The additional funds appropriated by the CARES Act were largely intended to help airport sponsors meet their debt service and bond obligations. Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. To provide flexibility to recipients of federally funded projects in providing opportunities to DBEs. Flashcards. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. 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 passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. While passenger safety and well-being are paramount, the extreme reduction in passenger flow has rippled across the entire airport-airline ecosystem. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. Budapest Airport. Below are some considerations for airport sponsors to keep in mind. We do expect further guidance from the federal government in upcoming months to clarify SEFA considerations. There will still be passengers, and the concession industry needs to be ready to serve them. The Airports Authority of India (AAI) has kick-started the process of appointing ground handling agencies for 83 state-run airports for a . Percentage Rent - In addition to the MAG, Concessionaires shall pay percentage rent but only to the extent that percentage rent exceeds the monthly installment of MAG, Some airports have had huge success in meeting ACDBE goals with the developer model. 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. At least $100 million will go to general aviation airports, allocated based on categories published in the current NPIAS. But opting out of some of these cookies may affect your browsing experience. As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. However, sponsors dont need to apply for the increased federal share of FY20 AIP or FY 2020 Supplemental Discretionary grants. 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. In other parts of the world, MAGs are the airports exact expected rental payments. Unlike earlier phases of stimulus, Phase 4 has the potential to include a significant infrastructure focus. . 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. 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. 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. Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee (MAG). Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. A collective of travel retailers have agreed that operational contracts hinging on minimum annual guarantees (MAGs) are no longer workable in a Covid-ravaged air transport climate and must be reformed. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. While the model has primarily been used for duty-free concessions, it has worked equally well for other types of concessions. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. The single factor most tied to concession success is the footfall past the concession locations. Terminal Closure and Footprint Reductions. The 10-year contract was awarded on the basis of the minimum annual guarantee payment totaling $352,000 or a percentage of gross receipts, whichever is greater. The CFC is a charge based on either the contract value, gross receipts, or per car per day. Using one unnamed airport as an example, with which 3Sixty is in constant dialogue and has a strong relationship Anson said: "The sum total of the $800 million when converted to one airport and to 3Sixty Duty Free would mean around a third of one month's minimum annual guarantee rent. 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. Please read our Privacy Policy for more information on the cookies we use. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. "We've already . Audit. Option 6: The airport as concession operator. 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 . To ensure that the program is performed in accordance with law. . Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. In this model, the airport takes on two roles: landlord and partner in the operation. In times of continued and prolonged growth, airports have learned to depend upon MAGs. In other parts of the world, MAGs are the airport's exact expected rental payments. Percentage (privilege) Fees - 10% of gross revenue from airport related car rentals, or a minimum annual guarantee, whichever is greater. For more insights from Alan Gluck and ICF, please go to https://www.icf.com/insights/transportation, The future of airport concessions in a post-COVID-19 world, https://www.icf.com/insights/transportation. Tallahassee, FL 32310 . Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. (By comparison, the competing House of Representatives version of the bill contained no such restriction.) One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. Concessionaires need to understand this new business reality when they ask for relief. Most simply, the airport and vendor could agree to a fixed percentage rent. Nichols wrote to the County Board of Supervisors that $12.1 million of the money will be used to finalize airport agreements that waive contractual minimum annual guarantee rents for airport . The compliance and accounting questions related to the COVID-19 outbreak and the related new funding streams are significant. Stakeholders are already beginning discussions on a proposed Phase 4 stimulus bill. The FAA has issued additional guidance on airport concession fees, some of which reverses earlier policies. For construction contracts over _____ federal regulations require the airport to obtain a bid guarantee to equal at least _____ of the bid price, as well as performance and payment bonds equaling _____ percent of the contract. Flashcards. