As general aviation service models continue to expand and evolve, investors in direct aviation infrastructure and service companies take different views on the merits of an integrated service offering versus narrowly specialized services. The model for the provision of on-airport services such as Fixed Base Operations (FBO), Maintenance Repair and Overhaul (MRO) and Aircraft Management and Charter (ACM) has varied among integrated/full service providers, specialized service providers and various hybrid structures in between.
FBOs are currently seen as the most valuable segment of general aviation services as they normally consist of long-term leases with strong operating rights and high barriers to entry, stable cash flows, and low execution risk associated with the core line services of aircraft handling and fueling. This is impacted, however, by the fact that when a facility reaches capacity revenue growth of line services may be limited to competing for additional transient market share at the airport. The same infrastructure characteristics which provide stability also limit growth, especially within the context of a single airport.
MRO is further down the stability continuum. Since airframe MRO must be performed on-airport, it has facility requirements similar to an FBO, just not necessarily of the same magnitude. While it is still an essential service, the periodicity of demand is not as frequent as fueling or handling. It is also not as location specific as core line service. While the revenue stream of an MRO service provider is comprised of a number of retail transactions, the capability and capacity of supply of this service drives the down time of an aircraft. Given the importance of availability, flexibility and reliability in the private aviation value equation, MRO is an important consideration for corporate aviation users.
The service with the most variance in terms of local demand and sometimes pricing is Aircraft Charter and Management. This is due to a number of reasons. First, it is not as location specific as FBO or MRO—while flights obviously originate and terminate at an airport, the service provider does not have to have a physical presence at that airport. Most of the assets providing the service (airplanes) are managed by the operator rather than owned, either outright or through a lease. The presence of charter brokers in the industry (companies which “sell” charter and then book the flight with a certificated Part 135 operator in order to fulfill it) distorts pricing, demand and reduces transparency to the customer. Also and perhaps most important is the fact that charter demand is the least predictable relative to the other two service offerings (most airplanes’ crews don’t change their mind when requesting line services at an airport and most MRO is required by regulation at certain intervals). The other side of the coin, however, is that in some ways ACM has the most upside with the least capital requirement—the management model allows for putting additional aircraft, with potentially high incremental revenue streams, on the air carrier certificate with little cost to the operator.
In our next post we will review the potential synergies among the service offerings.