The key will be ensuring that airline charges remain fair and reasonable. (1) On-Airport (% of Gross Receipts). This site uses Akismet to reduce spam. However, sponsors dont need to apply for the increased federal share of FY20 AIP or FY 2020 Supplemental Discretionary grants. This . Each entity will need to review the applicable accounting guidance, consider their own circumstances, and make their determination based on their professional judgment. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. The cost of design and construction for your space is going to be much higher. Necessary cookies are absolutely essential for the website to function properly. As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. 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. 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. Bond Covenants and Indenture Pledge of Revenues. Some airports have just a single FBO while others have multiple. Airports would have to offer benefit packages to these employees in line with those provided to other employees of the airport. Minimum Annual Guarantee or " MAG " means the minimum Privilege Fee due the Authority annually from the Operator set forth in Section 5.2. Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. 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. The workforce retention requirement doesnt apply to nonhub or nonprimary airports. 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. Other organizations that havent yet addressed some of these pending standards may want to take advantage of the implementation delays. What this option does do is change the distribution of risk. There are means of counting passengers who pass a concession location, but few airports have installed such technology. 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. 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. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. Where appropriate and agreed to by airport sponsors, terminal use leases should be amended to reflect the airlines changed operating circumstances. The disclosure of guaranteed minimum future lease payments will also be impacted for any changes in the MAG in the concession contracts. The joint venture lease must be similar to those given to other concessionaires, and enforcement of the airports rules and performance requirements must be uniform. Madang, Papua New Guinea - Madang (Airport Code) MAG: Mainzer Aufbaugesellschaft mbH: MAG: Mission Assurance Guidelines: MAG . Minimum Annual Guarantee listed as MAG. The joint venture lease must be similar to those given to other concessionaires, and enforcement of the airports rules and performance requirements must be uniform. This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. 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. 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. In the event that the concessionaire is unsuccessful, the airport absorbs the losses. As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. Match. which guarantees that the tenant will pay the airport a minimum amount annually. 4.1.2 Minimum Annual Guaranteed Concession Fee Payment. Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. 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 the model has primarily been used for duty-free concessions, it has worked equally well for other types of concessions. 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 passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. Nor do we know whether travel habits will change permanently because of new practices learned during lockdowns. FBOs may collect the landing fees for GA aircraft or charge them a fuel-flowage fee on behalf of the 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. . Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. 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. Because of the drastic reduction in flights and passenger traffic, airlines have been shrinking their staffing, space requirements and gate usage. The fallacy of Minimum Annual Guarantee (MAG). Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. At least $7.4 billion is allocated to commercial service airports, allocated based on enplanements, debt service, and unrestricted reserve ratios. . 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 Audit Committee has reviewed this report and is releasing it in accordance with Article 2, Chapter 6 of the City Charter. 1, their minimum annual guarantee was superior to anybody . 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. 6 . The FAA has issued additional guidance on airport concession fees, some of which reverses earlier policies. 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 If an airport can become a partner in the operation of a concession, it might also consider being a concession operator on its own. However, MAGs in concession contracts still expect continued growth. Airports provide the passengers, the retailers provide the services. A MAG, as currently developed, is unsustainable in anything but relatively normal times. Primarily, in residual agreements, the rates vary based on airport revenue. This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. Importantly, the $2 billion is not subject to the reduced apportionments for larger airports that also impose passenger facility charges (PFCs). This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. 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. 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 . While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. This essentially flips the rent risk from being entirely on the vendors (in a MAG-based model) to being entirely on the airport. 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. 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. A master operator, or sometimes referred to as an institutional operator, serves as a master lessee and either provide or sublease concessionaires for the airport. At least $100 million will go to general aviation airports, allocated based on categories published in the current NPIAS. A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. 