There are exactly thirty-four ways to light a match so that it doesn’t flare too brightly in the first three seconds, though only one of them is reliable when there is a draft in the theater. Silas, a set dresser for a local playhouse, knows this because he spent the better part of a decade ensuring that “candlelight” looks like while actually being powered by a hidden battery or a very specific grade of paraffin.
Silas, who has worked the back of the house for longer than most of the leading actors have been alive, understands that the most important parts of a set are the ones the audience never looks at directly. If the audience notices the texture of the wallpaper, the set has failed. If they notice the way the light hits the dust motes, the illusion is broken. Reality, in Silas’s world, is a fragile equilibrium maintained by things the public is never supposed to question.
We do the same thing in M&A, though we call it “normalized earnings” instead of “set dressing.” We look at a business and we see a finished stage. We see the actors-the general manager, the line service techs, the charter pilots-and we see the props, which in the world of Fixed Base Operators (FBOs), are the hangars and the fuel trucks.
We accept the lighting as it is. We see a fuel margin of $1.82 per gallon and we treat it like the color of the paint on the wall. We assume it is a property of the building. We assume that because it has been $1.82 for the last , it will be $1.82 for the next .
The Disappearing Blue Truck
I was recently reminded of Silas while watching a deal team struggle through a site visit at a mid-sized airport in the Midwest. Daniel, a partner at a mid-market private equity firm, was walking the ramp with the FBO’s general manager. It was a Tuesday, three o’clock in the afternoon, that weird dead time on a ramp where the morning departures are gone and the evening arrivals haven’t quite started.
The sun was flat, the air smelled of burnt kerosene and cut grass, and the pavement was radiating that tired, end-of-summer heat. As they walked toward a Gulfstream G550 parked near the edge of the leasehold, a fuel truck painted in a different set of primary colors-bright blue and yellow, contrasting with the target’s white and red-crossed the taxiway on the far side of the field.
The retail margin often accepted as an immutable property of the real estate, rather than a competitive truce.
It pulled up to a Cessna Citation that had just shut down its engines. Daniel stopped mid-sentence. He asked, almost as an afterthought, “Who is that?”
“Oh, them. That’s the other guy. They’ve been over there for twenty years. Don’t mind them. Anyway, let me show you the new LED lighting we just installed in Hangar 4. It’s going to save us $12,000 a year in utilities.”
– FBO General Manager
Daniel nodded, wrote nothing down, and the moment vanished. It didn’t appear in the preliminary memo. It wasn’t mentioned in the first draft of the investment committee deck. The blue and yellow truck was treated as part of the background scenery, a static element of the airport’s geography, like the control tower or the windsock.
A Number vs. A Truce
But that truck is not a static element. It is a variable. In fact, it is the most dangerous variable in the entire model. In the world of FBO acquisitions, we tend to treat fuel margin as an inherent characteristic of the business we are buying.
We verify it against the general ledger, we check the fuel supply agreements, and we look at the PLATTs or Argus pricing indexes to make sure the spread is “market.” If the seller says they make $1.85 a gallon, and the books show they made $1.85 a gallon, we plug $1.85 into the spreadsheet, grow it by 2% a year for inflation, and move on to debating the terminal value.
This is a fundamental misunderstanding of what a fuel margin actually is. On a field with two or more operators, the margin is a delicate, unspoken equilibrium between two businesses that have found a way to co-exist without destroying each other’s profitability. It is held in place by decades of habit, by the fact that the two general managers probably go to the same Rotary Club meetings, and by the absence of any reason to disturb the status quo.
The “other guy” across the field isn’t competing for share because, currently, the cost of competing outweighs the benefit of winning. They have their “house” accounts, the target has its “house” accounts, and everyone is making enough money to keep the lights on and the owners happy. It is a quiet life. And then, you buy the business.
The Paradox of Disruption
An acquisition is a loud, disruptive event. It is a signal to the other side of the field that the “quiet life” is over. A new owner usually means a new strategy, a new push for growth, and almost certainly a new set of expectations from a board of directors or an investment committee.
The other operator knows this. They see the new logo on the trucks. They see the “under new management” energy. And they start to wonder if their house accounts are still safe.
The thing being bought can change the price of the thing being bought. This is the paradox that most deal teams miss. By the very act of acquiring the FBO at a premium based on “share capture” or “margin expansion,” you are providing the competitor with the exact incentive they need to drop their price.
