April 14, 2011. Drilling for a solution: finding ways to curtail the crushing effect of high gas prices on small business. U.S. House of Representatives. Small Business Committee Document Number 112–011
Rick Richter, owner of Richter Aviation, an aerial application business in Maxwell, California.
I am testifying today on behalf of the National Agricultural Aviation Association, also known as the NAAA, of which I am the 2011 president. NAAA is a national association which represents the interests of small business owners and pilot licensed as commercial applicators that use aircraft to enhance the production of food, fiber, and biofuel, protect forestry and control health threatening pests. Aerial application accounts for an estimated 18 percent of commercially applied crop protection products in the United States and is often the only method for timely pesticide application, especially when wet soil conditions, rolling terrain, or dense plant foliage presents the use of other methods of treating an area for pests.
The average aerial application business consists of two operating aircraft, four people, including two pilots, a mixer-loader, and an administrative staffer. Increases in fuel prices result in a number of cash flow and service marketability issues for the aerial application industry. And, of course, the price of fuel for agriculture will trickle down to the end consumer of food.
At the beginning of the season, an aerial applicator sets a base price per acre treated by air based on the expected cost of operation. This is the amount he charges his farmer clients. Depending on the type of fuel used, of which there are two—avgas for piston engineered aircraft and Jet A for turbine engine ag aircraft—an operator includes a base price for fuel going into the season. Some applicators stick with this price regardless of fluctuations in fuel price, and as a result may lose money when prices go up steeply. Other applicators will incorporate a fuel surcharge into their pricing structure. Incorporated within that fee per acre charge is the fuel charge which is based on an average price of fuel per gallon. This ranges but on average it is estimated to be about $2 per gallon. If fuel rises above that figure, a fuel surcharge is added, and a typical fuel surcharge is the difference between the average price for a gallon of fuel that an applicator builds into his acre charge and the price of a gallon of aviation fuel at the time of application, assuming that the latter is a greater amount, multiplied by the average number of gallons burned by that particular aircraft in an hour multiplied by the amount of time it took to make the application for the farmer. Fuel surcharges in our industry have been met with minimal complaint by farmer clients as of late because they will be getting a good price for the crop. If this was 2002 and we were faced with the same high prices for fuel that we are facing today but ag commodity prices were two to three times lower than what they are today, our industry would be facing some real challenges. As of April 6, 2011, the wholesale price of Jet A without taxes was $3.33 per gallon as quoted by a large Southeast U.S. fuel supplier. If in 2002 when commodity prices were much lower and Jet A fuel for turbine-powered ag aircraft was the same price today or the same price that it was at its height in 2008 when it averaged $4.72 per gallon, it would be much tougher for a farmer to embrace a fuel surcharge for aerial application services rendered.
Realistically, when input prices such as fuel are high and commodity prices are low, a significant drop in the use of aerial application services and other farm services would occur as a result of containing costs. Well, this helps the farmer contain expenses but frequently results in less yield and poor crop quality, hence negatively affecting his revenue potential. The lack of application work is a challenge for an aerial application operator that requires steady business each season to remain viable.
Another challenge that aerial applicators face, particularly when fuel prices are high, is the financial terms that fuel suppliers have for payment of their fuel and how those terms differ from their own accounts receivable terms. The typical payment term that an aerial applicator has with his fuel supplier is 10 days with established credit. This usually differs from payment terms that aerial applicators’ customers are accustomed to paying, which is typically between 45 and 60 days. This can pose challenges because fuel costs consist of approximately 20 percent of an aerial applicator’s total expenses. If the average ag aircraft burns 50 gallons per hour and is flown 300 hours per season and there are 2.2 aircraft on average per aerial application operation, then 36,816 gallons of fuel will be required.
When an applicator is facing a deficit in accounts payable compared to his accounts receivable and outlaying large chunks of capital for fuel particularly when the price of fuel is high, this may result in sizable interest payments for small aerial application businesses. It is widely expected that higher interest rates will return and coupled with the greater demand for fuel globally will likely lead to a steady increase in the price of fuel and place much greater cost pressures on small aerial application businesses. High fuel cost conditions in some instances do lead to aerial applicators taking more risk in trying to hedge the price of fuel by filling up their tanks early and storing fuel. But storing for too long of a period can result in developing moisture in the fuel, algae problems in Jet A, and possibly evaporation of avgas.
One other issue of concern to the agricultural aviation industry that is related to fuel supply is an effort underway to phase out the use of avgas. EPA has mentioned the possibility of a new environmental standard associated with avgas due to its emissions of lead in the air and calls by environmental activists to ban the fuel completely. Avgas is used in 51.87 percent of ag aircraft in the U.S. today. NAAA’s primary concerns are with the safety and feasibility issues associated with mandated a shift from avgas. NAAA has encouraged the EPA and the FAA to allow time for and devote resources toward the development of a suitable alternative to avgas before imposing avgas regulations or banning the use of the fuel altogether. NAAA urged the agency to consider the detrimental economic impacts that could occur to our industry and the farmers that rely on us should avgas be phased out prior to the development of a safe and practical alternate fuel. Piston engines are a notably less expensive engine