minimum annual guarantee airport minimum annual guarantee airport

The fallacy of Minimum Annual Guarantee (MAG). This website uses cookies to improve your experience while you navigate through the website. Learn how your comment data is processed. The additional funds appropriated by the CARES Act were intended, in large part, to help airport sponsors meet their debt service and bond obligations. The FAA helped to level the playing field by allowing DBEs to compete for concessions contracts in airports. The passenger experience results from a combination of the actions or inactions of airport, concessionaire, and airline. 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. 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. Atlanta, GA - Hartsfield-Jackson Atlanta International Airport. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasnt imaginable six months ago. The CFC is a charge based on either the contract value, gross receipts, or per car per day. 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 . 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. 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. 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. 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. Minimum Annual Guarantee or " MAG " means the minimum Privilege Fee due the Authority annually from the Operator set forth in Section 5.2. 2023 Plante & Moran, PLLC. If any portion of the $2 billion is left over after distributing in accordance with 49 U.S.C. Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). The question that airport managers must ask themselves is which rent strategy is realistic in the current environment. When passenger traffic does come back, airports should rethink how their concession contracts work. MAG: Each Respondent shall indicate payment of a Minimum Annual Guarantee ("MAG") of $_____. Percentage Rent - In addition to the MAG, Concessionaires shall pay percentage rent but only to the extent that percentage rent exceeds the monthly installment of MAG, In the event that the concessionaire is unsuccessful, the airport absorbs the losses. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three other business structure options. . 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. Stakeholders are already beginning discussions on a proposed Phase 4 stimulus bill. To remove barriers in participation of DBEs. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. a minimum annual guarantee or MAG annually, which more or less translates to rent. Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. These cookies will be stored in your browser only with your consent. This essentially flips the rent risk from being entirely on the vendors (in a MAG-based model) to being entirely on the airport. 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 . But opting out of some of these cookies may affect your browsing experience. Six options for how to ensure that the airport concessions industry continues to be a robust and vibrant business for all. Some airports have had huge success in meeting ACDBE goals with the developer model. It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. . In North America, airports tend to look at MAGs as the least amount of acceptable rent. Tallahassee, FL 32310 . 4.1.2 Minimum Annual Guaranteed Concession Fee Payment. The AICPA State and Local Governments audit guide includes certain accounting guidance that has been cleared by GASB as Category B authoritative guidance. Airports would also have to hire and manage many additional hourly employees. Will this have an impact on airline and concession agreements? In either case, history has shown that MAGs are not supportable in the event of severe downturns. Option 5: The Trinity (or Trinity Plus) model. The CARES Act roughly triples the amount of money flowing from the federal government directly to airports for 2020. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). Concessionaires could avoid minimum annual guarantee payments for a third quarter as the MAC develops a long-term relief plan. 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 . 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 key will be ensuring that airline charges remain fair and reasonable. Most simply, the airport and vendor could agree to a fixed percentage rent. 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. If, on the other hand, an airport sponsor decides to enforce the M&O expense allocation in its terminal leases, then the terminal leases should be carefully reviewed to determine the terms of enforcement and what rights the airlines have under those leases. With the new economic and industry realities, capital access may be an even greater hurdle. 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 . 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). 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. SCOPE OF FEES TO BE PAID THE CITY BY CONCESSIONAIRES a. All rights reserved. Concessions covers more than what you think of served at a traditional concession stand. Sea-Tac airport may allow Uber, Lyft and Sidecar to start picking up passengers if new rules are passed. Yet one of the most severe barriers to entry, particularly for small businesses, has always been limited access to capital. 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. Percentage (privilege) Fees - 10% of gross revenue from airport related car rentals, or a minimum annual guarantee, whichever is greater. 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 airport might invest capital in the joint venture, it must be involved in a management committee overseeing the business. 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. 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 airport operator is always present and has a wealth of knowledge about the airport. 6 . 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 company, which . 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. The airport human resources function is likely not ready to handle that, as the annual turnover of concession employees often approaches 150%. While the model has primarily been used for duty free concessions, it has worked equally well for other types of concessions. A MAG, as currently developed, is unsustainable in anything but relatively normal times. There will still be passengers, and the concession industry needs to be ready to serve them. It may be necessary for an airport to close concession locations as they may close portions of the airport to reduce their operating costs. Chris Dinsdale has worked at Budapest Airport since 2015, originally as CFO until March 2021, where he was nominated for the position as CEO . 