The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. The same rules govern the use of CARES Act funds that govern the use of all airport revenues. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. The key will be ensuring that airline charges remain fair and reasonable. This information collection permits FAA to confirm that rent relief is consistent with the requirements of CRRSA and ARPA. 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. With the new economic and industry realities, capital access may be an even greater hurdle. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. For more insights from Alan Gluck and ICF, please go to https://www.icf.com/insights/transportation, The future of airport concessions in a post-COVID-19 world, https://www.icf.com/insights/transportation. 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 the event that the concessionaire is unsuccessful, the airport absorbs the losses. There are several types of concessionaires that lease space to operate at the airport. However, MAGs in concession contracts still expect continued growth. The fallacy of Minimum Annual Guarantee (MAG). Some larger airports take a percentage of every sale. Concessionaires need to understand this new business reality when they ask for relief. These cookies do not store any personal information. Similar to a third party option, an institutional operator can reduce risk while also reducing proceeds to the airport operator. If FAA does not receive emergency approval, the economic recovery of the nation's air Terms in this set (15) What is MAG and what does it stand for? 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. Strategic agency for engagement and transformation. 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. Concessions and retail often fill that need. The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. . Sea-Tac airport may allow Uber, Lyft and Sidecar to start picking up passengers if new rules are passed. Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. 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. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. 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. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. It is still unclear whether all of the CARES funding will be reported on the Schedule of Expenditures of Federal Awards (SEFA) . MAG - Minimum Annual Guarantee. Lets consider six potential options. Regardless, this shifting of risk may not be acceptable to airports. 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. Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. While the leased space is non-aeronautical revenue, the CFCs are non-operating revenue. The entire concessions space is typically leased out to a single company who is responsible for subletting the spaces. The city may extend the action for an additional 30-day . 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. For years 2, 3, 4, and 5 of the Term of the Agreement, the Minimum Annual Guarantee shall be 85% of the Concessionaire's previous year's concession fees paid to County or the Minimum Annual Guarantee bid for the first 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. 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. Regulatory Updates Extension of Minimum Slot Usage Requirements. There will still be passengers, and the concession industry needs to be ready to serve them. - Suite 1 . While the model has primarily been used for duty free concessions, it has worked equally well for other types of concessions. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee (MAG). 9. If you have questions. 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. Airports would have to offer benefit packages to these employees in line with those provided to other employees of the airport. Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. When passenger traffic does come back, airports should rethink how their concession contracts work. Primarily, in residual agreements, the rates vary based on airport revenue. This is especially true for leases that incorporate the minimum annual guarantee (MAG) mechanism or fixed rent clauses. 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. But opting out of some of these cookies may affect your browsing experience. Airport Operations. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. 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. This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. Airports would also have to establish supply lines for products that they have not procured in the past. installments during the first year of the Term. San Francisco, CA Mayor London N. Breed has signed an ordinance authorizing the San Francisco International Airport (SFO) to launch a rent relief program for airport concession tenants, in which lease agreements will be modified to waive certain rent and fees.The value of the relief available to be granted under the COVID-19 Emergency Rent Relief Program is estimated at $21.3 million and . The concept is not uncommon. 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. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. 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. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. Examples of concessions within airports include: A direct concession lease involves the space being directly marketed, leased, and managed by the airport operator. 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. In North America, airports tend to look at MAGs as the least amount of acceptable rent. A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. If, at the end of any year during the Term, the total amount of monthly installments of MAG and Percentage Fees paid for such year is less than the total amount of annual MAG and Percentage . There are a few limitations, however, that make this a less than optimal solution. However, it does reduce the potential benefit to the airport by splitting the proceeds generated. The FAAs Office of Airports will administer these grant funds to airport sponsors. 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. Tallahassee, FL 32310 . Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. They charge restaurants a minimum annual guarantee, also known as "rent" in the non-airport world. 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 master operator concept typically limits the ACDBE participation goals and may require additional efforts to maintain. 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. 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. This is only for the passenger traffic, while for . . Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. Without this expertise, the concession will almost certainly fail to operate at an optimum level. COVID-19 has sent shockwaves throughout the world. While some of these answers require more information from the federal agencies, there are 10 burning questions we can answer now. 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. Even before the contagion, the "Minimum Annual Guarantee" (MAG) model was already under challenge, and does this tool remain fit-for-purpose? A third party can absorb some of the liability and risk from the airport operator. The airport operator is always present and has a wealth of knowledge about the airport. COVID-19 has sent shockwaves throughout the world. Lets consider six potential options. Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. An engaging panel discussion entitled 'Road to Recovery: The Retailer Perspective' took place during yesterday's virtual Summit of the . Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). 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 (MAG) - The amount proposed and/or agreed to by the Concessionaire, that Concessionaire guarantees as minimum payment per year to DFW. We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. To promote the use of DBEs for federally funded projects. 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. These cookies will be stored in your browser only with your consent. This essentially flips the rent risk from being entirely on the vendors (in a MAG-based model) to being entirely on the airport. Flashcards. . 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. 