percentage of their annual gross revenues derived from operations at the airport or a minimum annual guaranteed amount, whichever is greater. 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. This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. 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. 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. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. In either case, history has shown that MAGs are not supportable in the event of severe downturns. 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. We did not review solicitation or award of concession agreements in this audit. New model commercial contracts will require a complete rebuild of the airport's financial model, along with revised relations with financiers. However, this still may not be the most effective solution. This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. Test. The competitive landscape may beby necessityaltered. They charge restaurants a minimum annual guarantee, also known as "rent" in the non-airport world. 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. Chris Dinsdale has worked at Budapest Airport since 2015, originally as CFO until March 2021, where he was nominated for the position as CEO . The airport operator is always present and has a wealth of knowledge about the airport. While the model has primarily been used for duty free concessions, it has worked equally well for other types of concessions. The FAA helped to level the playing field by allowing DBEs to compete for concessions contracts in airports. Airport sponsors should carefully review their bond documents to ensure the methods of calculating the airports rate covenant under the current circumstances are appropriate. But opting out of some of these cookies may affect your browsing experience. However, we recommend that you consider the underlying principles of Uniform Guidance and the terms and conditions of the FAA while administering the funds. This is only for the passenger traffic, while for . While passenger safety and well-being are paramount, the extreme reduction in passenger flow has rippled across the entire airport-airline ecosystem. Guarantee: 50% of Minimum Annual Guarantee. This essentially flips the rent risk from being entirely on the vendors (in a MAG-based model) to being entirely on the airport. 4.1.2 Minimum Annual Guaranteed Concession Fee Payment. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. 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. Each entity will need to review the applicable accounting guidance, consider their own circumstances, and make their determination based on their professional judgment. It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. 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 . In the event that the concessionaire is unsuccessful, the airport absorbs the losses. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. What this option does do is change the distribution of risk. Airport concession program in order to maximize non-aviation revenue, increasing sales per enplaned passenger at a rate higher than passenger . It is mandatory to procure user consent prior to running these cookies on your website. 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. In North America, airports tend to look at MAGs as the least amount of acceptable rent. The entire concessions space is typically leased out to a single company who is responsible for subletting the spaces. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. Terminal Rentals - Rent paid by car rental companies for ticket counters and office space in terminals. To ensure that firms meet the requirements of DBE qualification. 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. . Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. The passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. Minimum Annual Guarantee ("MAG") Lowest amount of rent to be paid To Be Negotiated . These cookies will be stored in your browser only with your consent. Some airports have had huge success in meeting ACDBE goals with the developer model. Rates for each new fiscal year will be posted on this page after Board approval of the rates and fees. 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. 2023 Plante & Moran, PLLC. Page 3 of 61 - Non-exclusive On-airport Rental Car Concession - Proposal documents 3. One of the components of the CARES Act provides the opportunity for employers to defer payment of the 6.2% FICA portion of the employers portion of employment taxes, effective immediately through Dec. 31, 2020. Until a few weeks ago, your organization has likely been focused on implementing several new GASB standards, including GASB Statement No. When passenger traffic does come back, airports should rethink how their concession contracts work. Fixed Based Operators or FBOs, are service providers to many GA and corporate aircraft. MAG - Minimum Annual Guarantee. 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). Minimum Annual Guarantee means the minimum amount of money that is due annually and payable monthly to Authority from Concessionaire, as provided in Article 5 of this Agreement. 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. Airport vendors typically pay a portion of their revenues to the MAC, and those payments can't fall below the minimum annual guarantee. Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. At least $100 million will go to general aviation airports, allocated based on categories published in the current NPIAS. Concessions covers more than what you think of served at a traditional concession stand. Minimum Annual Guarantee. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. 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. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. This category only includes cookies that ensures basic functionalities and security features of the website. This is especially true for leases that incorporate the minimum annual guarantee (MAG) mechanism or fixed rent clauses. Master operators are common options, such as HMS Host Intl, Paradies Lagardere, Delaware North, and SSP. 