Six options for how to ensure that the airport concessions industry continues to be a robust and vibrant business for all. These cookies will be stored in your browser only with your consent. Discover our insights for a sustainable, low-emissions future. However, sponsors dont need to apply for the increased federal share of FY20 AIP or FY 2020 Supplemental Discretionary grants. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. 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. 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. Its clear that fixed MAGs are unable to provide the flexibility necessary to deal with severe occurrences. Examples of concessions within airports include: A direct concession lease involves the space being directly marketed, leased, and managed by the airport operator. Delta will pay market rates to lease these three additional Delta-preferred gates with a minimum annual guarantee (MAG). CARES Act grant recipients should follow the FAAs Policy and Procedures Concerning the Use of Airport Revenues (Revenue Use Policy), 64 Federal Register 7696 (64 FR 7696), as amended by 78 Federal Register 55330 (78 FR 55330). Page 3 of 61 - Non-exclusive On-airport Rental Car Concession - Proposal documents 3. 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). However, MAGs in concession contracts still expect continued growth. 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. Budapest Airport. There are a few limitations, however, that make this a less than optimal solution. The entire concessions space is typically leased out to a single company who is responsible for subletting the spaces. 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 cookies do not store any personal information. Concessions and retail often fill that need. Primarily, in residual agreements, the rates vary based on airport revenue. To ensure nondiscrimination in federally funded contracts for DOT airport assistance programs. 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. 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. Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). The additional funds appropriated by the CARES Act were largely intended to help airport sponsors meet their debt service and bond obligations. 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. Where do we go from here? If any portion of the $2 billion is left over after distributing in accordance with 49 U.S.C. That is no longer possible. 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. Airport sponsors should carefully review the maintenance and operation (M&O) expense allocation methodology in their terminal leases to confirm the method for allocating costs for vacated space. . Products and services both fall into the concessions category. 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. 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 level the playing field so that DBEs can compete . A prepaid monthly "lease" to do business on the property. When passenger traffic does come back, airports should rethink how their concession contracts work. 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. Airport vendors have you right where they want you trapped at the gate, drinking a $20 beer. 2023 Plante & Moran, PLLC. At least for the immediate future, there will be reduced demand for concession services. . In times of continued and prolonged growth, airports have learned to depend upon MAGs. - Suite 1 . Lets consider six potential options. It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. By clicking Accept, you consent to the use of ALL the cookies. Additionally, nonoperating revenues would generally include grants, among other things. Without this expertise, the concession will almost certainly fail to operate at an optimum level. However, this still may not be the most effective solution. Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. 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 develop pays the amount due to the airport through the lease agreement and pockets the rest. Normally, operating classification on the statement of revenues, expenses, and changes in net position will typically follow the classification of operating activities in the statement of cash flows. One-twelfth of the MAG shall be due in advance on the first day of each month Providing a product or service inside the airport environment is one of the key qualifiers for a concessionaire. Paid parking went into effect at . While the leased space is non-aeronautical revenue, the CFCs are non-operating revenue. Below are some considerations for airport sponsors to keep in mind. The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. 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. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. NOTICE OF INTENTION TO ENTER INTO FOUR SEPARATE CONCESSION LEASE AGREEMENTS WITH THE DAY ONE GROUP LLC NOTICE IS HEREBY GIVEN, to all interested parties, that the Clark County Board of Commissioners intends to enter into four separate Concession Lease Agreements (Agreements) for the operation of 5 specialty retail concessions with The Day One Group LLC (Company) serving Harry Reid . Airports maintain goals of working with Disadvantaged Business Enterprises or more commonly referred to as DBEs. Airports would have to offer benefit packages to these employees in line with those provided to other employees of the airport. Project. The actual process is the easiest for the airport sponsor since there are minimal contracts. These three options do not change the underlying airport-concessionaire relationship. The Audit Committee has reviewed this report and is releasing it in accordance with Article 2, Chapter 6 of the City Charter. Retail/Gift Shop 11% of Gross Receipts or Minimum Annual Guarantee Terminal Advertising 30% -60% of Gross Receipts or Minimum Annual Guarantee . . Additionally, airports required to pay sick leave wages or family leave wages under Section 7001(e)(4) and 7003(e)(4) of the Families First Coronavirus Response Act are relieved of paying the employers 6.2% portion of FICA taxes associated with those wages. Airports would have to offer benefit packages to these employees in line with those provided to other employees of the airport. But opting out of some of these cookies may affect your browsing experience. The passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. 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. An engaging panel discussion entitled 'Road to Recovery: The Retailer Perspective' took place during yesterday's virtual Summit of the . Concessions covers more than what you think of served at a traditional concession stand. 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. 9. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). The concept is not uncommon. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. Stakeholders are already beginning discussions on a proposed Phase 4 stimulus bill. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options.