But that’s not all! The proposed ordinance also increases the health care benefit to $8.35 an hour from today’s $5.95. In total, airport food service and retail operators face a 22% increase in the airport minimum wage mere months from now.

And these new minimum wages ignore that the increases don’t just stop there. Operators usually have to increase compensation for employees all the way up the seniority chart.

The impact is devastating! One ARRA member projects this ordinance would raise their labor costs by 70% over the next four years. No business can sustain this level of increase in a prime cost without offsets of some type.

Increases Across the Country

Los Angeles is not alone. Although LAX may represent the most extreme example, similar increases in airport wages have been implemented from coast to coast.

• In September, concession workers at Austin-Bergstrom International Airport agreed to a $25 an hour minimum wage to avert a strike. The minimum had been $20 since 2022. Moreover, the new minimum wage exceeds the City’s own living wage by more than 15%.
• The Metropolitan Washington Airports Authority established a base wage rate of $16 for 2024 with an expected increase to $16.78 an hour in 2025.
• The Port Authority of New York and New Jersey last month announced a cumulative $1.50 an hour increase in the minimum wage during 2025, another 75¢ an hour in 2026, and then annual CPI increases between 2027 and 2032, reaching no less than $25 in September 2032.
• The City of SeaTac’s minimum wage increased from $19.06 to $19.71 an hour for workers in hospitality and transportation, the highest rate in the state of Washington and 21% higher than the state’s minimum wage standard of $16.28.

We recognize that airports are civic assets often used as vehicles for policy initiatives that may not apply throughout the community. But the current trend of mandates of excessive wage rates for airport workers is a bridge too far for airport food service and retail operators. And the ultimate losers are our customers, as operators eventually pare back service to make ends meet.

More than Mandates

Extraordinary minimum wage mandates are just part of the labor cost challenge. Airport wage rates have long exceeded streetside wages for comparable retail and food service positions. Part of the wage premium is simply overcoming the reluctance of workers to take on the more difficult working conditions of an airport. As explained by Riley Lagesen (chair of Greenberg Traurig’s Global Restaurant Industry Group) in a 2022 ARRA Forum:

[A]irports have always been more complicated on the labor side than operating on the street…. You’re looking at operating hours that are usually quite a bit longer. You’re looking at union labor, which is a huge differentiation, and you are looking at the ebb and flow of traffic at different periods and so forth. So, [in] comparison to a street, there’s no real relevant comparison to life in the airport. Food service operations [are] highly specialized and very different and should be considered as such.

Rich Schneider, Chief Development Officer of Areas USA, added during the same Forum:

Transportation is a huge issue and being able to get [employees] to the airport … is different than the street. I think sometimes you have folks [at the airport] that are probably on 30 to 45 [or] 40 minutes to an hour to get to work, where on the street they might be able to get there in ten. I think it’s just an important challenge that the airport operators have, in addition to the period of going through the security clearance and all the things that you need to do.

Moreover, as Lagesen noted, airport workers are overwhelmingly unionized in comparison to their streetside counterparts: ARRA’s recent member survey shows nearly 70% of concessions hourly associates are covered by collective bargaining agreements. This greatly exceeds union representation in the economy: in 2023, only 4.5% of retail workers and 1.6% of restaurant workers were represented by a union. The presence of unions generally leads to higher costs. In the case of restaurants in the overall economy, union representation leads to 8% higher wages.1

Finally, coming out of Covid, airport concessionaires – just like all lower-wage segments of the economy – endured tremendous labor shortages and consequent rapidly rising labor costs.
From 2021 through August 2024, ARRA members have increased their hourly associates’ wage rates 59%.2

And the increases are not just for our associates: increased wages for hourly associates trickle up to all workers. The 2024 ARRA member survey also found:

• Manager salaries have increased 52% from 2019 through August 2024.
• The cost of benefits per employee rose 27%
• Average hiring costs per new employee increased by 14%.
• Total labor costs increased 30%

