USA. Airport retailers and restaurateurs in the US will lose a combined US$3.4 billion between now and the end of 2021 due to the impact of the COVID-19 crisis. That’s the latest estimate of the Airport Restaurant & Retail Association (ARRA) in a new paper that underlines the need for urgent relief from government and airport partners.

Titled ‘The Survival and Revival of Airport Shopping and Dining’, it builds on the powerful ten-point paper issued in June that underlined the effects of the pandemic on airport concessionaires. It asks questions about the future viability of many concessionaires when traffic levels will remain depressed for three to four years, and about the airport economic model (see points below).

As reported, ARRA and its counterpart organisation the Airport Minority Advisory Council (AMAC) have been urging US airports and Congress to ensure financial relief measures for their members, airport restaurateurs and retailers.

The ten ‘facts’ laid out by ARRA in its latest document are as follows:

#1: It’s A Partnership…And The Passenger Experience Is At Stake

ARRA said: “The entire system and all stakeholders are currently overwhelmed and under severe duress from the COVID-19 pandemic because when one is weakened, others are similarly impacted and weakened. It is critical that the challenges and pressure points of each stakeholder be acknowledged by the others and that interim steps be taken to assist one another in rebuilding the system as a whole. Our collective future depends upon it. Moreover, decisions that are made now will define the very experience offered to passengers for years to come.

“The sudden and dramatic decline of the airport concessions industry has consequences beyond our walls. It brings a deteriorated passenger experience. The current trajectory of the business impact means shuttered storefronts, limited selection, limited diversity, and little innovation. It will usher in a wave of permanent restaurant and retail closures that will turn bustling airports once pulsing with energy into “ghost towns” even after travel recovers. The airport shopping experience that reflected local culture, diversity, and inclusion will be a thing of the past.”

The association called for more communication and transparency between industry actors, pulling together in the common interest, If they don’t the traveller will be the ultimate loser, it said.

#2: Flights Are Not Passengers: Traffic Still Will Not Recover This Year

The paper noted: “For US airlines, domestic flights are down 56% from last year, but passenger volume remains 71% below last year. Although airlines are ramping up their schedules, it remains to be seen if passengers will follow. The current uptick in travel is not yet a trend. The seasonal decline we usually see in the fall could be even worse this year if business travel remains low.”

ARRA cites a recent Goldman Sachs forecast, suggesting a long road back to recovery

Citing a Goldman Sachs report, ARRA said that the US travel market could remain 30% down on 2019 in 2021, and 12% down in 2022, before matching 2019 levels in 2023.

#3: Industry Is Heading Towards an Impasse…We’re Out of Money

ARRA said: “One often misunderstood aspect of the aviation business is that the various stakeholders do not all operate with the same financial pressure points or business structures. Their business models vary significantly as each transacts with its customers differently, and the impacts on P&Ls and profits are different. For example, under the “hub and spoke” travel model, airlines are able to subsidise many lower-profit routes with some highly profitable routes while maintaining a brand and network that serves a larger number of customers.

Even as traffic grows, profitability will remain a challenge for concessionaires, says ARRA

“By contrast, airport restaurants and retail stores have a limited number of customers (those who are traveling at any given time) and make money on a much simpler model. In practice, each airport agreement is a standalone business, needing to profit on its own. They operate on very, very thin margins, such that when they begin losing cash, the large businesses are driven to borrow cash and sell stock. The smaller companies use every bit of cash they can, until there is no more.

“As COVID-19 flows through July into August and is now looking more and more like fall and into winter, each of these businesses, regardless of size will quickly be facing solvency issues. The accumulated losses of the airport restaurant and retail industry will continue to mount. Between now and the end of 2021, this industry will lose US$3.4 billion. In just the next 18 months, this industry will lose more than three years of profits.

“The magnitude of these losses – combined with the thin margins of the businesses – will require many years of normal profitability to recoup and retire debt accumulated during the pandemic. Many airports have extended some form of relief through 2021 and some into next year. But, given the slow and uncertain pace of recovery and the anticipated cumulative cash losses, it is clear that airport restaurant and retailer operators will not be in a position to pay Minimum Annual Guarantee (MAG) rent until full recovery is reached.”

#4: We Must Reopen Smartly

ARRA said: “Although concessionaires share airports’ desire to reopen and serve the travelling public, reopening too soon is a recipe for financial disaster. Indeed, reopening now will increase the financial damage suffered by concessionaires. This is potentially worse than being closed at extremely low passenger volume as costs that can be eliminated when stores and restaurants are closed, are now incurred, and grow at a faster rate than the underlying sales. For example, minimum labour would be required to operate a restaurant to brand standards even though sales are insufficient to support the labour.”

