Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. An engaging panel discussion entitled 'Road to Recovery: The Retailer Perspective' took place during yesterday's virtual Summit of the . This is only for the passenger traffic, while for . Because of the drastic reduction in flights and passenger traffic, airlines have been shrinking their staffing, space requirements and gate usage. Save my name, email, and website in this browser for the next time I comment. The CARES Act roughly triples the amount of money flowing from the federal government directly to airports for 2020. The Trinity model is particularly applicable to duty free concessions, where it is practical to divide a store into departments wherein vendors (e.g., Channel, Rolex, Hrmes) are given the ability to design and operate their mini outlets. A MAG, as currently developed, is unsustainable in anything but relatively normal times. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee . If an airport can become a partner in the operation of a concession, it might also consider being a concession operator on its own. February 2, 2021January 28, 2021 | AirportU. If you have questions about COVID-19s impact on your business, please reach out to your Loeb relationship partner or email us directly atCOVID19@loeb.com. When passenger traffic does come back, airports should rethink how their concession contracts work. They rent space to provide a service/product (rental car) for an agreed upon time frame at a certain rate. In other parts of the world, MAGs are the airports exact expected rental payments. Alternatively, different percentages could be charged for varying levels of sales or by assigning either fixed or variable rates to different product categories (e.g., one percentage for food and non-alcoholic beverage and a separate percentage for alcoholic drinks only). The competitive landscape may beby necessityaltered. 3300 Capital Circle, S.W. Airports would also have to hire and manage many additional hourly employees. Airport concession fees in the era of COVID-19, Airports should carefully consider how they structure deals and their business models, Do Not Sell or Share My Personal Information, Limit the Use of My Sensitive Personal Information. Elsewhere, airports do not expect vendors to exceed their MAGs. A master operator, or sometimes referred to as an institutional operator, serves as a master lessee and either provide or sublease concessionaires for the airport. Most airports already calculate a PSF rent amount in their airline rates and charges (e.g., office space with passenger access) that applies to concession-type spaces. No one is sure how long recovery will take. a minimum annual guarantee or MAG annually, which more or less translates to rent. Regardless, this shifting of risk may not be acceptable to airports. We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. To promote the use of DBEs for federally funded projects. To provide flexibility to recipients of federally funded projects in providing opportunities to DBEs. The FAA may retain up to $10 million to fund the award and oversight of grants made pursuant to the CARES Act. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. Airports should carefully consider how they structure deals and their business modelsto ensure more flexibility to respond to potential future shocks. This essentially flips the rent risk from being entirely on the vendors (in a MAG-based model) to being entirely on the airport. Concessions covers more than what you think of served at a traditional concession stand. We did not review solicitation or award of concession agreements in this audit. Senior Living Development Consulting (Living Forward), Reimagining the future of healthcare systems, National Plan of Integrated Airports System, tax alert comparing COVID-19 employer tax incentives. President Donald Trump has already tweeted his support for such an infrastructure bill. Up to $2 billion will go to large, medium, and small hub airports, allocated based on AIP primary entitlement formulas. With the announcement by the GASB of a delay in the required implementation of these new standards, your organization will need to decide how to respond. If, at the end of any year during the Term, the total amount of monthly installments of MAG and Percentage Fees paid for such year is less than the total amount of annual MAG and Percentage . It is Minimum Annual Guarantee. The funds are coming directly from the U.S. Treasurys General Fund to prevent, prepare for, and respond to the impacts of the COVID-19 public health emergency. The MAC has already waived minimum annual guarantees three . Madang, Papua New Guinea - Madang (Airport Code) MAG: Mainzer Aufbaugesellschaft mbH: MAG: Mission Assurance Guidelines: MAG . Some larger airports take a percentage of every sale. You also have the option to opt-out of these cookies. The adjustment in Guaranteed Annual Rent may not, in any event, result in a decrease in the current amount of Minimum Annual Guaranteed Rent.. Any increase in Minimum Annual Guaranteed Rent shall be based upon an average increase in the index calculated over a period of 90 days prior to the end of the current five year term. Normally, airport concessionaires pay the city a percentage of sales or a "minimum annual guarantee" based on sales the previous year, whichever is greater. Most airports already calculate a PSF rent amount in their airline rates and charges (e.g., office space with passenger access) that applies to concession-type spaces. Airlines, while they may be able to reduce some operating costs associated with vacated premises, must still cover all their fixed and operating costs associated with the vacated space. Lets consider six potential options. In the event that the concessionaire is unsuccessful, the airport absorbs the losses. The $10 billion in funding is divided into four main categories: For airport grants, after the Secretary of Transportation announces awards under the CARES Act, each airport sponsor must submit a grant application to access those funds. If the basis for a MAG is what the airport thought it should be earning, the amount may never be supportable even if a concessionaire signed the contract. Airport sponsors should carefully review the maintenance and operation (M&O) expense allocation methodology in their terminal leases to confirm the method for allocating costs for vacated space. . Test. Cookie Notice: This site uses cookies to provide you with a more responsive and personalized service. Manchester Airport Group in the U.K. had started to operate a restaurant in their home airport before the pandemic, so there is precedent for this strategy. The federal share for FY 2018 and 2019 Supplemental Discretionary grants wont increase. Products and services both fall into the concessions category. Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. 1, their minimum annual guarantee was superior to anybody . The AICPA State and Local Governments audit guide includes certain accounting guidance that has been cleared by GASB as Category B authoritative guidance. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. FBOs may collect the landing fees for GA aircraft or charge them a fuel-flowage fee on behalf of the airport. "This is to offset rent and minimum annual guarantee requirements of those tenants in the face of a severe decline in their customers (passengers) during the continuing COVID issue." Airport . If relief drives airline costs to a significantly higher level, thereby reducing airport cost-competitiveness, airlines may choose not to fly to the airport or to operate fewer services. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. Given the focus on bottom line profits, the investment in variable costssuch as employees, training, maintenance, and product developmentrequired to earn additional sales may no longer make economic sense. Attention: Finance & Administration Division . Meanwhile, Aena is forecasting that in the period to 2023, the minimum annual guaranteed rents and fixed rents, corresponding to contracts in force at 30 June 2020, will decrease. Greater of 30% or Minimum Annual Guarantee : Taxi Fees (annual contract fee) Pre-Arranged Transportation (per pickup) $6.00 . New model commercial contracts will require a complete rebuild of the airport's financial model, along with revised relations with financiers. Any funding received under the Assistance Listing 20.106, Airport Improvement program will be reported on the SEFA. The airport operator is always present and has a wealth of knowledge about the airport. Airports are left with four basic responses: do nothing, suspend minimum annual guarantees (MAG), defer rent, or rent abatement. The airport operator also brings knowledge of how to do business in an airport environment while allowing the concessionaire to concentrate on what they do best: operate a highly successful restaurant or shop. Signatory carriers may exercise significant control over an airport's capital budgeting process under provisions in a use agreement known as. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. These three options do not change the underlying airport-concessionaire relationship. Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. Airlines are likely to oppose any PFC increase, and in the absence of any increase, infrastructure spending would likely be funded through additional appropriations to the Airport and Airway Trust Fund. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. Discover our insights for a sustainable, low-emissions future. Necessary cookies are absolutely essential for the website to function properly. Airports maintain goals of working with Disadvantaged Business Enterprises or more commonly referred to as DBEs. Flashcards. The city named the Vantage Airport Group to run the concessions when the new terminal opens in 2023. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. If any portion of the $2 billion is left over after distributing in accordance with 49 U.S.C. Jacksonville International Airport's split is 70 percent nonaeronautical revenue, which brought in $52 million in 2015, driven by parking, rental car and concessions, he said. Below are some considerations for airport sponsors to keep in mind. In either case, history has shown that MAGs are not supportable in the event of severe downturns. The Audit Committee has reviewed this report and is releasing it in accordance with Article 2, Chapter 6 of the City Charter. Notably, the GASB has deferred the implementation date of GASB Statement No. This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. This information collection permits FAA to confirm that rent relief is consistent with the requirements of CRRSA and ARPA. The joint venture lease must be similar to those given to other concessionaires, and enforcement of the airports rules and performance requirements must be uniform. With standard concession management programs, the airport operator assumes all of the risk for leasing the property but stands to profit the most by receiving a larger amount of generated revenues. Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. An amount of $7.4 billion, which can be distributed to airport sponsors for any purpose for which airport revenues may lawfully be used. The purpose for which airport revenues may lawfully be used is widely viewed as a reference to the FAAs Policy on Permitted and Prohibited Uses of Airport Revenue (Revenue Diversion Policy). While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. Option 5: The Trinity (or Trinity Plus) model. By clicking Accept, you consent to the use of ALL the cookies. leasehold at Washington Dulles International Airport (IAD). Minimum Annual Guarantee _____- concession often establish their rates as a percentage of gross . No one is sure how long recovery will take. However, this still may not be the most effective solution. These supplier relationships are unlikely to have the same economies of scale as those of national concessionaires, which means the costs of operation may be higher. There are a few limitations, however, that make this a less than optimal solution. The April 4th FAA guidance permits this: In coordination with airport sponsors, airlines, the Transportation Security Administration (TSA), and other entities, closing gates or sections of terminals is likely to be acceptable if the closure is executed in response to reduced passenger volumes and operations, is not discriminatory, and does not provide an unfair competitive advantage to one operator. It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. Meet the Woman Stockpiling Cash to Sue San Francisco Over Housing Deadlock, Loeb Secures Defense Victory for the State of California and the California State Lands Commission, Loeb Lawyers Recognized in 2023 Edition of Best Lawyers in America, American Conference Institutes (ACI) 37th International Conference on the Foreign Corrupt Practices Act, $500 million, which can be used to fund any grant made under the FY20 Appropriations Act (P.L. Where do we go from here? If relief drives airline costs to a significantly higher level, thereby reducing airport cost-competitiveness, airlines may choose not to fly to the airport or to operate fewer services. The recent COVID-19 pandemic has highlighted the need for an alternative outlook on the way that commercial contracts between airports and concessionaires are structured to reflect the current and future uncertainty around passenger profiles and passenger traffic volumes. For aviation, global recovery to 2019 levels is projected to take several years, into 2023 for markets with significant domestic air . The passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. Minimum Annual Guarantee (MAG) waived for concessionaires and rental cars -Targeted Operations & Maintenance reductions Implemented a hiring freeze and 8 furlough days Offered early retirement Focused on essential expenditures However, MAGs in concession contracts still expect continued growth. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. Summary: The Metropolitan Washington Airports Authority is seeking competitive bids from all responsible and qualified companies desiring to manage and operate rental car concessions from on-Airport facilities at Ronald Reagan Washington National Airport. Given the current state of the economy, Congress has turned to working on the next comprehensive economic relief package, which is being referred to as CARES 2.0.