. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. The CARES Act roughly triples the amount of money flowing from the federal government directly to airports for 2020. There are means of counting passengers who pass a concession location, but few airports have installed such technology. 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. Option 5: The Trinity (or Trinity Plus) model. Many airport agreements allow for a suspension of MAGs in the event of a severe enplanement decrease. Most simply, the airport and vendor could agree to a fixed percentage rent. Airports would also have to hire and manage many additional hourly employees. These benefit packages may make the cost of employment significantly higher than the all-in employment costs for most concession operators. installments during the first year of the Term. There are numerous ways to frame a contract without a MAG. With the announcement by the GASB of a delay in the required implementation of these new standards, your organization will need to decide how to respond. The competitive landscape may beby necessityaltered. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. 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 . Non-aeronautical revenueairport revenue from sources other than airlinestypically includes retail concessions, 1 car parking, and property and real estate. The actual process is the easiest for the airport sponsor since there are minimal contracts. 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. Similar to a third party option, an institutional operator can reduce risk while also reducing proceeds to the airport operator. However, MAGs in concession contracts still expect continued growth. To ensure that firms meet the requirements of DBE qualification. 4.1.2 Minimum Annual Guaranteed Concession Fee Payment. 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. A third party company could be contracted to handle the leasing and management of concessions on behalf of the airport. A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. 6 . 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. San Francisco, CA Mayor London N. Breed has signed an ordinance authorizing the San Francisco International Airport (SFO) to launch a rent relief program for airport concession tenants, in which lease agreements will be modified to waive certain rent and fees.The value of the relief available to be granted under the COVID-19 Emergency Rent Relief Program is estimated at $21.3 million and . In either case, history has shown that MAGs are not supportable in the event of severe downturns. While passenger safety and well-being are paramount, the extreme reduction in passenger flow has rippled across the entire airport-airline ecosystem. A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. New model commercial contracts will require a complete rebuild of the airport's financial model, along with revised relations with financiers. Guarantee: 50% of Minimum Annual Guarantee. The FAA will use the Office of Management and Budget (OMB) SF-424, Application for Federal Assistance, and provide a simplified grant agreement shortly after it receives an application. The additional funds appropriated by the CARES Act were largely intended to help airport sponsors meet their debt service and bond obligations. . 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. 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. Stakeholders are already beginning discussions on a proposed Phase 4 stimulus bill. Examples of Minimum Annual Guaranteed Rent in a sentence. Current generally accepted accounting principles suggests that entities should establish a policy that defines operating revenues for enterprise funds and use it consistently. 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. which guarantees that the tenant will pay the airport a minimum amount annually. Strategic agency for engagement and transformation. 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. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. 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. 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 current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. However, sponsors dont need to apply for the increased federal share of FY20 AIP or FY 2020 Supplemental Discretionary grants. Tallahassee, FL 32310 . In North America, airports tend to look at MAGs as the least amount of acceptable rent. I certify that Airport Concessions Inc. has not received a second draw or assistance for a covered loan under section 7(a)(37) of the Small Business Act (15 U.S.C. It is still unclear whether all of the CARES funding will be reported on the Schedule of Expenditures of Federal Awards (SEFA) . While the model has primarily been used for duty-free concessions, it has worked equally well for other types of concessions. https://www.law.cornell.edu/cfr/text/49/part-23, Airport Concessions Disadvantaged Business Enterprises, Developing An Operating Budget - Airport University, Disadvantaged Business Enterprises - Airport University. 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. . While the bulk of the $10 billion appropriated for airport sponsors can be used to make bond principal and interest payments if necessary, airport sponsors may be faced with difficult decisions about how to prioritize needs while under financial stress. Attention: Finance & Administration Division . A third party can absorb some of the liability and risk from the airport operator. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. However, this still may not be the most effective solution. Car rental companies are concessionaires at the airport. 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. This information collection permits FAA to confirm that rent relief is consistent with the requirements of CRRSA and ARPA. 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. There are means of counting passengers who pass a concession location, but few airports have installed such technology. Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. Airports maintain goals of working with Disadvantaged Business Enterprises or more commonly referred to as DBEs. Up to $2 billion will go to large, medium, and small hub airports, allocated based on AIP primary entitlement formulas. How does the Airport Authority charge rent? Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. While the leased space is non-aeronautical revenue, the CFCs are non-operating revenue. 