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 . 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. Signatory carriers may exercise significant control over an airport's capital budgeting process under provisions in a use agreement known as. MAG - Minimum Annual Guarantee. Minimum Annual Guarantees. This opportunity is for two available FBO leaseholds with a general aviation terminal, office space . The airport operator is always present and has a wealth of knowledge about the airport. If flights do not return to their pre-pandemic levels, then the airport will not be able to recover former passenger levels. Nor do we know whether travel habits will change permanently because of new practices learned during lockdowns. View bio. 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. Concessions are typically leased with a percentage type lease so that a specific percentage of gross sales are given to the airport as part of their lease agreement. As a result, airports may wish to consider going a step further. President Donald Trump has already tweeted his support for such an infrastructure bill. leasehold at Washington Dulles International Airport (IAD). This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. 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. To provide flexibility to recipients of federally funded projects in providing opportunities to DBEs. They often charge more than 10% for water and alcohol, Waguespack said. installments during the first year of the Term. Concessionaires need to understand this new business reality when they ask for relief. Where do we go from here? Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. $100,000, 5%, 100% . This is especially true for leases incorporating a Minimum Annual Guarantee (MAG) mechanism or fixed rent clauses. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee . Annual fee for the airport to perform snow removal at the Vehicle Ready/Storage Vehicle Parking Area and Service Building/Wash Bay Facility. The disclosure of guaranteed minimum future lease payments will also be impacted for any changes in the MAG in the concession contracts. There are a few limitations, however, that make this a less than optimal solution. 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. To promote the use of DBEs for federally funded projects. Current generally accepted accounting principles suggests that entities should establish a policy that defines operating revenues for enterprise funds and use it consistently. Airport Cargo Community system Bid Opening Date: 07/13/2021 05:00:00 PM Purchaser: Kevin Hanagan Organization: City of Philadelphia . We did not review solicitation or award of concession agreements in this audit. 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. Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. Airports should carefully consider how they structure deals and their business modelsto ensure more flexibility to respond to potential future shocks. 84, Fiduciary Activities. This Minimum Annual Guarantee must exceed $100,000. The Trinity model can be considered an extension of the joint venture model. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. The airport environment is complex and has become even more challenging due to COVID-19. Land . Airlines have a significant stake in the quality of the concession program because of its impact on the passenger experience. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. 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. If FAA does not receive emergency approval, the economic recovery of the nation's air 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. These cookies do not store any personal information. 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. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. Supplemental Airport Grant-In-Aid Funding While some of these answers require more information from the federal agencies, there are 10 burning questions we can answer now. There are means of counting passengers who pass a concession location, but few airports have installed such technology. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. Airports would have to offer benefit packages to these employees in line with those provided to other employees of the airport. Match. The $10 billion in funding is divided into four main categories: For airport grants, after the Secretary of Transportation announces awards under the CARES Act, each airport sponsor must submit a grant application to access those funds. The joint venture model allows the airport to supply capital, likely at a lower cost than its business partners. . Minimum Annual Guarantee _____- concession often establish their rates as a percentage of gross . The federal share for FY 2018 and 2019 Supplemental Discretionary grants wont increase. 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 third party can absorb some of the liability and risk from the airport operator. Please read our Privacy Policy for more information on the cookies we use. Flashcards. The competitive landscape may beby necessityaltered. As is becoming evident, basing financial remuneration on an aspirational or required numberor even recent experiencecan fail. FBOs may collect the landing fees for GA aircraft or charge them a fuel-flowage fee on behalf of the airport. 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 establish supply lines for products that they have not procured in the past. The single factor most tied to concession success is the footfall past the concession locations. Primarily, in residual agreements, the rates vary based on airport revenue. Airport Operations. 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. The FBOs lease space from the airport sponsor to be able to provide those services. Guarantee: 50% of Minimum Annual Guarantee. Greater of 30% or Minimum Annual Guarantee : Taxi Fees (annual contract fee) Pre-Arranged Transportation (per pickup) $6.00 . 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 other parts of the world, MAGs are the airports exact expected rental payments. A MAG is guarantees the airport sponsor a minimum amount of money from the concession, in the event they do not generate much revenue. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. C. Concession Fee. This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. This information collection permits FAA to confirm that rent relief is consistent with the requirements of CRRSA and ARPA. While this methodology is feasible, it does not get to the actual number of passengers who see a concession location. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. Because of the drastic reduction in flights and passenger traffic, airlines have been shrinking their staffing, space requirements and gate usage. Test. In North America, airports tend to look at MAGs as the least amount of acceptable rent. First championed by Martin Moodieone of the stalwarts of the concession industrythis model has airports, retailers, and suppliers cooperate in developing concession operations. Airlines value an attractive commercial program because it makes a better background for the expression of their brand. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to the reduction in originating passenger volume.. While the model has primarily been used for duty-free concessions, it has worked equally well for other types of concessions. They rent space to provide a service/product (rental car) for an agreed upon time frame at a certain rate. 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. An airport owner/sponsor may use these funds for any purpose for which airport revenues may be lawfully used. 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. These benefit packages may make the cost of employment significantly higher than the all-in employment costs for most concession operators. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. These MAGs are usually based on some percentage of the prior years revenue and are intended to provide the airport sponsor with a revenue floor from these concession contracts. 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 Using one unnamed airport as an example, with which 3Sixty is in constant dialogue and has a strong relationship Anson said: "The sum total of the $800 million when converted to one airport and to 3Sixty Duty Free would mean around a third of one month's minimum annual guarantee rent. Respondents will propose both a MAG and a Percentage (%) of Annual Gross Revenue, the greater of which will be paid . The minimum guaranteed rent for the first year of the lease is the amount proposed by the winning proposal. Products and services both fall into the concessions category. There are numerous ways to frame a contract without a MAG. Up to $2 billion apportioned in accordance with the per-passenger apportionment rules of 49 U.S.C. An engaging panel discussion entitled 'Road to Recovery: The Retailer Perspective' took place during yesterday's virtual Summit of the . Minimum Annual Guarantee. 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. As such, most airports should stay out of active management of the concession location, leaving that to the expert partner. 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. In addition, they typically provide the fueling services for the airport. A prepaid monthly "lease" to do business on the property. First, and most important, the recently enacted Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contains a supplemental appropriation of $10 billion to be made through Grants-In-Aid for Airports. That $10 billion is divided into the following categories: Any airport that receives money under the CARES Act must continue to employ, for the remainder of 2020, at least 90% of the number of employees that airport had as of March 27, the date of the enactment of the Act. 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. Some larger airports take a percentage of every sale. Discover how we help clients achieve success. 4.1.1 Minimum Annual Guaranteed Concession Fee. Without this expertise, the concession will almost certainly fail to operate at an optimum level. Non-airport retail leases typically charge rent on a per square foot (PSF) basis. 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. We do expect further guidance from the federal government in upcoming months to clarify SEFA considerations. While it may never be business as usual again, the airport and its business partners need to adjust to a new normal. The entire concessions space is typically leased out to a single company who is responsible for subletting the spaces. Minimum Annual Guarantee ("MAG") Lowest amount of rent to be paid To Be Negotiated . Tax. New model commercial contracts will require a complete rebuild of the airport's financial model, along with revised relations with financiers. Airport vendors have you right where they want you trapped at the gate, drinking a $20 beer. 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. 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. Minimum Annual Guarantee (MAG) waived for concessionaires and rental cars -Targeted Operations & Maintenance reductions Implemented a hiring freeze and 8 furlough days Offered early retirement Focused on essential expenditures Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). 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. Minimum Annual Guarantee listed as MAG. 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 by-location per passenger MAG may be too complicated for widespread implementation at this point. Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. Any funding received under the Assistance Listing 20.106, Airport Improvement program will be reported on the SEFA. It varies based on the size, capacity, and operations of the airport. Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. We also use third-party cookies that help us analyze and understand how you use this website. 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. 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. 116-94). (The catch: Potential renters must submit a formal proposal to the Airport Commission and are subject . These three options do not change the underlying airport-concessionaire relationship. The FAA may retain up to $10 million to fund the award and oversight of grants made pursuant to the CARES Act. Here are some others. 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 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. They will typically also offer a percentage of their gross receipts to the airport as part of the RFP for the FBO services. The same rules govern the use of CARES Act funds that govern the use of all airport revenues. The current decline dwarfs those of the recent past, as enplanement levels have dropped by upwards of 90%. A payment called a Minimum Annual Guarantee will be waived for the months of March, April and May last year. 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. 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 . 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. In the concessions arena, they are referred to as Airport Concessions Disadvantaged Business Enterprise (ACDBE). There will still be passengers, and the concession industry needs to be ready to serve them.