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. 4.1.1 Minimum Annual Guaranteed Concession Fee. Non-airport retail leases typically charge rent on a per square foot (PSF) basis. 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 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 . That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. As a result, airports may wish to consider going a step further. The Trinity model can be considered an extension of the joint venture model. The Trinity model can be considered an extension of the joint venture model. Airports would also have to hire and manage many additional hourly employees. Guarantee: 50% of Minimum Annual Guarantee. 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. 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. The Airports Authority of India (AAI) has kick-started the process of appointing ground handling agencies for 83 state-run airports for a . Airport Cargo Community system Bid Opening Date: 07/13/2021 05:00:00 PM Purchaser: Kevin Hanagan Organization: City of Philadelphia . These funds are available only to sponsors as defined in Section 47102 of title 49, United States Code (U.S.C. As a result, airports may wish to consider going a step further. Concessionaires need to understand this new business reality when they ask for relief. Examples of concessions within airports include: A direct concession lease involves the space being directly marketed, leased, and managed by the airport operator. The same rules govern the use of CARES Act funds that govern the use of all airport revenues. Add it up, and the cost of operating at an airport is often higher than operating at a typical mall. When one partner tries to do too much, it will lessen the benefits of the joint venture. a minimum annual guarantee or MAG annually, which more or less translates to rent. Bond Covenants and Indenture Pledge of Revenues. Respondents will propose both a MAG and a Percentage (%) of Annual Gross Revenue, the greater of which will be paid . 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. which guarantees that the tenant will pay the airport a minimum amount annually. Six options for how to ensure that the airport concessions industry continues to be a robust and vibrant business for all. While it may never be business as usual again, the airport and its business partners need to adjust to a new normal. COVID-19 has sent shockwaves throughout the world. Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. 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. 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. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. leasehold at Washington Dulles International Airport (IAD). CARES Act funding: Ten things airports need to know The FAA has issued additional guidance on airport concession fees, some of which reverses earlier policies. At least $100 million will go to general aviation airports, allocated based on categories published in the current NPIAS. 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. 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.. Minimum Annual Guarantee: Each Proposer shall submit its proposal as a minimum annual guarantee (MAG) for each of the first two (2) years of the Concession Agreement. 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. 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. Supplemental Airport Grant-In-Aid Funding Option 4: Airport-concessionaire joint ventures. For information on the business impacts of COVID-19, please visit ourCOVID-19 Resource Center, which we continue to update as the situation evolves. Flashcards. The single factor most tied to concession success is the footfall past the concession locations. Majority-In-Interest (MII) clauses. Tax. How involved the airport gets in the day-to-day operation is the option of the airport and their partner(s). The CFC is a charge based on either the contract value, gross receipts, or per car per day. The airport environment is complex and has become even more challenging due to COVID-19. 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. 4.1.3 Percentage Fees. It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. SFO to launch rent relief programme for airport concession tenants Tallahassee, FL 32310 . 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. Without this expertise, the concession will almost certainly fail to operate at an optimum level. See how we help fast-changing industries succeed. 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. This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. Airport Operations Flashcards | Quizlet Some airports have had huge success in meeting ACDBE goals with the developer model. Greater of 30% or Minimum Annual Guarantee : Taxi Fees (annual contract fee) Pre-Arranged Transportation (per pickup) $6.00 . Rates and Fees are adjusted annually based on the Airport's fiscal year, from October 1st through September 30th. Sea-Tac airport may allow Uber, Lyft and Sidecar to start picking up passengers if new rules are passed. What this option does do is change the distribution of risk. The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. If any portion of the $2 billion is left over after distributing in accordance with 49 U.S.C. Discover our insights for a sustainable, low-emissions future. The compliance and accounting questions related to the COVID-19 outbreak and the related new funding streams are significant. The additional funds appropriated by the CARES Act were largely intended to help airport sponsors meet their debt service and bond obligations. That is no longer possible. Current generally accepted accounting principles suggests that entities should establish a policy that defines operating revenues for enterprise funds and use it consistently. To provide flexibility to recipients of federally funded projects in providing opportunities to DBEs. SCOPE OF FEES TO BE PAID THE CITY BY CONCESSIONAIRES a. FBO/SASO: NOTE: PDF Federal Aviation Administration By using this site you agree to our use of cookies. 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. Annual fee for the airport to perform snow removal at the Vehicle Ready/Storage Vehicle Parking Area and Service Building/Wash Bay Facility. Kansas City names company to run concessions at new KCI Airport - KMBC As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. High-profile restaurateurs battle for Orlando International eatery In other parts of the world, MAGs are the airport's exact expected rental payments. There are numerous ways to frame a contract without a MAG. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. Airport sponsors should carefully review their bond documents to ensure the methods of calculating the airports rate covenant under the current circumstances are appropriate. Why is airport food so expensive? - Policygenius First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. CM Module 1 Questions Flashcards | Quizlet While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. Denver International Airport refundings to ease debt-service schedule https://www.law.cornell.edu/cfr/text/49/part-23, Airport Concessions Disadvantaged Business Enterprises, Developing An Operating Budget - Airport University, Disadvantaged Business Enterprises - Airport University. Many airport agreements allow for a suspension of MAGs in the event of a severe enplanement decrease. The policies and procedures are available for review here. As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. 9. O'Hare and Midway concessionaires to get rent relief - Chicago Sun-Times 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. A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. The fallacy of Minimum Annual Guarantee (MAG). In North America, airports tend to look at MAGs as the least amount of acceptable rent. mwaa.com - RFP-21-26914: Fixed Base Operator, IAD Primarily, in residual agreements, the rates vary based on airport revenue. Unlike earlier phases of stimulus, Phase 4 has the potential to include a significant infrastructure focus. While the airport might invest capital in the joint venture, it must be involved in a management committee overseeing the business. An airport owner/sponsor may use these funds for any purpose for which airport revenues may be lawfully used. 