Airports around the country will soon receive their share of $10 billion in FAA grants provided in the CARES Act. The Airport has also experienced a reduction in passengers and operations as a result of . 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. 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. Airlines value an attractive commercial program because it makes a better background for the expression of their brand. Airlines, while they may be able to reduce some operating costs associated with vacated premises, must still cover all their fixed and operating costs associated with the vacated space. If youre far enough along in the implementation process, you may want to move forward with adopting these standards. 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. Respondents will propose both a MAG and a Percentage (%) of Annual Gross Revenue, the greater of which will be paid . 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. Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. In a standard MAG model, the concessionaire bears a great deal of uncertainty with little risk falling to the airport. Weve compiled the top 10 things that you should know about the CARES Act funding for airports. Save my name, email, and website in this browser for the next time I comment. Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. 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. $100 million is distributed to general aviation airports in accordance with categories established by the National Plan of Integrated Airport Systems (NPIAS). However, this still may not be the most effective solution. Examples of concessions within airports include: A direct concession lease involves the space being directly marketed, leased, and managed by the airport operator. Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. Yellow Cab pays Sea-Tac a $3.67 million minimum annual guarantee or 13 percent of its . 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. 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. Chris Dinsdale has worked at Budapest Airport since 2015, originally as CFO until March 2021, where he was nominated for the position as CEO . The FAA released guidance for airport administrators, but questions still linger and issues have gone unaddressed. Airlines are likely to oppose any PFC increase, and in the absence of any increase, infrastructure spending would likely be funded through additional appropriations to the Airport and Airway Trust Fund. Will this have an impact on airline and concession agreements? 47114 (as modified by the CARES Act), then the remainder is distributed in the same manner as the $7.4 billionbased on a mixture of enplanements and debt service. The compliance and accounting questions related to the COVID-19 outbreak and the related new funding streams are significant. The Trinity model can be considered an extension of the joint venture model. Some larger airports take a percentage of every sale. 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 the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. A MAG, as currently developed, is unsustainable in anything but relatively normal times. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). Where do we go from here? Minimum Annual Guarantee _____- concession often establish their rates as a percentage of gross . This essentially flips the rent risk from being entirely on the vendors (in a MAG-based model) to being entirely on the airport. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. Learn. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. It is mandatory to procure user consent prior to running these cookies on your website. If flights do not return to their pre-pandemic levels, then the airport will not be able to recover former passenger levels. Below are some considerations for airport sponsors to keep in mind. 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. 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. The passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. Stakeholders are already beginning discussions on a proposed Phase 4 stimulus bill. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. The Federal Aviation Administration (FAA) . Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. At least $7.4 billion is allocated to commercial service airports, allocated based on enplanements, debt service, and unrestricted reserve ratios. The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. Each entity will need to review the applicable accounting guidance, consider their own circumstances, and make their determination based on their professional judgment. 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 competitive landscape may beby necessityaltered. As a result, airports may wish to consider going a step further. For information on the business impacts of COVID-19, please visit ourCOVID-19 Resource Center, which we continue to update as the situation evolves. Consulting. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. In times of continued and prolonged growth, airports have learned to depend upon MAGs. The FAA regional office must approve if the airport receives federal funding and is a primary airport with commercial service and the revenue generated by concessions exceeds $200,000. To promote the use of DBEs for federally funded projects. Audit. them from immediately acquiescing to their advertisers' perfectly justifiable requests is the cold draught of the minimum annual guarantee (MAG). Nor do we know whether travel habitswill change permanently because of new practices learned during lockdowns. 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. New model commercial contracts will require a complete rebuild of the airport's financial model, along with revised relations with financiers. The cost of design and construction for your space is going to be much higher. The additional funds appropriated by the CARES Act were intended, in large part, to help airport sponsors meet their debt service and bond obligations. Six options for how to ensure that the airport concessions industry continues to be a robust and vibrant business for all. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. The federal share for FY 2018 and 2019 Supplemental Discretionary grants wont increase. With the new economic and industry realities, capital access may be an even greater hurdle. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. This site uses Akismet to reduce spam. We do expect further guidance from the federal government in upcoming months to clarify SEFA considerations. That will, in turn, harm the concession program. 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. 9. Signatory carriers may exercise significant control over an airport's capital budgeting process under provisions in a use agreement known as. 