Save my name, email, and website in this browser for the next time I comment. Because of the drastic reduction in flights and passenger traffic, airlines have been shrinking their staffing, space requirements and gate usage. However, MAGs in concession contracts still expect continued growth. In the concessions arena, they are referred to as Airport Concessions Disadvantaged Business Enterprise (ACDBE). 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. All rights reserved. Flashcards. 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 The price tag is a whopping $440 per square foot. 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. A. The city named the Vantage Airport Group to run the concessions when the new terminal opens in 2023. For information on the business impacts of COVID-19, please visit ourCOVID-19 Resource Center, which we continue to update as the situation evolves. However, sponsors dont need to apply for the increased federal share of FY20 AIP or FY 2020 Supplemental Discretionary grants. Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. 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. While the airport might invest capital in the joint venture, it must be involved in a management committee overseeing the business. Please pay it forward. This is especially true for leases that incorporate the minimum annual guarantee (MAG) mechanism or fixed rent clauses. Providing a product or service inside the airport environment is one of the key qualifiers for a concessionaire. Concessionaires are, in general, seeking some manner of rent relief from their airport partners. Minimum Annual Guarantee. Stakeholders are already beginning discussions on a proposed Phase 4 stimulus bill. 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. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. Learn. If FAA does not receive emergency approval, the economic recovery of the nation's air Airports would also have to establish supply lines for products that they have not procured in the past. In North America, airports tend to look at MAGs as the least amount of acceptable rent. 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 . 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. Weve compiled the top 10 things that you should know about the CARES Act funding for airports. 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. 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. The FAA helped to level the playing field by allowing DBEs to compete for concessions contracts in airports. 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. In either case, history has shown that MAGs are not supportable in the event of severe downturns. The Trinity model can be considered an extension of the joint venture model. 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. A by-location per passenger MAG may be too complicated for widespread implementation at this point. 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. 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. 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. Will this have an impact on airline and concession agreements? The single factor most tied to concession success is the footfall past the concession locations. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. 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. Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. . 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. installments during the first year of the Term. Page 3 of 61 - Non-exclusive On-airport Rental Car Concession - Proposal documents 3. The FAAs Office of Airports will administer these grant funds to airport sponsors. 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. At least $7.4 billion is allocated to commercial service airports, allocated based on enplanements, debt service, and unrestricted reserve ratios. 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. Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. 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. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. The federal share for FY 2018 and 2019 Supplemental Discretionary grants wont increase. 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, Discover how we help clients achieve success. This . Minimum Annual Guarantees. 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 . These MAG clauses in concession contracts should be carefully reviewed. The develop pays the amount due to the airport through the lease agreement and pockets the rest. Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. Because this rate base is not related to passenger numbers, it is equally as inflexible as a MAG set by any other means in the event of significant changes in enplanements. Additionally, nonoperating revenues would generally include grants, among other things. To remove barriers in participation of DBEs. However, this still may not be the most effective solution. 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. 2023 Plante & Moran, PLLC. . 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. 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. Option 4: Airport-concessionaire joint ventures. Minimum Annual Guarantee or " MAG " means the minimum Privilege Fee due the Authority annually from the Operator set forth in Section 5.2. A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. - Suite 1 . CARES Act grant recipients should follow the FAAs Policy and Procedures Concerning the Use of Airport Revenues (Revenue Use Policy), 64 Federal Register 7696 (64 FR 7696), as amended by 78 Federal Register 55330 (78 FR 55330). Without this expertise, the concession will almost certainly fail to operate at an optimum level. Its clear that fixed MAGs are unable to provide the flexibility necessary to deal with severe occurrences. Non-airport retail leases typically charge rent on a per square foot (PSF) basis. There are a few limitations, however, that make this a less than optimal solution. 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. Find more information in a tax alert comparing COVID-19 employer tax incentives, issued by our National Tax Office. Meanwhile, Aena is forecasting that in the period to 2023, the minimum annual guaranteed rents and fixed rents, corresponding to contracts in force at 30 June 2020, will decrease. Option 5: The Trinity (or Trinity Plus) model. Six options for how to ensure that the airport concessions industry continues to be a robust and vibrant business for all. 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. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. 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. In a standard MAG model, the concessionaire bears a great deal of uncertainty with little risk falling to the airport. Please read our Privacy Policy for more information on the cookies we use. Where do we go from here? 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 . . 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. If you have questions. . Non-airport retail leases typically charge rent on a per square foot (PSF) basis.

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