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. With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. View bio. 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. Rent abatement / minimum annual guarantee: A decision to abate rent (including "minimum annual guarantees" and also encompassing fees) is a local . In a standard MAG model, the concessionaire bears a great deal of uncertainty with little risk falling to the airport. They will typically also offer a percentage of their gross receipts to the airport as part of the RFP for the FBO services. A. 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.. In the concessions arena, they are referred to as Airport Concessions Disadvantaged Business Enterprise (ACDBE). Six options for how to ensure that the airport concessions industry continues to be a robust and vibrant business for all. They often charge more than 10% for water and alcohol, Waguespack said. Match. Calculating MAG based on traffic in a larger area (e.g., the concourse or terminal) is one possible answer. 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. The fallacy of Minimum Annual Guarantee (MAG). With a MAG based on enplanements, the airport accepts the risk of failing to deliver enough enplanements. leasehold at Washington Dulles International Airport (IAD). 49 CFR Part 23 requires airports to have a concessions-based DBE program. A MAG, as currently developed, is unsustainable in anything but relatively normal times. The city named the Vantage Airport Group to run the concessions when the new terminal opens in 2023. Will this have an impact on airline and concession agreements? 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. Some airports have had huge success in meeting ACDBE goals with the developer model. Regardless, this shifting of risk may not be acceptable to airports. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. One-twelfth of the MAG shall be due in advance on the first day of each month Nor do we know whether travel habits will change permanently because of new practices learned during lockdowns. This is especially true for leases that incorporate the minimum annual guarantee (MAG) mechanism or fixed rent clauses. https://www.law.cornell.edu/cfr/text/49/part-23, Airport Concessions Disadvantaged Business Enterprises, Developing An Operating Budget - Airport University, Disadvantaged Business Enterprises - Airport University. While the airport might invest capital in the joint venture, it must be involved in a management committee overseeing the business. In other parts of the world, MAGs are the airports exact expected rental payments. The FAA helped to level the playing field by allowing DBEs to compete for concessions contracts in airports. Retail/Gift Shop 11% of Gross Receipts or Minimum Annual Guarantee Terminal Advertising 30% -60% of Gross Receipts or Minimum Annual Guarantee . Minimum Annual Guarantee. 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. Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. Percentage (privilege) Fees - 10% of gross revenue from airport related car rentals, or a minimum annual guarantee, whichever is greater. 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. The workforce retention requirement doesnt apply to nonhub or nonprimary airports. 3300 Capital Circle, S.W. Additionally, car rental companies will usually be required to pay the airport a Customer Facility Charge (CFC). The Airport has also experienced a reduction in passengers and operations as a result of . Airport vendors typically pay a portion of their revenues to the MAC, and those payments can't fall below the minimum annual guarantee. 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. 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. 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. These benefit packages may make the cost of employment significantly higher than the all-in employment costs for most concession operators. Elsewhere, airports do not expect vendors to exceed their MAGs. The CFC is a charge based on either the contract value, gross receipts, or per car per day. Passengers have needs while at airports. If flights do not return to their pre-pandemic levels, then the airport will not be able to recover former passenger levels. . While the vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. 84, Fiduciary Activities. 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. When one partner tries to do too much, it will lessen the benefits of the joint venture. Another advantage of this model is that it may provide a means to improve the levels of involvement of smaller and local businesses. However, MAGs in concession contracts still expect continued growth. The policies and procedures are available for review here. 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. The disclosure of guaranteed minimum future lease payments will also be impacted for any changes in the MAG in the concession contracts. 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. Unlike earlier phases of stimulus, Phase 4 has the potential to include a significant infrastructure focus. Some larger airports take a percentage of every sale. The airport charges the businesses 8 percent of gross revenue, or a minimum annual guarantee. Looking for abbreviations of MAG? 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. Where appropriate and agreed to by airport sponsors, terminal use leases should be amended to reflect the airlines changed operating circumstances. Chris Dinsdale has worked at Budapest Airport since 2015, originally as CFO until March 2021, where he was nominated for the position as CEO . In this model, the airport takes on two roles: landlord and partner in the operation. To ensure that the program is performed in accordance with law. With the new economic and industry realities, capital access may be an even greater hurdle. This . Concessionaires need to understand this new business reality when they ask for relief. $100 million is distributed to general aviation airports in accordance with categories established by the National Plan of Integrated Airport Systems (NPIAS). 4.1.2 Minimum Annual Guaranteed Concession Fee Payment. That will, in turn, harm the concession program. Airports would also have to establish supply lines for products that they have not procured in the past. Where do we go from here? Tallahassee International Airport . For years 2, 3, 4, and 5 of the Term of the Agreement, the Minimum Annual Guarantee shall be 85% of the Concessionaire's previous year's concession fees paid to County or the Minimum Annual Guarantee bid for the first 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. By one industry estimate, airports have nearly $100 billion in collective debt, with $7 billion in bond principal and interest payments due in 2020. 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. Lets consider six potential options. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). In a 6-to-3 vote on Monday, June 8, the council approved temporarily revising the Minimum Annual Guarantee, which is a fixed amount restaurants guarantee they will pay the city to do business at . The develop pays the amount due to the airport through the lease agreement and pockets the rest. "No. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. Non-airport retail leases typically charge rent on a per square foot (PSF) basis. The airport operator is always present and has a wealth of knowledge about the airport. 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). What this option does do is change the distribution of risk. The Federal Aviation Administration (FAA) . 