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. Add it up, and the cost of operating at an airport is often higher than operating at a typical mall. However, MAGs in concession contracts still expect continued growth. By clicking Accept, you consent to the use of ALL the cookies. 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. The CFC is a charge based on either the contract value, gross receipts, or per car per day. Current generally accepted accounting principles suggests that entities should establish a policy that defines operating revenues for enterprise funds and use it consistently. 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. 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. 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. C. Concession Fee. Here are some others. How involved the airport gets in the day-to-day operation is the option of the airport and their partner(s). This . These benefit packages may make the cost of employment significantly higher than the all-in employment costs for most concession operators. These funds are available only to sponsors as defined in Section 47102 of title 49, United States Code (U.S.C. It varies based on the size, capacity, and operations of the airport. In April, the San Jose City Council voted to grant delegated authority to the airport staff to finalize negotiations and execute a 50-year lease to Signature Flight Support. Discover our insights for a sustainable, low-emissions future. February 2, 2021January 28, 2021 | AirportU. The key will be ensuring that airline charges remain fair and reasonable. In North America, airports tend to look at MAGs as the least amount of acceptable rent. It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. Find out how our purpose shapes our culture, people, and mission-driven work. 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. The master operator concept typically limits the ACDBE participation goals and may require additional efforts to maintain. Airlines value an attractive commercial program because it makes a better background for the expression of their brand. (a) Annual Reconciliation. Airport Operations. While the airport might invest capital in the joint venture, it must be involved in a management committee overseeing the business. 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. Airports should carefully consider how they structure deals and their business modelsto ensure more flexibility to respond to potential future shocks. Wealth Management. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. The federal share for FY 2018 and 2019 Supplemental Discretionary grants wont increase. 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 joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. Cookie Notice: This site uses cookies to provide you with a more responsive and personalized service. However, there is no relief of the obligation to withhold and remit the corresponding employee share. The FAA has issued additional guidance on airport concession fees, some of which reverses earlier policies. 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. The develop pays the amount due to the airport through the lease agreement and pockets the rest. 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. These three options do not change the underlying airport-concessionaire relationship. There are numerous ways to frame a contract without a MAG. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. The FAA has issued additional guidance on airport concession fees, some of which reverses earlier policies. A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. 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. 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. Examples of Minimum Annual Guaranteed Rent in a sentence. Respondents will propose both a MAG and a Percentage (%) of Annual Gross Revenue, the greater of which will be paid . Without this expertise, the concession will almost certainly fail to operate at an optimum level. With the new economic and industry realities, capital access may be an even greater hurdle. Airport sponsors should carefully review their bond covenants and indentures, with a particular focus on pledge of revenues and flow of funds. 4.1.1 Minimum Annual Guaranteed Concession Fee. Looking for abbreviations of MAG? COVID-19 has sent shockwaves throughout the world. Retail/Gift Shop 11% of Gross Receipts or Minimum Annual Guarantee Terminal Advertising 30% -60% of Gross Receipts or Minimum Annual Guarantee . 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. Majority-In-Interest (MII) clauses. While the leased space is non-aeronautical revenue, the CFCs are non-operating revenue. It is Minimum Annual Guarantee. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. October 09, 2020, 11:40 a.m. EDT 4 Min Read. Six options for how to ensure that the airport concessions industry continues to be a robust and vibrant business for all. The FBOs lease space from the airport sponsor to be able to provide those services. 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. Tallahassee International Airport . This site uses Akismet to reduce spam. Option 6: The airport as concession operator. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. They will typically lease space for counter and office space and additional space for the vehicle storage. This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. Airlines have a significant stake in the quality of the concession program because of its impact on the passenger 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) 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. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. If an airport can become a partner in the operation of a concession, it might also consider being a concession operator on its own. Greater of 30% or Minimum Annual Guarantee : Taxi Fees (annual contract fee) Pre-Arranged Transportation (per pickup) $6.00 . View bio. 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. 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.