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. (1) On-Airport (% of Gross Receipts). The Airport has also experienced a reduction in passengers and operations as a result of . Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. No one is sure how long recovery will take. Opinion: Why MAG flexibility is essential for airport advertising City of Philadelphia Procurement Department - Bid Solicitation Performance. 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. 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. (The catch: Potential renters must submit a formal proposal to the Airport Commission and are subject . With the new economic and industry realities, capital access may be an even greater hurdle. 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. 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. Page 3 of 61 - Non-exclusive On-airport Rental Car Concession - Proposal documents 3. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. 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. If flights do not return to their pre-pandemic levels, then the airport will not be able to recover former passenger levels. Food worker shortage at Sacramento airport prompts closures | The Piedmont Triad International Airport in Greensboro gets $10 million in Its clear that fixed MAGs are unable to provide the flexibility necessary to deal with severe occurrences. The price tag is a whopping $440 per square foot. 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. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. No one is sure how long recovery will take. Learn. 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. 47114, with minimum apportionments for smaller airports that serve between 8,000 and 10,000 passengers annually. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee (MAG). 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. As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. There are a few limitations, however, that make this a less than optimal solution. Opinion: Airport concession fee strategies in the coronavirus era 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. If FAA does not receive emergency approval, the economic recovery of the nation's air 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. However, MAGs in concession contracts still expect continued growth. The concept is not uncommon. 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. We did not review solicitation or award of concession agreements in this audit. Atlanta, GA - Hartsfield-Jackson Atlanta International Airport. 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. This is especially true for leases incorporating a Minimum Annual Guarantee (MAG) mechanism or fixed rent clauses. MAG - Minimum Annual Guarantee. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. . 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. Terms in this set (15) What is MAG and what does it stand for? By way of comparison, in the past two fiscal years (FY19 and FY20), the federal government has appropriated approximately $3.35 billion in regular Air Improvement Program (AIP) spending and an additional $400$500 million in discretionary AIP grants. In either case, history has shown that MAGs are not supportable in the event of severe downturns. Attention: Finance & Administration Division . Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. Airports maintain goals of working with Disadvantaged Business Enterprises or more commonly referred to as DBEs. Guarantee: $50,000. The city named the Vantage Airport Group to run the concessions when the new terminal opens in 2023. Summary: The Metropolitan Washington Airports Authority is seeking competitive bids from all responsible and qualified companies desiring to manage and operate rental car concessions from on-Airport facilities at Ronald Reagan Washington National Airport. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. PDF Request for Proposal - Dallas/Fort Worth International Airport While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. Some larger airports take a percentage of every sale. Two ground handling service providers selected for Chennai airport's It was suspended in June, following the severe decline of passenger traffic over those . The Board of Airport Commissioners at Los Angeles World Airports has recently approved a recommendation by management to permit concessionaire relief measures, including moving all concessionaires with contracts based on Minimum Annual Guarantee fee payments to percentage rent-based agreements This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. Fuelling Airport Recovery Via Non-Aeronautical Revenue | WSP - WSPglobal This . Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. The passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. Concessions Development - Airport University The single factor most tied to concession success is the footfall past the concession locations. 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. They rent space to provide a service/product (rental car) for an agreed upon time frame at a certain rate. Weve compiled the top 10 things that you should know about the CARES Act funding for airports. . Regulatory Updates due to Coronavirus - Federal Aviation Administration Please pay it forward. . 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. Similar to a third party option, an institutional operator can reduce risk while also reducing proceeds to the airport operator. As MSP airport develops long-term relief plan for shops and restaurants The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. Because of the drastic reduction in flights and passenger traffic, airlines have been shrinking their staffing, space requirements and gate usage. Rent abatement should be tied to the changed circumstances caused by the public health emergency and done in accordance with Grant Assurances 22 and 24, as well as related statutes. This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. [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. The FAA released guidance for airport administrators, but questions still linger and issues have gone unaddressed. All rights reserved. Discover how we help clients achieve success. 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. Through Dec. 31, 2020, the airport sponsor must continue to employ at least 90% of the number of individuals employed (after adjusting for retirements or voluntary employee separations) as of March 27, 2020. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. . A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. The AICPA State and Local Governments audit guide includes certain accounting guidance that has been cleared by GASB as Category B authoritative guidance. Airports would also have to establish supply lines for products that they have not procured in the past. 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. A third party company could be contracted to handle the leasing and management of concessions on behalf of the airport. If, on the other hand, the airport sponsor decides to enforce the terms of a MAG, then it should carefully review the concession contract to determine the terms of enforcement and whether the concessionaire has any basis to refuse to pay the MAG. The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. Will this have an impact on airline and concession agreements? The FAAs Office of Airports will administer these grant funds to airport sponsors. Necessary cookies are absolutely essential for the website to function properly. Master operators are common options, such as HMS Host Intl, Paradies Lagardere, Delaware North, and SSP. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. The future of airport concessions in a post-COVID-19 world - Duty Free The FAA helped to level the playing field by allowing DBEs to compete for concessions contracts in airports. See how we support our people, protect the planet, and give back to communities. 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. Project. Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. Airports should carefully consider how they structure deals and their business modelsto ensure more flexibility to respond to potential future shocks. The additional funds appropriated by the CARES Act were intended, in large part, to help airport sponsors meet their debt service and bond obligations. 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.