Building on its analysis of industry P&Ls in June, ARRA presented scenarios at various sales levels ranging from 30% to 90%, as well as fully recovered sales. It noted that restaurants do not return to profitability until a recovery of 85% to 90% of full sales is reached. The situation in the retail sector is similar, it said.

Reopening must occur at a pace that works for all parties, insists ARRA (Phoenix Sky Harbor Airport pictured)

Reopening should follow these general principles and procedures:

  1. Airport Concessions/Properties executives engage with concessionaires in developing comprehensive reopening plans.
  2. Focus on right-sizing the number of stores and restaurants in the program based upon exposed enplanements rather than requiring or requesting all units to open.
  3. For the right-sizing analysis, use planning metrics as would have been used for the overall pre-COVID programming of the terminals.
  4. Permit stores and restaurants to re-close as the summer ends if passenger traffic does not continue to increase or even declines in the typically slower fall travel season.
  5. The reopening process must be based on passenger numbers, not calendar timelines.
  6. Airlines should not dictate service levels in the absence of quantifiable passenger enplanements, flights, and proximate gate utilisation that warrants such service.
  7. Allow adequate time to recall staff and perform other re-opening tasks such as reactivating security badging, implementing social distancing, cleaning and sanitisation, and governmental inspections.
  8. No reopening plan should proceed without consistent, regularly available data and other information as set forth in Fact # 7 below.

#5 The Industry Has an Over-Capacity Problem

Most airport concession programmes are oversized for current and future traffic, noted ARRA, with a likely surplus of shops and restaurants based on near-term demand.

Airports should consider buying out leases and concessionaires should be able to give back space with no penalty, says ARRA

ARRA said: “Resolving this overcapacity is the most significant challenge facing airport shopping and dining operators and their airport partners. There will be insufficient customer demand over the next three years to allow all concessions units to be self-sufficient. The shopping and dining industry needs support from airports.” Potential options include:

  1. Allow units to be deactivated until passenger traffic returns to an appropriate level. The lease is suspended – including payment of MAG – for the portion of the premises that are closed until deactivated units are ready to reopen. At that time, the lease and rent simply restart for the balance of the term. Although this approach has many benefits, it does leave operators with the need to renegotiate or otherwise manage their debt.
  2. Airports buy out leases (or portions of leases) through purchase of concessionaire assets. The affected units close and the lease and MAG terminate for those units. The airport can then re-offer the space in a future RFP when demand warrants. The concessionaire loses its future profits but receives cash to pay off remaining debt. A variation is to preserve the lease and allow the concessionaire to rebuy the space prior to offering to the market.
  3. A concessionaire gives back space to the airport with no penalty, no questions asked. The lease as it relates to surrendered units is cancelled and all obligations to the airport end. Although a “clean” resolution, the tenant writes off assets, loses future profits, and has debt to pay – still with no income.
  4. A do-nothing, Darwinian option is just ugly and scary. Airports demand restaurants and retailers open all of their stores, over-capacity and low sales overwhelm each operator, and they run themselves into bankruptcy. Alternatively, airports allow stores and restaurants to remain closed, but demand MAG payments; without sales, these closed stores continue to lose money until forced into bankruptcy.

#6 ACDBEs Face Daunting Financial Obligations And Will Soon Reach An Inflection Point

ARRA said: “A recent AMAC Coronavirus Impact Survey found that over two-thirds of minority- owned airport businesses have experienced a 75% to 100% drop in revenue due to the pandemic with 77% of respondents describing the impact as severe. Revenue losses also equate to thousands of job losses. Moreover, many ACDBE operators have mortgaged homes or collateralised other assets to secure loans. Now with daunting levels of debt service and no income, bankruptcy may be the only path.”

The quality of the offer and experience will suffer without support for airport business partners small and large, says ARRA

It added: “As US airports consider options to save the concessions industry so as to continue providing service at levels passengers have come to expect, they should consider the impact various options will have on their ACDBE partners. For example, when an airport decides to simply ‘take back excess space with no recourse to the tenant,’ as is being considered by some airports, where does that leave the ACDBE?

“Debt service obligations remain pressing and without an infusion of capital to cover unamortised investment, they may be doomed to fail. This will have the dramatic effect of not only cratering the entire ACDBE programme, but also financially crippling every individual who had the courage to participate.”