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. If the airport sponsor determines that its in its best interest to defer the MAG, the revenue should still be recorded in the period earned, and the receivable should be considered for treatment as noncurrent depending on the new repayment terms. There are numerous ways to frame a contract without a MAG. By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. A MAG, as currently developed, is unsustainable in anything but relatively normal times. That is no longer possible. COVID-19 has sent shockwaves throughout the world. It varies based on the size, capacity, and operations of the airport. This site uses Akismet to reduce spam. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. 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. These MAG clauses in concession contracts should be carefully reviewed. You also have the option to opt-out of these cookies. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. In the event that the concessionaire is unsuccessful, the airport absorbs the losses. The FAA may retain up to $10 million to fund the award and oversight of grants made pursuant to the CARES Act. The city may extend the action for an additional 30-day . Many airport agreements allow for a suspension of MAGs in the event of a severe enplanement decrease. Minimum Annual Guarantees. Learn. The fallacy of Minimum Annual Guarantee (MAG). 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. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. 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. As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. https://www.law.cornell.edu/cfr/text/49/part-23, Airport Concessions Disadvantaged Business Enterprises, Developing An Operating Budget - Airport University, Disadvantaged Business Enterprises - Airport University. 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. COVID-19 has sent shockwaves throughout the world. Airports maintain goals of working with Disadvantaged Business Enterprises or more commonly referred to as DBEs. This information collection permits FAA to confirm that rent relief is consistent with the requirements of CRRSA and ARPA. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. BADGES AND SECURITY: . This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. Supplemental Airport Grant-In-Aid Funding Option 4: Airport-concessionaire joint ventures. First, and most important, the recently enacted Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contains a supplemental appropriation of $10 billion to be made through Grants-In-Aid for Airports. That $10 billion is divided into the following categories: Any airport that receives money under the CARES Act must continue to employ, for the remainder of 2020, at least 90% of the number of employees that airport had as of March 27, the date of the enactment of the Act. The key will be ensuring that airline charges remain fair and reasonable. The same rules govern the use of CARES Act funds that govern the use of all airport revenues. The master operator concept typically limits the ACDBE participation goals and may require additional efforts to maintain. However, we recommend that you consider the underlying principles of Uniform Guidance and the terms and conditions of the FAA while administering the funds. 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. All rights reserved. Were here to help! If flights do not return to their pre-pandemic levels, then the airport will not be able to recover former passenger levels. 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. This essentially flips the rent risk from being entirely on the vendors (in a MAG-based model) to being entirely on the airport. Airport vendors typically pay a portion of their revenues to the MAC, and those payments can't fall below the minimum annual guarantee. 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. Minimum Annual Guarantee _____- concession often establish their rates as a percentage of gross . Airports would have to offer benefit packages to these employees in line with those provided to other employees of the airport. MAG - Minimum Annual Guarantee. That will, in turn, harm the concession program. They charge restaurants a minimum annual guarantee, also known as "rent" in the non-airport world. 84, Fiduciary Activities. Airport vendors have you right where they want you trapped at the gate, drinking a $20 beer. Save my name, email, and website in this browser for the next time I comment. This suggests that the best way to ensure an outstanding customer experience would be for this Trinity (or Trinity Plus, including the supplier) to work together. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. Fixed Based Operators or FBOs, are service providers to many GA and corporate aircraft. There are means of counting passengers who pass a concession location, but few airports have installed such technology. . (The catch: Potential renters must submit a formal proposal to the Airport Commission and are subject . Learn how your comment data is processed. Annual fee for the airport to perform snow removal at the Vehicle Ready/Storage Vehicle Parking Area and Service Building/Wash Bay Facility. If you are a sponsor who controls multiple airports the FAA has stated in its CARES Act FAQ, an airport sponsor may use funds at any airport under its control. CREDIT UPDATE Prior to the pandemic, Terminal 4 was observing strength in its operational performance with enplanements reaching 10.8 million in 2019, the leader across all terminals at JFK. a minimum annual guarantee or MAG annually, which more or less translates to rent. 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). Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. 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. Learn. percentage of their annual gross revenues derived from operations at the airport or a minimum annual guaranteed amount, whichever is greater. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. 