The Trinity Initiative
Tackling the contract conundrum
Our coverage of The Trinity Initiative webinars continues with reflections on the industry commercial model post-COVID-19.
The majority of contracts in force today between airports, travel retailers and brands “simply don't make sense anymore in the new scenario”. That was the view of Bain & Company Italy Partner Mauro Anastasi during two webinars on 24 April about The Trinity Initiative, which seeks to find solutions to key challenges facing the industry against the backdrop of the current crisis (see page 5).
He said: “The contracts were viable before this, when both parties could forecast and agree on realistic scenarios that might happen during the contract’s lifetime of five to seven years. But now we don’t know what will happen in two months, never mind two years.
“We have the immediate scenario, the next 12 to 24 months where we learn about the changing consumer attitudes and then the ‘new normal’ in the longer term.
“There will need to be a more balanced share of risk”
“With the present Minimum Annual Guarantee (MAG) situation, what we have in place is not much of a contract. They don’t make sense anymore. The process to changing that needs to start now because adapting the retail infrastructure of an airport is a long process. We will need more flexibility to react and to learn, to be ready to adapt to how the consumer behaviour will evolve. The standard contract has to be different from today and needs this flexibility.”
How airports react as partners will depend on their own circumstances, plus other factors.
Castelpole Consulting Director (and former ARI CEO) Jack MacGowan said: “Every airport is different. A state-owned, strategic airport with no debt will have different priorities to a privately-owned secondary airport with a lot of debt. And you have many models across the world in terms of management contracts, concession contracts, joint ventures, and each of those has pros and cons for the current situation and for the next three years.
How will the mix evolve as the crisis eases; what role for luxury? (Frankfurt Airport pictured)
“But almost certainly the current concession model is not fit for purpose. And for at least the next six to 12 months, not only is MAG not relevant, it might be that a retailer will lose money on a cash basis for the next 12 months because of so few passengers coming through. If you get up to 60%, 70%, 80% of 2019 traffic you can have that conversation, but in the short term it won’t be, so does the airport offer help or compensation? The contract has to be fundamentally re-examined for the next two or three years; I don't think is about short-term profit.”
Anastasi underscored the point that the next 12-24 months must be separated from the long term. “For contracts, I would separate conceptually two things. One is the profit sharing part. And the second one is the risk sharing part. Frankly, I don’t believe that in the long term there will be MAG anymore.
Discussing the shifting industry picture, clockwise from top: Dermot Davitt, Martin Moodie, Eric Trichot, Jack MacGowan and Mauro Anastasi
“The problem is how much is the minimum and how much is the risk that a travel retailer is ready to take on something, part of the business, that is not directly under their control – the passenger levels. There will need to be a more balanced share of risk.”
Airports will have to take a new view of the business simply to get through the coming years from a public policy standpoint – with an impact on concessions.
MacGowan said: “You cannot naturally revert back to buying exactly the same things they used to. And if you put it in that context, an airport has to manage through the next three years. Its first job is to work with governments and public health officials to make air travel safe. And I think if you can make it safe and reassure people that they will start to fly again, I think you have started the process.
“And for that to happen, the emphasis is not on incremental profit and margin and getting your cost of goods at 71% instead of 70% gross margin.
“My optimistic view is that the next two to three years… will lead to a re-evaluation of travel retail relationships, and that we will end up with a higher penetration of sales and a more customer-driven offer”
“It’s now about having a partnership which is flexible and agile, one which can open three shops and open four more when the traffic comes – it can change the mix so that it is maximising the offer for the number passengers that are actually going through the airport. If we can adapt quickly to that, and to offering what those consumers demand, we have a better chance of coming out of this crisis quickly.”
Asked whether the ‘brave new world’ could be one that features better balanced relationships post-crisis, Anastasi said: “The difference compared to previous events is the opportunity to leverage this crisis to change and also grow the business for everyone; then how that is shared becomes the question.”
MacGowan concluded: “The financials are important but they are put in their place by this human crisis. Airports and their retailers don’t have a choice. They will be forced into closer partnerships. My optimistic view is that the next two to three years of forced trial in some cases or voluntary trial in others will lead to a re-evaluation of travel retail relationships, and that we will end up with a higher penetration of sales and a more customer-driven offer.”
Incheon International Airport Terminal 1 liquor & tobacco: No takers; how will retailers assess risk in future?
The Trinity Initiative: Next steps
In seeking solutions that ensure a ‘win’ for airports from their commercial activities, while attracting investment and expertise from top-class retail partners and leading brands, The Trinity Initiative will be conducted in phases, some public, some private.
- After the 24 April webinars, a consultation phase began with key stakeholders across multiple sectors on an anonymous basis, and this runs for several weeks. Specific questions and issues will be discussed with representatives from the industry Trinity. Finally, with the assistance of Bain and Company a White Paper will be produced.
- In parallel, less public discussions will be conducted among smaller groups, hopefully accelerating progress through the influence and commitment of the industry’s leaders.
- Afterwards, a periodic review will be established, involving players that wish to join. Thus The Trinity Initiative becomes not a one-off solution but an ongoing review mechanism that can be drawn on by industry stakeholders if necessary.
- Findings and recommendations will be discussed publicly during the Trinity Initiative session of our Virtual Symposium at The Moodie Davitt Virtual Travel Retail Expo in September.
Planning a commercial tender mid-crisis
Eric Trichot, Managing Director of commercial consultancy PT&M, and a former Commercial Director at Nice Airport, is currently preparing tender documents for client airports that are pushing ahead with leasing programmes mid-crisis.
He is working on tender models for contracts at airports in Bali, Bangalore and Santiago de Chile and was invited to present his thoughts during The Trinity Initiative webinar.
At Bali Airport, where Trichot is currently involved in tender negotiations, the present contracts for duty free and fashion are up for tender this year, from 1 July and 1 December respectively. He said that the current tenants will not renew the contract on the existing terms, given the impact of COVID-19.
Trichot said: “What we are suggesting is that instead of bidding for a five-year contract, you will be bidding for five years plus any crisis period. The crisis period is not determined in terms of duration, it is determined by volume of traffic. So, as long as the traffic has not recovered to the level of 2019, we are asking bidders to answer what level of revenue share they are able to give for lower passenger traffic volumes.”
Explaining further, he said: “For example, they can indicate a share for 1 million passengers, 2 million passengers and so on until they reach the level that was the 2019 level. This is not perfect, of course. But this allows the bidder to have the assurance that as long as a crisis is in progress, he will not pay the classical MAG or classical revenue share, he will pay a reduced revenue share. So the crisis can be six months, it can be two years, but this will be added to the normal duration of the contract of five years.”
Asked what happens if a second crisis comes in the middle of this term, he clarified the position of the style of contract he was advocating. “It’s the same principle – this is an automatic system which applies to any crisis situations, situations where passenger numbers are significantly reduced. The difficulty is for everybody – the airport and the bidders – is that they can’t be sure of the duration of the contract. So it might end up being eight years instead of five. But the minimum guarantee would be expressed in minimum guarantee per passenger.”
The Moodie Davitt eZine
Issue 279 | 4 May 2020
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