If you try to take 10% of their volume, they aren’t going to just let it go; they are going to protect their fuel flow by cutting their margin. And because fuel is a commodity, you will have to match them. Suddenly, that $1.85 margin in your model-the one you treated as an immutable law of physics-becomes $1.40. And just like that, your IRR evaporates.
Lessons from the Tobacco Case of
This phenomenon is well-documented in industrial history, though it rarely makes it into modern M&A training. Consider the Tobacco Case of 1946 (American Tobacco Co. v. United States). The Supreme Court looked at the “Big Three” tobacco companies and found that they were able to maintain high, identical prices without any formal agreement or secret meetings in smoke-filled rooms.
They simply engaged in “conscious parallelism.” They knew that if one of them raised prices, the others would follow, and if one of them lowered prices, the others would have to match, leading to lower profits for everyone. So, they stayed in a quiet, profitable equilibrium.
The FBO on the other side of the runway is practicing conscious parallelism. They are matching your price not because they like you, but because they like making money. But unlike the “Big Three” tobacco companies, an FBO is a local monopoly or duopoly tied to a specific piece of real estate. When a new owner enters the fray with a mandate to “disrupt,” the parallelism breaks.
I spent my morning yesterday killing a spider in my office with a shoe. It was a messy, abrupt end to a very small life. I felt a slight pang of guilt, not because I liked the spider, but because the room felt different afterward. The quiet corner where it lived was now just an empty corner.
Deals often die with that same kind of abruptness. You spend modeling the perfect transaction, and then a single question from an investment committee member-usually the one who knows nothing about aviation but everything about game theory-smashes the whole thing.
The Killer Question:
“What happens if the guy in the blue truck decides he wants that Gulfstream account more than you do?”
If your answer is “The model assumes margins remain flat based on historical performance,” you have already lost.
Due Diligence in the Dirt
This is why the due diligence process needs to move beyond the spreadsheet and into the dirt. You have to understand the “why” behind the margin. Is it held in place by a long-term contract with a fractional provider that expires in ? Is it held in place because the competitor is an old-timer who owns his land outright and doesn’t care about growth, but whose son is about to take over and wants to build a new hangar?
Buyers who price an FBO off the seller’s narrative are essentially buying the set dressing Silas worked so hard to create. They are buying the illusion of stability. To see through the illusion, you have to be willing to look at the parts of the business that aren’t on the stage.
This level of scrutiny is what separates a successful acquisition from a “slow-motion car crash.” It requires a partner who understands the nuances of the aviation market-someone who doesn’t just look at the fuel flow reports, but who knows how to read the tension on the field. This is why firms like
focus so heavily on the ‘why’ behind the margin rather than just the ‘what’.
The Coffee and Lobby Trap
I remember another deal, , where the buyer was convinced they could “capture” 20% of the competitor’s volume by simply upgrading the lobby and offering better coffee. They modeled a $2.00 fuel margin on all that new volume.
They closed the deal on a Friday. On Monday, the competitor-who had been watching the new owners move in with a mixture of amusement and irritation-dropped his fuel price by fifty cents across the board.
The buyer’s “share capture” happened, but at a margin that didn’t even cover their debt service. They had bought a beautiful set, but they forgot that the guy across the street was the one holding the lighting cues.
And like any relationship, it changes when a stranger walks into the room. If you aren’t accounting for the cost of that change, you aren’t modeling a business; you’re just writing a script for a play that’s going to close on opening night. The fuel truck parked across the taxiway is a silent ledger of the margin you haven’t actually earned yet.
Looking for the Gaps
When we look at the numbers, we have to look for the gaps. We have to look for the “add-backs” that aren’t really add-backs, like the owner’s personal travel that was actually necessary business development, or the “one-time” maintenance expense that seems to happen every year.
But more than anything, we have to look at that other fuel truck. We have to ask ourselves what that driver is thinking while he watches us walk the ramp. Because once the deal closes, he’s the one who gets to decide if your model is a work of genius or a work of fiction.
Silas told me once that the hardest part of his job wasn’t making things look real; it was making them look real enough that nobody would ever think to touch them. A good FBO seller does the same. They present a business that looks so solid, so stable, and so inevitable that you don’t even think to reach out and tap the walls to see if they’re made of plywood.
Don’t buy the set. Buy the reality. And remember that the reality of your margin is currently sitting in a truck on the other side of the field, waiting to see what you do next.