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. The airport operator is always present and has a wealth of knowledge about the airport. 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 actual process is the easiest for the airport sponsor since there are minimal contracts. Airports should carefully consider how they structure deals and their business models to ensure more flexibility to respond to potential future shocks. See how we support our people, protect the planet, and give back to communities. $100,000, 5%, 100% . The city named the Vantage Airport Group to run the concessions when the new terminal opens in 2023. 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. While the airport might invest capital in the joint venture, it must be involved in a management committee overseeing the business. Chris Dinsdale has worked at Budapest Airport since 2015, originally as CFO until March 2021, where he was nominated for the position as CEO . Examples of concessions within airports include: A direct concession lease involves the space being directly marketed, leased, and managed by the airport operator. . 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. The competitive landscape may beby necessityaltered. 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. This essentially flips the rent risk from being entirely on the vendors (in a MAG-based model) to being entirely on the airport. The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. Rent abatement should be tied to the changed circumstances caused by the public health emergency and done in accordance with Grant Assurances 22 and 24, as well as related statutes. It beat four other finalists. Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. These benefit packages may make the cost of employment significantly higher than the all-in employment costs for most concession operators. The FBOs lease space from the airport sponsor to be able to provide those services. NOTICE OF INTENTION TO ENTER INTO FOUR SEPARATE CONCESSION LEASE AGREEMENTS WITH THE DAY ONE GROUP LLC NOTICE IS HEREBY GIVEN, to all interested parties, that the Clark County Board of Commissioners intends to enter into four separate Concession Lease Agreements (Agreements) for the operation of 5 specialty retail concessions with The Day One Group LLC (Company) serving Harry Reid . Add it up, and the cost of operating at an airport is often higher than operating at a typical mall. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. Delta will pay market rates to lease these three additional Delta-preferred gates with a minimum annual guarantee (MAG). One of the components of the CARES Act provides the opportunity for employers to defer payment of the 6.2% FICA portion of the employers portion of employment taxes, effective immediately through Dec. 31, 2020. October 09, 2020, 11:40 a.m. EDT 4 Min Read. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. Airports would also have to hire and manage many additional hourly employees. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. Products and services both fall into the concessions category. MAG: Each Respondent shall indicate payment of a Minimum Annual Guarantee ("MAG") of $_____. The single factor most tied to concession success is the footfall past the concession locations. . Master operators are common options, such as HMS Host Intl, Paradies Lagardere, Delaware North, and SSP. 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. Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. Tax. Will this have an impact on airline and concession agreements? When one partner tries to do too much, it will lessen the benefits of the joint venture. Non-airport retail leases typically charge rent on a per square foot (PSF) basis. Airport Operations. Terminal Rentals - Rent paid by car rental companies for ticket counters and office space in terminals. These MAGs are usually based on some percentage of the prior year's revenue and are intended to provide the airport sponsor with a revenue floor from these . Minimum Annual Guarantee listed as MAG. 116-94). How involved the airport gets in the day-to-day operation is the option of the airport and their partner(s). These cookies will be stored in your browser only with your consent. 6 . 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. 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. Non-airport retail leases typically charge rent on a per square foot (PSF) basis. In airports with residual airline agreements, the airlines will be required to make up the difference between revenue to the airport and required revenue to pay for airport development and other expenses. There will still be passengers, and the concession industry needs to be ready to serve them. The repayment will occur over time, with 50% of the deferral being due by Dec. 31, 3021, and the remaining due by Dec. 31, 2022. The FAA regional office must approve if the airport receives federal funding and is a primary airport with commercial service and the revenue generated by concessions exceeds $200,000. At least $7.4 billion is allocated to commercial service airports, allocated based on enplanements, debt service, and unrestricted reserve ratios. No one is sure how long recovery will take. In a standard MAG model, the concessionaire bears a great deal of uncertainty with little risk falling to the airport. Atlanta, GA - Hartsfield-Jackson Atlanta International Airport. 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. The FAA helped to level the playing field by allowing DBEs to compete for concessions contracts in airports. As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. Normally, operating classification on the statement of revenues, expenses, and changes in net position will typically follow the classification of operating activities in the statement of cash flows.
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