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. (By comparison, the competing House of Representatives version of the bill contained no such restriction.) Airports around the country will soon receive their share of $10 billion in FAA grants provided in the CARES Act. Until a few weeks ago, your organization has likely been focused on implementing several new GASB standards, including GASB Statement No. To promote the use of DBEs for federally funded projects. Lets consider six potential options. In North America, airports tend to look at MAGs as the least amount of acceptable rent. MAG: Each Respondent shall indicate payment of a Minimum Annual Guarantee ("MAG") of $_____. See how we support our people, protect the planet, and give back to communities. The actual process is the easiest for the airport sponsor since there are minimal contracts. In either case, history has shown that MAGs are not supportable in the event of severe downturns. Rates and Fees are adjusted annually based on the Airport's fiscal year, from October 1st through September 30th. 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. Sea-Tac airport may allow Uber, Lyft and Sidecar to start picking up passengers if new rules are passed. The competitive landscape may beby necessityaltered. 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. 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. Current generally accepted accounting principles suggests that entities should establish a policy that defines operating revenues for enterprise funds and use it consistently. "This is to offset rent and minimum annual guarantee requirements of those tenants in the face of a severe decline in their customers (passengers) during the continuing COVID issue." Airport . To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). 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. Concessions and retail often fill that need. The CARES Act roughly triples the amount of money flowing from the federal government directly to airports for 2020. 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. Guarantee: $50,000. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. Land . 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. Project. However, it does reduce the potential benefit to the airport by splitting the proceeds generated. One-twelfth of the MAG shall be due in advance on the first day of each month Non-aeronautical revenueairport revenue from sources other than airlinestypically includes retail concessions, 1 car parking, and property and real estate. 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. There are numerous ways to frame a contract without a MAG. Minimum Annual Guarantee _____- concession often establish their rates as a percentage of gross . Concessionaires need to understand this new business reality when they ask for relief. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. Even before the contagion, the "Minimum Annual Guarantee" (MAG) model was already under challenge, and does this tool remain fit-for-purpose? 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. These funds are available only to sponsors as defined in Section 47102 of title 49, United States Code (U.S.C. A MAG, as currently developed, is unsustainable in anything but relatively normal times. This category only includes cookies that ensures basic functionalities and security features of the website. Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. Option 4: Airport-concessionaire joint ventures. Airport concession program in order to maximize non-aviation revenue, increasing sales per enplaned passenger at a rate higher than passenger . While it may never be business as usual again, the airport and its business partners need to adjust to a new normal. 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. Car rental companies are concessionaires at the airport. They charge restaurants a minimum annual guarantee, also known as "rent" in the non-airport world. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. This website uses cookies to improve your experience while you navigate through the website. Elsewhere, airports do not expect vendors to exceed their MAGs. 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 . The develop pays the amount due to the airport through the lease agreement and pockets the rest. That is no longer possible. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. The FAA released guidance for airport administrators, but questions still linger and issues have gone unaddressed. 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. . How involved the airport gets in the day-to-day operation is the option of the airport and their partner(s). 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. 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. BADGES AND SECURITY: . What this option does do is change the distribution of risk. 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. Page 3 of 61 - Non-exclusive On-airport Rental Car Concession - Proposal documents 3. 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 To ensure nondiscrimination in federally funded contracts for DOT airport assistance programs. [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. Many airport agreements allow for a suspension of MAGs in the event of a severe enplanement decrease. Airport Cargo Community system Bid Opening Date: 07/13/2021 05:00:00 PM Purchaser: Kevin Hanagan Organization: City of Philadelphia . These MAG clauses in concession contracts should be carefully reviewed. 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. 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. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. The CFC is a charge based on either the contract value, gross receipts, or per car per day. 4.1.3 Percentage Fees. The company, which . The FAAs Office of Airports will administer these grant funds to airport sponsors. 