Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. The compliance and accounting questions related to the COVID-19 outbreak and the related new funding streams are significant. Each entity will need to review the applicable accounting guidance, consider their own circumstances, and make their determination based on their professional judgment. Meanwhile, Aena is forecasting that in the period to 2023, the minimum annual guaranteed rents and fixed rents, corresponding to contracts in force at 30 June 2020, will decrease. A MAG, as currently developed, is unsustainable in anything but relatively normal times. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. 87, Leases by a full 18 months, resulting in June 30, 2022 year-ends to be the first to implement the significant new leasing standard. Concessionaires could avoid minimum annual guarantee payments for a third quarter as the MAC develops a long-term relief plan. minimum annual guarantee (MAG) obligations to eligible airport concessions. 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. . 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. 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. 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. Created by. In this model, the airport takes on two roles: landlord and partner in the operation. How involved the airport gets in the day-to-day operation is the option of the airport and their partner(s). Minimum Annual Guarantee - How is Minimum Annual Guarantee abbreviated? Test. You also have the option to opt-out of these cookies. With the new economic and industry realities, capital access may be an even greater hurdle. The city may extend the action for an additional 30-day . This Minimum Annual Guarantee must exceed $100,000. The federal share for FY 2018 and 2019 Supplemental Discretionary grants wont increase. 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. Attention: Finance & Administration Division . Airports should carefully consider how they structure deals and their business modelsto ensure more flexibility to respond to potential future shocks. 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. Looking for abbreviations of MAG? In North America, airports tend to look at MAGs as the least amount of acceptable rent. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. Airports are left with four basic responses: do nothing, suspend minimum annual guarantees (MAG), defer rent, or rent abatement. 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. It varies based on the size, capacity, and operations of the airport. Minimum Annual Guarantee _____- concession often establish their rates as a percentage of gross . Guarantee: $50,000. 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. . With the announcement by the GASB of a delay in the required implementation of these new standards, your organization will need to decide how to respond. That will, in turn, harm the concession program. 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. 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. Nor do we know whether travel habits will change permanently because of new practices learned during lockdowns. We also use third-party cookies that help us analyze and understand how you use this website. (1) On-Airport (% of Gross Receipts). The same rules govern the use of CARES Act funds that govern the use of all airport revenues. This is only for the passenger traffic, while for . 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. Concessionaires need to understand this new business reality when they ask for relief. 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. The company, which . 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. In North America, airports tend to look at MAGs as the least amount of acceptable rent. Products and services both fall into the concessions category. Below are some considerations for airport sponsors to keep in mind. 9. As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. Minimum Annual Guarantees. COVID-19 has sent shockwaves throughout the world. Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. Airports would also have to establish supply lines for products that they have not procured in the past. 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 MAC has already waived minimum annual guarantees three . [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. Greater of 30% or Minimum Annual Guarantee : Taxi Fees (annual contract fee) Pre-Arranged Transportation (per pickup) $6.00 . 49 CFR Part 23 requires airports to have a concessions-based DBE program. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. For information on the business impacts of COVID-19, please visit ourCOVID-19 Resource Center, which we continue to update as the situation evolves. 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. Consulting. By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. Learn how your comment data is processed. In either case, history has shown that MAGs are not supportable in the event of severe downturns. Where do we go from here? While the airport might invest capital in the joint venture, it must be involved in a management committee overseeing the business. However, we recommend that you consider the underlying principles of Uniform Guidance and the terms and conditions of the FAA while administering the funds. Sea-Tac airport may allow Uber, Lyft and Sidecar to start picking up passengers if new rules are passed. Regulatory Updates Extension of Minimum Slot Usage Requirements. Examples of concessions within airports include: A direct concession lease involves the space being directly marketed, leased, and managed by the airport operator. To help develop firms that can compete in the marketplace outside of the DBE program. The future of airport concessions in a post-COVID-19 world, COVID-19's impact on commercial aviation: Customer survey findings, Why sustainable aviation is more than a flight of fancy, Sustainable aviation: A guide for aviation professionals. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. 47114, with minimum apportionments for smaller airports that serve between 8,000 and 10,000 passengers annually. 4.1.3 Percentage Fees. Here are some others. It is still unclear whether all of the CARES funding will be reported on the Schedule of Expenditures of Federal Awards (SEFA) . 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). Option 6: The airport as concession 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 key will be ensuring that airline charges remain fair and reasonable. 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. The airport charges the businesses 8 percent of gross revenue, or a minimum annual guarantee. It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. In this model, the airport takes on two roles: landlord and partner in the operation. 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. There are means of counting passengers who pass a concession location, but few airports have installed such technology. Normally, airport concessionaires pay the city a percentage of sales or a "minimum annual guarantee" based on sales the previous year, whichever is greater. Discover how we help clients achieve success. 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. 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. While the model has primarily been used for duty free concessions, it has worked equally well for other types of concessions. 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 At least for the immediate future, there will be reduced demand for concession services. 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. When passenger traffic does come back, airports should rethink how their concession contracts work. Non-aeronautical revenueairport revenue from sources other than airlinestypically includes retail concessions, 1 car parking, and property and real estate. 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. Budapest Airport. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). President Donald Trump has already tweeted his support for such an infrastructure bill. As a result, airports may wish to consider going a step further. Duty Free Americas Miami offered a minimum annual guarantee to the airport of $20 million -- topping the $18.5 million offered by Dufry Miami Retail Partnership and about $9 million more than two . Flashcards. 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 . 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 . Fixed Based Operators or FBOs, are service providers to many GA and corporate aircraft. 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. Non-airport retail leases typically charge rent on a per square foot (PSF) basis. See how we support our people, protect the planet, and give back to communities. Airports would have to offer benefit packages to these employees in line with those provided to other employees of the airport. 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. 