minimum annual guarantee airport minimum annual guarantee airport

Minimum Annual Guarantee (MAG) - The amount proposed and/or agreed to by the Concessionaire, that Concessionaire guarantees as minimum payment per year to DFW. The Airport has also experienced a reduction in passengers and operations as a result of . This essentially flips the rent risk from being entirely on the vendors (in a MAG-based model) to being entirely on the airport. Option 4: Airport-concessionaire joint ventures. While passenger safety and well-being are paramount, the extreme reduction in passenger flow has rippled across the entire airport-airline ecosystem. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. A payment called a Minimum Annual Guarantee will be waived for the months of March, April and May last year. 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. A collective of travel retailers have agreed that operational contracts hinging on minimum annual guarantees (MAGs) are no longer workable in a Covid-ravaged air transport climate and must be reformed. The fallacy of Minimum Annual Guarantee (MAG). Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. Until a few weeks ago, your organization has likely been focused on implementing several new GASB standards, including GASB Statement No. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. 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. Airport sponsors should carefully review their bond covenants and indentures, with a particular focus on pledge of revenues and flow of funds. This strategy is particularly applicable for a hub airport where the hub airlines brand expression is likely already an important part of the airports perceived brand. The additional funds appropriated by the CARES Act were largely intended to help airport sponsors meet their debt service and bond obligations. 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. Elsewhere, airports do not expect vendors to exceed their MAGs. This . For information on the business impacts of COVID-19, please visit ourCOVID-19 Resource Center, which we continue to update as the situation evolves. COVID-19 has sent shockwaves throughout the world. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. If you have questions. Regardless, this shifting of risk may not be acceptable to airports. 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. Similar to a third party option, an institutional operator can reduce risk while also reducing proceeds to the airport operator. Wealth Management. 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. Its clear that fixed MAGs are unable to provide the flexibility necessary to deal with severe occurrences. $100,000, 5%, 100% . 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. Without this expertise, the concession will almost certainly fail to operate at an optimum level. Discover the top trends shaping government in 2023. percentage of their annual gross revenues derived from operations at the airport or a minimum annual guaranteed amount, whichever is greater. Airlines are likely to oppose any PFC increase, and in the absence of any increase, infrastructure spending would likely be funded through additional appropriations to the Airport and Airway Trust Fund. In North America, airports tend to look at MAGs as the least amount of acceptable rent. In a standard MAG model, the concessionaire bears a great deal of uncertainty with little risk falling to the airport. Additionally, nonoperating revenues would generally include grants, among other things. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. A MAG, as currently developed, is unsustainable in anything but relatively normal times. 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. As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. Meanwhile the company maintained a resilient retail margin of above 60%, helped by minimum annual guarantee waivers to airport landlords of $1.2 billion. 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 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. 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. Tallahassee, FL 32310 . 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. Audit. But opting out of some of these cookies may affect your browsing experience. Concessionaires could avoid minimum annual guarantee payments for a third quarter as the MAC develops a long-term relief plan. Depending on the level of the sales decrease, the resulting increase in space rental rates may lead to concessions being no longer economically viable. The concept is not uncommon. The CFC is a charge based on either the contract value, gross receipts, or per car per day. The policies and procedures are available for review here. To remove barriers in participation of DBEs. In a standard MAG model, the concessionaire bears a great deal of uncertainty with little risk falling to the airport. It is mandatory to procure user consent prior to running these cookies on your website. 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. 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 workforce retention requirement doesnt apply to nonhub or nonprimary airports. The same rules govern the use of CARES Act funds that govern the use of all airport revenues. The airport operator is always present and has a wealth of knowledge about the airport. 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. Some airports have had huge success in meeting ACDBE goals with the developer model. A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. 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, Hermes) are given the ability to design and operate their mini outlets. Concessionaires are, in general, seeking some manner of rent relief from their airport partners. 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. . 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. While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. 