#7 Data are Essential…Facts Not Fluff

ARRA said: “To engage in a conversation about recovery, full and frequent sharing of data is immediately needed from every airport. Flights, enplanements, and gate locations continue to be fluid and impacted by a great many factors. Businesses are making decisions each day that threaten their very existence. The industry is desperate for a level of fact-based information on a consistent daily and weekly basis as indicated below:

  • Enplanements by airport, terminal, concourse, and zone (daily)
  • Airline gate usage/assignments (weekly)
  • Airline load factors (daily)
  • Traffic forecast updates (daily)
  • Updates on openings and closings of concession outlets by location
  • TSA counts by check point (daily)
  • International passenger counts by destination, terminal/ gate location (daily)
  • Communications received from airlines regarding operations (daily)
  • Records of “phantom flights” (flights scheduled but subsequently withdrawn from airline schedules prior to original departure dates).

#8 Health and Safety Are Essential, but There Is A Cost

While recognising the health and safety of staff and customers is paramount, ARRA noted that this involves added costs. These can “significantly alter the concessions financial model, particularly at low sales levels. Indeed, health and safety measures add to a concessionaire’s financial distress and further delay financially feasible reopening.”

It added: “The impact of these costs on a concessionaire’s financial model can be substantial and may warrant adjustments in percentage rent rates. Airports and concessionaires have a shared interest in health and safety of passengers and employees. We encourage airports to work with concessionaires to sustain the revival of airport shopping and dining by sharing the costs – and benefits – of protecting passengers and employees.”

All of the new health and safety measures, while necessary, come at a cost to struggling businesses, says ARRA

#9 What Can Airports Do Now?

ARRA said: “There are several immediate steps that airports can take to assist concessions operators, enabling them to survive the historic drop in traffic and have a reasonable chance to resume service as traffic returns:

  • Take a realistic view of traffic patterns and in formulating rent relief proposals, plan for the worst-case scenario – whether or not it turns out to be the case.
  •  Grant immediate relief from minimum guaranteed rent (MAG). This fixed cost is one of the most crippling to concessionaires. Until the system has recovered, use a portion of US$10 billion CARES Act grant, which was enacted to offset lost revenue, to support rent abatement for concessionaires.
  • Initiate variable percentage rent rates until the system has recovered to a minimum of 90% of 2019 enplanements.
  • Grant extensions of existing agreements for a minimum of two years to allow operators to re-amortise existing debt and provide the opportunity to earn additional sales in the future once traffic has returned to 2019 levels.
  • Engage all airport stakeholders in the discussions of concessions survival and revival.
  • Consider using unrestricted reserve funds to meet other budgetary requirements, thereby freeing up cash to assist concessionaires.
  • Share the financial relief airports were given under the CARES Act, and any future relief, with concessionaires through MAG waivers and rent abatement consistent with the FAA’s recent letter to Airport Sponsors entitled “FAA Encourages Airport Sponsors to Help Mitigate Impact on Airport Tenants During National Health Emergency.”
  • Defer capital investment in new concessions development projects.
  • Suspend all storage rents, utilities, CAM, Marketing Fund, and parking fees.
  • Suspend all scheduled mid-term refurbishment.
  • Suspend any pending RFPs/RFQs.
  • Develop a measured and rational store reopening plan in collaboration with concession operators which is based on traffic, flights, and gate usage data. Utilise industry standard metrics for space planning and recalibrate MAG and percentage rents.
  • Provide rent allowances to support the added costs of implementing health and safety measures.

ARRA proposes a suite of measures through which airports can assist concession partners (Las Vegas McCarran Airport pictured)

#10 COVID-19 has Changed Many, Many Things in the World. What Will Change in the Aviation Concessions Industry?

ARRA said: “The pandemic has and will continue to cause change in every section of our society. There are many components of this, but perhaps the most challenging and unknown is how long it will last and how long it will take to recover. But, no matter how long the recovery takes, the severity of the downturn raises questions:

  • Is it logical that restaurant and retail operators – as well as other service providers – assume all financial risk in the face of severe fluctuations in passenger traffic?
  • Is the notion of a Minimum Annual Guarantee outdated?
  •  How can America finance the overall aviation system during this downturn?
  •  Is there a financial instrument that can help us effectively hit pause on things and then enable a “kick start” of the business?
  •  How should restaurants and retailers meet their passenger service responsibility when passenger numbers are too low to sustain the financial viability of the business that is providing the service?
  •  While we are making substantial changes to the marketplace are there others that should be considered as well?

ARRA concluded: “The entire aviation financial eco-system is in demand of a reset. But this reset is not zero sum where an entity succeeds at others’ expense. Everyone has felt pain. Everyone needs to work together to sort how we can work our way through to financial survival. If we contemplate that US aviation traffic may not recover for three years, we must also contemplate structural revisions to the industry. The system needs help to support the services and experience our customers have come to expect. We need to think through as partners how that will work. It’s time to begin the conversation.”