Implications

ARRA members support livable wages for their valued associates. But concessionaires’ businesses cannot sustain the current extraordinary growth in wages – mandated or otherwise – without offsets in either pricing or other costs. Let’s face facts: Wage increases at airports are huge and significantly outpace wage growth on the street. For example, where Los Angeles is considering a $25 minimum wage at its airports, its city-wide minimum wage currently sits at $17.28 per hour. The 2025 minimum wage for fast food workers in New York City will be $16.50 per hour, nearly 20% less than the new minimum wage at the Port Authority airports.3

From 2022 through August 2024, nationwide leisure and hospitality worker wage rates have increased 16%, compared to 59% for ARRA members.4 During the same period, prices at restaurants kept pace with labor rates on the street, but lagged far behind the increase in labor rates for concessionaires.5

This last fact is critical: most airport food service and retail operators face pricing restrictions based on street prices. They simply cannot increase prices to keep pace with costs. More than 90% of respondents to ARRA’s 2024 member survey saw labor costs increase at a substantially greater pace than sales from 2019 through mid-2024.

The excessive growth of wages and salaries highlight why ARRA members, in the recent survey, stated labor costs are their most important current business challenge!

Solutions

What can we do? In the short term, allow cost recovery through relaxed pricing. Or offset rising labor costs with cost reductions elsewhere in the income statement.

For example, Phoenix Sky Harbor International Airport, in 2019, eliminated street pricing restrictions and replaced them with market pricing. An Arizona Republic investigation found many restaurants enacted at least some price increases, but most were less than a dollar.6 Moreover, the airport has reported no customer complaints.

The Port Authority of New York and New Jersey has matched its minimum wage increase with an increase in pricing from street +10% to street +15%, as well as an Employee Benefits & Retention surcharge of 3%.

On the cost side of the ledger, reducing rent rates to offset wage rate increases is appropriate, especially if the extraordinary wage increase is the result of an airport sponsor or other governmental action. In fact, the Los Angeles Council action increasing the minimum wage also directs LAX to consider rent relief, as well as other business assistance programs for concessionaires.

It’s a Big Deal!

Airport wage increases exceeding local market conditions are simply not sustainable for airport concessionaires. The current model has created an unlevel playing field that will decrease competition; push smaller, medium-sized, and minority-owned businesses out of the market; and even make it harder in some cases for the legacy concessionaires to participate. Most important, the customer experience will suffer: to financially survive without pricing or cost offsets, operators eventually must reduce service levels.

It’s vital that airports and concessionaires collaborate to find a solution to rising labor costs. Otherwise, the food & beverage and retail offerings we want to serve our joint customer, the traveling public, will deteriorate. Let’s figure out how to get this right to maintain the travel experience we have all come to expect.

1 “Union Members – 2023,” U.S. Bureau of Labor Statistics news release issued January 23, 2024.
2 ARRA 2024 member business survey.
3 New York State Department of Labor website (https://dol.ny.gov/minimum-wage-fast-food-workersfrequently-asked-questions)
4 U.S. Bureau of Labor Statistics, Average Hourly Earnings of Production and Nonsupervisory Employees, Leisure and Hospitality [CES7000000008], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CES7000000008, November 13, 2024.
5 U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Food Away from Home in U.S. City Average [CUSR0000SEFV], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CUSR0000SEFV, November 13, 2024.
6 Melissa Yeager, “Phoenix airport restaurants: How much have prices gone up since street pricing ended?” The Arizona Republic, March 19, 2019, retrieved from azcentral.com, November 5, 2024.

Issued December 5, 2024
Reissued December 13, 2024 to update LA City Council action
​

But why must we choose? Let’s just face facts: the current situation is not sustainable. Why? Consider four facts.

• Labor costs keep climbing. The labor market has evolved to be vastly different than before the pandemic, an evolution we believe is a permanent change.
• Construction costs have soared beyond anything anyone contemplated.
• Interest rates are back to normal. And it’s not what we all think “normal” is!
• Sales per enplanement growth has stalled. Sales have not kept pace with costs.

Allow us to explain in four charts and a table.

