Respondents will propose both a MAG and a Percentage (%) of Annual Gross Revenue, the greater of which will be paid . Match. 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. COVID-19 has sent shockwaves throughout the world. 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. How involved the airport gets in the day-to-day operation is the option of the airport and their partner(s). Its clear that fixed MAGs are unable to provide the flexibility necessary to deal with severe occurrences. 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. Minimum Annual Guarantee - How is Minimum Annual Guarantee abbreviated? A MAG, as currently developed, is unsustainable in anything but relatively normal times. 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. Find more information in a tax alert comparing COVID-19 employer tax incentives, issued by our National Tax Office. 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. As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. If the metric for rent resumption is comparing the current period to the same period in the previous year, by the time the world reaches year two of recoveryeven if the improvement is only slight and slowthe contract may reinstate the original MAG. The FAA helped to level the playing field by allowing DBEs to compete for concessions contracts in airports. Non-aeronautical revenueairport revenue from sources other than airlinestypically includes retail concessions, 1 car parking, and property and real estate. In either case, history has shown that MAGs are not supportable in the event of severe downturns. 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). 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. Annual fee for the airport to perform snow removal at the Vehicle Ready/Storage Vehicle Parking Area and Service Building/Wash Bay Facility. A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. This is especially true for leases incorporating a Minimum Annual Guarantee (MAG) mechanism or fixed rent clauses. Master operators are common options, such as HMS Host Intl, Paradies Lagardere, Delaware North, and SSP. 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. One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. 47114, with minimum apportionments for smaller airports that serve between 8,000 and 10,000 passengers annually. Some airports have just a single FBO while others have multiple. It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). The Airport has also experienced a reduction in passengers and operations as a result of . Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. 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. Minimum Annual Guarantee (MAG) - The amount proposed and/or agreed to by the Concessionaire, that Concessionaire guarantees as minimum payment per year to DFW. Paid parking went into effect at . 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. 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. Given the sharp reduction in revenue that these concession vendors are now facing, they may not be able to meet their MAGs. The passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. 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. 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. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. 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. This opportunity is for two available FBO leaseholds with a general aviation terminal, office space . Receive perspectives on the industries and issues that matter. The CFC is a charge based on either the contract value, gross receipts, or per car per day. There will still be passengers, and the concession industry needs to be ready to serve them. This document addresses common issues that have arisen or may arise for airport sponsors during the response to the COVID-19 public health emergency. Airlines value an attractive commercial program because it makes a better background for the expression of their brand. That will, in turn, harm the concession program. The CARES Act roughly triples the amount of money flowing from the federal government directly to airports for 2020. 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. 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 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. The FAA has published a map showing airports that are receiving the funds and the allocations made to them. The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. These funds are available only to sponsors as defined in Section 47102 of title 49, United States Code (U.S.C. Wealth Management. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. The minimum annual guarantee of $3.25 million to the airport for the right to run the restaurant is too high and could result in the partners cutting corners to make the payments or, even worse . While the leased space is non-aeronautical revenue, the CFCs are non-operating revenue. In the event that the concessionaire is unsuccessful, the airport absorbs the losses. A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. 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 FAAs Office of Airports will administer these grant funds to airport sponsors. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. FBOs may collect the landing fees for GA aircraft or charge them a fuel-flowage fee on behalf of the airport. The cost of design and construction for your space is going to be much higher. While some of these answers require more information from the federal agencies, there are 10 burning questions we can answer now. The airport operator is always present and has a wealth of knowledge about the airport. Strategic agency for engagement and transformation. Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. The same rules govern the use of CARES Act funds that govern the use of all airport revenues. While it may never be business as usual again, the airport and its business partners need to adjust to a new normal. Learn how your comment data is processed. At least $100 million will go to general aviation airports, allocated based on categories published in the current NPIAS. Many airport agreements allow for a suspension of MAGs in the event of a severe enplanement decrease. What this option does do is change the distribution of risk. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. They often charge more than 10% for water and alcohol, Waguespack said. Terminal Rentals - Rent paid by car rental companies for ticket counters and office space in terminals. 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. 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. 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. 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. . $100,000, 5%, 100% . The Trinity model can be considered an extension of the joint venture model. What this option does do is change the distribution of risk. Save my name, email, and website in this browser for the next time I comment. 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. Weve compiled the top 10 things that you should know about the CARES Act funding for airports. Elsewhere, airports do not expect vendors to exceed their MAGs. 4.1.2 Minimum Annual Guaranteed Concession Fee Payment. 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. 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 . A by-location per passenger MAG may be too complicated for widespread implementation at this point. 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 concessionaire's rent structure in an airport may differ from the traditional model. Elsewhere, airports do not expect vendors to exceed their MAGs. (1) On-Airport (% of Gross Receipts). Airport Operations. Like their partners in the airline industry, airports have been dramatically affected by the slowdown in flights and passenger traffic associated with COVID-19. With the new economic and industry realities, capital access may be an even greater hurdle. Rent abatement / minimum annual guarantee: A decision to abate rent (including "minimum annual guarantees" and also encompassing fees) is a local . They will typically also offer a percentage of their gross receipts to the airport as part of the RFP for the FBO services. Non-airport retail leases typically charge rent on a per square foot (PSF) basis. Airport concession program in order to maximize non-aviation revenue, increasing sales per enplaned passenger at a rate higher than passenger . Airlines value an attractive commercial program because it makes a better background for the expression of their brand. Providing a product or service inside the airport environment is one of the key qualifiers for a concessionaire. Normally, airport concessionaires pay the city a percentage of sales or a "minimum annual guarantee" based on sales the previous year, whichever is greater. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. Additionally, nonoperating revenues would generally include grants, among other things. 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. Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. They charge restaurants a minimum annual guarantee, also known as "rent" in the non-airport world. It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. 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. However, this still may not be the most effective solution. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. For aviation, global recovery to 2019 levels is projected to take several years, into 2023 for markets with significant domestic air . How involved the airport gets in the day-to-day operation is the option of the airport and their partner(s). As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. 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. As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. Looking for abbreviations of MAG? 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. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. They rent space to provide a service/product (rental car) for an agreed upon time frame at a certain rate. While it may never be business as usual again, the airport and its business partners need to adjust to a new normal. minimum annual guarantee (MAG) obligations to eligible airport concessions. If flights do not return to their pre-pandemic levels, then the airport will not be able to recover former passenger levels. 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 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. 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. No one is sure how long recovery will take. 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. The airport environment is complex and has become even more challenging due to COVID-19. The city named the Vantage Airport Group to run the concessions when the new terminal opens in 2023. For construction contracts over _____ federal regulations require the airport to obtain a bid guarantee to equal at least _____ of the bid price, as well as performance and payment bonds equaling _____ percent of the contract. There are means of counting passengers who pass a concession location, but few airports have installed such technology. Stakeholders are already beginning discussions on a proposed Phase 4 stimulus bill. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. . A prepaid monthly "lease" to do business on the property. Examples of concessions within airports include: A direct concession lease involves the space being directly marketed, leased, and managed by the airport operator. 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 . 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. Signatory carriers may exercise significant control over an airport's capital budgeting process under provisions in a use agreement known as. Because of the drastic reduction in flights and passenger traffic, airlines have been shrinking their staffing, space requirements and gate usage. The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. 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). We did not review solicitation or award of concession agreements in this audit. This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. 116-94). 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 . In the concessions arena, they are referred to as Airport Concessions Disadvantaged Business Enterprise (ACDBE). 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. In addition, they typically provide the fueling services for the airport. Terms in this set (15) What is MAG and what does it stand for? Minimum Annual Guarantee ("MAG") Lowest amount of rent to be paid To Be Negotiated . A by-location per passenger MAG may be too complicated for widespread implementation at this point. Created by. Airports would have to offer benefit packages to these employees in line with those provided to other employees of the airport. (a) Annual Reconciliation. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. 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. 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. Where appropriate and agreed to by airport sponsors, terminal use leases should be amended to reflect the airlines changed operating circumstances. 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. But opting out of some of these cookies may affect your browsing experience. Flashcards. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. It was suspended in June, following the severe decline of passenger traffic over those . $100 million is distributed to general aviation airports in accordance with categories established by the National Plan of Integrated Airport Systems (NPIAS). The compliance and accounting questions related to the COVID-19 outbreak and the related new funding streams are significant. Some airports have had huge success in meeting ACDBE goals with the developer model. These three options do not change the underlying airport-concessionaire relationship. 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. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. Retail/Gift Shop 11% of Gross Receipts or Minimum Annual Guarantee Terminal Advertising 30% -60% of Gross Receipts or Minimum Annual Guarantee . The single factor most tied to concession success is the footfall past the concession locations. 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 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. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. With the new economic and industry realities, capital access may be an even greater hurdle. 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 MAC has already waived minimum annual guarantees three . Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. Airports would also have to hire and manage many additional hourly employees. . MAG - Minimum Annual Guarantee. 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. Concessionaires are, in general, seeking some manner of rent relief from their airport partners. While passenger safety and well-being are paramount, the extreme reduction in passenger flow has rippled across the entire airport-airline ecosystem. MAG: Each Respondent shall indicate payment of a Minimum Annual Guarantee ("MAG") of $_____. - Suite 1 . Project. Percentage (privilege) Fees - 10% of gross revenue from airport related car rentals, or a minimum annual guarantee, whichever is greater. Flashcards. While the model has primarily been used for duty-free concessions, it has worked equally well for other types of concessions. In times of continued and prolonged growth, airports have learned to depend upon MAGs. The FAA may retain up to $10 million to fund the award and oversight of grants made pursuant to the CARES Act. 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. 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. . It is mandatory to procure user consent prior to running these cookies on your website. Airports around the country will soon receive their share of $10 billion in FAA grants provided in the CARES Act. The Audit Committee has reviewed this report and is releasing it in accordance with Article 2, Chapter 6 of the City Charter. 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. To promote the use of DBEs for federally funded projects. Concessionaires need to understand this new business reality when they ask for relief.

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