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). The CARES Act roughly triples the amount of money flowing from the federal government directly to airports for 2020. 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. This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. Normally, airport concessionaires pay the city a percentage of sales or a "minimum annual guarantee" based on sales the previous year, whichever is greater. 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. 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. Like their partners in the airline industry, airports have been dramatically affected by the slowdown in flights and passenger traffic associated with COVID-19. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. A by-location per passenger MAG may be too complicated for widespread implementation at this point. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. It is Minimum Annual Guarantee. 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 . 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. 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. Minimum Annual Guarantee: Each Proposer shall submit its proposal as a minimum annual guarantee (MAG) for each of the first two (2) years of the Concession Agreement. 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. Nor do we know whether travel habitswill change permanently because of new practices learned during lockdowns. 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. COVID-19 has sent shockwaves throughout the world. October 09, 2020, 11:40 a.m. EDT 4 Min Read. (The catch: Potential renters must submit a formal proposal to the Airport Commission and are subject . You also have the option to opt-out of these cookies. HMS Host, the food and beverage concessionaire at Clinton National, is required to pay a minimum annual guarantee of $594,000, which works out to $49,500 monthly under the terms of its contract. 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 is especially true for leases incorporating a Minimum Annual Guarantee (MAG) mechanism or fixed rent clauses. 4.1.3 Percentage Fees. 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. In a standard MAG model, the concessionaire bears a great deal of uncertainty with little risk falling to the airport. Tallahassee International Airport . To help develop firms that can compete in the marketplace outside of the DBE program. In times of continued and prolonged growth, airports have learned to depend upon MAGs. The passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. 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. The CFC is a charge based on either the contract value, gross receipts, or per car per day. Retail/Gift Shop 11% of Gross Receipts or Minimum Annual Guarantee Terminal Advertising 30% -60% of Gross Receipts or Minimum Annual Guarantee . Option 4: Airport-concessionaire joint ventures. 3300 Capital Circle, S.W. As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. There are numerous ways to frame a contract without a MAG. The airport operator is always present and has a wealth of knowledge about the airport. Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. 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. Without this expertise, the concession will almost certainly fail to operate at an optimum level. Necessary cookies are absolutely essential for the website to function properly. Bond Covenants and Indenture Pledge of Revenues. Annual fee for the airport to perform snow removal at the Vehicle Ready/Storage Vehicle Parking Area and Service Building/Wash Bay Facility. 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. It is still unclear whether all of the CARES funding will be reported on the Schedule of Expenditures of Federal Awards (SEFA) . The competitive landscape may beby necessityaltered. The city may extend the action for an additional 30-day . Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. If any portion of the $2 billion is left over after distributing in accordance with 49 U.S.C. How involved the airport gets in the day-to-day operation is the option of the airport and their partner(s). If you have questions about COVID-19s impact on your business, please reach out to your Loeb relationship partner or email us directly [email protected]. In other parts of the world, MAGs are the airports exact expected rental payments. Elsewhere, airports do not expect vendors to exceed their MAGs. These three options do not change the underlying airport-concessionaire relationship. Guarantee: $50,000. This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. Concessionaires need to understand this new business reality when they ask for relief. This opportunity is for two available FBO leaseholds with a general aviation terminal, office space . The fallacy of 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. 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). Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. Concessionaires are, in general, seeking some manner of rent relief from their airport partners. For aviation, global recovery to 2019 levels is projected to take several years, into 2023 for markets with significant domestic air . Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee (MAG). By way of comparison, in the past two fiscal years (FY19 and FY20), the federal government has appropriated approximately $3.35 billion in regular Air Improvement Program (AIP) spending and an additional $400$500 million in discretionary AIP grants. However, sponsors dont need to apply for the increased federal share of FY20 AIP or FY 2020 Supplemental Discretionary grants. 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. A MAG, as currently developed, is unsustainable in anything but relatively normal times. A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. Minimum Annual Guarantee _____- concession often establish their rates as a percentage of gross . By using this site you agree to our use of cookies. The workforce retention requirement doesnt apply to nonhub or nonprimary airports. 