The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. By using this site you agree to our use of cookies. One-twelfth of the MAG shall be due in advance on the first day of each month Meanwhile the company maintained a resilient retail margin of above 60%, helped by minimum annual guarantee waivers to airport landlords of $1.2 billion. The airport environment is complex and has become even more challenging due to COVID-19. There will still be passengers, and the concession industry needs to be ready to serve them. If flights do not return to their pre-pandemic levels, then the airport will not be able to recover former passenger levels. a minimum annual guarantee or MAG annually, which more or less translates to rent. Airport vendors have you right where they want you trapped at the gate, drinking a $20 beer. 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 the airport might invest capital in the joint venture, it must be involved in a management committee overseeing the business. Signatory carriers may exercise significant control over an airport's capital budgeting process under provisions in a use agreement known as. 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 catch: Potential renters must submit a formal proposal to the Airport Commission and are subject . This opportunity is for two available FBO leaseholds with a general aviation terminal, office space . Below are some considerations for airport sponsors to keep in mind. . 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. Similar to a third party option, an institutional operator can reduce risk while also reducing proceeds to the airport operator. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. Examples of Minimum Annual Guaranteed Rent in a sentence. 4.1.3 Percentage Fees. Where do we go from here? Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). This information collection permits FAA to confirm that rent relief is consistent with the requirements of CRRSA and ARPA. Nor do we know whether travel habitswill change permanently because of new practices learned during lockdowns. Here are some others. These three options do not change the underlying airport-concessionaire relationship. 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 . This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. In the event that the concessionaire is unsuccessful, the airport absorbs the losses. Other organizations that havent yet addressed some of these pending standards may want to take advantage of the implementation delays. 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. The FAAs Office of Airports will administer these grant funds to airport sponsors. Most simply, the airport and vendor could agree to a fixed percentage rent. 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). "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 need to understand this new business reality when they ask for relief. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. 4.1.2 Minimum Annual Guaranteed Concession Fee Payment. Many airport agreements allow for a suspension of MAGs in the event of a severe enplanement decrease. Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. This is especially true for leases incorporating a Minimum Annual Guarantee (MAG) mechanism or fixed rent clauses. Concessions covers more than what you think of served at a traditional concession stand. This simplified agreement includes the requirements under the CARES Act and makes funds immediately available for expenses, other than airport development, including payroll, debt service, utility expenses, service contracts, and supplies. There are means of counting passengers who pass a concession location, but few airports have installed such technology. FBO/SASO: NOTE: 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. 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. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. These benefit packages may make the cost of employment significantly higher than the all-in employment costs for most concession operators. C. Concession Fee. The policies and procedures are available for review here. February 2, 2021January 28, 2021 | AirportU. The MAC has already waived minimum annual guarantees three . They will typically also offer a percentage of their gross receipts to the airport as part of the RFP for the FBO services. 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. A third party company could be contracted to handle the leasing and management of concessions on behalf of the airport. 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. These benefit packages may make the cost of employment significantly higher than the all-in employment costs for most concession operators. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee (MAG). 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. In times of continued and prolonged growth, airports have learned to depend upon MAGs. The CARES Act roughly triples the amount of money flowing from the federal government directly to airports for 2020. At least for the immediate future, there will be reduced demand for concession services. Primarily, in residual agreements, the rates vary based on airport revenue. The master operator concept typically limits the ACDBE participation goals and may require additional efforts to maintain. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. In North America, airports tend to look at MAGs as the least amount of acceptable rent. 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. 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. In North America, airports tend to look at MAGs as the least amount of acceptable rent. Tallahassee International Airport . Rates and Fees are adjusted annually based on the Airport's fiscal year, from October 1st through September 30th. The city of Atlanta suspended the minimum annual guarantee payment obligation for concessionaires and rental car companies at Hartsfield-Jackson Atlanta International Airport (ATL) for a four-month period ending June 20. 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. Rent abatement / minimum annual guarantee: A decision to abate rent (including "minimum annual guarantees" and also encompassing fees) is a local . A concessionaire's rent structure in an airport may differ from the traditional model. 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. Guarantee: $50,000. While the leased space is non-aeronautical revenue, the CFCs are non-operating revenue. This site uses Akismet to reduce spam. Flashcards. 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. 1, their minimum annual guarantee was superior to anybody . 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. In North America, airports tend to look at MAGs as the least amount of acceptable rent. Most simply, the airport and vendor could agree to a fixed percentage rent. BADGES AND SECURITY: . 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. They rent space to provide a service/product (rental car) for an agreed upon time frame at a certain rate. Match. In this model, the airport takes on two roles: landlord and partner in the operation. The competitive landscape may beby necessityaltered. (1) On-Airport (% of Gross Receipts). COVID-19 has sent shockwaves throughout the world. As a result, airports may wish to consider going a step further. 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. 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. Respondents will propose both a MAG and a Percentage (%) of Annual Gross Revenue, the greater of which will be paid . The FBOs lease space from the airport sponsor to be able to provide those services. Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. However, there is no relief of the obligation to withhold and remit the corresponding employee share. 