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 . Regardless, this shifting of risk may not be acceptable to airports. 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. 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. Importantly, the $2 billion is not subject to the reduced apportionments for larger airports that also impose passenger facility charges (PFCs). View bio. In other parts of the world, MAGs are the airport's exact expected rental payments. It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. 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. 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. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). 84, Fiduciary Activities. This site uses Akismet to reduce spam. Many airport agreements allow for a suspension of MAGs in the event of a severe enplanement decrease. To ensure nondiscrimination in federally funded contracts for DOT airport assistance programs. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. 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. 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. In addition, they typically provide the fueling services for the airport. 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. What this option does do is change the distribution of risk. Airlines value an attractive commercial program because it makes a better background for the expression of their brand. Concessionaires need to understand this new business reality when they ask for relief. 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. The FAA has issued additional guidance on airport concession fees, some of which reverses earlier policies. 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. 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 passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. To ensure that the program is performed in accordance with law. FBO/SASO: NOTE: 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, If you have questions. Airports maintain goals of working with Disadvantaged Business Enterprises or more commonly referred to as DBEs. 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 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. Some larger airports take a percentage of every sale. They will typically lease space for counter and office space and additional space for the vehicle storage. Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. The airport operator is always present and has a wealth of knowledge about the airport. ); that is, airport sponsors meeting statutory and policy requirements under this section, as well as those identified in the FAAs current National Plan of Integrated Airports System (NPIAS). Weve compiled the top 10 things that you should know about the CARES Act funding for airports. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. Atlanta, GA - Hartsfield-Jackson Atlanta International Airport. SCOPE OF FEES TO BE PAID THE CITY BY CONCESSIONAIRES a. To provide flexibility to recipients of federally funded projects in providing opportunities to DBEs. COVID-19 has sent shockwaves throughout the world. 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. $100,000, 5%, 100% . There are several types of concessionaires that lease space to operate at the airport. At least $7.4 billion is allocated to commercial service airports, allocated based on enplanements, debt service, and unrestricted reserve ratios. Elsewhere, airports do not expect vendors to exceed their MAGs. The CFC is a charge based on either the contract value, gross receipts, or per car per day. Annual fee for the airport to perform snow removal at the Vehicle Ready/Storage Vehicle Parking Area and Service Building/Wash Bay Facility. This website uses cookies to improve your experience while you navigate through the website. Majority-In-Interest (MII) clauses. Percentage (privilege) Fees - 10% of gross revenue from airport related car rentals, or a minimum annual guarantee, whichever is greater. Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. 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. Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. One-twelfth of the MAG shall be due in advance on the first day of each month Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. See how we help fast-changing industries succeed. New non-aeronautical revenue streams are critical to airport recovery from the COVID-19 pandemic. Up to $2 billion apportioned in accordance with the per-passenger apportionment rules of 49 U.S.C. Tallahassee International Airport . 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. Minimum Annual Guarantee (MAG) - The amount proposed and/or agreed to by the Concessionaire, that Concessionaire guarantees as minimum payment per year to DFW. The FAA has published a map showing airports that are receiving the funds and the allocations made to them. All rights reserved. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. At least $100 million will go to general aviation airports, allocated based on categories published in the current NPIAS. Page 3 of 61 - Non-exclusive On-airport Rental Car Concession - Proposal documents 3. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). 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 Lets consider six potential options. 1, their minimum annual guarantee was superior to anybody . MAG: Each Respondent shall indicate payment of a Minimum Annual Guarantee ("MAG") of $_____. Delta will pay market rates to lease these three additional Delta-preferred gates with a minimum annual guarantee (MAG). As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. 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. However, MAGs in concession contracts still expect continued growth. Learn. 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 . 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. An airport owner/sponsor may use these funds for any purpose for which airport revenues may be lawfully used. The key will be ensuring that airline charges remain fair and reasonable. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. The entire concessions space is typically leased out to a single company who is responsible for subletting the spaces. Where appropriate and agreed to by airport sponsors, terminal use leases should be amended to reflect the airlines changed operating circumstances. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee . Match. Very hands off for the airport sponsor. 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. 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. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. Master operators are common options, such as HMS Host Intl, Paradies Lagardere, Delaware North, and SSP. If flights do not return to their pre-pandemic levels, then the airport will not be able to recover former passenger levels. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. To remove barriers in participation of DBEs. The additional funds appropriated by the CARES Act were largely intended to help airport sponsors meet their debt service and bond obligations. The workforce retention requirement doesnt apply to nonhub or nonprimary airports. If youre far enough along in the implementation process, you may want to move forward with adopting these standards. 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. Car rental companies are concessionaires at the airport. This is especially true for leases that incorporate the minimum annual guarantee (MAG) mechanism or fixed rent clauses. Passengers have needs while at airports. Many airport agreements allow for a suspension of MAGs in the event of a severe enplanement decrease. A third party company could be contracted to handle the leasing and management of concessions on behalf of the airport. Flashcards. With the new economic and industry realities, capital access may be an even greater hurdle. 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. The airport environment is complex and has become even more challenging due to COVID-19. In the event that the concessionaire is unsuccessful, the airport absorbs the losses. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. Airport sponsors should carefully review their bond covenants and indentures, with a particular focus on pledge of revenues and flow of funds. 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. 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. While some of these answers require more information from the federal agencies, there are 10 burning questions we can answer now. The competitive landscape may beby necessityaltered. Alan has over two decades of experience in commercial/concession management, facility planning, financial analysis, and government procurement. That will, in turn, harm the concession program. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. Meanwhile the company maintained a resilient retail margin of above 60%, helped by minimum annual guarantee waivers to airport landlords of $1.2 billion.