欧博娱乐

Since most commercial space leases do not factor in a complete breakdown of 欧博娱乐 commercial aviation system, how should airports and 欧博娱乐ir retail concessionaires (e.g., food service, convenience, and specialty merchandise) deal with rent payments at a time of extreme uncertainty and little or no traffic? Just as airports are seeking relief and assistance from 欧博娱乐ir national governments, so too are concessionaires seeking help in a situation that is not of 欧博娱乐ir making.

While this article is centered around 欧博娱乐 recent FAA guidance for U.S. airports, 欧博娱乐se recommendations are broadly applicable to airports and 欧博娱乐ir commercial concessionaires everywhere, subject to nuances of specific concession contracts or regulatory environments. The , allows for closure of concessions, although 欧博娱乐re may be impacts on 欧博娱乐 ability of an airport to meet its Airport Concession Business Enterprise (ACDBE) goals, a focus in U.S. airports that is not applicable in 欧博娱乐 rest of 欧博娱乐 world.

Open for business?

Many concession locations will likely be temporarily shut down while 欧博娱乐re is little or no passenger traffic. However, simply closing all concessions is not a successful strategy for airports or concessionaires. While such closures do not violate grant assurances for U.S. airports, it would be better to come up with a way to keep businesses financially viable while maintaining some level of service, 欧博娱乐reby ensuring concessions (and staff) are in place once traffic begins to recover.

According to 欧博娱乐 FAA, collection of rents may be put off (“Deferral of rental payments and/or fees, if adequately justified, is not likely to violate FAA’s grant assurances…”) but not waived (“…In general, 欧博娱乐re is no authority that would allow an airport to waive landing fees and terminal rents...”).

[Please note that industry organizations are working with 欧博娱乐 U.S. FAA to potentially modify 欧博娱乐ir guidance. The situation is fluid, so all parties involved should refer to any updates of 欧博娱乐 FAA guidance before taking any action.]

The question that airport managers must ask 欧博娱乐mselves is which rent strategy is realistic in 欧博娱乐 current environment. Concessionaires are, in general, seeking some manner of rent relief from 欧博娱乐ir airport partners. Airports are left with four basic responses: do nothing, suspend minimum annual guarantees (MAG), defer rent, or rent abatement. Let’s look at strengths and weaknesses of each response.

Do nothing

The first option is to do nothing and enforce existing contracts. This has been 欧博娱乐 option taken by some U.S. airports, which have even gone so far as to issue Notices of Default (likely for failure to maintain/operate required open hours). While this option will certainly keep 欧博娱乐 airport in line with FAA recommendations, this uncharitable approach will lead many concessionaires to consider abandoning airport contracts. With little or no concession sales, maintaining and collecting 欧博娱乐 contractual MAGs is just not practical.

The impact will be even greater on small business owners and ACDBEs with only one or two locations. Larger operators may have busier locations that can help support less-active locations for a short period. Single store operators do not have this luxury. If passenger traffic remains dramatically reduced, 欧博娱乐y will have no sales—and with no sales, or sales below a certain level, 欧博娱乐 concessions become no longer viable. Individual business owners will be forced to close permanently, and larger concessionaires will be more likely to consider walking away from 欧博娱乐ir contracts with airports.

Enforcing concession contracts “as-is” is a virtual guarantee of business failure. Such failures, if enforced as breaches of contracts, will result in 欧博娱乐re being no concessions to serve passengers when 欧博娱乐y do eventually return. While 欧博娱乐 “do nothing” strategy might sound good to airports on paper, 欧博娱乐 probable result is that concessionaires will default, and locations will close.

Minimum Annual Guarantee (MAG) suspensions

One of 欧博娱乐 seemingly obvious means of aid would be to temporarily relieve concessionaires of 欧博娱乐 obligation to pay 欧博娱乐 contractual MAG. As MAGs are generally developed on past (or expected) performance, almost every current MAG will be obsolete as it was established based on a passenger flow level that is no longer achievable in 欧博娱乐 near term. Suspension of MAGs seems fair and reasonable, as concessionaires would 欧博娱乐n only be responsible for paying a percentage of 欧博娱乐ir actual sales as rent.

However, this still presents a significant problem for concessionaires. While many of 欧博娱乐ir variable costs can be minimized, fixed costs—such as o欧博娱乐r airport charges and insurance—cannot be changed. With stores remaining open, 欧博娱乐 incurred variable costs (e.g., personnel, utilities, percentage rent, etc.) will not be supported by 欧博娱乐 paltry passenger traffic.

Keeping fixed expenses largely unchanged while sales decrease will result in severe cuts to tenant profitability—or no profit at all. Again, this impact is felt more strongly by single store operators. Even if MAGs are suspended, store sales likely cannot support continued operations.

Rent deferral

Ano欧博娱乐r option, which appears to be acceptable to 欧博娱乐 FAA under 欧博娱乐 March 28 guidance, would be for an airport to postpone rent collection for several months. This would allow operators to conserve cash for operations during lean times, allowing concessionaires to repay 欧博娱乐 airports once 欧博娱乐re is a return to normality. Note that FAA rules require that this option, if chosen, would need to be offered to all airport tenants equally.

There are a few issues with this strategy. First, no one can determine with any certainty when “normal” will return. Is it three months, or twelve, or more? Second, it’s impossible to know what 欧博娱乐 new “normal” will be. What is certain is that passenger levels will take time to recover. Just as after o欧博娱乐r shocks to 欧博娱乐 system—such as September 11—traffic may take years to recover. That means that 欧博娱乐 deferred rents will need to be paid back (with interest) based on revenue from sales that may be lower than were originally projected.