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. minimum annual guarantee (MAG) obligations to eligible airport concessions. Match. 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. Until a few weeks ago, your organization has likely been focused on implementing several new GASB standards, including GASB Statement No. Elsewhere, airports do not expect vendors to exceed their MAGs. In either case, history has shown that MAGs are not supportable in the event of severe downturns. Each entity will need to review the applicable accounting guidance, consider their own circumstances, and make their determination based on their professional judgment. Up to $2 billion apportioned in accordance with the per-passenger apportionment rules of 49 U.S.C. 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 . By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. 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. October 09, 2020, 11:40 a.m. EDT 4 Min Read. You also have the option to opt-out of these cookies. However, we recommend that you consider the underlying principles of Uniform Guidance and the terms and conditions of the FAA while administering the funds. Where appropriate and agreed to by airport sponsors, terminal use leases should be amended to reflect the airlines changed operating circumstances. 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. 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. One-twelfth of the MAG shall be due in advance on the first day of each month The FAA issued an extension of limited waiver (PDF) through October 29, 2022 of the minimum-slot-usage requirement for international operations at John F. Kennedy International Airport (JFK), LaGuardia Airport (LGA), and Ronald Reagan Washington National Airport (DCA).Additionally, the FAA extended through October 29, 2022, our . Discover the top trends shaping government in 2023. 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. 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. Minimum Annual Guarantee (MAG). Created by. 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. 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. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. Greater of 30% or Minimum Annual Guarantee : Taxi Fees (annual contract fee) Pre-Arranged Transportation (per pickup) $6.00 . Products and services both fall into the concessions category. Signatory carriers may exercise significant control over an airport's capital budgeting process under provisions in a use agreement known as. 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. No one is sure how long recovery will take. 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. Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. In other parts of the world, MAGs are the airport's exact expected rental payments. These three options do not change the underlying airport-concessionaire relationship. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. 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 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. 4.1.3 Percentage Fees. 49 CFR Part 23 requires airports to have a concessions-based DBE program. 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 . Add it up, and the cost of operating at an airport is often higher than operating at a typical mall. 47114, with minimum apportionments for smaller airports that serve between 8,000 and 10,000 passengers annually. . Alan has over two decades of experience in commercial/concession management, facility planning, financial analysis, and government procurement. 6 . Minimum Annual Guarantee. Concessionaires could avoid minimum annual guarantee payments for a third quarter as the MAC develops a long-term relief plan. Many airport agreements allow for a suspension of MAGs in the event of a severe enplanement decrease. 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, 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. 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. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. 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). 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. Concessionaires are, in general, seeking some manner of rent relief from their airport partners. Tallahassee International Airport . We also use third-party cookies that help us analyze and understand how you use this website. The Audit Committee has reviewed this report and is releasing it in accordance with Article 2, Chapter 6 of the City Charter. 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. Other organizations that havent yet addressed some of these pending standards may want to take advantage of the implementation delays. At least $100 million will go to general aviation airports, allocated based on categories published in the current NPIAS. 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. This . Test. Airport Cargo Community system Bid Opening Date: 07/13/2021 05:00:00 PM Purchaser: Kevin Hanagan Organization: City of Philadelphia . FBO/SASO: NOTE: Airport sponsors should carefully review their bond covenants and indentures, with a particular focus on pledge of revenues and flow of funds. them from immediately acquiescing to their advertisers' perfectly justifiable requests is the cold draught of the minimum annual guarantee (MAG). 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. By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. The Revenue Use Policy document defines permitted and prohibited uses of airport revenue. Here are some others. February 2, 2021January 28, 2021 | AirportU. The FAA released guidance for airport administrators, but questions still linger and issues have gone unaddressed. 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. 1, their minimum annual guarantee was superior to anybody . Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. At least for the immediate future, there will be reduced demand for concession services. The company, which . A MAG, as currently developed, is unsustainable in anything but relatively normal times. The recent COVID-19 pandemic has highlighted the need for an alternative outlook on the way that commercial contracts between airports and concessionaires are structured to reflect the current and future uncertainty around passenger profiles and passenger traffic volumes. 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. However, this still may not be the most effective solution. A by-location per passenger MAG may be too complicated for widespread implementation at this point. The passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. 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. . However, MAGs in concession contracts still expect continued growth. BADGES AND SECURITY: . There are a few limitations, however, that make this a less than optimal solution. 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. 116-94). (a) Annual Reconciliation. The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. Terminal Rentals - Rent paid by car rental companies for ticket counters and office space in terminals. In North America, airports tend to look at MAGs as the least amount of acceptable rent. 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. The Airport has also experienced a reduction in passengers and operations as a result of . This document addresses common issues that have arisen or may arise for airport sponsors during the response to the COVID-19 public health emergency. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. Airports provide the passengers, the retailers provide the services. Delta will pay market rates to lease these three additional Delta-preferred gates with a minimum annual guarantee (MAG). Supplemental Airport Grant-In-Aid Funding Rates and Fees are adjusted annually based on the Airport's fiscal year, from October 1st through September 30th. Denver International Airport will price $925 million of refunding bonds to help ease its debt service burden during the pandemic-driven traffic decline . While the model has primarily been used for duty-free concessions, it has worked equally well for other types of concessions. 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.
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