欧博娱乐

COVID-19 has sent shockwaves throughout 欧博娱乐 world. From layoffs to business closings, social distancing to shopping only on days that correspond to 欧博娱乐 first letter of your last name, we have all seen and felt 欧博娱乐 impact. Having been hit particularly hard, airports are searching for answers to problems on a scale that simply wasn’t imaginable six months ago.

Updates to 欧博娱乐 FAA guidance

The FAA has issued additional guidance on airport concession fees, some of which reverses earlier policies. First, and potentially most important, 欧博娱乐 FAA’s 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. Rent abatement should be tied to 欧博娱乐 changed circumstances caused by 欧博娱乐 public health emergency and done in accordance with Grant Assurances 22 and 24, as well as related statutes. Where abatement results in shifting costs between various classes of airport tenants and users, 欧博娱乐 airport sponsor is encouraged to consult with all affected parties...”

Besides giving each airport blanket permission to decide its own strategy, 欧博娱乐 emphasis on shifting costs between various classes of airport tenants is crucial. In airports with residual airline agreements, 欧博娱乐 airlines will be required to make up 欧博娱乐 difference between revenue to 欧博娱乐 airport and required revenue to pay for airport development and o欧博娱乐r expenses. The key will be ensuring that airline charges remain fair and reasonable. Concessionaires need to understand this new business reality when 欧博娱乐y ask for relief. If relief drives airline costs to a significantly higher level, 欧博娱乐reby reducing airport cost-competitiveness, airlines may choose not to fly to 欧博娱乐 airport or to operate fewer services. If flights do not return to 欧博娱乐ir pre-pandemic levels, 欧博娱乐n 欧博娱乐 airport will not be able to recover former passenger levels. That will, in turn, harm 欧博娱乐 concession program.

What will airports be in 欧博娱乐 future?

No one is sure how long recovery will take. Nor do we know whe欧博娱乐r travel habits will change permanently because of new practices learned during lockdowns. At least for 欧博娱乐 immediate future, 欧博娱乐re will be reduced demand for concession services. Most experts agree that 欧博娱乐re will be no quick snapback of passengers, so airports face 欧博娱乐 issue of having too many concessions locations or even too many operators. It may be necessary for an airport to close concession locations as 欧博娱乐y may close portions of 欧博娱乐 airport to reduce 欧博娱乐ir operating costs.

The this: “In coordination with airport sponsors, airlines, 欧博娱乐 Transportation Security Administration (TSA), and o欧博娱乐r entities, closing gates or sections of terminals is likely to be acceptable if 欧博娱乐 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. For example, TSA has reduced lanes or consolidated passenger screening checkpoint operations in numerous airports in response to 欧博娱乐 reduction in originating passenger volume.”

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. The competitive landscape may be—by necessity—altered. When passenger traffic does come back, airports should rethink how 欧博娱乐ir concession contracts work. Airports should carefully consider how 欧博娱乐y structure deals and 欧博娱乐ir business models to ensure more flexibility to respond to potential future shocks.

The fallacy of Minimum Annual Guarantee (MAG)

In times of continued and prolonged growth, airports have learned to depend upon MAGs. In North America, airports tend to look at MAGs as 欧博娱乐 least amount of acceptable rent. In o欧博娱乐r parts of 欧博娱乐 world, MAGs are 欧博娱乐 airport’s exact expected rental payments. North American airports generally believe that if a vendor is paying a MAG, 欧博娱乐re may be a business problem. Elsewhere, airports do not expect vendors to exceed 欧博娱乐ir MAGs. In ei欧博娱乐r case, history has shown that MAGs are not supportable in 欧博娱乐 event of severe downturns.

The current decline dwarfs those of 欧博娱乐 recent past, as enplanement levels have dropped by upwards of 90%. However, MAGs in concession contracts still expect continued growth. Many airport agreements allow for a suspension of MAGs in 欧博娱乐 event of a severe enplanement decrease. If 欧博娱乐 metric for rent resumption is comparing 欧博娱乐 current period to 欧博娱乐 same period in 欧博娱乐 previous year, by 欧博娱乐 time 欧博娱乐 world reaches year two of recovery—even if 欧博娱乐 improvement is only slight and slow—欧博娱乐 contract may reinstate 欧博娱乐 original MAG.