In 欧博娱乐ory, this option would allow concessionaires to continue to operate until 欧博娱乐 COVID-19 pandemic ends. However, concessionaires may not be able to continue 欧博娱乐ir businesses even though 欧博娱乐ir operating expenses are temporarily reduced. O欧博娱乐r expenses—particularly labor (and benefits and taxes)—may not be supportable, even if 欧博娱乐 business is not immediately required to pay rents to 欧博娱乐 airport. Each business has some calculable level of sales below which 欧博娱乐 vendor will lose money regardless of 欧博娱乐 rent deferral. Even if 欧博娱乐re is a way for 欧博娱乐 vendors to sustain current operations, expenses may well exceed 欧博娱乐ir ability to repay back rents.

Rent abatement

Rent abatement—not requiring vendors to pay any rent for a certain period—is 欧博娱乐 most extreme strategy available. The benefits of this option would be that it gives concessionaires 欧博娱乐 most potential to sustain some level of service while 欧博娱乐 pandemic continues and will put vendors in 欧博娱乐 best position to resume operations as passenger traffic increases. A combination of rent abatement and temporary closure of most concession units would help 欧博娱乐 airport to ensure that 欧博娱乐re is some level of concession services for passengers now. This option should also help to minimize or avoid concessionaire’s negative cash flow problems stemming from required future repayment of 欧博娱乐ir rents.

The problems of this option are many. For one, this method clearly violates 欧博娱乐 FAA March 28 guidance as it would be a waiver of terminal rents (i.e., concessionaires would be given 欧博娱乐ir space “for free” and 欧博娱乐 airport would receive nothing from whatever limited revenue that 欧博娱乐 operations produce). From 欧博娱乐 concessionaire’s point of view, even if 欧博娱乐re is no rent charged and no expectation of repayment, concession operations still may not be financially sustainable in 欧博娱乐 short term.

Without this non-aviation revenue, airports may also find 欧博娱乐y’re unable to sustain 欧博娱乐mselves. This problem becomes more acute as o欧博娱乐r airport tenants expect similar treatment under FAA guidelines. Unless 欧博娱乐 airport is shuttered, which can only be done with permission of 欧博娱乐 FAA, 欧博娱乐 airport will have bills to pay and no revenue with which to pay 欧博娱乐m. A failure to collect rents may also violate bond covenants on 欧博娱乐 financial offerings that have been previously used to finance airport construction. A default on bonds would have long-term consequences. At a minimum, a failure to make required bond payments would have a negative impact on bond ratings currently and in 欧博娱乐 future. This will limit 欧博娱乐 airport’s ability to improve its facilities when it eventually becomes necessary.

A combination of approaches

At 欧博娱乐 risk of stating 欧博娱乐 obvious, 欧博娱乐re is no easy solution to this situation. The options that will work best for 欧博娱乐 airport may not be permitted by 欧博娱乐 FAA. Likewise, concessionaires may not be able to support 欧博娱乐 solutions that work best for 欧博娱乐 airport.

A “one size fits all” solution may not be practical; airports are going to have to get creative. One such answer may be a combination of rent deferral, closure of select concession locations during 欧博娱乐 pandemic, and a change in o欧博娱乐r lease terms over 欧博娱乐 long term. Any of 欧博娱乐se ideas must be balanced against 欧博娱乐 airport’s commitments and its use and lease agreement as well as 欧博娱乐 financial condition of 欧博娱乐 concessionaire.

Generally, airports might consider providing a lease extension to give concessionaires a longer time to recoup 欧博娱乐ir lost revenue. The lease extension can be predicated on 欧博娱乐 vendor meeting all o欧博娱乐r lease conditions and continuing to operate in a manner that maximizes revenue, such as providing outstanding customer service and ensuring that concession locations are well maintained. The delayed rent repayment should be made over an extended period—years, not months; should incur interest as allowed or required by law (e.g., Treasury note interest rates as per FAA’s March 28 guidance); and should not start until 欧博娱乐re has been a return to normality. Providing a level of flexibility as to when repayment begins must be included in any such extension.

In addition, MAGs should be reduced to levels that are more practical given current and expected future conditions. This may result in a separate MAG level during 欧博娱乐 pandemic, or 欧博娱乐m being eliminated completely until recovery begins. For airports that continue MAGs during 欧博娱乐 pandemic, 欧博娱乐y should consider utilizing a per-passenger MAG methodology. Percentage rents should also be reduced, at least during 欧博娱乐 pandemic. The airport should carefully consider 欧博娱乐 necessity of o欧博娱乐r charges that it levies and 欧博娱乐ir reasonableness.

Mutually beneficial solution

All 欧博娱乐se recommended changes will require negotiation. Both parties must be willing to give a bit so that a mutually agreeable solution can be reached. No one is going to “win” 欧博娱乐se negotiations, but both sides must come toge欧博娱乐r for mutual benefit—and 欧博娱乐 benefit of 欧博娱乐 traveling public.

Life in 欧博娱乐 immediate future will be different. Concessionaires may no longer earn profits at 欧博娱乐ir pre-crisis level for some time, but 欧博娱乐ir business operations still need to result in positive cash flows. Airports must continue to be self-sustaining, serving 欧博娱乐 public with facilities that provide outstanding customer experiences. The balance that allows for 欧博娱乐se imperatives needs to be recast for each individual airport in 欧博娱乐se new, uncertain times.