Airport Restaurant & Retail Association
Tackling the MAG model and concessionaire costs (III)
#Fact 2: Capital investment model needs to be restructured
“A fair return on investment is unachievable given escalating construction costs which have severely impacted prime and ACDBE operators” – Airport Restaurant & Retail Association
High-quality shops and restaurants are part of the modern travel experience, but as ARRA notes, they are expensive. While street-side restaurant and store construction costs vary regionally and range between US$100 to US$400 per square foot, ARRA notes, based upon the project scope, an overall average for airport restaurants ranges between US$1,000 and US$1,400 per square foot and for retail stores between US$400 and US$800 per square foot. These costs continue to rise sharply, with retailers further hit by changes in project scope and the fact that term lengths have not extended in line with rising capex needs. Cash flow is a particular issue for smaller, minority-owned businesses seeking to enter or remain in the airport system.
Construction costs at airports outweight those on the High Street, adding to already heavy debt burdens, notes ARRA (San Francisco Airport pictured)
Construction costs reached “fever pitch” before the COVID-19 crisis, says ARRA, but now present an even greater challenge as concessionaires are straddled with debt incurred to survive the loss of cash flow during the pandemic. “This has impacted all concessionaires but is particularly challenging for ACDBE businesses which have historically lacked access to capital—a situation which is now further exacerbated by their inability to pay pre-pandemic debt service.” In addition most ACDBEs are joint venture partners with prime operators. Under the joint venture structure, they are not able to fully participate in federal government relief programmes such as the Payroll Protection Program and Main Street Lending, and their eligibility for the Restaurant Revitalization Fund remains unclear, says ARRA.
ARRA’s recommendations for short-term survival:
- Grant contract term extensions as a means of providing a longer runway to earn sufficient operating cash flow to recover initial capital investment.
- Defer and reduce or eliminate mid-term capital obligations.
- Review current expansion and reopening plans to ensure optimal programme size for business potential.
- Implement airport-sponsored funding assistance programmes, such as low- or no-interest loans, for ACDBEs.
Recommendations for long-term prosperity:
- Extend contract term for new RFPs to 10-15 years.
- Provide a tenant improvement allowance to offset capital requirements.
- Redefine base building obligations and commitments from the airport.
- Reconsider expected levels of finishes in stores and restaurants.
- Ensure optimal programme size focusing on industry benchmarks.
- Implement airport-sponsored funding assistance programmes, such as low-or no-interest loans, for ACDBEs.
The Moodie Davitt eZine Issue 297 | 21 June 2021
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