October 09, 2020, 11:40 a.m. EDT 4 Min Read. Sea-Tac airport may allow Uber, Lyft and Sidecar to start picking up passengers if new rules are passed. Meanwhile the company maintained a resilient retail margin of above 60%, helped by minimum annual guarantee waivers to airport landlords of $1.2 billion. The actual process is the easiest for the airport sponsor since there are minimal contracts. Concessions covers more than what you think of served at a traditional concession stand. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. - Suite 1 . Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. The cost of design and construction for your space is going to be much higher. The concept is not uncommon. The company, which . MAG: Each Respondent shall indicate payment of a Minimum Annual Guarantee ("MAG") of $_____. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. No one is sure how long recovery will take. The Federal Aviation Administration (FAA) . 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. When passenger traffic does come back, airports should rethink how their concession contracts work. 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 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. Products and services both fall into the concessions category. Airports would have to offer benefit packages to these employees in line with those provided to other employees of the airport. The single factor most tied to concession success is the footfall past the concession locations. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. 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. Tallahassee, FL 32310 . The same rules govern the use of CARES Act funds that govern the use of all airport revenues. If an airport can become a partner in the operation of a concession, it might also consider being a concession operator on its own. 49 CFR Part 23 requires airports to have a concessions-based DBE program. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. The Airports Authority of India (AAI) has kick-started the process of appointing ground handling agencies for 83 state-run airports for a . Airport Operations. The airport environment is complex and has become even more challenging due to COVID-19. An engaging panel discussion entitled 'Road to Recovery: The Retailer Perspective' took place during yesterday's virtual Summit of the . The federal share for FY 2018 and 2019 Supplemental Discretionary grants wont increase. Airports should carefully consider how they structure deals and their business models to ensure more flexibility to respond to potential future shocks. 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. Airport sponsors should carefully review their bond documents to ensure the methods of calculating the airports rate covenant under the current circumstances are appropriate. These cookies do not store any personal information. This essentially flips the rent risk from being entirely on the vendors (in a MAG-based model) to being entirely on the airport. Nor do we know whether travel habitswill change permanently because of new practices learned during lockdowns. A MAG, as currently developed, is unsustainable in anything but relatively normal times. The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. Match. Its clear that fixed MAGs are unable to provide the flexibility necessary to deal with severe occurrences. Signatory carriers may exercise significant control over an airport's capital budgeting process under provisions in a use agreement known as. Some airports have had huge success in meeting ACDBE goals with the developer model. Find more information in a tax alert comparing COVID-19 employer tax incentives, issued by our National Tax Office. Lets consider six potential options. The entire concessions space is typically leased out to a single company who is responsible for subletting the spaces. The 10-year contract was awarded on the basis of the minimum annual guarantee payment totaling $352,000 or a percentage of gross receipts, whichever is greater. 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, 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). 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) 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. As a result, airports may wish to consider going a step further. Will this have an impact on airline and concession agreements? 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. However, MAGs in concession contracts still expect continued growth. 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 develop pays the amount due to the airport through the lease agreement and pockets the rest. Airport sponsors should carefully review their bond covenants and indentures, with a particular focus on pledge of revenues and flow of funds. A third party can absorb some of the liability and risk from the airport operator. A by-location per passenger MAG may be too complicated for widespread implementation at this point. In the concessions arena, they are referred to as Airport Concessions Disadvantaged Business Enterprise (ACDBE). There are numerous ways to frame a contract without a MAG. A payment called a Minimum Annual Guarantee will be waived for the months of March, April and May last year. minimum annual guarantee (MAG) obligations to eligible airport concessions. A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. This opportunity is for two available FBO leaseholds with a general aviation terminal, office space . The Trinity model can be considered an extension of the joint venture model. percentage of their annual gross revenues derived from operations at the airport or a minimum annual guaranteed amount, whichever is greater. To ensure nondiscrimination in federally funded contracts for DOT airport assistance programs. 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? 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. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. In North America, airports tend to look at MAGs as the least amount of acceptable rent. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. 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. Discover how we help clients achieve success. Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. COVID-19 has sent shockwaves throughout the world. 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. Learn how your comment data is processed. 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. Given the current state of the economy, Congress has turned to working on the next comprehensive economic relief package, which is being referred to as CARES 2.0. The intent of DBE programs is to increase the amount of business done with Minority Business Enterprises (MBE) and Women Business Enterprises (WBE). By clicking Accept, you consent to the use of ALL the cookies. A by-location per passenger MAG may be too complicated for widespread implementation at this point. However, this still may not be the most effective solution. Fixed Based Operators or FBOs, are service providers to many GA and corporate aircraft. 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. We do expect further guidance from the federal government in upcoming months to clarify SEFA considerations. 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. Discover the top trends shaping government in 2023. Option 4: Airport-concessionaire joint ventures. To level the playing field so that DBEs can compete . Additionally, nonoperating revenues would generally include grants, among other things. If flights do not return to their pre-pandemic levels, then the airport will not be able to recover former passenger levels. With the new economic and industry realities, capital access may be an even greater hurdle. Where do we go from here? 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 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 other parts of the world, MAGs are the airport's exact expected rental payments. 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. Some larger airports take a percentage of every sale. Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. Current generally accepted accounting principles suggests that entities should establish a policy that defines operating revenues for enterprise funds and use it consistently. 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. 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. To remove barriers in participation of DBEs. In either case, history has shown that MAGs are not supportable in the event of severe downturns.
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