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. 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. A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. There will still be passengers, and the concession industry needs to be ready to serve them. To ensure that the program is performed in accordance with law. The single factor most tied to concession success is the footfall past the concession locations. 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. In times of continued and prolonged growth, airports have learned to depend upon MAGs. In North America, airports tend to look at MAGs as the least amount of acceptable rent. However, sponsors dont need to apply for the increased federal share of FY20 AIP or FY 2020 Supplemental Discretionary grants. Airport concession program in order to maximize non-aviation revenue, increasing sales per enplaned passenger at a rate higher than passenger . The airport environment is complex and has become even more challenging due to COVID-19. The minimum guaranteed rent for the first year of the lease is the amount proposed by the winning proposal. a minimum annual guarantee or MAG annually, which more or less translates to rent. 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. 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. In a standard MAG model, the concessionaire bears a great deal of uncertainty with little risk falling to the airport. Looking for abbreviations of MAG? President Donald Trump has already tweeted his support for such an infrastructure bill. Non-airport retail leases typically charge rent on a per square foot (PSF) basis. However, MAGs in concession contracts still expect continued growth. (The catch: Potential renters must submit a formal proposal to the Airport Commission and are subject . These cookies will be stored in your browser only with your consent. 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). In other parts of the world, MAGs are the airport's exact expected rental payments. [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. A. 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. Add it up, and the cost of operating at an airport is often higher than operating at a typical mall. Discover how we help clients achieve success. Airport Cargo Community system Bid Opening Date: 07/13/2021 05:00:00 PM Purchaser: Kevin Hanagan Organization: City of Philadelphia . 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 While the airport might invest capital in the joint venture, it must be involved in a management committee overseeing the business. 3300 Capital Circle, S.W. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. 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. . Airport sponsors should carefully review their bond documents to ensure the methods of calculating the airports rate covenant under the current circumstances are appropriate. Majority-In-Interest (MII) clauses. Up to $2 billion will go to large, medium, and small hub airports, allocated based on AIP primary entitlement formulas. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee (MAG). Option 6: The airport as concession operator. Option 5: The Trinity (or Trinity Plus) model. An engaging panel discussion entitled 'Road to Recovery: The Retailer Perspective' took place during yesterday's virtual Summit of the . The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. When passenger traffic does come back, airports should rethink how their concession contracts work. . Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. Were here to help! 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.. 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 . 1, their minimum annual guarantee was superior to anybody . (a) Annual Reconciliation. Unlike earlier phases of stimulus, Phase 4 has the potential to include a significant infrastructure focus. Page 3 of 61 - Non-exclusive On-airport Rental Car Concession - Proposal documents 3. Minimum Annual Guarantee (MAG) of at least Eleven Million Dollars ($11,000,000) for each Contract Year and an annual escalation of at least three percent (3%) for the Contract Term. Minimum Annual Guarantee (MAG) - The amount proposed and/or agreed to by the Concessionaire, that Concessionaire guarantees as minimum payment per year to DFW. Current generally accepted accounting principles suggests that entities should establish a policy that defines operating revenues for enterprise funds and use it consistently. Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). It beat four other finalists. 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. Even before the contagion, the "Minimum Annual Guarantee" (MAG) model was already under challenge, and does this tool remain fit-for-purpose? No one is sure how long recovery will take. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. Elsewhere, airports do not expect vendors to exceed their MAGs. Primarily, in residual agreements, the rates vary based on airport revenue. 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. 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. Car rental companies are concessionaires at the airport. Where do we go from here? "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 . Flashcards. 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. Receive perspectives on the industries and issues that matter. Match. installments during the first year of the Term. 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. Project. Cookie Notice: This site uses cookies to provide you with a more responsive and personalized service. The Airports Authority of India (AAI) has kick-started the process of appointing ground handling agencies for 83 state-run airports for a . This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. The FAA has issued additional guidance on airport concession fees, some of which reverses earlier policies. While some of these answers require more information from the federal agencies, there are 10 burning questions we can answer now. To ensure that firms meet the requirements of DBE qualification. By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. 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. To level the playing field so that DBEs can compete . What this option does do is change the distribution of risk. The FAA has issued additional guidance on airport concession fees, some of which reverses earlier policies. Terms in this set (15) What is MAG and what does it stand for? 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. Many airport agreements allow for a suspension of MAGs in the event of a severe enplanement decrease. To provide flexibility to recipients of federally funded projects in providing opportunities to DBEs. 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 CFC is a charge based on either the contract value, gross receipts, or per car per day.