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The CARES Act roughly triples the amount of money flowing from the federal government directly to airports for 2020. Non-airport retail leases typically charge rent on a per square foot (PSF) basis. Discover our insights for a sustainable, low-emissions future. 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. In times of continued and prolonged growth, airports have learned to depend upon MAGs. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. Attention: Finance & Administration Division . However, it does reduce the potential benefit to the airport by splitting the proceeds generated. Regulatory Updates Extension of Minimum Slot Usage Requirements. Match. Audit. Creation of the lounge would require around a $4-million investment from whichever group decides to take over the space, which is 9,100 square feet -- on the small side for most airport lounges. This document addresses common issues that have arisen or may arise for airport sponsors during the response to the COVID-19 public health emergency. Airports would also have to hire and manage many additional hourly employees. 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. Necessary cookies are absolutely essential for the website to function properly. That will, in turn, harm the concession program. softballrizer. In the event that the concessionaire is unsuccessful, the airport absorbs the losses. A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. Providing a product or service inside the airport environment is one of the key qualifiers for a concessionaire. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. Option 4: Airport-concessionaire joint ventures. Because of the drastic reduction in flights and passenger traffic, airlines have been shrinking their staffing, space requirements and gate usage. These cookies will be stored in your browser only with your consent. Airports are left with four basic responses: do nothing, suspend minimum annual guarantees (MAG), defer rent, or rent abatement. Tax. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. These benefit packages may make the cost of employment significantly higher than the all-in employment costs for most concession operators. [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. $100,000, 5%, 100% . What this option does do is change the distribution of risk. Airlines value an attractive commercial program because it makes a better background for the expression of their brand. 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. 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. 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. Airports provide the passengers, the retailers provide the services. October 09, 2020, 11:40 a.m. EDT 4 Min Read. These benefit packages may make the cost of employment significantly higher than the all-in employment costs for most concession operators. 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. minimum annual guarantee (MAG) obligations to eligible airport concessions. The airport operator is always present and has a wealth of knowledge about the airport. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. They charge restaurants a minimum annual guarantee, also known as "rent" in the non-airport world. As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. June 9: Extending the leases of current airport, dining, and retail (ADR) tenants by up to three years, including a temporary suspension of the Minimum Annual Guarantee (MAG) for ADR tenants through the end of 2020, and possibly extending this policy into 2021. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. By clicking Accept, you consent to the use of ALL the cookies. An engaging panel discussion entitled 'Road to Recovery: The Retailer Perspective' took place during yesterday's virtual Summit of the . Learn. For information on the business impacts of COVID-19, please visit ourCOVID-19 Resource Center, which we continue to update as the situation evolves. Most airports already calculate a PSF rent amount in their airline rates and charges (e.g., office space with passenger access) that applies to concession-type spaces. The key will be ensuring that airline charges remain fair and reasonable. The single factor most tied to concession success is the footfall past the concession locations. To ensure that the program is performed in accordance with law. . Greater of 30% or Minimum Annual Guarantee : Taxi Fees (annual contract fee) Pre-Arranged Transportation (per pickup) $6.00 . With the new economic and industry realities, capital access may be an even greater hurdle. 47114, with minimum apportionments for smaller airports that serve between 8,000 and 10,000 passengers annually. 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. Some airports have had huge success in meeting ACDBE goals with the developer model. If any portion of the $2 billion is left over after distributing in accordance with 49 U.S.C. 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. By using this site you agree to our use of cookies. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. When passenger traffic does come back, airports should rethink how their concession contracts work. The federal share for FY 2018 and 2019 Supplemental Discretionary grants wont increase. 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 . Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. 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. Yellow Cab pays Sea-Tac a $3.67 million minimum annual guarantee or 13 percent of its . When one partner tries to do too much, it will lessen the benefits of the joint venture. Where appropriate and agreed to by airport sponsors, terminal use leases should be amended to reflect the airlines changed operating circumstances. 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. The Federal Aviation Administration (FAA) . With the announcement by the GASB of a delay in the required implementation of these new standards, your organization will need to decide how to respond. Some airports have just a single FBO while others have multiple. 