business Strategies Group in 2006 following a distinguished career in aviation fueling and FBO management, including as president of Mercury Air Centers. He is the author of 10 Steps to Building a Profitable FBO and developed NATA’s acclaimed FBO Success Seminar Series.

Is Your Cost of ‘Plastic’ out of Control?

Get a Grip on Credit and Debit Card Fees!

"The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic." – Peter Drucker

One of our more popular courses at our FBO Success Seminar is Maximizing Your Credit Card Transactions. We discuss in detail the credit /debit card processing system and how it affects your FBO business. Needless to say, the cost of this vital service is substantial and increasing.

Debit Card Update

First, let’s take a look at the use of debit cards. In the process of updating our seminar course materials, I’ve been researching the recently enacted regulations by the Federal Reserve to reduce debit card interchange fees. Here’s a little background information.

The new laws are still being written and are scheduled to be completed by April 21 with an implementation date of July 21. The laws change the fees from percentages to fixed fees. Some efforts in Congress may further delay the implementation or change the regulations.

Currently, debit card swipe fees average $0.44 per swipe. The new requirements reduce them to $0.07 to $0.12 per swipe. The banking and credit card industries are not in favor of the new requirements because they stand to lose some $12 billion in fees; therefore, they are lobbying Congress and others for changes.

As an example of the impact this would have on a retailer, look at The Home Depot’s operations. If the debit card fees are reduced as planned; The Home Depot will see a reduction of $35 million in debit cards costs. Obviously, the average FBO doesn’t have the volume of debit card transactions of a large box retailer, but we’re talking about potential savings over the long term and revenue to your bottom line.

A Look at Credit Card Fees

Regarding credit card fees, each transaction fee in the FBO business varies greatly. The fee can be zero for your branded oil company card to a high of four percent of the transaction. During the classes we teach at the FBO Success Seminar, we provide a detailed analysis of fees, but for now, here’s a look at an example of an average transaction:

First of all, the current national average cost of Jet A is $5.38 per gallon. Based on the Platts index, this average is an increase of more than 92 cents per gallon in only the last six months. For the FBO operator, this adds up to an increased credit card transaction charge of just over $0.02 per gallon or a total of $0.11836 per gallon, assuming the average fee is 2.2 percent. Under this scenario, a 500 gallon sale would result in credit card fees totaling $59.18, which includes an increase of $10.02 in extra charges resulting from the rise in fuel costs over the past six months.

We would venture to say that credit card fees are a bigger portion of your costs than you imagined!

If you are selling 1.5 million gallons a year at $5.38 per gallon, your annual credit fees will be $177,540. In this scenario, your credit card fees have gone up approximately $30,360 per year, based on recent fuel price increases.

Bottom Line

Here is the bottom line: The credit card processors are profiting during this crazy volatile spike in fuel prices, and the FBO is not! So what do we do?

The first step is to look at your processing fee costs and where the fees are being generated. Start by analyzing your sales and payment history:

• Retail sales and payment by what credit card or debit card?
• Factor out no-fee cards such as oil company cards.
• Factor out contract fuel sales. (By the way, are you getting paid promptly by the contract supplier?)
• Take a look at based customers vs. transient customer sales and payments.

Once you have completed your research, look at changing customer buying/payment habits, — not an easy task!

• You should want all your base customers paying with a no-fee oil company card. If they don’t, figure out an incentive to make this happen.
• For your transient customers, you should train your CSRs to ask for no-fee cards for payment.
• Make sure your contract fuel suppliers are paying you quickly and within contract terms. If they are late paying or otherwise, you need to rethink your contract fuel supplier relationships.

As your business changes with all the turbulence in today’s marketplace, you need to analyze all of your cost structure. Credit card fees are sometimes a cost we think we cannot manage. Not true!

With the tools and ideas we have presented here, these costs can be reduced. As Peter Drucker indicates in his quote, new thinking is most important in business, not only for this issue, but for all your business management concerns.

Let us know your thoughts on this issue or any of our FBO Connection blogs. Please contact me at jenticknap@bellsouth.net.

John Enticknap

John Enticknap founded Aviation Business Strategies Group in 2006 following a distinguished career in aviation fueling and FBO management, including as president of Mercury Air Centers. He is the author of 10 Steps to Building a Profitable FBO and developed NATA’s acclaimed FBO Success Seminar Series.