Tackling the MAG model and concessionaire costs

Two previous white papers from the association underlined the effects of the pandemic on airport concessionaires and proposed ideas that could help the sector survive and recover. The latest paper builds on these while acknowledging the continuing severe impact on the business. ARRA says that airport retail and restaurant operators lost over 90% of their business early last year—following a decade of “increasing headwinds” from escalating capital and labour costs, and revenue and margin challenges. To survive, concessionaires large and small incurred vast debt and faced dramatically altered operating procedures, it noted. Now, even as US airport traffic reaches 70% of pre-pandemic levels, travel retailers and restaurateurs face “constantly changing flight schedules and capacity, slowly increasing, but uneven passenger levels, and a set of shifting airport dynamics that make planning and predicting operational needs nearly impossible—all the while challenged by a workforce reluctant to re-engage”. Fundamentally, says ARRA, the “business model which has defined the airport concessions industry for decades no longer serves it well. Pre-COVID-19, the model was misaligned with the financial and operational realities of doing business in airports: labour, construction, and airport costs were outpacing sales gains to squeeze profit margins. Since COVID-19, its function and feasibility is even more challenged: the cash impacts of fixed rents and operating restrictions endanger concessions businesses. Indeed, survival is questionable. However, in the absence of other viable solutions, the current business model has become the ‘default’ option for most airports. The positive news is the pandemic, though catastrophic, is also serving as the catalyst for evaluating alternative structures to ensure the future viability of airport restaurant and retail operations.”

In a hard-hitting introduction to the paper, ARRA adds: “Our new debt reality must be acknowledged in order for the industry to move forward constructively. Moreover, the process of returning to positive cash flow is likely to be prolonged by several factors. Pre-pandemic debt remains outstanding; deferred rent remains outstanding; and new debt required to stay afloat during the pandemic has accumulated. “All the while, airports are anxious to get their concessions programmes up and running amidst positive vaccination news and an uptick in traffic. Yet, concessionaires face new operational challenges as they work to reopen, ranging from extreme difficulty re-staffing restaurants and stores due to the overall national labour shortage, supply chain disruptions creating shortages and higher costs, and a changing mix of passengers with different spending patterns.” The association highlighted “fundamental flaws” in the business model, with the white paper examining four key areas in particular: 1) Minimum Annual Guarantees (MAG) 2) Capital Investment 3) Labour Access and Cost 4) Operational Flexibility In these pages we take a look at each of the ‘facts’ laid out by ARRA in detail.