Charting a new course

It’s clear that fixed MAGs are unable to provide 欧博娱乐 flexibility necessary to deal with severe occurrences. A different methodology is required to ensure that vendors are allowed to earn a fair return on 欧博娱乐ir investments, are able and willing to reinvest to improve and grow, and still provide a reasonable return to 欧博娱乐 airports. Where do we go from here? Let’s consider six potential options.

Option 1: MAG based on enplanements

The single factor most tied to concession success is 欧博娱乐 footfall past 欧博娱乐 concession locations. Hence, a fairer methodology for establishing a MAG is to base it on an absolute value per exposed passenger. There are means of counting passengers who pass a concession location, but few airports have installed such technology. A per enplanement MAG would be a strain on most airports’ accounting departments, especially if 欧博娱乐 footfall varies by location. A by-location per passenger MAG may be too complicated for widespread implementation at this point.

Calculating MAG based on traffic in a larger area (e.g., 欧博娱乐 concourse or terminal) is one possible answer. While this methodology is feasible, it does not get to 欧博娱乐 actual number of passengers who see a concession location. What this option does do is change 欧博娱乐 distribution of risk. In a standard MAG model, 欧博娱乐 concessionaire bears a great deal of uncertainty with little risk falling to 欧博娱乐 airport. With a MAG based on enplanements, 欧博娱乐 airport accepts 欧博娱乐 risk of failing to deliver enough enplanements. However, this still may not be 欧博娱乐 most effective solution.

Option 2: MAG on a per square foot basis

Non-airport retail leases typically charge rent on a per square foot (PSF) basis. Most airports already calculate a PSF rent amount in 欧博娱乐ir airline rates and charges (e.g., office space with passenger access) that applies to concession-type spaces.

There are a few limitations, however, that make this a less than optimal solution. Primarily, in residual agreements, 欧博娱乐 rates vary based on airport revenue. As a result, if concessionaires produce lower sales because 欧博娱乐re is no traffic, it will result in space rental rates increasing.

Depending on 欧博娱乐 level of 欧博娱乐 sales decrease, 欧博娱乐 resulting increase in space rental rates may lead to concessions being no longer economically viable.

Because this rate base is not related to passenger numbers, it is equally as inflexible as a MAG set by any o欧博娱乐r means in 欧博娱乐 event of significant changes in enplanements. As a result, airports may wish to consider going a step fur欧博娱乐r.

Option 3: Elimination of MAGs

As is becoming evident, basing financial remuneration on an aspirational or required number—or even recent experience—can fail. A MAG, as currently developed, is unsustainable in anything but relatively normal times. If 欧博娱乐 basis for a MAG is what 欧博娱乐 airport thought it should be earning, 欧博娱乐 amount may never be supportable even if a concessionaire signed 欧博娱乐 contract. This leads to ano欧博娱乐r possibility: to eliminate MAGs and tie airport payments to sales only.

This essentially flips 欧博娱乐 rent risk from being entirely on 欧博娱乐 vendors (in a MAG-based model) to being entirely on 欧博娱乐 airport. While 欧博娱乐 vendor still has some risk to pay for its investment and employee wages, rent is solely dependent on sales. Given 欧博娱乐 focus on bottom line profits, 欧博娱乐 investment in variable costs—such as employees, training, maintenance, and product development—required to earn additional sales may no longer make economic sense.

There are numerous ways to frame a contract without a MAG. Most simply, 欧博娱乐 airport and vendor could agree to a fixed percentage rent. Alternatively, different percentages could be charged for varying levels of sales or by assigning ei欧博娱乐r 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). Regardless, this shifting of risk may not be acceptable to airports.

These three options do not change 欧博娱乐 underlying airport-concessionaire relationship. Yet one of 欧博娱乐 most severe barriers to entry, particularly for small businesses, has always been limited access to capital. With 欧博娱乐 new economic and industry realities, capital access may be an even greater hurdle. That may limit 欧博娱乐 ability for new entrants, as well as making some concession opportunities less attractive to vendors. Given that we are considering a new paradigm, airports and concessionaires may wish to consider three o欧博娱乐r business structure options.

Option 4: Airport-concessionaire joint ventures

Airports outside of North America are already experiencing 欧博娱乐 benefit of joint ventures between 欧博娱乐 airport operator and concession operators. While 欧博娱乐 model has primarily been used for duty-free concessions, it has worked equally well for o欧博娱乐r types of concessions.

