The passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. 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. Normally, airport concessionaires pay the city a percentage of sales or a "minimum annual guarantee" based on sales the previous year, whichever is greater. minimum annual guarantee (MAG) obligations to eligible airport concessions. Some airports have had huge success in meeting ACDBE goals with the developer model. 9. Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. Supplemental Airport Grant-In-Aid Funding 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. 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. 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. Minimum Annual Guarantee. Discover how we help clients achieve success. For aviation, global recovery to 2019 levels is projected to take several years, into 2023 for markets with significant domestic air . It is still unclear whether all of the CARES funding will be reported on the Schedule of Expenditures of Federal Awards (SEFA) . 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. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. Concessions covers more than what you think of served at a traditional concession stand. Stakeholders are already beginning discussions on a proposed Phase 4 stimulus bill. However, MAGs in concession contracts still expect continued growth. Minimum Annual Guarantee Process Up to 3 years Or Up to $100,000 per year Direct negotiation with potential concessionaire Over 3 years and up to 5 Were here to help! Airports would also have to hire and manage many additional hourly employees. 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. Percentage Rent to the Board as set forth in Article 1 based on Concessionaire's Gross Receipts, subject to a Minimum Annual Guarantee (MAG) as set forth in Article 1, and as further provided below. Tax. They will typically lease space for counter and office space and additional space for the vehicle storage. 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. Denver International Airport will price $925 million of refunding bonds to help ease its debt service burden during the pandemic-driven traffic decline . New non-aeronautical revenue streams are critical to airport recovery from the COVID-19 pandemic. When one partner tries to do too much, it will lessen the benefits of the joint venture. While the bulk of the $10 billion appropriated for airport sponsors can be used, if necessary, to make bond principal and interest payments, airport sponsors may be faced with difficult decisions about how to prioritize needs during the financial stress. Learn. October 09, 2020, 11:40 a.m. EDT 4 Min Read. If youre far enough along in the implementation process, you may want to move forward with adopting these standards. Importantly, the $2 billion is not subject to the reduced apportionments for larger airports that also impose passenger facility charges (PFCs). Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). 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. 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 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, Hermes) are given the ability to design and operate their mini outlets. The additional funds appropriated by the CARES Act were largely intended to help airport sponsors meet their debt service and bond obligations. See how we support our people, protect the planet, and give back to communities. 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. Creation of the lounge would require around a $4-million investment from whichever group decides to take over the space, which is 9,100 square feet -- on the small side for most airport lounges. 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.. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. Because of the drastic reduction in flights and passenger traffic, airlines have been shrinking their staffing, space requirements and gate usage. June 9: Extending the leases of current airport, dining, and retail (ADR) tenants by up to three years, including a temporary suspension of the Minimum Annual Guarantee (MAG) for ADR tenants through the end of 2020, and possibly extending this policy into 2021. Page 3 of 61 - Non-exclusive On-airport Rental Car Concession - Proposal documents 3. Terminal Closure and Footprint Reductions. 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. To ensure that the program is performed in accordance with law. They will typically also offer a percentage of their gross receipts to the airport as part of the RFP for the FBO services. . 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. 636(a)(37)) that has been applied toward rent or minimum annual guarantee costs. The single factor most tied to concession success is the footfall past the concession locations. Concessionaires need to understand this new business reality when they ask for relief. Airlines value an attractive commercial program because it makes a better background for the expression of their brand. Airport Operations. The minimum annual guarantee of $3.25 million to the airport for the right to run the restaurant is too high and could result in the partners cutting corners to make the payments or, even worse . The company, which . With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. Retail/Gift Shop 11% of Gross Receipts or Minimum Annual Guarantee Terminal Advertising 30% -60% of Gross Receipts or Minimum Annual Guarantee . There are means of counting passengers who pass a concession location, but few airports have installed such technology. Weve compiled the top 10 things that you should know about the CARES Act funding for airports. The competitive landscape may beby necessityaltered. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. (By comparison, the competing House of Representatives version of the bill contained no such restriction.) They often charge more than 10% for water and alcohol, Waguespack said. 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. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. 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). Attention: Finance & Administration Division . . Airports should carefully consider how they structure deals and their business models to ensure more flexibility to respond to potential future shocks. MAG: Each Respondent shall indicate payment of a Minimum Annual Guarantee ("MAG") of $_____. 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 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. 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. FBO/SASO: NOTE: 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 . Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. BADGES AND SECURITY: . While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. Minimum Annual Guarantee (MAG) of at least Eleven Million Dollars ($11,000,000) for each Contract Year and an annual escalation of at least three percent (3%) for the Contract Term. This website uses cookies to improve your experience while you navigate through the website. It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. 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. Atlanta, GA - Hartsfield-Jackson Atlanta International Airport. Majority-In-Interest (MII) clauses. The develop pays the amount due to the airport through the lease agreement and pockets the rest. In other parts of the world, MAGs are the airport's exact expected rental payments. 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. 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 Minimum Annual Guarantees. How involved the airport gets in the day-to-day operation is the option of the airport and their partner(s). The airport operator is always present and has a wealth of knowledge about the airport. However, this still may not be the most effective solution. $100,000, 5%, 100% . 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. At least for the immediate future, there will be reduced demand for concession services. - Suite 1 . As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. In a standard MAG model, the concessionaire bears a great deal of uncertainty with little risk falling to the airport. This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. Concessions and retail often fill that need. Even before the contagion, the "Minimum Annual Guarantee" (MAG) model was already under challenge, and does this tool remain fit-for-purpose? 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. 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. In either case, history has shown that MAGs are not supportable in the event of severe downturns. 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. Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. To promote the use of DBEs for federally funded projects. 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. 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. That will, in turn, harm the concession program. 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.

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