Concessions and retail often fill that need. Because of the drastic reduction in flights and passenger traffic, airlines have been shrinking their staffing, space requirements and gate usage. Alan has over two decades of experience in commercial/concession management, facility planning, financial analysis, and government procurement. 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. It varies based on the size, capacity, and operations of the airport. A MAG, as currently developed, is unsustainable in anything but relatively normal times. In other parts of the world, MAGs are the airports exact expected rental payments. A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. Very hands off for the airport sponsor. them from immediately acquiescing to their advertisers' perfectly justifiable requests is the cold draught of the minimum annual guarantee (MAG). A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. Six options for how to ensure that the airport concessions industry continues to be a robust and vibrant business for all. [1]https://www.law.cornell.edu/cfr/text/49/part-23 jQuery('#footnote_plugin_tooltip_333_1_1').tooltip({ tip: '#footnote_plugin_tooltip_text_333_1_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top center', relative: true, offset: [-7, 0], }); The entire premise of the DBE program is based on: The writers of AirportU do so not for recognition, rather for learning, sharing, and empowering others. 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. See how we help fast-changing industries succeed. 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. Most simply, the airport and vendor could agree to a fixed percentage rent. That report and certification should include the number of full-time equivalent employees working at the airport as of March 27, 2020, as the baseline comparison. MAG - Minimum Annual Guarantee. Tallahassee International Airport . Denver International Airport will price $925 million of refunding bonds to help ease its debt service burden during the pandemic-driven traffic decline . Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. These cookies will be stored in your browser only with your consent. A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. Weve compiled the top 10 things that you should know about the CARES Act funding for airports. C. Concession Fee. First, and potentially most important, the FAAs position on rent abatements has gone from NO to: A decision to abate rent (including minimum annual guarantees and encompassing fees) is a local decision. FBO/SASO: NOTE: Airports would also have to establish supply lines for products that they have not procured in the past. The big change at Los Angeles International Airport allows concessionaire partners, which include DFS Group, Hudson and HMSHost, among others, to pay percentage rent rather than a minimum annual guarantee (MAG) from April 1 through June 30 as a result of passenger traffic declines due to the coronavirus pandemic. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). When passenger traffic does come back, airports should rethink how their concession contracts work. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. "We've already . PFCs have been set at $4.50/passenger since 2000, and increasing the PFC maximum has been a priority of the airport industry for some time. The airport environment is complex and has become even more challenging due to COVID-19. 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. . softballrizer. Where appropriate and agreed to by airport sponsors, terminal use leases should be amended to reflect the airlines changed operating circumstances. Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. Strategic agency for engagement and transformation. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. Any funding received under the Assistance Listing 20.106, Airport Improvement program will be reported on the SEFA. Created by. These benefit packages may make the cost of employment significantly higher than the all-in employment costs for most concession operators. 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. The AICPA State and Local Governments audit guide includes certain accounting guidance that has been cleared by GASB as Category B authoritative guidance. Bond Covenants and Indenture Pledge of Revenues. Even before the contagion, the "Minimum Annual Guarantee" (MAG) model was already under challenge, and does this tool remain fit-for-purpose? One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. That will, in turn, harm the concession program. The FAA will use the Office of Management and Budget (OMB) SF-424, Application for Federal Assistance, and provide a simplified grant agreement shortly after it receives an application. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. 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. Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. Wealth Management. Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. These three options do not change the underlying airport-concessionaire relationship. Learn how your comment data is processed. The actual process is the easiest for the airport sponsor since there are minimal contracts. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. The federal share for FY 2018 and 2019 Supplemental Discretionary grants wont increase. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). With the new economic and industry realities, capital access may be an even greater hurdle. (The catch: Potential renters must submit a formal proposal to the Airport Commission and are subject . An airport owner/sponsor may use these funds for any purpose for which airport revenues may be lawfully used. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. "No. Save my name, email, and website in this browser for the next time I comment. Airports should carefully consider how they structure deals and their business models to ensure more flexibility to respond to potential future shocks. 