If you have questions. 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 . Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. The additional funds appropriated by the CARES Act were largely intended to help airport sponsors meet their debt service and bond obligations. Without this expertise, the concession will almost certainly fail to operate at an optimum level. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. 4.1.2 Minimum Annual Guaranteed Concession Fee Payment. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. Cookie Notice: This site uses cookies to provide you with a more responsive and personalized service. 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). However, it does reduce the potential benefit to the airport by splitting the proceeds generated. Tax. 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. Concessionaires need to understand this new business reality when they ask for relief. 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. Regardless, this shifting of risk may not be acceptable to airports. Discover the top trends shaping government in 2023. In the event that the concessionaire is unsuccessful, the airport absorbs the losses. 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. To level the playing field so that DBEs can compete . In a standard MAG model, the concessionaire bears a great deal of uncertainty with little risk falling to the airport. There are numerous ways to frame a contract without a MAG. This information collection permits FAA to confirm that rent relief is consistent with the requirements of CRRSA and ARPA. . 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 . 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. At least for the immediate future, there will be reduced demand for concession services. These funds are available only to sponsors as defined in Section 47102 of title 49, United States Code (U.S.C. In times of continued and prolonged growth, airports have learned to depend upon MAGs. Lets consider six potential options. installments during the first year of the Term. 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. Learn how your comment data is processed. To ensure nondiscrimination in federally funded contracts for DOT airport assistance programs. Some larger airports take a percentage of every sale. 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. 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. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. 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 Supplemental Airport Grant-In-Aid Funding Fixed Based Operators or FBOs, are service providers to many GA and corporate aircraft. Find out how our purpose shapes our culture, people, and mission-driven work. 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. A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. 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. 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. 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. 1, their minimum annual guarantee was superior to anybody . 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. 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. The intent of DBE programs is to increase the amount of business done with Minority Business Enterprises (MBE) and Women Business Enterprises (WBE). Concessionaires are, in general, seeking some manner of rent relief from their airport partners. While it may never be business as usual again, the airport and its business partners need to adjust to a new normal. Non-airport retail leases typically charge rent on a per square foot (PSF) basis. This website uses cookies to improve your experience while you navigate through the website. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. The competitive landscape may beby necessityaltered. Below are some considerations for airport sponsors to keep in mind. President Donald Trump has already tweeted his support for such an infrastructure bill. By clicking Accept, you consent to the use of ALL the cookies. 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. The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. Minimum Annual Guarantees. 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. 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. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. While the airport might invest capital in the joint venture, it must be involved in a management committee overseeing the business. Minimum Annual Guarantee. leasehold at Washington Dulles International Airport (IAD). Many airport agreements allow for a suspension of MAGs in the event of a severe enplanement decrease. The FBOs lease space from the airport sponsor to be able to provide those services. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee (MAG). In either case, history has shown that MAGs are not supportable in the event of severe downturns. Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. Airport sponsors should carefully review their bond covenants and indentures, with a particular focus on pledge of revenues and flow of funds. 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. 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. Find more information in a tax alert comparing COVID-19 employer tax incentives, issued by our National Tax Office. Rates for each new fiscal year will be posted on this page after Board approval of the rates and fees. A prepaid monthly "lease" to do business on the property. While the model has primarily been used for duty free concessions, it has worked equally well for other types of concessions. Where do we go from here? The airport charges the businesses 8 percent of gross revenue, or a minimum annual guarantee. The FAA has issued additional guidance on airport concession fees, some of which reverses earlier policies. 3300 Capital Circle, S.W. Airport Cargo Community system Bid Opening Date: 07/13/2021 05:00:00 PM Purchaser: Kevin Hanagan Organization: City of Philadelphia . Minimum Annual Guarantee listed as MAG. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. Other organizations that havent yet addressed some of these pending standards may want to take advantage of the implementation delays. The Revenue Use Policy document defines permitted and prohibited uses of airport revenue. 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. Rent abatement / minimum annual guarantee: A decision to abate rent (including "minimum annual guarantees" and also encompassing fees) is a local . Please read our Privacy Policy for more information on the cookies we use. Six options for how to ensure that the airport concessions industry continues to be a robust and vibrant business for all. Regardless, this shifting of risk may not be acceptable to airports. them from immediately acquiescing to their advertisers' perfectly justifiable requests is the cold draught of the minimum annual guarantee (MAG). If any portion of the $2 billion is left over after distributing in accordance with 49 U.S.C. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). Products and services both fall into the concessions category. Sea-Tac airport may allow Uber, Lyft and Sidecar to start picking up passengers if new rules are passed. . (a) Annual Reconciliation. The federal share for FY 2018 and 2019 Supplemental Discretionary grants wont increase. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. Airports should carefully consider how they structure deals and their business modelsto ensure more flexibility to respond to potential future shocks. Signatory carriers may exercise significant control over an airport's capital budgeting process under provisions in a use agreement known as. 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. This is especially true for leases that incorporate the minimum annual guarantee (MAG) mechanism or fixed rent clauses. Its clear that fixed MAGs are unable to provide the flexibility necessary to deal with severe occurrences. . The passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. $100,000, 5%, 100% . 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. Airport sponsors must certify compliance with the CARES Act employment requirements at the time of grant execution and report employment totals quarterly on June 30, Sept. 30, and Dec. 31, 2020. 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). - Suite 1 . C. Concession Fee. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. A third party can absorb some of the liability and risk from the airport operator. Most simply, the airport and vendor could agree to a fixed percentage rent. 636(a)(37)) that has been applied toward rent or minimum annual guarantee costs. To provide flexibility to recipients of federally funded projects in providing opportunities to DBEs. The disclosure of guaranteed minimum future lease payments will also be impacted for any changes in the MAG in the concession contracts. (1) On-Airport (% of Gross Receipts). Wealth Management. 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. 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. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. There are numerous ways to frame a contract without a MAG. COVID-19 has sent shockwaves throughout the world. The question that airport managers must ask themselves is which rent strategy is realistic in the current environment. When passenger traffic does come back, airports should rethink how their concession contracts work. The Audit Committee has reviewed this report and is releasing it in accordance with Article 2, Chapter 6 of the City Charter. 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. We do expect further guidance from the federal government in upcoming months to clarify SEFA considerations. When one partner tries to do too much, it will lessen the benefits of the joint venture. To meet aggressive congressional deadlines for request submissions, a new airport industry request is being made with three potential components: $13 billion in additional emergency assistance, a gap financing program for airports, and a touchless journey through security. 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. To promote the use of DBEs for federally funded projects. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). Please pay it forward. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. Duty Free Americas Miami offered a minimum annual guarantee to the airport of $20 million -- topping the $18.5 million offered by Dufry Miami Retail Partnership and about $9 million more than two . Airports provide the passengers, the retailers provide the services. 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.