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. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. Option 5: The Trinity (or Trinity Plus) model. C. Concession Fee. February 2, 2021January 28, 2021 | AirportU. 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 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. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. Given the current state of the economy, Congress has turned to working on the next comprehensive economic relief package, which is being referred to as CARES 2.0. 4.1.3 Percentage 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. This document addresses common issues that have arisen or may arise for airport sponsors during the response to the COVID-19 public health emergency. For aviation, global recovery to 2019 levels is projected to take several years, into 2023 for markets with significant domestic air . As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. Audit. Rent abatement / minimum annual guarantee: A decision to abate rent (including "minimum annual guarantees" and also encompassing fees) is a local . There are several types of concessionaires that lease space to operate at the airport. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. They will typically lease space for counter and office space and additional space for the vehicle storage. An amount of $7.4 billion, which can be distributed to airport sponsors for any purpose for which airport revenues may lawfully be used. The purpose for which airport revenues may lawfully be used is widely viewed as a reference to the FAAs Policy on Permitted and Prohibited Uses of Airport Revenue (Revenue Diversion Policy). While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. Guarantee: $50,000. The Audit Committee has reviewed this report and is releasing it in accordance with Article 2, Chapter 6 of the City Charter. As a result, the collectability of this revenue may need to be reviewed and an allowance for estimated uncollectable amounts may need to be recorded. This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. . . Airports would also have to establish supply lines for products that they have not procured in the past. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). But opting out of some of these cookies may affect your browsing experience. Because of the drastic reduction in flights and passenger traffic, airlines have been shrinking their staffing, space requirements and gate usage. This is especially true for leases incorporating a Minimum Annual Guarantee (MAG) mechanism or fixed rent clauses. While it may never be business as usual again, the airport and its business partners need to adjust to a new normal. A MAG, as currently developed, is unsustainable in anything but relatively normal times. 47114 (as modified by the CARES Act), then the remainder is distributed in the same manner as the $7.4 billionbased on a mixture of enplanements and debt service. Budapest Airport. 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 passenger safety and well-being are paramount, the extreme reduction in passenger flow has rippled across the entire airport-airline ecosystem. The $10 billion in funding is divided into four main categories: For airport grants, after the Secretary of Transportation announces awards under the CARES Act, each airport sponsor must submit a grant application to access those funds. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. To help develop firms that can compete in the marketplace outside of the DBE program. You also have the option to opt-out of these cookies. which guarantees that the tenant will pay the airport a minimum amount annually. How does the Airport Authority charge rent? Its clear that fixed MAGs are unable to provide the flexibility necessary to deal with severe occurrences. - Suite 1 . 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). 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 Process Up to 3 years Or Up to $100,000 per year Direct negotiation with potential concessionaire Over 3 years and up to 5 Off-airport companies pay up to 8% of gross revenue from their airport-related car rentals. 1, their minimum annual guarantee was superior to anybody . However, there is no relief of the obligation to withhold and remit the corresponding employee share. The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. When passenger traffic does come back, airports should rethink how their concession contracts work. There will still be passengers, and the concession industry needs to be ready to serve them. If you are a sponsor who controls multiple airports the FAA has stated in its CARES Act FAQ, an airport sponsor may use funds at any airport under its control. The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. 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. Strategic agency for engagement and transformation. The Airport has also experienced a reduction in passengers and operations as a result of . As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. The policies and procedures are available for review here. There are numerous ways to frame a contract without a MAG. 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. Signatory carriers may exercise significant control over an airport's capital budgeting process under provisions in a use agreement known as. Primarily, in residual agreements, the rates vary based on airport revenue. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. Airports maintain goals of working with Disadvantaged Business Enterprises or more commonly referred to as DBEs. Concessionaires need to understand this new business reality when they ask for relief. 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. A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. 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. Minimum Annual Guarantee. Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. There are a few limitations, however, that make this a less than optimal solution. Airport vendors typically pay a portion of their revenues to the MAC, and those payments can't fall below the minimum annual guarantee. 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. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. To remove barriers in participation of DBEs. That is no longer possible. Learn. Importantly, the $2 billion is not subject to the reduced apportionments for larger airports that also impose passenger facility charges (PFCs). These MAG clauses in concession contracts should be carefully reviewed. A third party company could be contracted to handle the leasing and management of concessions on behalf of the airport. In this model, the airport takes on two roles: landlord and partner in the operation. them from immediately acquiescing to their advertisers' perfectly justifiable requests is the cold draught of the minimum annual guarantee (MAG). BADGES AND SECURITY: . There are a few limitations, however, that make this a less than optimal solution. 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. While many contracts include a "force majeure" clause, this does not necessarily cover pandemic scenarios and in many instances, there is no formal agreement in place to review commercial terms in the event of such a . Tallahassee International Airport . 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. 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 Board of Airport Commissioners at Los Angeles World Airports has recently approved a recommendation by management to permit concessionaire relief measures, including moving all concessionaires with contracts based on Minimum Annual Guarantee fee payments to percentage rent-based agreements 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. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. . 2023 Plante & Moran, PLLC. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee . The Trinity model can be considered an extension of the joint venture model. While the model has primarily been used for duty-free concessions, it has worked equally well for other types of concessions. $100 million is distributed to general aviation airports in accordance with categories established by the National Plan of Integrated Airport Systems (NPIAS). The workforce retention requirement doesnt apply to nonhub or nonprimary airports. . 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. 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. Airport sponsors should carefully review their bond covenants and indentures, with a particular focus on pledge of revenues and flow of funds. Until a few weeks ago, your organization has likely been focused on implementing several new GASB standards, including GASB Statement No. FBO/SASO: NOTE: MAG - Minimum Annual Guarantee. In North America, airports tend to look at MAGs as the least amount of acceptable rent. Tallahassee, FL 32310 . In other parts of the world, MAGs are the airport's exact expected rental payments. The fallacy of Minimum Annual Guarantee (MAG). COVID-19 has sent shockwaves throughout the world. Delta will pay market rates to lease these three additional Delta-preferred gates with a minimum annual guarantee (MAG). Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). 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.
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