Rebuilding the industry in North America

Michael Svagdis echoed the view that airport support helped the industry to survive this far and hailed SSP’s front-line workers and ACBDE minority partners.

Revealing the scale of the impact, he added: “My team and I took six years to take SSP America from US$200 million to US$1 billion and that all disappeared in two weeks. And the worst part was what it did to the men and women of SSP America, losing their jobs and having loved ones get sick from COVID-19.

“I have visited many of our airports and seen many of our people working to take care of the people they are serving but also staying in touch with kids at home as they work.”

While maintaining the view that “aviation will come back and come back strong” Svagdis noted that business remains sharply down in the US and Canada, with around 40% of all SSP America units open today.

Partners under pressure

The panel also voiced concern for the future of their ACDBE (Airport Concession Disadvantaged Business Enterprise) partners, many of which are small, local players with limited access to financing.

Gregg Paradies said: “2020 was the first wave of the COVID tsunami for these companies, who have been burning cash quickly. Most of them have survived so far as they did a good job controlling what they could, and got some aid from airports.

“For 2021, in the second wave, it could be more devastating. First, the banks may not support them. Lenders in past recessions want to know when their loans will be repaid. Without lease extensions and some certainty, those loans could be called in. That is a big challenge. These are lost years of cash generation but many lending institutions don’t care. These small companies help our diversity so hopefully small operators will get support from airports and governments.”

Steve Johnson added: “Part of the solution is working with airport partners to seek a new way forward. Are there funds that can take some debt off ACDBEs? Most of them are involved in JVs, and there has to be a solution between us and the airports – maybe from the Federal Aviation Administration too. 2021 will be about finding solutions and making sure that these programmes stay viable. We need these strong partners to stay with us.”

The shape of recovery

The speakers agreed that the pace of vaccinations will play a key role in dictating a return of confidence in travel – and as vaccines roll out, 2021 looks like being a year of two halves, the first continuing much like late 2020, the second (hopefully) seeing an acceleration.

Roger Fordyce said: “Clearly we anticipate the summer months being much better than last summer. We hope to see a significant rebound in Q3. But we still face the challenges of international travel and business travel which is a substantial part of our business.”

He added: “This dramatic event has meant two years of lost profitability and we all know that servicing debt is very challenging. So continued collaboration with airports and the FAA to make business sustainable will be crucial.”

Gregg Paradies noted: “For our budget we had to make many assumptions. The key one is traffic. This used to be easy to do but the margin of error today could be as high as 15-30%. Our optimistic view is that traffic will be down -35% for the year, and worse in H1. Our conservative view is -50%, again better in H2 than H1. Our best case for recovery is probably 2023 but it could be in the 2025 traffic range before we are back to 2019 levels in North America. And domestic leisure travel will lead the charge in 2021.”

Michael Svagdis said: “Similar to others we are thinking more conservatively, at about -50% [for 2021]. The speed of vaccine [roll-out] is one thing, and what airlines do differently is another. Will the hub and spoke model still exist? What will business travel do? What about international? One thing that worries me is bringing back employees. Will they still want to work in this industry? What about the ability to badge them quickly and efficiently? How many stores are open at what point? If you have too much supply and not enough demand you might be at 70-80% of 2019 levels and still not profitable.

“We will get back to 2019 traffic but the sales and profits that went with it are gone. So partnership will be vital as we move along. Other challenges will come in 2021, from inflation to possible rises in minimum wage. We need to be open to new ideas, be patient with one another and put ourselves in each other’s shoes. If that doesn’t happen, we won’t recover.”

Steve Johnson echoed the view that a return to 2019 levels of traffic or business is still years away.

“With 9/11 and the Great Recession how long did it take to get back to where we were? In both cases it was in that five to six year range. The issue here is that we have all sunk money into assets and a base of business that was expected to grow by +2-3% a year.

“As we all know, margins are thin. If you start at a base lower than you expected, then you have a depressed asset for the remainder of your term at least. Recovery is hard to see – I’m not sure we will gain back what we lost. When investment starts again in 2023/24 then the industry will take off – but meantime in these next years it will be tough as we all try to come out from under the debt we took on to survive. We have a solid industry but it’s a long fight to get back to where we were.”

Reshaping the future

Expressing their wider hopes for the future, Gregg Paradies said the key will be “traffic, traffic and more traffic “. He added: “It will all be predicated on the vaccine. I also pray for the emotional health of our front line workers. One time we had 10,000 associates, we are down to 2,500 – we must help them collaboratively as we are all part of one airport family industry.

To ensure the business channel remains viable well into the future, “innovation, adaptability and partnership” will be key words, said Roger Fordyce.

Gregg Paradies echoed that sentiment, notably about airport collaboration. He said: “Our partnerships have strengthened during the pandemic and we cannot lose that momentum. Airports need to work as true partnerships; one where both sides work in a 50-50 collaborative way.

“That means meeting the needs of the traveller – first to be safe and healthy. It also means adjusting business terms to reflect the realities of business and traffic. That includes right-sizing of programmes, opening and closing of units, lease extensions to make up for lost years, fair pricing and more flexibility in what we can sell.

“Longer term, it is clear that the typical lease model is broken. It was broken pre-pandemic and we see it clearly mid-pandemic. One model that can work is our Charlotte model. It is based on 50-50 profit sharing. At first I was nervous about this as we had to open our books to airport partners. But we understand the airport and they understand where we sit. We can make smart decisions for travellers. It works. It’s not a new model but it does focus around partnership. MAGs are not an insurance policy but many airports see it as such.

“Now, as airports think differently about agreements and partnerships, this is a chance to review just how these structures work.”

Steve Johnson added: “It’s about the health of our people and also about the health of our companies, in partnership with our airports. How do you work through this, delay capital spending, ensure the MAG is appropriate and make them understand what we have been through? If we can do this I have great hope we will find a way through this.”

Beyond that, Johnson said: “Congress must find a way to move our country forward, based on the strengths of diversity and opportunity for all. If we can keep our people safe and vaccinated, all will fall into place.”

A major focus for SSP’s Michael Svagdis too is the mental and physical health of teams. “We must continue to push diversity and inclusion and ingrain that into our culture. Technology must play a greater role and we need to keep in mind the experience. If we maintain our team members’ safety as a priority now more than ever, that will give confidence back to the traveller.

“And in all of this for aviation, speed will matter. That means vaccine roll-out, government help for ACBDEs, the ability to meet supply and demand. We cut costs so much and that impacts the experience – so partnership will be critical to everyone.

“But I would take this positive from the crisis: it has created a stronger community feel in the aviation business. And I hope that will continue.”