While the airport might invest capital in the joint venture, it must be involved in a management committee overseeing the business. The Board of Airport Commissioners at Los Angeles World Airports has recently approved a recommendation by management to permit concessionaire relief measures, including moving all concessionaires with contracts based on Minimum Annual Guarantee fee payments to percentage rent-based agreements Discover the top trends shaping government in 2023. Guarantee: $50,000. Each entity will need to review the applicable accounting guidance, consider their own circumstances, and make their determination based on their professional judgment. In other parts of the world, MAGs are the airport's exact expected rental payments. Most simply, the airport and vendor could agree to a fixed percentage rent. Meanwhile the company maintained a resilient retail margin of above 60%, helped by minimum annual guarantee waivers to airport landlords of $1.2 billion. percentage of their annual gross revenues derived from operations at the airport or a minimum annual guaranteed amount, whichever is greater. Airlines value an attractive commercial program because it makes a better background for the expression of their brand. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). There are means of counting passengers who pass a concession location, but few airports have installed such technology. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. The passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. This strategy is particularly applicable for a hub airport where the hub airlines brand expression is likely already an important part of the airports perceived brand. Respondents will propose both a MAG and a Percentage (%) of Annual Gross Revenue, the greater of which will be paid . In addition to the detailed guidance in the Revenue Use Policy, the CARES Act makes clear that the funds may not be used for any purpose unrelated to the airport. To level the playing field so that DBEs can compete . The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. Terminal Closure and Footprint Reductions. Save my name, email, and website in this browser for the next time I comment. Alan has over two decades of experience in commercial/concession management, facility planning, financial analysis, and government procurement. Even before the contagion, the "Minimum Annual Guarantee" (MAG) model was already under challenge, and does this tool remain fit-for-purpose? Chris Dinsdale has worked at Budapest Airport since 2015, originally as CFO until March 2021, where he was nominated for the position as CEO . However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. Its clear that fixed MAGs are unable to provide the flexibility necessary to deal with severe occurrences. The entire concessions space is typically leased out to a single company who is responsible for subletting the spaces. The policies and procedures are available for review here. If FAA does not receive emergency approval, the economic recovery of the nation's air . Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). A MAG, as currently developed, is unsustainable in anything but relatively normal times. When passenger traffic does come back, airports should rethink how their concession contracts work. We did not review solicitation or award of concession agreements in this audit. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. . In other parts of the world, MAGs are the airports exact expected rental payments. For aviation, global recovery to 2019 levels is projected to take several years, into 2023 for markets with significant domestic air . Airport sponsors should carefully review their bond documents to ensure the methods of calculating the airports rate covenant under the current circumstances are appropriate. 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 . One such excerpt from this guide (Paragraph 6.81) indicates nonoperating revenues would generally include, among other things, grants that may be used, at the recipients discretion, for either operating purposes or capital outlay. That being said, while there seems to be a compelling argument that most of the CARES Act funding for airports may be operating, each entity will need to review the applicable accounting guidance, consider their own circumstances, and make their determination based on their professional judgment. The MAC has already waived minimum annual guarantees three . Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. The CARES Act roughly triples the amount of money flowing from the federal government directly to airports for 2020. C. Concession Fee. Elsewhere, airports do not expect vendors to exceed their MAGs. Normally, airport concessionaires pay the city a percentage of sales or a "minimum annual guarantee" based on sales the previous year, whichever is greater. Current generally accepted accounting principles suggests that entities should establish a policy that defines operating revenues for enterprise funds and use it consistently. Find out how our purpose shapes our culture, people, and mission-driven work. Like their partners in the airline industry, airports have been dramatically affected by the slowdown in flights and passenger traffic associated with COVID-19. 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. One-twelfth of the MAG shall be due in advance on the first day of each month Test. This category only includes cookies that ensures basic functionalities and security features of the website. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). The single factor most tied to concession success is the footfall past the concession locations. Under one version of an infrastructure plan floated by House Democrats (the Moving Forward Framework), airports and airspace improvements would be funded, in part, by an increase in PFCs. This financial shock has created a number of legal and financial issues. However, it does reduce the potential benefit to the airport by splitting the proceeds generated. HMS Host, the food and beverage concessionaire at Clinton National, is required to pay a minimum annual guarantee of $594,000, which works out to $49,500 monthly under the terms of its contract. A concessionaire's rent structure in an airport may differ from the traditional model. Learn. The additional funds appropriated by the CARES Act were largely intended to help airport sponsors meet their debt service and bond obligations. Nor do we know whether travel habitswill change permanently because of new practices learned during lockdowns. Airports provide the passengers, the retailers provide the services. There will still be passengers, and the concession industry needs to be ready to serve them. Delta will pay market rates to lease these three additional Delta-preferred gates with a minimum annual guarantee (MAG). 6 . No one is sure how long recovery will take. Most experts agree that there will be no quick snapback of passengers, so airports face the issue of having too many concessions locations or even too many operators. However, MAGs in concession contracts still expect continued growth. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee . That $7.4 billion is divided in half and distributed in two ways: 50% is allocated among all commercial service airports based on each sponsors calendar year 2018 enplanements as a percentage of total 2018 enplanements for all commercial service airports., 50% is allocated among all commercial service airports based on an equal combination of each sponsors fiscal year 2018 debt service as a percentage of the combined debt service for all commercial service airports and each sponsors ratio of unrestricted reserves to their respective debt service.. In April, the San Jose City Council voted to grant delegated authority to the airport staff to finalize negotiations and execute a 50-year lease to Signature Flight Support. The city named the Vantage Airport Group to run the concessions when the new terminal opens in 2023. FBO/SASO: NOTE: 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. For information on the business impacts of COVID-19, please visit ourCOVID-19 Resource Center, which we continue to update as the situation evolves. . 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 In addition, they typically provide the fueling services for the airport. 2023 Plante & Moran, PLLC. leasehold at Washington Dulles International Airport (IAD). (a) Annual Reconciliation. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. Considering all the current changes in our business, this model may be a solution to sharing risk and encouraging a strong representation of critical brands in airports. The compliance and accounting questions related to the COVID-19 outbreak and the related new funding streams are significant. It beat four other finalists. If the metric for rent resumption is comparing the current period to the same period in the previous year, by the time the world reaches year two of recoveryeven if the improvement is only slight and slowthe contract may reinstate the original MAG. Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. There are a few limitations, however, that make this a less than optimal solution. I certify that Airport Concessions Inc. has not received a second draw or assistance for a covered loan under section 7(a)(37) of the Small Business Act (15 U.S.C. Because this rate base is not related to passenger numbers, it is equally as inflexible as a MAG set by any other means in the event of significant changes in enplanements. Airports should carefully consider how they structure deals and their business models to ensure more flexibility to respond to potential future shocks. 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. Receive perspectives on the industries and issues that matter. If, on the other hand, the airport sponsor decides to enforce the terms of a MAG, then it should carefully review the concession contract to determine the terms of enforcement and whether the concessionaire has any basis to refuse to pay the MAG. Match. We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. While the bulk of the $10 billion appropriated for airport sponsors can be used to make bond principal and interest payments if necessary, airport sponsors may be faced with difficult decisions about how to prioritize needs while under financial stress. The FAA issued an extension of limited waiver (PDF) through October 29, 2022 of the minimum-slot-usage requirement for international operations at John F. Kennedy International Airport (JFK), LaGuardia Airport (LGA), and Ronald Reagan Washington National Airport (DCA).Additionally, the FAA extended through October 29, 2022, our . That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. Concessionaires are, in general, seeking some manner of rent relief from their airport partners. Annual fee for the airport to perform snow removal at the Vehicle Ready/Storage Vehicle Parking Area and Service Building/Wash Bay Facility. Importantly, the $2 billion is not subject to the reduced apportionments for larger airports that also impose passenger facility charges (PFCs). There are numerous ways to frame a contract without a MAG. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. COVID-19 has sent shockwaves throughout the world. Where abatement results in shifting costs between various classes of airport tenants and users, the airport sponsor is encouraged to consult with all affected parties. A third party company could be contracted to handle the leasing and management of concessions on behalf of the airport. The company, which . If the airport sponsor determines that it is in its best interest to waive the MAG, then these clauses can be replaced with an alternative fee structure, such as a simple percentage of sales or some other agreed-upon metric of performance. A. As someone who's sat on all four corners of the airport advertising negotiating table - media owner, airport operator, media agency and client - I have a degree of sympathy with all parties. 84, Fiduciary Activities. Both were selected based on a global tender, and need to pay the Minimum Annual Guarantee of 31 crore each to the Airports Authority of India. The Secretary of Transportation may waive this workforce retention requirement if they determine that the sponsor is experiencing economic hardship as a direct result of the requirement, or that the requirement reduces aviation safety or security. As a result, the collectability of this revenue may need to be reviewed and an allowance for estimated uncollectable amounts may need to be recorded. In North America, airports tend to look at MAGs as the least amount of acceptable rent. A different methodology is required to ensure that vendors are allowed to earn a fair return on their investments, are able and willing to reinvest to improve and grow, and still provide a reasonable return to the airports. Regardless, this shifting of risk may not be acceptable to airports. 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. The same rules govern the use of CARES Act funds that govern the use of all airport revenues. However, sponsors dont need to apply for the increased federal share of FY20 AIP or FY 2020 Supplemental Discretionary grants. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. A different methodology is required to ensure that vendors are allowed to earn a fair return on their investments, are able and willing to reinvest to improve and grow, and still provide a reasonable return to the airports. The Federal Aviation Administration (FAA) . 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). Up to $2 billion will go to large, medium, and small hub airports, allocated based on AIP primary entitlement formulas. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. In other parts of the world, MAGs are the airport's exact expected rental payments. The FAA has published a map showing airports that are receiving the funds and the allocations made to them. Without this expertise, the concession will almost certainly fail to operate at an optimum level. Elsewhere, airports do not expect vendors to exceed their MAGs. Airports around the country will soon receive their share of $10 billion in FAA grants provided in the CARES Act. Match. This website uses cookies to improve your experience while you navigate through the website. October 09, 2020, 11:40 a.m. EDT 4 Min Read. Page 3 of 61 - Non-exclusive On-airport Rental Car Concession - Proposal documents 3. Off-airport companies pay up to 8% of gross revenue from their airport-related car rentals. While it may never be business as usual again, the airport and its business partners need to adjust to a new normal. 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. This strategy is particularly applicable for a hub airport where the hub airlines brand expression is likely already an important part of the airports perceived brand. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). . When passenger traffic does come back, airports should rethink how their concession contracts work. Airport concession program in order to maximize non-aviation revenue, increasing sales per enplaned passenger at a rate higher than passenger . Budapest Airport. This site uses Akismet to reduce spam. A by-location per passenger MAG may be too complicated for widespread implementation at this point. From layoffs to business closings, social distancing to shopping only on days that correspond to the first letter of your last name, we have all seen and felt the impact. 49 CFR Part 23 requires airports to have a concessions-based DBE program. In the concessions arena, they are referred to as Airport Concessions Disadvantaged Business Enterprise (ACDBE). These MAGs are usually based on some percentage of the prior years revenue and are intended to provide the airport sponsor with a revenue floor from these concession contracts. Minimum Annual Guarantee means the minimum amount of money that is due annually and payable monthly to Authority from Concessionaire, as provided in Article 5 of this Agreement. If an airport operator closes a concourse or a terminal, it would need to eliminate some concession spaces from its contracts, which may render some deals no longer viable. Through Dec. 31, 2020, the airport sponsor must continue to employ at least 90% of the number of individuals employed (after adjusting for retirements or voluntary employee separations) as of March 27, 2020. At SAN, rent is calculated as a percentage of the gross revenues supported by a minimum annual guarantee, or MAG, that is a part of the leasing requirements. Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options.