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. A MAG, as currently developed, is unsustainable in anything but relatively normal times. 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. While some of these answers require more information from the federal agencies, there are 10 burning questions we can answer now. Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). a minimum annual guarantee or MAG annually, which more or less translates to rent. 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. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. them from immediately acquiescing to their advertisers' perfectly justifiable requests is the cold draught of the 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. 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 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. 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. Budapest Airport. This . Without this expertise, the concession will almost certainly fail to operate at an optimum level. Test. 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. We do expect further guidance from the federal government in upcoming months to clarify SEFA considerations. In either case, history has shown that MAGs are not supportable in the event of severe downturns. Looking for abbreviations of MAG? If the airport sponsor determines that its in its best interest to defer the MAG, the revenue should still be recorded in the period earned, and the receivable should be considered for treatment as noncurrent depending on the new repayment terms. Up to $2 billion apportioned in accordance with the per-passenger apportionment rules of 49 U.S.C. They rent space to provide a service/product (rental car) for an agreed upon time frame at a certain rate. 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. 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. The CFC is a charge based on either the contract value, gross receipts, or per car per day. Atlanta, GA - Hartsfield-Jackson Atlanta International Airport. The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. Airport Operations. Nor do we know whether travel habits will change permanently because of new practices learned during lockdowns. Passengers have needs while at airports. In other parts of the world, MAGs are the airports exact expected rental payments. While the model has primarily been used for duty-free concessions, it has worked equally well for other types of concessions. 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. While the leased space is non-aeronautical revenue, the CFCs are non-operating revenue. The single factor most tied to concession success is the footfall past the concession locations. The policies and procedures are available for review here. Similar to a third party option, an institutional operator can reduce risk while also reducing proceeds to the airport operator. 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. Stakeholders are already beginning discussions on a proposed Phase 4 stimulus bill. An airport owner/sponsor may use these funds for any purpose for which airport revenues may be lawfully used. Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. 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. With the new economic and industry realities, capital access may be an even greater hurdle. 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. The price tag is a whopping $440 per square foot. The company, which . Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. 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. No one is sure how long recovery will take. How involved the airport gets in the day-to-day operation is the option of the airport and their partner(s). Below are some considerations for airport sponsors to keep in mind. . 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. 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. 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. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. Receive perspectives on the industries and issues that matter. 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 . A. 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. Like their partners in the airline industry, airports have been dramatically affected by the slowdown in flights and passenger traffic associated with COVID-19. . If you have questions. . Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). Minimum Annual Guarantee ("MAG") Lowest amount of rent to be paid To Be Negotiated . 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. First, and most important, the recently enacted Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contains a supplemental appropriation of $10 billion to be made through Grants-In-Aid for Airports. That $10 billion is divided into the following categories: Any airport that receives money under the CARES Act must continue to employ, for the remainder of 2020, at least 90% of the number of employees that airport had as of March 27, the date of the enactment of the Act. 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 additional funds appropriated by the CARES Act were largely intended to help airport sponsors meet their debt service and bond obligations. However, sponsors dont need to apply for the increased federal share of FY20 AIP or FY 2020 Supplemental Discretionary grants. These MAG clauses in concession contracts should be carefully reviewed. Many airport agreements allow for a suspension of MAGs in the event of a severe enplanement decrease. 4.1.2 Minimum Annual Guaranteed Concession Fee Payment. Senior Living Development Consulting (Living Forward), Reimagining the future of healthcare systems, National Plan of Integrated Airports System, tax alert comparing COVID-19 employer tax incentives. Without this expertise, the concession will almost certainly fail to operate at an optimum level. 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. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. Non-airport retail leases typically charge rent on a per square foot (PSF) basis. 