The AICPA State and Local Governments audit guide includes certain accounting guidance that has been cleared by GASB as Category B authoritative guidance. This site uses Akismet to reduce spam. At least for the immediate future, there will be reduced demand for concession services. To promote the use of DBEs for federally funded projects. What this option does do is change the distribution of risk. (a) Annual Reconciliation. 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. 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. 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. The Airports Authority of India (AAI) has kick-started the process of appointing ground handling agencies for 83 state-run airports for a . 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. Similar to a third party option, an institutional operator can reduce risk while also reducing proceeds to the airport operator. The FBOs lease space from the airport sponsor to be able to provide those services. 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. Terminal Rentals - Rent paid by car rental companies for ticket counters and office space in terminals. At least $100 million will go to general aviation airports, allocated based on categories published in the current NPIAS. If FAA does not receive emergency approval, the economic recovery of the nation's air President Donald Trump has already tweeted his support for such an infrastructure bill. Minimum Annual Guarantee (MAG) waived for concessionaires and rental cars -Targeted Operations & Maintenance reductions Implemented a hiring freeze and 8 furlough days Offered early retirement Focused on essential expenditures The key will be ensuring that airline charges remain fair and reasonable. Tallahassee International Airport . Meanwhile the company maintained a resilient retail margin of above 60%, helped by minimum annual guarantee waivers to airport landlords of $1.2 billion. Airport concession program in order to maximize non-aviation revenue, increasing sales per enplaned passenger at a rate higher than passenger . 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. To level the playing field so that DBEs can compete . Rent abatement / minimum annual guarantee: A decision to abate rent (including "minimum annual guarantees" and also encompassing fees) is a local . Test. The airport operator also brings knowledge of how to do business in an airport environment while allowing the concessionaire to concentrate on what they do best: operate a highly successful restaurant or shop. 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. It beat four other finalists. 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. It is still unclear whether all of the CARES funding will be reported on the Schedule of Expenditures of Federal Awards (SEFA) . New model commercial contracts will require a complete rebuild of the airport's financial model, along with revised relations with financiers. A MAG, as currently developed, is unsustainable in anything but relatively normal times. Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. No one is sure how long recovery will take. Minimum Annual Guarantee or " MAG " means the minimum Privilege Fee due the Authority annually from the Operator set forth in Section 5.2. them from immediately acquiescing to their advertisers' perfectly justifiable requests is the cold draught of the minimum annual guarantee (MAG). That is no longer possible. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. "No. The FAA has published a map showing airports that are receiving the funds and the allocations made to them. Percentage Rent to the Board as set forth in Article 1 based on Concessionaire's Gross Receipts, subject to a Minimum Annual Guarantee (MAG) as set forth in Article 1, and as further provided below. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. 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. 4.1.1 Minimum Annual Guaranteed Concession Fee. A third party company could be contracted to handle the leasing and management of concessions on behalf of the airport. 4.1.3 Percentage Fees. Where do we go from here? Rates and Fees are adjusted annually based on the Airport's fiscal year, from October 1st through September 30th. 84, Fiduciary Activities. 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. 87, Leases by a full 18 months, resulting in June 30, 2022 year-ends to be the first to implement the significant new leasing standard. 47114, with minimum apportionments for smaller airports that serve between 8,000 and 10,000 passengers annually. There will still be passengers, and the concession industry needs to be ready to serve them. Creation of the lounge would require around a $4-million investment from whichever group decides to take over the space, which is 9,100 square feet -- on the small side for most airport lounges. The Revenue Use Policy document defines permitted and prohibited uses of airport revenue. Summary: The Metropolitan Washington Airports Authority is seeking competitive bids from all responsible and qualified companies desiring to manage and operate rental car concessions from on-Airport facilities at Ronald Reagan Washington National Airport. Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. While the bulk of the $10 billion appropriated for airport sponsors can be used, if necessary, to make bond principal and interest payments, airport sponsors may be faced with difficult decisions about how to prioritize needs during the financial stress. Airports provide the passengers, the retailers provide the services. This category only includes cookies that ensures basic functionalities and security features of the website. Minimum Annual Guarantee. If youre far enough along in the implementation process, you may want to move forward with adopting these standards. Minimum Annual Guarantee. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). . . Its clear that fixed MAGs are unable to provide the flexibility necessary to deal with severe occurrences. Match. Guarantee: 50% of Minimum Annual Guarantee. This is especially true for leases that incorporate the minimum annual guarantee (MAG) mechanism or fixed rent clauses. Atlanta, GA - Hartsfield-Jackson Atlanta International Airport. Retail/Gift Shop 11% of Gross Receipts or Minimum Annual Guarantee Terminal Advertising 30% -60% of Gross Receipts or Minimum Annual Guarantee . . 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. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. In addition, they typically provide the fueling services for the airport. . However, there is no relief of the obligation to withhold and remit the corresponding employee share. While the leased space is non-aeronautical revenue, the CFCs are non-operating revenue. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). 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 Federal Aviation Administration (FAA) . They will typically lease space for counter and office space and additional space for the vehicle storage. 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. Learn how your comment data is processed. While passenger safety and well-being are paramount, the extreme reduction in passenger flow has rippled across the entire airport-airline ecosystem. First, and most important, the recently enacted Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contains a supplemental appropriation of $10 billion to be made through Grants-In-Aid for Airports. That $10 billion is divided into the following categories: Any airport that receives money under the CARES Act must continue to employ, for the remainder of 2020, at least 90% of the number of employees that airport had as of March 27, the date of the enactment of the Act. Without this expertise, the concession will almost certainly fail to operate at an optimum level. 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 fallacy of Minimum Annual Guarantee (MAG). Where appropriate and agreed to by airport sponsors, terminal use leases should be amended to reflect the airlines changed operating circumstances. There are numerous ways to frame a contract without a MAG. 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. When passenger traffic does come back, airports should rethink how their concession contracts work. 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. Airport sponsors should carefully review their bond documents to ensure the methods of calculating the airports rate covenant under the current circumstances are appropriate. ); 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). 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. COVID-19 has sent shockwaves throughout the world. Necessary cookies are absolutely essential for the website to function properly. FBOs may collect the landing fees for GA aircraft or charge them a fuel-flowage fee on behalf of the airport. A concessionaire's rent structure in an airport may differ from the traditional model. The FAA released guidance for airport administrators, but questions still linger and issues have gone unaddressed. In other parts of the world, MAGs are the airports exact expected rental payments. Under one version of an infrastructure plan floated by House Democrats (the Moving Forward Framework), airports and airspace improvements would be funded, in part, by an increase in PFCs. When one partner tries to do too much, it will lessen the benefits of the joint venture. Wealth Management. 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. Concessions and retail often fill that need. A by-location per passenger MAG may be too complicated for widespread implementation at this point. We did not review solicitation or award of concession agreements in this audit. Without this expertise, the concession will almost certainly fail to operate at an optimum level. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. 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. 6 . Minimum Annual Guarantee _____- concession often establish their rates as a percentage of gross . Option 6: The airport as concession operator. If, at the end of any year during the Term, the total amount of monthly installments of MAG and Percentage Fees paid for such year is less than the total amount of annual MAG and Percentage . The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. Bid. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. For construction contracts over _____ federal regulations require the airport to obtain a bid guarantee to equal at least _____ of the bid price, as well as performance and payment bonds equaling _____ percent of the contract. Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. These MAG clauses in concession contracts should be carefully reviewed. These three options do not change the underlying airport-concessionaire relationship. 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 concept is not uncommon. As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. Audit. The CFC is a charge based on either the contract value, gross receipts, or per car per day. A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. There are means of counting passengers who pass a concession location, but few airports have installed such technology. 49 CFR Part 23 requires airports to have a concessions-based DBE program. Sea-Tac airport may allow Uber, Lyft and Sidecar to start picking up passengers if new rules are passed. 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. 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. To remove barriers in participation of DBEs. 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. To ensure that the program is performed in accordance with law. 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 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. Percentage (privilege) Fees - 10% of gross revenue from airport related car rentals, or a minimum annual guarantee, whichever is greater. 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, Hrmes) are given the ability to design and operate their mini outlets. Created by. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. They will typically also offer a percentage of their gross receipts to the airport as part of the RFP for the FBO services. How involved the airport gets in the day-to-day operation is the option of the airport and their partner(s). At least for the immediate future, there will be reduced demand for concession services. 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. Learn. 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. Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout the passengers journey. (By comparison, the competing House of Representatives version of the bill contained no such restriction.) Cookie Notice: This site uses cookies to provide you with a more responsive and personalized service. A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. 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. However, MAGs in concession contracts still expect continued growth. Airport sponsors should carefully review their bond covenants and indentures, with a particular focus on pledge of revenues and flow of funds. Non-aeronautical revenueairport revenue from sources other than airlinestypically includes retail concessions, 1 car parking, and property and real estate. which guarantees that the tenant will pay the airport a minimum amount annually. Bond Covenants and Indenture Pledge of Revenues. To help develop firms that can compete in the marketplace outside of the DBE program. Add it up, and the cost of operating at an airport is often higher than operating at a typical mall. A prepaid monthly "lease" to do business on the property. February 2, 2021January 28, 2021 | AirportU. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. 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. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. 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. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee . However, this still may not be the most effective solution. This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. No one is sure how long recovery will take. These three options do not change the underlying airport-concessionaire relationship. Minimum Annual Guarantees. 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. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. In times of continued and prolonged growth, airports have learned to depend upon MAGs. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee (MAG). 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. 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. The price tag is a whopping $440 per square foot. Car rental companies are concessionaires at the airport. Discover our insights for a sustainable, low-emissions future. These benefit packages may make the cost of employment significantly higher than the all-in employment costs for most concession operators. They often charge more than 10% for water and alcohol, Waguespack said. By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. The competitive landscape may beby necessityaltered. With the new economic and industry realities, capital access may be an even greater hurdle. 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 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 single factor most tied to concession success is the footfall past the concession locations. While it may never be business as usual again, the airport and its business partners need to adjust to a new normal. 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 . In North America, airports tend to look at MAGs as the least amount of acceptable rent. Minimum Annual Guarantee (MAG). Minimum Annual Guarantee (MAG) - The amount proposed and/or agreed to by the Concessionaire, that Concessionaire guarantees as minimum payment per year to DFW. Notably, the GASB has deferred the implementation date of GASB Statement No. 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. Master operators are common options, such as HMS Host Intl, Paradies Lagardere, Delaware North, and SSP. The city may extend the action for an additional 30-day . 9. A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. There will still be passengers, and the concession industry needs to be ready to serve them. The Trinity model can be considered an extension of the joint venture model. 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. It is mandatory to procure user consent prior to running these cookies on your website. By clicking Accept, you consent to the use of ALL the cookies. 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. Here are some others. 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. Concessionaires could avoid minimum annual guarantee payments for a third quarter as the MAC develops a long-term relief plan. With the new economic and industry realities, capital access may be an even greater hurdle. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. Six options for how to ensure that the airport concessions industry continues to be a robust and vibrant business for all. 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. Learn. 116-94). The cost of design and construction for your space is going to be much higher. Its clear that fixed MAGs are unable to provide the flexibility necessary to deal with severe occurrences. Primarily, in residual agreements, the rates vary based on airport revenue. There are several types of concessionaires that lease space to operate at the airport. In this model, the airport takes on two roles: landlord and partner in the operation. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. 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 . MAG - Minimum Annual Guarantee. Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. The policies and procedures are available for review here. The intent of DBE programs is to increase the amount of business done with Minority Business Enterprises (MBE) and Women Business Enterprises (WBE).
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