1. Labor

The labor market has changed, particularly in the lower-wage segment of the economy. This is likely a permanent change, partially because of how industry and the labor market have evolved, and partially because, in the case of wages, what has been given cannot be easily taken back. These workers – who not just airport restaurants and retail, but street side food service, retail, health care, elder care, and many other service industries rely on – have moved on. And also dropped out. We have seen a decline in participation, for a variety of reasons, but generally related to low wages and the personal costs of earning low wages (e.g., the cost of childcare taking a large proportion of one’s own wages). Perhaps more important, these workers now have alternatives: for example, the growing number of well-paying jobs in logistics. Logistics companies – e.g., Amazon – now set the wages for many service industries. (Remember Amazon built a complete delivery system, and the three that were in place did not 2 retract much.) The consequence of this shift is increasing labor costs for all companies that compete in this labor market. 

Concessionaires are not immune to wage pressures. An ARRA survey of its members showed a 38% increase in associates’ hourly wage rates from 2022 through 2023 (Chart 1). During this same period, average hourly earnings in the overall nationwide leisure and hospitality industry increased only 13%. 1 Moreover, a company cannot just raise its associates’ wages: these increases trickle through the company’s whole labor system, its whole P&L. This level of cost increase presents a significant challenge. With widespread pricing constraints in the airport concessions industry, recovery of these extraordinary costs is nearly impossible, and as a consequence, profitability vanishes.

2. Construction

We all know about construction costs. The ARRA survey of its members (representing more than 80% of the US concessions industry) shows a weighted average 37% increase in construction costs since the beginning of the pandemic (Chart 2). During the same period, economy-wide nonresidential construction costs increased 22%.2 No one reading this should be surprised by the finding. But let us mix in the other half of our industry’s capital situation – interest rates​...

3. Interest Rates

The concessions industry – and everybody in the economy – is also experiencing a substantial increase in interest rates. Certainly expected, given central banks’ efforts to control inflation. But, let us suggest, current rates won’t fall back to what we have come to think of as “normal” – that is, pre-pandemic levels. Rather, interest rates have now returned to normal.

Consider a long-term perspective: until the recent run-up in interest rates, our economy enjoyed a long streak of very low interest rates (Chart 3). Frankly, unprecedented. If we look at interest rates over a longer time span – in this case, a benchmark 10-year Treasuries – we see that current interest rates are similar to levels before the 2008-2009 financial crisis. With central banks working to maintain liquidity and economic stability in response to the financial crisis, the low rates we enjoyed between the financial crisis and the pandemic may be the exception, not the rule.

​So, it should not be a surprise if interest rates do not return to their pre-pandemic levels. Are we back to normal? In this case, it depends on how you define normal. Unfortunately, what we have come to expect, is probably not normal.

Which implies that our industry – our economy – should adapt to higher rates as a long-term reality rather than expecting a return to the unusually low rates of the recent past. Looking at the impact of higher interest rates from a concessionaire’s point of view: baseline interest rates that drive borrowing costs for concessions buildout loans (Secured Overnight Funding Rate, the successor to LIBOR) are now about 5.3%. Before the pandemic, SOFR hovered around 2.5%. Moreover, the margin above SOFR that lenders charge concessionaires has also increased: pre-pandemic, the margin was generally 5%. Today, the margin is 8%. Total borrowing cost: pre-pandemic, about 7.5%. Today, about 13.3%.

Obviously, this is a significant hit to a concessionaire’s bottom line. Combine higher interest rates with higher construction costs and an airport operator’s debt service on a typical sevenyear loan is now 63% higher than before the pandemic.

4. Sales

But sales have recovered, yes? Well … no.

Consider average sales per enplanement as reported in ACI-NA’s annual concessions benchmarking survey (Chart 4. Note these are not necessarily the same airports from year to year, but an annual sample of ~70 airports). Sales per enplanement increased steadily from 2009 to 2014 to approximately $10.00 per enplaned passenger (including duty free), but then, essentially plateaus.

​Although there has been some growth coming out of the pandemic, on the whole, sales rates are lagging inflation by a substantial amount. If sales rates had kept pace with inflation from 2018 (the last year reported prior to the pandemic), the industry could have achieved an additional $1.00 in revenue per enplanement. With 2023 total enplanements recovering to 946 million,3 falling behind inflation has cost concessionaires $946 million in the aggregate. In light of rapidly rising operating and capital costs, this revenue shortfall is a staggering blow to the industry.