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. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). Audit. Percentage (privilege) Fees - 10% of gross revenue from airport related car rentals, or a minimum annual guarantee, whichever is greater. Find more information in a tax alert comparing COVID-19 employer tax incentives, issued by our National Tax Office. 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. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. Guarantee: $50,000. 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. The FAA may retain up to $10 million to fund the award and oversight of grants made pursuant to the CARES Act. 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. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. 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. Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. Additionally, nonoperating revenues would generally include grants, among other things. 84, Fiduciary Activities. 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. This financial shock has created a number of legal and financial issues. The key will be ensuring that airline charges remain fair and reasonable. Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. Master operators are common options, such as HMS Host Intl, Paradies Lagardere, Delaware North, and SSP. . Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. Minimum Annual Guarantee. In a 6-to-3 vote on Monday, June 8, the council approved temporarily revising the Minimum Annual Guarantee, which is a fixed amount restaurants guarantee they will pay the city to do business at . A concessionaire's rent structure in an airport may differ from the traditional model. Guarantee: 50% of Minimum Annual Guarantee. Most simply, the airport and vendor could agree to a fixed percentage rent. One-twelfth of the MAG shall be due in advance on the first day of each month View bio. Some larger airports take a percentage of every sale. Greater of 30% or Minimum Annual Guarantee : Taxi Fees (annual contract fee) Pre-Arranged Transportation (per pickup) $6.00 . A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. The FAA released guidance for airport administrators, but questions still linger and issues have gone unaddressed. 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. 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. Each entity will need to review the applicable accounting guidance, consider their own circumstances, and make their determination based on their professional judgment. If an airport can become a partner in the operation of a concession, it might also consider being a concession operator on its own. The compliance and accounting questions related to the COVID-19 outbreak and the related new funding streams are significant. These funds are available only to sponsors as defined in Section 47102 of title 49, United States Code (U.S.C. (By comparison, the competing House of Representatives version of the bill contained no such restriction.) Like their partners in the airline industry, airports have been dramatically affected by the slowdown in flights and passenger traffic associated with COVID-19. Terms in this set (15) What is MAG and what does it stand for? Concessions covers more than what you think of served at a traditional concession stand. 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. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. 4.1.3 Percentage Fees. Examples of Minimum Annual Guaranteed Rent in a sentence. 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 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. Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. 9. February 2, 2021January 28, 2021 | AirportU. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. The price tag is a whopping $440 per square foot. 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. Sea-Tac airport may allow Uber, Lyft and Sidecar to start picking up passengers if new rules are passed. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. 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. 6 . It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. 47114, with minimum apportionments for smaller airports that serve between 8,000 and 10,000 passengers annually. Concessionaires could avoid minimum annual guarantee payments for a third quarter as the MAC develops a long-term relief plan. 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. Without this expertise, the concession will almost certainly fail to operate at an optimum level. Lets consider six potential options. Regardless, this shifting of risk may not be acceptable to airports. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. This document addresses common issues that have arisen or may arise for airport sponsors during the response to the COVID-19 public health emergency. Airport sponsors must certify compliance with the CARES Act employment requirements at the time of grant execution and report employment totals quarterly on June 30, Sept. 30, and Dec. 31, 2020. This opportunity is for two available FBO leaseholds with a general aviation terminal, office space . The additional funds appropriated by the CARES Act were largely intended to help airport sponsors meet their debt service and bond obligations. Similar to a third party option, an institutional operator can reduce risk while also reducing proceeds to the airport operator. What this option does do is change the distribution of risk. Regulatory Updates Extension of Minimum Slot Usage Requirements. SCOPE OF FEES TO BE PAID THE CITY BY CONCESSIONAIRES a. Bid. Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. When one partner tries to do too much, it will lessen the benefits of the joint venture. The Federal Aviation Administration (FAA) . The Audit Committee has reviewed this report and is releasing it in accordance with Article 2, Chapter 6 of the City Charter. As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. 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. Flashcards. Rates for each new fiscal year will be posted on this page after Board approval of the rates and fees. In North America, airports tend to look at MAGs as the least amount of acceptable rent. Stakeholders are already beginning discussions on a proposed Phase 4 stimulus bill. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. However, we recommend that you consider the underlying principles of Uniform Guidance and the terms and conditions of the FAA while administering the funds. However, MAGs in concession contracts still expect continued growth. Concessionaires pay the Airport Authority a percentage of their gross sales each month, which is one-twelfth of a pre-determined minimum annual guarantee (MAG). If youre far enough along in the implementation process, you may want to move forward with adopting these standards. By clicking Accept, you consent to the use of ALL the cookies. This is especially true for leases that incorporate the minimum annual guarantee (MAG) mechanism or fixed rent clauses. Other organizations that havent yet addressed some of these pending standards may want to take advantage of the implementation delays. Will this have an impact on airline and concession agreements? First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. We also use third-party cookies that help us analyze and understand how you use this website. To ensure that the program is performed in accordance with law. As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. 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. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. For information on the business impacts of COVID-19, please visit ourCOVID-19 Resource Center, which we continue to update as the situation evolves. For aviation, global recovery to 2019 levels is projected to take several years, into 2023 for markets with significant domestic air . (1) On-Airport (% of Gross Receipts). The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. Option 5: The Trinity (or Trinity Plus) model. 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. 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 . The FBOs lease space from the airport sponsor to be able to provide those services. Discover our insights for a sustainable, low-emissions future. 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. 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. Its clear that fixed MAGs are unable to provide the flexibility necessary to deal with severe occurrences. This information collection permits FAA to confirm that rent relief is consistent with the requirements of CRRSA and ARPA. At least $500 million is available to increase the federal share to 100% for grants awarded under the fiscal year 2020 appropriations cycle for FY20 Airport Improvement Program (AIP) and FY20 Supplemental Discretionary grants. Concessions are typically leased with a percentage type lease so that a specific percentage of gross sales are given to the airport as part of their lease agreement. SFO concession tenants pay the greater of a Minimum Annual Guarantee (MAG) or a percentage of Gross Receipts (Concession Fee), along with other cleaning and infrastructure fees. Match. 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. 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). The competitive landscape may beby necessityaltered. Unlike earlier phases of stimulus, Phase 4 has the potential to include a significant infrastructure focus. Airlines value an attractive commercial program because it makes a better background for the expression of their brand. That report and certification should include the number of full-time equivalent employees working at the airport as of March 27, 2020, as the baseline comparison. 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. Kona International Airport at Keahole is located on the western coast of the Island of Hawaii, approximately 10 miles from the town of Kailua Kona. Airport sponsors should carefully review their bond documents to ensure the methods of calculating the airports rate covenant under the current circumstances are appropriate. To meet aggressive congressional deadlines for request submissions, a new airport industry request is being made with three potential components: $13 billion in additional emergency assistance, a gap financing program for airports, and a touchless journey through security. If, on the other hand, an airport sponsor decides to enforce the M&O expense allocation in its terminal leases, then the terminal leases should be carefully reviewed to determine the terms of enforcement and what rights the airlines have under those leases. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. Cookie Notice: This site uses cookies to provide you with a more responsive and personalized service. The question that airport managers must ask themselves is which rent strategy is realistic in the current environment. The single factor most tied to concession success is the footfall past the concession locations. 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. It is Minimum Annual Guarantee. . The FAA has published a map showing airports that are receiving the funds and the allocations made to them. "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 . Concessionaires are, in general, seeking some manner of rent relief from their airport partners. By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. Airports provide the passengers, the retailers provide the services. Nor do we know whether travel habitswill change permanently because of new practices learned during lockdowns. 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.