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.. Airport concession program in order to maximize non-aviation revenue, increasing sales per enplaned passenger at a rate higher than passenger . A third party can absorb some of the liability and risk from the airport operator. Both were selected based on a global tender, and need to pay the Minimum Annual Guarantee of 31 crore each to the Airports Authority of India. Until a few weeks ago, your organization has likely been focused on implementing several new GASB standards, including GASB Statement No. New model commercial contracts will require a complete rebuild of the airport's financial model, along with revised relations with financiers. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee (MAG). This essentially flips the rent risk from being entirely on the vendors (in a MAG-based model) to being entirely on the airport. Lets consider six potential options. (By comparison, the competing House of Representatives version of the bill contained no such restriction.) Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. Airport sponsors should carefully review their bond documents to ensure the methods of calculating the airports rate covenant under the current circumstances are appropriate. Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. Concessionaires need to understand this new business reality when they ask for relief. 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. Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. 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. 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. $100 million is distributed to general aviation airports in accordance with categories established by the National Plan of Integrated Airport Systems (NPIAS). The Airport has also experienced a reduction in passengers and operations as a result of . Products and services both fall into the concessions category. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. Airports would have to offer benefit packages to these employees in line with those provided to other employees of the airport. 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. While the model has primarily been used for duty free concessions, it has worked equally well for other types of concessions. 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. The develop pays the amount due to the airport through the lease agreement and pockets the rest. In other parts of the world, MAGs are the airport's exact expected rental payments. The additional funds appropriated by the CARES Act were largely intended to help airport sponsors meet their debt service and bond obligations. The AICPA State and Local Governments audit guide includes certain accounting guidance that has been cleared by GASB as Category B authoritative guidance. See how we help fast-changing industries succeed. There are means of counting passengers who pass a concession location, but few airports have installed such technology. 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. COVID-19 has sent shockwaves throughout the world. Concessions and retail often fill that need. Minimum Annual Guarantee (MAG) - The amount proposed and/or agreed to by the Concessionaire, that Concessionaire guarantees as minimum payment per year to DFW. Airports would also have to hire and manage many additional hourly employees. Manchester Airport Group in the U.K. had started to operate a restaurant in their home airport before the pandemic, so there is precedent for this strategy. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. Its clear that fixed MAGs are unable to provide the flexibility necessary to deal with severe occurrences. Airport sponsors should carefully review their bond covenants and indentures, with a particular focus on pledge of revenues and flow of funds. The FAA released guidance for airport administrators, but questions still linger and issues have gone unaddressed. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. Test. The fallacy of Minimum Annual Guarantee (MAG). We also use third-party cookies that help us analyze and understand how you use this website. 9. At least for the immediate future, there will be reduced demand for concession services. 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. The disclosure of guaranteed minimum future lease payments will also be impacted for any changes in the MAG in the concession contracts. Delta will pay market rates to lease these three additional Delta-preferred gates with a minimum annual guarantee (MAG). The minimum guaranteed rent for the first year of the lease is the amount proposed by the winning proposal. which guarantees that the tenant will pay the airport a minimum amount annually. It was suspended in June, following the severe decline of passenger traffic over those . The cost of design and construction for your space is going to be much higher. Paid parking went into effect at . There will still be passengers, and the concession industry needs to be ready to serve them. The competitive landscape may beby necessityaltered. In the concessions arena, they are referred to as Airport Concessions Disadvantaged Business Enterprise (ACDBE). A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. A third party company could be contracted to handle the leasing and management of concessions on behalf of 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, Hermes) are given the ability to design and operate their mini outlets. . 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. They will typically also offer a percentage of their gross receipts to the airport as part of the RFP for the FBO services. Some larger airports take a percentage of every sale. 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 Trinity model can be considered an extension of the joint venture model. Strategic agency for engagement and transformation. 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. 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). "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 . In a standard MAG model, the concessionaire bears a great deal of uncertainty with little risk falling to the airport. The airport environment is complex and has become even more challenging due to COVID-19.

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