It’s a Big Deal!

​What does this all mean? Well … it’s a big deal. The impact on concessionaires is dramatic!

​Keep in mind that airport concessions (as well as street side restaurant and retail businesses) are low margin businesses. As we can see in the nearby table, prior to the pandemic, a representative free cash flow return on sales was about 10.5% (the orange circle). This is the cash available to pay investors. Today, considering the impact of the four facts just discussed – as well as other changes we didn’t highlight such as increasing costs of goods – the return is now zero (the red circle). The bottom line: concessions contracts starting today earn no return on equity, nor return of equity. This is not the picture of a sustainable business model … for anybody, for any business. 

We have arrived at an urgent situation where airports and concessionaires must together make a choice about how to go forward. Do we change our model, or do we keep our model? Either way, there are consequences. If we evolve the model to meet the new business environment, then we can maintain the service levels that we’ve all come to expect, that our customers have come to expect: great looking stores and restaurants, recognized brands, and exceptional hospitality. If we don’t change the model, we will likely regress as an industry. Back to an era of limited offerings and generic concepts. As the industry moves into this critical period, the choices we together make today will shape not only the future of airport concessions but also the broader passenger experience for years to come.

​Let’s begin the conversation. We must decide. Before others make the choice for us!

1 U.S. Bureau of Labor Statistics, “Average Hourly Earnings of Production and Nonsupervisory Employees, Leisure and Hospitality” reported by the Federal Reserve Bank of St. Louis. Comparison period is January 2022 to January 2024.

2 Turner Construction Building Cost Index for 2024Q1 vs. 2019 annual average.
​
3 U.S. Bureau of Transportation Statistics
​

Issued: September 6, 2024​

Lurking in the background is a more serious threat to our industry’s recovery: as reported in a recent article in the Washington Post, American consumers are pulling back on travel. Adobe Analytics reports that U.S. flight bookings were down 2.3% in May from a month earlier. A Barclays Bank analysis of credit card transactions shows spending on services like travel has slowed to half the pace seen at the beginning of the year. Charles Schwab notes “travel-related spending ls weakening.” The Post further reports flight searches on Kayak are down 13% in comparison to the same period in 2019.

All indicators point to weakness in passenger numbers later this summer and into the fall – a clear and present risk to the entire aviation ecosystem’s recovery. The watchword remains flexibility: ARRA encourages its airport partners to keep flexible operating policies and practices to allow a swift response to quickly changing conditions.

We invite you to read the Washington Post article here.
​

These modifications to contractual pricing rules will give concessionaires a measure of financial health – financial health that is threatened by the combination of cost inflation and restrictive pricing.

It’s no secret that airport food & beverage and retail concessionaires suffered greatly in the pandemic. Fortunately, there has been a degree of recovery, but only in the past few weeks have some ARRA members enjoyed a few days of sales exceeding the same day in 2019. Yet there is still a lot to overcome from the past two years. In short, airport concessions — as well as much of the aviation ecosystem — are not recovered. Concessionaires face labor shortages, increasing labor costs, passenger volumes and sales still generally below 2019 levels, and increased debt obligations. Airport restaurateurs and retailers are now operating at breakeven cash flows at best. There is little slack for additional financial challenges. However, the rapidly increasing rate of inflation is just the additional financial challenge that threatens the industry’s recovery. Once again, concessionaires face a financial crisis directly related to COVID.

Inflation is the most talked about current economic news. The headline Consumer Price Index (CPI) inflation rate reported for March by the U.S. Bureau of Labor Statistics was 8.5% over the past 12 months. This is the highest rate of inflation in 40+ years. Many factors contribute to price increases as the country recovers from the economic impacts of the COVID pandemic: labor shortages, commodities shortages, shipping shortages, truck shortages … the list goes on. Just one factor that seeps into all economic activity is energy: the energy cost index increased 11% in just one month; gasoline alone accounted for more than half of total inflation in March. 

