The key will be ensuring that airline charges remain fair and reasonable. That will, in turn, harm the concession program. Find out how our purpose shapes our culture, people, and mission-driven work. Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. 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. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. The single factor most tied to concession success is the footfall past the concession locations. See how we help fast-changing industries succeed. To help develop firms that can compete in the marketplace outside of the DBE program. 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. Cookie Notice: This site uses cookies to provide you with a more responsive and personalized service. Learn. 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. A. Add it up, and the cost of operating at an airport is often higher than operating at a typical mall. If an airport can become a partner in the operation of a concession, it might also consider being a concession operator on its own. Most simply, the airport and vendor could agree to a fixed percentage rent. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). However, we recommend that you consider the underlying principles of Uniform Guidance and the terms and conditions of the FAA while administering the funds. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. Until a few weeks ago, your organization has likely been focused on implementing several new GASB standards, including GASB Statement No. Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. In North America, airports tend to look at MAGs as the least amount of acceptable rent. Lets consider six potential options. October 09, 2020, 11:40 a.m. EDT 4 Min Read. While the leased space is non-aeronautical revenue, the CFCs are non-operating revenue. . While some of these answers require more information from the federal agencies, there are 10 burning questions we can answer now. $100,000, 5%, 100% . Flashcards. 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 The same rules govern the use of CARES Act funds that govern the use of all airport revenues. 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. At least $100 million will go to general aviation airports, allocated based on categories published in the current NPIAS. Because of the drastic reduction in flights and passenger traffic, airlines have been shrinking their staffing, space requirements and gate usage. 1, their minimum annual guarantee was superior to anybody . The master operator concept typically limits the ACDBE participation goals and may require additional efforts to maintain. Land . One-twelfth of the MAG shall be due in advance on the first day of each month The additional funds appropriated by the CARES Act were intended, in large part, to help airport sponsors meet their debt service and bond obligations. Primarily, in residual agreements, the rates vary based on airport revenue. There are a few limitations, however, that make this a less than optimal solution. 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. 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. The Airport has also experienced a reduction in passengers and operations as a result of . There are means of counting passengers who pass a concession location, but few airports have installed such technology. The FAA may retain up to $10 million to fund the award and oversight of grants made pursuant to the CARES Act. Below are some considerations for airport sponsors to keep in mind. Wealth Management. The fallacy of Minimum Annual Guarantee (MAG). 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 current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. While the bulk of the $10 billion appropriated for airport sponsors can be used to make bond principal and interest payments if necessary, airport sponsors may be faced with difficult decisions about how to prioritize needs while under financial stress. By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. However, this still may not be the most effective solution. 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. If an airport can become a partner in the operation of a concession, it might also consider being a concession operator on its own. 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. 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. There are numerous ways to frame a contract without a MAG. Percentage (privilege) Fees - 10% of gross revenue from airport related car rentals, or a minimum annual guarantee, whichever is greater. Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. Many airport agreements allow for a suspension of MAGs in the event of a severe enplanement decrease. 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. Additionally, nonoperating revenues would generally include grants, among other things. Examples of Minimum Annual Guaranteed Rent in a sentence. They will typically lease space for counter and office space and additional space for the vehicle storage. Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. Regardless, this shifting of risk may not be acceptable to airports. This is especially true for leases that incorporate the minimum annual guarantee (MAG) mechanism or fixed rent clauses. The future of airport concessions in a post-COVID-19 world, COVID-19's impact on commercial aviation: Customer survey findings, Why sustainable aviation is more than a flight of fancy, Sustainable aviation: A guide for aviation professionals. 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. Nor do we know whether travel habitswill change permanently because of new practices learned during lockdowns. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee (MAG). Most simply, the airport and vendor could agree to a fixed percentage 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. Minimum Annual Guarantee (MAG). When passenger traffic does come back, airports should rethink how their concession contracts work. "We've already . In a standard MAG model, the concessionaire bears a great deal of uncertainty with little risk falling to the airport. The Trinity model can be considered an extension of the joint venture model. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. 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. 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, A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. The CARES Act roughly triples the amount of money flowing from the federal government directly to airports for 2020. Terminal Closure and Footprint Reductions. New model commercial contracts will require a complete rebuild of the airport's financial model, along with revised relations with financiers. 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.. When one partner tries to do too much, it will lessen the benefits of the joint venture. Airport sponsors should carefully review their bond documents to ensure the methods of calculating the airports rate covenant under the current circumstances are appropriate. Master operators are common options, such as HMS Host Intl, Paradies Lagardere, Delaware North, and SSP. softballrizer. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. Up to $2 billion apportioned in accordance with the per-passenger apportionment rules of 49 U.S.C. They often charge more than 10% for water and alcohol, Waguespack said. Save my name, email, and website in this browser for the next time I comment. They rent space to provide a service/product (rental car) for an agreed upon time frame at a certain rate. While the model has primarily been used for duty free concessions, it has worked equally well for other types of concessions. New non-aeronautical revenue streams are critical to airport recovery from the COVID-19 pandemic. 4.1.2 Minimum Annual Guaranteed Concession Fee Payment. Minimum Annual Guarantees. Will this have an impact on airline and concession agreements? Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. Car rental companies are concessionaires at the airport. 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. 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. Project. 