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. Add it up, and the cost of operating at an airport is often higher than operating at a typical mall. Receive perspectives on the industries and issues that matter. As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. Minimum Annual Guarantee (MAG). Elsewhere, airports do not expect vendors to exceed their MAGs. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. No one is sure how long recovery will take. 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. 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. 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. Stakeholders are already beginning discussions on a proposed Phase 4 stimulus bill. Airport sponsors should carefully review their bond covenants and indentures, with a particular focus on pledge of revenues and flow of funds. The minimum guaranteed rent for the first year of the lease is the amount proposed by the winning proposal. Discover our insights for a sustainable, low-emissions future. Unlike earlier phases of stimulus, Phase 4 has the potential to include a significant infrastructure focus. Airport Operations. 3300 Capital Circle, S.W. Regulatory Updates Extension of Minimum Slot Usage Requirements. In times of continued and prolonged growth, airports have learned to depend upon MAGs. 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. 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. The passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. 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. Primarily, in residual agreements, the rates vary based on airport revenue. 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. 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. There are numerous ways to frame a contract without a MAG. The FAA helped to level the playing field by allowing DBEs to compete for concessions contracts in airports. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. 47114, with minimum apportionments for smaller airports that serve between 8,000 and 10,000 passengers annually. 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. MAG - Minimum Annual Guarantee. 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 . President Donald Trump has already tweeted his support for such an infrastructure bill. Majority-In-Interest (MII) clauses. By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. 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. A. To remove barriers in participation of DBEs. In times of continued and prolonged growth, airports have learned to depend upon MAGs. As a result, airports may wish to consider going a step further. Flashcards. 84, Fiduciary Activities. 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. Minimum Annual Guarantee (MAG) - The amount proposed and/or agreed to by the Concessionaire, that Concessionaire guarantees as minimum payment per year to DFW. Airports would also have to hire and manage many additional hourly employees. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. Airports would also have to establish supply lines for products that they have not procured in the past. 636(a)(37)) that has been applied toward rent or minimum annual guarantee costs. $100 million is distributed to general aviation airports in accordance with categories established by the National Plan of Integrated Airport Systems (NPIAS). Test. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. They rent space to provide a service/product (rental car) for an agreed upon time frame at a certain rate. The concept is not uncommon. Concessionaires are, in general, seeking some manner of rent relief from their airport partners. 9. We do expect further guidance from the federal government in upcoming months to clarify SEFA considerations. 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. 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. Airport vendors typically pay a portion of their revenues to the MAC, and those payments can't fall below the minimum annual guarantee. "We've already . minimum annual guarantee (MAG) obligations to eligible airport concessions. The price tag is a whopping $440 per square foot. 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. 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). The master operator concept typically limits the ACDBE participation goals and may require additional efforts to maintain. Respondents will propose both a MAG and a Percentage (%) of Annual Gross Revenue, the greater of which will be paid . FBO/SASO: NOTE: Minimum Annual Guarantee - How is Minimum Annual Guarantee abbreviated? These cookies will be stored in your browser only with your consent. Tallahassee, FL 32310 . There are means of counting passengers who pass a concession location, but few airports have installed such technology. If an airport can become a partner in the operation of a concession, it might also consider being a concession operator on its own. These benefit packages may make the cost of employment significantly higher than the all-in employment costs for most concession operators. Retail/Gift Shop 11% of Gross Receipts or Minimum Annual Guarantee Terminal Advertising 30% -60% of Gross Receipts or Minimum Annual Guarantee . While the model has primarily been used for duty free concessions, it has worked equally well for other types of concessions. However, this still may not be the most effective solution. The FAA regional office must approve if the airport receives federal funding and is a primary airport with commercial service and the revenue generated by concessions exceeds $200,000. 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. To ensure that the program is performed in accordance with law. 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. 49 CFR Part 23 requires airports to have a concessions-based DBE program. Six options for how to ensure that the airport concessions industry continues to be a robust and vibrant business for all. 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. Match. Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. When one partner tries to do too much, it will lessen the benefits of the joint venture.