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To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). 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. Very hands off for the airport sponsor. Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. While passenger safety and well-being are paramount, the extreme reduction in passenger flow has rippled across the entire airport-airline ecosystem. The cost of design and construction for your space is going to be much higher. To provide flexibility to recipients of federally funded projects in providing opportunities to DBEs. 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. If you have questions. ); that is, airport sponsors meeting statutory and policy requirements under this section, as well as those identified in the FAAs current National Plan of Integrated Airports System (NPIAS). Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. 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. The compliance and accounting questions related to the COVID-19 outbreak and the related new funding streams are significant. Discover the top trends shaping government in 2023. As a result, airports may wish to consider going a step further. . The concept is not uncommon. No one is sure how long recovery will take. There are means of counting passengers who pass a concession location, but few airports have installed such technology. 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. Some airports have had huge success in meeting ACDBE goals with the developer model. 3300 Capital Circle, S.W. However, we recommend that you consider the underlying principles of Uniform Guidance and the terms and conditions of the FAA while administering the funds. Match. The additional funds appropriated by the CARES Act were intended, in large part, to help airport sponsors meet their debt service and bond obligations. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. 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. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. Terms in this set (15) What is MAG and what does it stand for? If an airport can become a partner in the operation of a concession, it might also consider being a concession operator on its own. The Secretary of Transportation may waive this workforce retention requirement if they determine that the sponsor is experiencing economic hardship as a direct result of the requirement, or that the requirement reduces aviation safety or security. Flashcards. 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. To ensure that the program is performed in accordance with law. If flights do not return to their pre-pandemic levels, then the airport will not be able to recover former passenger levels. A MAG, as currently developed, is unsustainable in anything but relatively normal times. The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. Stakeholders are already beginning discussions on a proposed Phase 4 stimulus bill. Below are some considerations for airport sponsors to keep in mind. Greater of 30% or Minimum Annual Guarantee : Taxi Fees (annual contract fee) Pre-Arranged Transportation (per pickup) $6.00 . The FAAs Office of Airports will administer these grant funds to airport sponsors. While it may never be business as usual again, the airport and its business partners need to adjust to a new normal. With the new economic and industry realities, capital access may be an even greater hurdle. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. Importantly, the $2 billion is not subject to the reduced apportionments for larger airports that also impose passenger facility charges (PFCs). They will typically also offer a percentage of their gross receipts to the airport as part of the RFP for the FBO services. The FAA helped to level the playing field by allowing DBEs to compete for concessions contracts in airports. 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. Option 5: The Trinity (or Trinity Plus) model. This site uses Akismet to reduce spam. In times of continued and prolonged growth, airports have learned to depend upon MAGs. At least for the immediate future, there will be reduced demand for concession services. This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. It beat four other finalists. Airports would also have to establish supply lines for products that they have not procured in the past. These three options do not change the underlying airport-concessionaire relationship. Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. View bio. 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. 6 . There are numerous ways to frame a contract without a MAG. 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. This Minimum Annual Guarantee must exceed $100,000. 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. That will, in turn, harm the concession program. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. Some airports have just a single FBO while others have multiple. Lets consider six potential options. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. If the airport sponsor determines that it is in its best interest to waive the MAG, then these clauses can be replaced with an alternative fee structure, such as a simple percentage of sales or some other agreed-upon metric of performance. In either case, history has shown that MAGs are not supportable in the event of severe downturns. 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. All rights reserved. In North America, airports tend to look at MAGs as the least amount of acceptable rent. Airport sponsors should carefully review the maintenance and operation (M&O) expense allocation methodology in their terminal leases to confirm the method for allocating costs for vacated space. Regardless, this shifting of risk may not be acceptable to airports. Regulatory Updates Extension of Minimum Slot Usage Requirements. This opportunity is for two available FBO leaseholds with a general aviation terminal, office space . Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). If the basis for a MAG is what the airport thought it should be earning, the amount may never be supportable even if a concessionaire signed the contract. 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 . The develop pays the amount due to the airport through the lease agreement and pockets the rest. When passenger traffic does come back, airports should rethink how their concession contracts work. Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. Chris Dinsdale has worked at Budapest Airport since 2015, originally as CFO until March 2021, where he was nominated for the position as CEO . Airport vendors have you right where they want you trapped at the gate, drinking a $20 beer. . In times of continued and prolonged growth, airports have learned to depend upon MAGs. There are numerous ways to frame a contract without a MAG. 4.1.2 Minimum Annual Guaranteed Concession Fee Payment. 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. 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 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. Nor do we know whether travel habitswill change permanently because of new practices learned during lockdowns. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. Meet the Woman Stockpiling Cash to Sue San Francisco Over Housing Deadlock, Loeb Secures Defense Victory for the State of California and the California State Lands Commission, Loeb Lawyers Recognized in 2023 Edition of Best Lawyers in America, American Conference Institutes (ACI) 37th International Conference on the Foreign Corrupt Practices Act, $500 million, which can be used to fund any grant made under the FY20 Appropriations Act (P.L. Unlike earlier phases of stimulus, Phase 4 has the potential to include a significant infrastructure focus. In other parts of the world, MAGs are the airports exact expected rental payments. 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, Additionally, nonoperating revenues would generally include grants, among other things. This is only for the passenger traffic, while for . Meanwhile the company maintained a resilient retail margin of above 60%, helped by minimum annual guarantee waivers to airport landlords of $1.2 billion. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. However, sponsors dont need to apply for the increased federal share of FY20 AIP or FY 2020 Supplemental Discretionary grants. The master operator concept typically limits the ACDBE participation goals and may require additional efforts to maintain. 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. Concessionaires could avoid minimum annual guarantee payments for a third quarter as the MAC develops a long-term relief plan. Minimum Annual Guarantee or " MAG " means the minimum Privilege Fee due the Authority annually from the Operator set forth in Section 5.2. However, this still may not be the most effective solution. SCOPE OF FEES TO BE PAID THE CITY BY CONCESSIONAIRES a. Option 6: The airport as concession operator. The Airports Authority of India (AAI) has kick-started the process of appointing ground handling agencies for 83 state-run airports for a . 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 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 . At SAN, rent is calculated as a percentage of the gross revenues supported by a minimum annual guarantee, or MAG, that is a part of the leasing requirements.

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