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 leased space is non-aeronautical revenue, the CFCs are non-operating revenue. These funds are available only to sponsors as defined in Section 47102 of title 49, United States Code (U.S.C. These three options do not change the underlying airport-concessionaire relationship. The actual process is the easiest for the airport sponsor since there are minimal contracts. Test. A by-location per passenger MAG may be too complicated for widespread implementation at this point. Examples of concessions within airports include: A direct concession lease involves the space being directly marketed, leased, and managed by the airport operator. 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. Airport concession program in order to maximize non-aviation revenue, increasing sales per enplaned passenger at a rate higher than passenger . Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. Many airport agreements allow for a suspension of MAGs in the event of a severe enplanement decrease. Here are some others. This website uses cookies to improve your experience while you navigate through the website. 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. Concessions and retail often fill that need. There are a few limitations, however, that make this a less than optimal solution. Airport Cargo Community system Bid Opening Date: 07/13/2021 05:00:00 PM Purchaser: Kevin Hanagan Organization: City of Philadelphia . A third party company could be contracted to handle the leasing and management of concessions on behalf of the airport. Tallahassee International Airport . Learn. At least $7.4 billion is allocated to commercial service airports, allocated based on enplanements, debt service, and unrestricted reserve ratios. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. These cookies do not store any personal information. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee (MAG). Below are some considerations for airport sponsors to keep in mind. 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). Minimum Annual Guarantee. As a result, airports may wish to consider going a step further. Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. In other parts of the world, MAGs are the airport's exact expected rental payments. 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. Non-aeronautical revenueairport revenue from sources other than airlinestypically includes retail concessions, 1 car parking, and property and real estate. This site uses Akismet to reduce spam. Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. 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. The price tag is a whopping $440 per square foot. When one partner tries to do too much, it will lessen the benefits of the joint venture. Minimum Annual Guarantee: Each Proposer shall submit its proposal as a minimum annual guarantee (MAG) for each of the first two (2) years of the Concession Agreement. Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. 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. Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). Land . Elsewhere, airports do not expect vendors to exceed their MAGs. Rates for each new fiscal year will be posted on this page after Board approval of the rates and fees. 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. Consulting. 84, Fiduciary Activities. All rights reserved. This Minimum Annual Guarantee must exceed $100,000. MAG: Each Respondent shall indicate payment of a Minimum Annual Guarantee ("MAG") of $_____. 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. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. 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. Minimum Annual Guarantee _____- concession often establish their rates as a percentage of gross . While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. The question that airport managers must ask themselves is which rent strategy is realistic in the current environment. See how we support our people, protect the planet, and give back to communities. Option 6: The airport as concession operator. We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. In other parts of the world, MAGs are the airport's exact expected rental payments. This opportunity is for two available FBO leaseholds with a general aviation terminal, office space . The competitive landscape may beby necessityaltered. 2023 Plante & Moran, PLLC. 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 FBOs lease space from the airport sponsor to be able to provide those services. Where appropriate and agreed to by airport sponsors, terminal use leases should be amended to reflect the airlines changed operating circumstances. The FAA may retain up to $10 million to fund the award and oversight of grants made pursuant to the CARES Act. In this model, the airport takes on two roles: landlord and partner in the operation. At least for the immediate future, there will be reduced demand for concession services. 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. The airport charges the businesses 8 percent of gross revenue, or a minimum annual guarantee. 49 CFR Part 23 requires airports to have a concessions-based DBE program. Flashcards. 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. In either case, history has shown that MAGs are not supportable in the event of severe downturns. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. The FAAs Office of Airports will administer these grant funds to airport sponsors. 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. These benefit packages may make the cost of employment significantly higher than the all-in employment costs for most concession operators. Lets consider six potential options. Respondents will propose both a MAG and a Percentage (%) of Annual Gross Revenue, the greater of which will be paid . 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. While some of these answers require more information from the federal agencies, there are 10 burning questions we can answer now. 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. Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. 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. With the new economic and industry realities, capital access may be an even greater hurdle. Most simply, the airport and vendor could agree to a fixed percentage rent. The airport environment is complex and has become even more challenging due to COVID-19. This is especially true for leases that incorporate the minimum annual guarantee (MAG) mechanism or fixed rent clauses. (a) Annual Reconciliation. A. Duty Free Americas Miami offered a minimum annual guarantee to the airport of $20 million -- topping the $18.5 million offered by Dufry Miami Retail Partnership and about $9 million more than two . Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. 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. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. softballrizer. 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 . The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. In North America, airports tend to look at MAGs as the least amount of acceptable rent. Airports would also have to hire and manage many additional hourly employees. Where do we go from here? One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. When passenger traffic does come back, airports should rethink how their concession contracts work. 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. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. Annual fee for the airport to perform snow removal at the Vehicle Ready/Storage Vehicle Parking Area and Service Building/Wash Bay Facility. Airports around the country will soon receive their share of $10 billion in FAA grants provided in the CARES Act. 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. This simplified agreement includes the requirements under the CARES Act and makes funds immediately available for expenses, other than airport development, including payroll, debt service, utility expenses, service contracts, and supplies. An engaging panel discussion entitled 'Road to Recovery: The Retailer Perspective' took place during yesterday's virtual Summit of the . 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. 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 Airport Operations. In other parts of the world, MAGs are the airports exact expected rental payments. Master operators are common options, such as HMS Host Intl, Paradies Lagardere, Delaware North, and SSP. Six options for how to ensure that the airport concessions industry continues to be a robust and vibrant business for all. Any funding received under the Assistance Listing 20.106, Airport Improvement program will be reported on the SEFA. 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. 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. Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. Bid. (The catch: Potential renters must submit a formal proposal to the Airport Commission and are subject . 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. The entire concessions space is typically leased out to a single company who is responsible for subletting the spaces. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. How involved the airport gets in the day-to-day operation is the option of the airport and their partner(s). There are numerous ways to frame a contract without a MAG. By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. An airport owner/sponsor may use these funds for any purpose for which airport revenues may be lawfully used. The city may extend the action for an additional 30-day . New model commercial contracts will require a complete rebuild of the airport's financial model, along with revised relations with financiers. Its clear that fixed MAGs are unable to provide the flexibility necessary to deal with severe occurrences. The intent of DBE programs is to increase the amount of business done with Minority Business Enterprises (MBE) and Women Business Enterprises (WBE). February 2, 2021January 28, 2021 | AirportU. That $7.4 billion is divided in half and distributed in two ways: 50% is allocated among all commercial service airports based on each sponsors calendar year 2018 enplanements as a percentage of total 2018 enplanements for all commercial service airports., 50% is allocated among all commercial service airports based on an equal combination of each sponsors fiscal year 2018 debt service as a percentage of the combined debt service for all commercial service airports and each sponsors ratio of unrestricted reserves to their respective debt service.. 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. Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. Fixed Based Operators or FBOs, are service providers to many GA and corporate aircraft. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. 636(a)(37)) that has been applied toward rent or minimum annual guarantee costs. A prepaid monthly "lease" to do business on the property. 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. Airports maintain goals of working with Disadvantaged Business Enterprises or more commonly referred to as DBEs. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. 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. 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. 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. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. To ensure that the program is performed in accordance with law. 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. With the new economic and industry realities, capital access may be an even greater hurdle. 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. Airport vendors typically pay a portion of their revenues to the MAC, and those payments can't fall below the minimum annual guarantee. The FAA has published a map showing airports that are receiving the funds and the allocations made to them. The cost of design and construction for your space is going to be much higher. The FAA has issued additional guidance on airport concession fees, some of which reverses earlier policies. Very hands off for the airport sponsor. Test. The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. Up to $2 billion will go to large, medium, and small hub airports, allocated based on AIP primary entitlement formulas. Created by. 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. CARES Act grant recipients should follow the FAAs Policy and Procedures Concerning the Use of Airport Revenues (Revenue Use Policy), 64 Federal Register 7696 (64 FR 7696), as amended by 78 Federal Register 55330 (78 FR 55330). Match. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). Sea-Tac airport may allow Uber, Lyft and Sidecar to start picking up passengers if new rules are passed.