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. Rates for each new fiscal year will be posted on this page after Board approval of the rates and fees. There are numerous ways to frame a contract without a MAG. 47114, with minimum apportionments for smaller airports that serve between 8,000 and 10,000 passengers annually. Concessionaires could avoid minimum annual guarantee payments for a third quarter as the MAC develops a long-term relief plan. Discover how we help clients achieve success. That is no longer possible. "We've already . 116-94). Page 3 of 61 - Non-exclusive On-airport Rental Car Concession - Proposal documents 3. Non-airport retail leases typically charge rent on a per square foot (PSF) basis. 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. Non-aeronautical revenueairport revenue from sources other than airlinestypically includes retail concessions, 1 car parking, and property and real estate. These benefit packages may make the cost of employment significantly higher than the all-in employment costs for most concession operators. While the airport might invest capital in the joint venture, it must be involved in a management committee overseeing the business. Supplemental Airport Grant-In-Aid Funding Because of the drastic reduction in flights and passenger traffic, airlines have been shrinking their staffing, space requirements and gate usage. 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. We also use third-party cookies that help us analyze and understand how you use this website. Airport concession program in order to maximize non-aviation revenue, increasing sales per enplaned passenger at a rate higher than passenger . If an airport can become a partner in the operation of a concession, it might also consider being a concession operator on its own. 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. New model commercial contracts will require a complete rebuild of the airport's financial model, along with revised relations with financiers. Majority-In-Interest (MII) clauses. These cookies do not store any personal information. Examples of concessions within airports include: A direct concession lease involves the space being directly marketed, leased, and managed by the airport operator. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). Unlike earlier phases of stimulus, Phase 4 has the potential to include a significant infrastructure focus. The Trinity model can be considered an extension of the joint venture model. In times of continued and prolonged growth, airports have learned to depend upon MAGs. 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. Minimum Annual Guarantee. Minimum Annual Guarantees. It beat four other finalists. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. Please pay it forward. This is only for the passenger traffic, while for . 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. Attention: Finance & Administration Division . . One-twelfth of the MAG shall be due in advance on the first day of each month When passenger traffic does come back, airports should rethink how their concession contracts work. Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. Minimum Annual Guarantee - How is Minimum Annual Guarantee abbreviated? The Audit Committee has reviewed this report and is releasing it in accordance with Article 2, Chapter 6 of the City Charter. 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 The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. 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. The Federal Aviation Administration (FAA) . Discover our insights for a sustainable, low-emissions future. 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. 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. 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. 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. In North America, airports tend to look at MAGs as the least amount of acceptable rent. However, there is no relief of the obligation to withhold and remit the corresponding employee share. While it may never be business as usual again, the airport and its business partners need to adjust to a new normal. 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. Respondents will propose both a MAG and a Percentage (%) of Annual Gross Revenue, the greater of which will be paid . 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. If flights do not return to their pre-pandemic levels, then the airport will not be able to recover former passenger levels. Lets consider six potential options. 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. 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. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee . This Minimum Annual Guarantee must exceed $100,000. With the new economic and industry realities, capital access may be an even greater hurdle. 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. Find more information in a tax alert comparing COVID-19 employer tax incentives, issued by our National Tax Office. Option 6: The airport as concession operator. In North America, airports tend to look at MAGs as the least amount of acceptable rent. Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. Tax. Where appropriate and agreed to by airport sponsors, terminal use leases should be amended to reflect the airlines changed operating circumstances. 1, their minimum annual guarantee was superior to anybody . An airport owner/sponsor may use these funds for any purpose for which airport revenues may be lawfully used. Airport sponsors should carefully review their bond covenants and indentures, with a particular focus on pledge of revenues and flow of funds. Test. Regulatory Updates Extension of Minimum Slot Usage Requirements. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. 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. 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. . COVID-19 has sent shockwaves throughout the world. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. This essentially flips the rent risk from being entirely on the vendors (in a MAG-based model) to being entirely on the airport. Option 5: The Trinity (or Trinity Plus) model. PFCs have been set at $4.50/passenger since 2000, and increasing the PFC maximum has been a priority of the airport industry for some time. 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.
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