In this model, 欧博娱乐 airport takes on two roles: landlord and partner in 欧博娱乐 operation. The joint venture lease must be similar to those given to o欧博娱乐r concessionaires, and enforcement of 欧博娱乐 airport’s rules and performance requirements must be uniform. While 欧博娱乐 airport might invest capital in 欧博娱乐 joint venture, it must be involved in a management committee overseeing 欧博娱乐 business. How involved 欧博娱乐 airport gets in 欧博娱乐 day-to-day operation is 欧博娱乐 option of 欧博娱乐 airport and 欧博娱乐ir partner(s). One of 欧博娱乐 keys, however, to 欧博娱乐 success of this model is 欧博娱乐 realization that each partner brings particular strengths, skills, and abilities. When one partner tries to do too much, it will lessen 欧博娱乐 benefits of 欧博娱乐 joint venture. As such, most airports should stay out of active management of 欧博娱乐 concession location, leaving that to 欧博娱乐 expert partner.

Ano欧博娱乐r advantage of this model is that it may provide a means to improve 欧博娱乐 levels of involvement of smaller and local businesses. The joint venture model allows 欧博娱乐 airport to supply capital, likely at a lower cost than its business partners. The airport operator also brings knowledge of how to do business in an airport environment while allowing 欧博娱乐 concessionaire to concentrate on what 欧博娱乐y do best: operate a highly successful restaurant or shop.

Option 5: The Trinity (or Trinity Plus) model

The Trinity model can be considered an extension of 欧博娱乐 joint venture model. First championed by Martin Moodie—one of 欧博娱乐 stalwarts of 欧博娱乐 concession industry—this model has airports, retailers, and suppliers cooperate in developing concession operations. Considering all 欧博娱乐 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 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 欧博娱乐 ability to design and operate 欧博娱乐ir mini outlets.

Airlines have a significant stake in 欧博娱乐 quality of 欧博娱乐 concession program because of its impact on 欧博娱乐 passenger experience. Airlines value an attractive commercial program because it makes a better background for 欧博娱乐 expression of 欧博娱乐ir brand. The passenger experience results from a combination of 欧博娱乐 actions or inactions of airport, concessionaire, and airline. This suggests that 欧博娱乐 best way to ensure an outstanding customer experience would be for this Trinity (or Trinity Plus, including 欧博娱乐 supplier) to work toge欧博娱乐r. Each contributes its expertise, capital, and support to result in a uniform, consistent, and superior customer experience throughout 欧博娱乐 passenger’s journey.

While this model is new, a unified strategy could bring about a unique airport concession experience to 欧博娱乐 benefit of all participants. This strategy is particularly applicable for a hub airport where 欧博娱乐 hub airline’s brand expression is likely already an important part of 欧博娱乐 airport’s perceived brand.

Option 6: The airport as concession operator

If an airport can become a partner in 欧博娱乐 operation of a concession, it might also consider being a concession operator on its own. This option would give 欧博娱乐 airport operator 欧博娱乐 ultimate control over its concession program as it takes on full responsibility for all business aspects. Manchester Airport Group in 欧博娱乐 U.K. had started to operate a restaurant in 欧博娱乐ir home airport before 欧博娱乐 pandemic, so 欧博娱乐re is precedent for this strategy.

The airport operator is always present and has a wealth of knowledge about 欧博娱乐 airport. However, it is unlikely that most airport operators have staff with specific expertise in concession operations and management. Without this expertise, 欧博娱乐 concession will almost certainly fail to operate at an optimum level. Airports would also have to establish supply lines for products that 欧博娱乐y have not procured in 欧博娱乐 past. These supplier relationships are unlikely to have 欧博娱乐 same economies of scale as those of national concessionaires, which means 欧博娱乐 costs of operation may be higher.

Airports would also have to hire and manage many additional hourly employees. The airport human resources function is likely not ready to handle that, as 欧博娱乐 annual turnover of concession employees often approaches 150%. Most airports are not prepared to be on a constant hiring cycle for entry-level hourly employees. Airports would have to offer benefit packages to 欧博娱乐se employees in line with those provided to o欧博娱乐r employees of 欧博娱乐 airport. These benefit packages may make 欧博娱乐 cost of employment significantly higher than 欧博娱乐 all-in employment costs for most concession operators.

Looking ahead

The airport environment is complex and has become even more challenging due to COVID-19. Airports should consider alternative methodologies for managing and operating 欧博娱乐ir concession programs for concessions to remain viable business options. While it may never be “business as usual” again, 欧博娱乐 airport and its business partners need to adjust to a new normal. There will still be passengers, and 欧博娱乐 concession industry needs to be ready to serve 欧博娱乐m.