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. These three options do not change the underlying airport-concessionaire relationship. Sea-Tac airport may allow Uber, Lyft and Sidecar to start picking up passengers if new rules are passed. The disclosure of guaranteed minimum future lease payments will also be impacted for any changes in the MAG in the concession contracts. When one partner tries to do too much, it will lessen the benefits of the joint venture. Concessions covers more than what you think of served at a traditional concession stand. At least $7.4 billion is allocated to commercial service airports, allocated based on enplanements, debt service, and unrestricted reserve ratios. Option 6: The airport as concession operator. Nor do we know whether travel habits will change permanently because of new practices learned during lockdowns. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. Concessionaires could avoid minimum annual guarantee payments for a third quarter as the MAC develops a long-term relief plan. An airport owner/sponsor may use these funds for any purpose for which airport revenues may be lawfully used. Atlanta, GA - Hartsfield-Jackson Atlanta International Airport. 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. 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. Percentage (privilege) Fees - 10% of gross revenue from airport related car rentals, or a minimum annual guarantee, whichever is greater. Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. Airports maintain goals of working with Disadvantaged Business Enterprises or more commonly referred to as DBEs. Bond Covenants and Indenture Pledge of Revenues. That will, in turn, harm the concession program. . The actual process is the easiest for the airport sponsor since there are minimal contracts. The city named the Vantage Airport Group to run the concessions when the new terminal opens in 2023. Delta will pay market rates to lease these three additional Delta-preferred gates with a minimum annual guarantee (MAG). Looking for abbreviations of MAG? Option 5: The Trinity (or Trinity Plus) model. softballrizer. . To remove barriers in participation of DBEs. However, we recommend that you consider the underlying principles of Uniform Guidance and the terms and conditions of the FAA while administering the funds. 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. 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. With the new economic and industry realities, capital access may be an even greater hurdle. A payment called a Minimum Annual Guarantee will be waived for the months of March, April and May last year. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. 47114, with minimum apportionments for smaller airports that serve between 8,000 and 10,000 passengers annually. The entire concessions space is typically leased out to a single company who is responsible for subletting the spaces. The Federal Aviation Administration (FAA) . Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. A by-location per passenger MAG may be too complicated for widespread implementation at this point. Airport Operations. If youre far enough along in the implementation process, you may want to move forward with adopting these standards. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. 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. The key will be ensuring that airline charges remain fair and reasonable. Airports would also have to hire and manage many additional hourly employees. It varies based on the size, capacity, and operations of the airport. New non-aeronautical revenue streams are critical to airport recovery from the COVID-19 pandemic. In either case, history has shown that MAGs are not supportable in the event of severe downturns. The Airport has also experienced a reduction in passengers and operations as a result of . To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). While it may never be business as usual again, the airport and its business partners need to adjust to a new normal. Were here to help! The additional funds appropriated by the CARES Act were largely intended to help airport sponsors meet their debt service and bond obligations. leasehold at Washington Dulles International Airport (IAD). . 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. Learn. 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, Elsewhere, airports do not expect vendors to exceed their MAGs. This is especially true for leases that incorporate the minimum annual guarantee (MAG) mechanism or fixed rent clauses. However, this still may not be the most effective solution. Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. This essentially flips the rent risk from being entirely on the vendors (in a MAG-based model) to being entirely on the airport. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. 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. The single factor most tied to concession success is the footfall past the concession locations. 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. There will still be passengers, and the concession industry needs to be ready to serve them. All rights reserved. Find more information in a tax alert comparing COVID-19 employer tax incentives, issued by our National Tax Office. Six options for how to ensure that the airport concessions industry continues to be a robust and vibrant business for all. Airports provide the passengers, the retailers provide the services. It is Minimum Annual Guarantee. minimum annual guarantee (MAG) obligations to eligible airport concessions. 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. Discover the top trends shaping government in 2023. 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 . How involved the airport gets in the day-to-day operation is the option of the airport and their partner(s). 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. Flashcards. 116-94). The airport charges the businesses 8 percent of gross revenue, or a minimum annual guarantee. Retail/Gift Shop 11% of Gross Receipts or Minimum Annual Guarantee Terminal Advertising 30% -60% of Gross Receipts or Minimum Annual Guarantee . We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. 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. The CFC is a charge based on either the contract value, gross receipts, or per car per day. 636(a)(37)) that has been applied toward rent or minimum annual guarantee costs. Under the current process, minimum annual guarantee for the first year is the financial bid parameter for selection of bidder and the period of concession is 10 years from the commercial operations date. Primarily, in residual agreements, the rates vary based on airport revenue. Airports would also have to establish supply lines for products that they have not procured in the past. 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. 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 joint venture lease must be similar to those given to other concessionaires, and enforcement of the airports rules and performance requirements must be uniform. $100,000, 5%, 100% . Option 4: Airport-concessionaire joint ventures. In a standard MAG model, the concessionaire bears a great deal of uncertainty with little risk falling to the airport. 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. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. Greater of 30% or Minimum Annual Guarantee : Taxi Fees (annual contract fee) Pre-Arranged Transportation (per pickup) $6.00 . Bid. The airport environment is complex and has become even more challenging due to COVID-19. A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. The intent of DBE programs is to increase the amount of business done with Minority Business Enterprises (MBE) and Women Business Enterprises (WBE). 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. It was suspended in June, following the severe decline of passenger traffic over those . Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. "We've already . If any portion of the $2 billion is left over after distributing in accordance with 49 U.S.C. Regardless, this shifting of risk may not be acceptable to airports. 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. A. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. These cookies will be stored in your browser only with your consent. For aviation, global recovery to 2019 levels is projected to take several years, into 2023 for markets with significant domestic air . As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. SCOPE OF FEES TO BE PAID THE CITY BY CONCESSIONAIRES a. 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.