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. Master operators are common options, such as HMS Host Intl, Paradies Lagardere, Delaware North, and SSP. Airport sponsors should carefully review their bond documents to ensure the methods of calculating the airports rate covenant under the current circumstances are appropriate. The CFC is a charge based on either the contract value, gross receipts, or per car per day. Normally, operating classification on the statement of revenues, expenses, and changes in net position will typically follow the classification of operating activities in the statement of cash flows. Airport sponsors should carefully review their bond covenants and indentures, with a particular focus on pledge of revenues and flow of funds. Tallahassee International Airport . Retail/Gift Shop 11% of Gross Receipts or Minimum Annual Guarantee Terminal Advertising 30% -60% of Gross Receipts or 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 . (a) Annual Reconciliation. Primarily, in residual agreements, the rates vary based on airport revenue. The competitive landscape may beby necessityaltered. Non-airport retail leases typically charge rent on a per square foot (PSF) basis. New non-aeronautical revenue streams are critical to airport recovery from the COVID-19 pandemic. If youre far enough along in the implementation process, you may want to move forward with adopting these standards. Airport Cargo Community system Bid Opening Date: 07/13/2021 05:00:00 PM Purchaser: Kevin Hanagan Organization: City of Philadelphia . Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee (MAG). Delta will pay market rates to lease these three additional Delta-preferred gates with a minimum annual guarantee (MAG). 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. Lets consider six potential options. A prepaid monthly "lease" to do business on the property. Importantly, the $2 billion is not subject to the reduced apportionments for larger airports that also impose passenger facility charges (PFCs). Terminal Closure and Footprint Reductions. 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 Trinity model can be considered an extension of the joint venture model. 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. NOTICE OF INTENTION TO ENTER INTO FOUR SEPARATE CONCESSION LEASE AGREEMENTS WITH THE DAY ONE GROUP LLC NOTICE IS HEREBY GIVEN, to all interested parties, that the Clark County Board of Commissioners intends to enter into four separate Concession Lease Agreements (Agreements) for the operation of 5 specialty retail concessions with The Day One Group LLC (Company) serving Harry Reid . The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. 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. 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. Signatory carriers may exercise significant control over an airport's capital budgeting process under provisions in a use agreement known as. To provide flexibility to recipients of federally funded projects in providing opportunities to DBEs. [1]https://www.law.cornell.edu/cfr/text/49/part-23 jQuery('#footnote_plugin_tooltip_333_1_1').tooltip({ tip: '#footnote_plugin_tooltip_text_333_1_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top center', relative: true, offset: [-7, 0], }); The entire premise of the DBE program is based on: The writers of AirportU do so not for recognition, rather for learning, sharing, and empowering others. Airport Operations. Concessions covers more than what you think of served at a traditional concession stand. As a result, airports may wish to consider going a step further. Providing a product or service inside the airport environment is one of the key qualifiers for a concessionaire. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). Denver International Airport will price $925 million of refunding bonds to help ease its debt service burden during the pandemic-driven traffic decline . Cookie Notice: This site uses cookies to provide you with a more responsive and personalized service. Any funding received under the Assistance Listing 20.106, Airport Improvement program will be reported on the SEFA. The FAA released guidance for airport administrators, but questions still linger and issues have gone unaddressed. If any portion of the $2 billion is left over after distributing in accordance with 49 U.S.C. 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. There are a few limitations, however, that make this a less than optimal solution. 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. In North America, airports tend to look at MAGs as the least amount of acceptable rent. Minimum Annual Guarantees. Airports would have to offer benefit packages to these employees in line with those provided to other employees of the airport. 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 FAAs Office of Airports will administer these grant funds to airport sponsors. Airport vendors typically pay a portion of their revenues to the MAC, and those payments can't fall below the minimum annual guarantee. At least for the immediate future, there will be reduced demand for concession services. Respondents will propose both a MAG and a Percentage (%) of Annual Gross Revenue, the greater of which will be paid . Minimum Annual Guarantee ("MAG") Lowest amount of rent to be paid To Be Negotiated . 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 (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. Without this expertise, the concession will almost certainly fail to operate at an optimum level. Guarantee: $50,000. The same rules govern the use of CARES Act funds that govern the use of all airport revenues. Rates and Fees are adjusted annually based on the Airport's fiscal year, from October 1st through September 30th. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. When one partner tries to do too much, it will lessen the benefits of the joint venture. Discover how we help clients achieve success. The Airport has also experienced a reduction in passengers and operations as a result of . Airports should carefully consider how they structure deals and their business modelsto ensure more flexibility to respond to potential future shocks. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. The policies and procedures are available for review here. To level the playing field so that DBEs can compete . 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. 