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. Each entity will need to review the applicable accounting guidance, consider their own circumstances, and make their determination based on their professional judgment. The intent of DBE programs is to increase the amount of business done with Minority Business Enterprises (MBE) and Women Business Enterprises (WBE). If FAA does not receive emergency approval, the economic recovery of the nation's air Annual fee for the airport to perform snow removal at the Vehicle Ready/Storage Vehicle Parking Area and Service Building/Wash Bay Facility. "No. The additional funds appropriated by the CARES Act were largely intended to help airport sponsors meet their debt service and bond obligations. Like their partners in the airline industry, airports have been dramatically affected by the slowdown in flights and passenger traffic associated with COVID-19. By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. These benefit packages may make the cost of employment significantly higher than the all-in employment costs for most concession operators. Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. In other parts of the world, MAGs are the airport's exact expected rental payments. 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. 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 . 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 . Please read our Privacy Policy for more information on the cookies we use. By using this site you agree to our use of cookies. Unlike earlier phases of stimulus, Phase 4 has the potential to include a significant infrastructure focus. The FAA released guidance for airport administrators, but questions still linger and issues have gone unaddressed. To level the playing field so that DBEs can compete . The price tag is a whopping $440 per square foot. Minimum Annual Guarantee - How is Minimum Annual Guarantee abbreviated? The cost of design and construction for your space is going to be much higher. This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. MAG: Each Respondent shall indicate payment of a Minimum Annual Guarantee ("MAG") of $_____. In times of continued and prolonged growth, airports have learned to depend upon MAGs. In other parts of the world, MAGs are the airports exact expected rental payments. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. The city may extend the action for an additional 30-day . Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. The airport environment is complex and has become even more challenging due to COVID-19. But opting out of some of these cookies may affect your browsing experience. 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). minimum annual guarantee (MAG) obligations to eligible airport concessions. It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. Concessionaires could avoid minimum annual guarantee payments for a third quarter as the MAC develops a long-term relief plan. Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. 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. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. 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 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 . An amount of $7.4 billion, which can be distributed to airport sponsors for any purpose for which airport revenues may lawfully be used. The purpose for which airport revenues may lawfully be used is widely viewed as a reference to the FAAs Policy on Permitted and Prohibited Uses of Airport Revenue (Revenue Diversion Policy). When passenger traffic does come back, airports should rethink how their concession contracts work. The entire concessions space is typically leased out to a single company who is responsible for subletting the spaces. 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 actual process is the easiest for the airport sponsor since there are minimal contracts. The question that airport managers must ask themselves is which rent strategy is realistic in the current environment. While the model has primarily been used for duty-free concessions, it has worked equally well for other types of concessions. This financial shock has created a number of legal and financial issues. Primarily, in residual agreements, the rates vary based on airport revenue. In the concessions arena, they are referred to as Airport Concessions Disadvantaged Business Enterprise (ACDBE). 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. 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. Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. Here are some others. Airport vendors have you right where they want you trapped at the gate, drinking a $20 beer. Greater of 30% or Minimum Annual Guarantee : Taxi Fees (annual contract fee) Pre-Arranged Transportation (per pickup) $6.00 . Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). 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. 116-94). In times of continued and prolonged growth, airports have learned to depend upon MAGs. With the new economic and industry realities, capital access may be an even greater hurdle. However, MAGs in concession contracts still expect continued growth. . Concessionaires pay the Airport Authority a percentage of their gross sales each month, which is one-twelfth of a pre-determined minimum annual guarantee (MAG). However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. In other parts of the world, MAGs are the airports exact expected rental payments. 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. Flashcards. Percentage Rent to the Board as set forth in Article 1 based on Concessionaire's Gross Receipts, subject to a Minimum Annual Guarantee (MAG) as set forth in Article 1, and as further provided below. This website uses cookies to improve your experience while you navigate through the website. Match. The AICPA State and Local Governments audit guide includes certain accounting guidance that has been cleared by GASB as Category B authoritative guidance. Weve compiled the top 10 things that you should know about the CARES Act funding for airports. 9. 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. At least for the immediate future, there will be reduced demand for concession services. 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. BADGES AND SECURITY: . Without this expertise, the concession will almost certainly fail to operate at an optimum level. 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. At least $500 million is available to increase the federal share to 100% for grants awarded under the fiscal year 2020 appropriations cycle for FY20 Airport Improvement Program (AIP) and FY20 Supplemental Discretionary grants. However, MAGs in concession contracts still expect continued growth. Its clear that fixed MAGs are unable to provide the flexibility necessary to deal with severe occurrences. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. Chris Dinsdale has worked at Budapest Airport since 2015, originally as CFO until March 2021, where he was nominated for the position as CEO . 4.1.1 Minimum Annual Guaranteed Concession Fee. Normally, airport concessionaires pay the city a percentage of sales or a "minimum annual guarantee" based on sales the previous year, whichever is greater. It is still unclear whether all of the CARES funding will be reported on the Schedule of Expenditures of Federal Awards (SEFA) . The $10 billion in funding is divided into four main categories: For airport grants, after the Secretary of Transportation announces awards under the CARES Act, each airport sponsor must submit a grant application to access those funds. While passenger safety and well-being are paramount, the extreme reduction in passenger flow has rippled across the entire airport-airline ecosystem. SCOPE OF FEES TO BE PAID THE CITY BY CONCESSIONAIRES a. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. The Revenue Use Policy document defines permitted and prohibited uses of airport revenue. 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. 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. 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. Airport Operations. (1) On-Airport (% of Gross Receipts). FBOs may collect the landing fees for GA aircraft or charge them a fuel-flowage fee on behalf of the airport. The FAA has published a map showing airports that are receiving the funds and the allocations made to them. This is especially true for leases incorporating a Minimum Annual Guarantee (MAG) mechanism or fixed rent clauses. Discover the top trends shaping government in 2023. 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. A MAG, as currently developed, is unsustainable in anything but relatively normal times. While many contracts include a "force majeure" clause, this does not necessarily cover pandemic scenarios and in many instances, there is no formal agreement in place to review commercial terms in the event of such a .