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. That may limit the ability for new entrants, as well as making some concession opportunities less attractive to vendors. Airport concession program in order to maximize non-aviation revenue, increasing sales per enplaned passenger at a rate higher than passenger . The additional funds appropriated by the CARES Act were intended, in large part, to help airport sponsors meet their debt service and bond obligations. To go along with that, concessions are often subject to Minimum Annual Guarantees (MAG). Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options. It varies based on the size, capacity, and operations of the airport. Most simply, the airport and vendor could agree to a fixed percentage rent. Discover how we help clients achieve success. Airport Operations. The concept is not uncommon. Here are some others. Denver International Airport will price $925 million of refunding bonds to help ease its debt service burden during the pandemic-driven traffic decline . The same rules govern the use of CARES Act funds that govern the use of all airport revenues. 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. 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. 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. Weve compiled the top 10 things that you should know about the CARES Act funding for airports. A per enplanement MAG would be a strain on most airports accounting departments, especially if the footfall varies by location. However, there is no relief of the obligation to withhold and remit the corresponding employee share. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. As a result, if concessionaires produce lower sales because there is no traffic, it will result in space rental rates increasing. Terms in this set (15) What is MAG and what does it stand for? Airports should carefully consider how they structure deals and their business modelsto ensure more flexibility to respond to potential future shocks. 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. Save my name, email, and website in this browser for the next time I comment. If you have questions. Discover the top trends shaping government in 2023. These MAG clauses in concession contracts should be carefully reviewed. While it may never be business as usual again, the airport and its business partners need to adjust to a new normal. A payment called a Minimum Annual Guarantee will be waived for the months of March, April and May last year. No one is sure how long recovery will take. 636(a)(37)) that has been applied toward rent or minimum annual guarantee costs. 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 . Any funding received under the Assistance Listing 20.106, Airport Improvement program will be reported on the SEFA. While this model is new, a unified strategy could bring about a unique airport concession experience to the benefit of all participants. The additional funds appropriated by the CARES Act were largely intended to help airport sponsors meet their debt service and bond obligations. The CARES Act roughly triples the amount of money flowing from the federal government directly to airports for 2020. With the announcement by the GASB of a delay in the required implementation of these new standards, your organization will need to decide how to respond. The FAA will use the Office of Management and Budget (OMB) SF-424, Application for Federal Assistance, and provide a simplified grant agreement shortly after it receives an application. The 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 FAA has issued additional guidance on airport concession fees, some of which reverses earlier policies. 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 Revenue Use Policy document defines permitted and prohibited uses of airport revenue. . C. Concession Fee. Master operators are common options, such as HMS Host Intl, Paradies Lagardere, Delaware North, and SSP. Concessionaires pay the Airport Authority a percentage of their gross sales each month, which is one-twelfth of a pre-determined minimum annual guarantee (MAG). The key will be ensuring that airline charges remain fair and reasonable. Cookie Notice: This site uses cookies to provide you with a more responsive and personalized service. However, this still may not be the most effective solution. Rates and Fees are adjusted annually based on the Airport's fiscal year, from October 1st through September 30th. Airports would also have to hire and manage many additional hourly employees. At least for the immediate future, there will be reduced demand for concession services. Airport concession contracts, including rental cars, parking, and retail, usually contain a minimum annual guarantee . One of the keys, however, to the success of this model is the realization that each partner brings particular strengths, skills, and abilities. In either case, history has shown that MAGs are not supportable in the event of severe downturns. 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. Airport sponsors should carefully review their bond documents to ensure the methods of calculating the airports rate covenant under the current circumstances are appropriate. Airports outside of North America are already experiencing the benefit of joint ventures between the airport operator and concession operators. This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. Airport concession contracts for the full panoply of concessions, including rental cars, parking and retail, usually contain a minimum annual guarantee (MAG). This document addresses common issues that have arisen or may arise for airport sponsors during the response to the COVID-19 public health emergency. That is no longer possible. Other organizations that havent yet addressed some of these pending standards may want to take advantage of the implementation delays. In addition, they typically provide the fueling services for the airport. 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. Paid parking went into effect at . 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. Majority-In-Interest (MII) clauses. COVID-19 has sent shockwaves throughout the world. Project. To remove barriers in participation of DBEs. Besides giving each airport blanket permission to decide its own strategy, the emphasis on shifting costs between various classes of airport tenants is crucial. Minimum Annual Guarantee. These cookies do not store any personal information. Providing a product or service inside the airport environment is one of the key qualifiers for a concessionaire. Concessions and retail often fill that need. North American airports generally believe that if a vendor is paying a MAG, there may be a business problem. 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, percentage of their annual gross revenues derived from operations at the airport or a minimum annual guaranteed amount, whichever is greater. It was suspended in June, following the severe decline of passenger traffic over those . This leads to another possibility: to eliminate MAGs and tie airport payments to sales only. Annual fee for the airport to perform snow removal at the Vehicle Ready/Storage Vehicle Parking Area and Service Building/Wash Bay Facility. February 2, 2021January 28, 2021 | AirportU. It is still unclear whether all of the CARES funding will be reported on the Schedule of Expenditures of Federal Awards (SEFA) . This option would give the airport operator the ultimate control over its concession program as it takes on full responsibility for all business aspects. The fallacy of Minimum Annual Guarantee (MAG) In times of continued and prolonged growth, airports have learned to depend upon MAGs. . This site uses Akismet to reduce spam. Airports are left with four basic responses: do nothing, suspend minimum annual guarantees (MAG), defer rent, or rent abatement.
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