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. The develop pays the amount due to the airport through the lease agreement and pockets the rest. A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. If flights do not return to their pre-pandemic levels, then the airport will not be able to recover former passenger levels. An engaging panel discussion entitled 'Road to Recovery: The Retailer Perspective' took place during yesterday's virtual Summit of the . As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. 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. Learn. In addition, they typically provide the fueling services for the airport. 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 only for the passenger traffic, while for . BADGES AND SECURITY: . The FAA has issued additional guidance on airport concession fees, some of which reverses earlier policies. Save my name, email, and website in this browser for the next time I comment. In either case, history has shown that MAGs are not supportable in the event of severe downturns. 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. Minimum Annual Guarantee. The fallacy of Minimum Annual Guarantee (MAG). The city may extend the action for an additional 30-day . Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). Please read our Privacy Policy for more information on the cookies we use. It is mandatory to procure user consent prior to running these cookies on your website. 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. 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. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. 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. Concessionaires are, in general, seeking some manner of rent relief from their airport partners. Bid. . The compliance and accounting questions related to the COVID-19 outbreak and the related new funding streams are significant. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. 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. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. . As someone who's sat on all four corners of the airport advertising negotiating table - media owner, airport operator, media agency and client - I have a degree of sympathy with all parties. We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. 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. In this model, the airport takes on two roles: landlord and partner in the operation. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. You also have the option to opt-out of these cookies. In other parts of the world, MAGs are the airport's exact expected rental payments. 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. Terms in this set (15) What is MAG and what does it stand for? 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. 4.1.3 Percentage Fees. When passenger traffic does come back, airports should rethink how their concession contracts work. 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. In this model, the airport takes on two roles: landlord and partner in the operation. 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 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. Non-airport retail leases typically charge rent on a per square foot (PSF) basis. A MAG, as currently developed, is unsustainable in anything but relatively normal times. 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. This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. Jacksonville International Airport's split is 70 percent nonaeronautical revenue, which brought in $52 million in 2015, driven by parking, rental car and concessions, he said. 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. . President Donald Trump has already tweeted his support for such an infrastructure bill. To remove barriers in participation of DBEs. Elsewhere, airports do not expect vendors to exceed their MAGs. them from immediately acquiescing to their advertisers' perfectly justifiable requests is the cold draught of the minimum annual guarantee (MAG). 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. However, we recommend that you consider the underlying principles of Uniform Guidance and the terms and conditions of the FAA while administering the funds. The federal share for FY 2018 and 2019 Supplemental Discretionary grants wont increase. The Revenue Use Policy document defines permitted and prohibited uses of airport revenue. This website uses cookies to improve your experience while you navigate through the website. Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. 49 CFR Part 23 requires airports to have a concessions-based DBE program. No one is sure how long recovery will take. Add it up, and the cost of operating at an airport is often higher than operating at a typical mall. Audit. Where do we go from here? We also use third-party cookies that help us analyze and understand how you use this website. October 09, 2020, 11:40 a.m. EDT 4 Min Read. In a 6-to-3 vote on Monday, June 8, the council approved temporarily revising the Minimum Annual Guarantee, which is a fixed amount restaurants guarantee they will pay the city to do business at . The airport environment is complex and has become even more challenging due to COVID-19. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. 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 minimum annual guarantee or MAG annually, which more or less translates to rent. The single factor most tied to concession success is the footfall past the concession locations. There are numerous ways to frame a contract without a MAG. Option 4: Airport-concessionaire joint ventures. 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. percentage of their annual gross revenues derived from operations at the airport or a minimum annual guaranteed amount, whichever is greater. Airlines, while they may be able to reduce some operating costs associated with vacated premises, must still cover all their fixed and operating costs associated with the vacated space. Consulting. 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. These MAG clauses in concession contracts should be carefully reviewed. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. Some airports have just a single FBO while others have multiple. Will this have an impact on airline and concession agreements? The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. Rent abatement / minimum annual guarantee: A decision to abate rent (including "minimum annual guarantees" and also encompassing fees) is a local .
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