Everybody – consumers and businesses – must deal with inflation. Just as consumers see rising prices in their daily shopping, restaurants and stores face similar pressures. However, the magnitude of cost inflation for restaurateurs and retailers has been extraordinary, even exceeding consumer price inflation. Since March 2021, the Producer Price Index for food & alcohol wholesaling increased 10.2%; the index for merchant wholesalers of non-durable goods, 10.7%. Each of these is representative of the increases in costs of goods airport concessionaires (and all food service and retail businesses) are experiencing. Moreover, it is expected to continue: the U.S. Department of Agriculture forecasts key categories of food products to reach double-digit price increases through the remainder of 2022. And we haven’t even mentioned labor!

With cost of goods as a percentage of sales ranging from 25% to 45% or more, cost inflation of this magnitude seriously squeezes concessionaire profit margins: anywhere from 250 to 500 basis points of profitability – a significant financial blow to a recovering business. Moreover, it is not always possible to simply increase prices to offset increasing costs. In the case of airport concessionaires, many airport concessions contracts include pricing restrictions of some sort. Pricing policies that tie prices to comparative street businesses are common. Also common – and actually more important during this time of rapid inflation – are contract restrictions on the frequency of price increases (irrespective of what is happening on the street), as well as airportapproval requirements. If “market basket” pricing is restricted to once or twice a year, then any cost increases between permitted price changes shrinks profits and is lost forever to the concessionaire – a loss that many cannot absorb during this stage of financial recovery from the pandemic.

There is an easy solution: allow individual concessionaires to independently manage their own prices in a manner that best fits their revenue and cost conditions. During this period of high cost inflation – which compounds the financial challenges concessionaires already face as fallout from the pandemic – ARRA urges airports to waive price change restrictions on concessionaires. Concessionaires want to make sales so consumers will provide a natural check on pricing. More adaptable pricing will allow concessionaires to mitigate the financial impact of inflation as they work their way out of the financial impacts of the pandemic. Adaptive pricing is a natural remedy to a critical problem. ARRA encourages airports to adopt adaptive pricing to support their concession partners during these economically challenging times.
​

The COVID-19 pandemic has had a devastating impact on the airport concessions industry. Retail and restaurant operators lost over 90% of their business early last year—this following a decade of increasing headwinds from escalating capital and labor costs, and revenue and margin challenges. Today, traffic is beginning to improve, yet losses continue to accumulate. Just to survive, concessionaires, large and small, have incurred tremendous levels of debt and dramatically altered operating procedures. While devastating in its immediate impact, the pandemic crisis has also exposed fundamental flaws in the decades-old airport concessions business model, which prompts a reexamination of the business structure under which the industry has operated. It is clear that a more equitable and sustainable business model—in addition to continued relief efforts—is a requirement for a true, sustainable recovery of the airport concessions industry.

In this third installment of the Airport Restaurant and Retail Association’s (ARRA) Facing Facts papers, ARRA examines the impact of the COVID-19 crisis on the airport concessions business as the industry begins to recover and looks to a brighter future. More importantly, we offer collaborative solutions to better align airports and concessions operators’ collective economic interests. Together we can modify the business model to support today’s cost and operational realities, which will enable operators to realize a truly sustainable recovery and provide exceptional restaurant and retail services to the traveling public for years to come. 

Background

Facing Facts III: Survival, Revival and Braving the Future is presented as a continuation of ARRA’s series of white papers discussing the COVID-19 pandemic and its impact on the airport restaurant and retail industry. This installment is informed by contributions from our weekly COVID-19: Survival and Revival industry calls, discussions with airport leaders and industry experts, and close collaboration among ARRA’s Board of Directors and members—large and small, primes and Airport Concession Disadvantaged Business Enterprises (ACDBEs). The paper is intended to generate rigorous discussion throughout our channel regarding the airport concessions business model in order to restore a robust business environment and provide travelers with world-class service.

In issuing this latest paper, ARRA thanks—on behalf of its members and all concessionaires—our airport partners for the considerable support provided with rent waivers and other relief during this challenging period. We are grateful to the Airports Council International—North America (ACI-NA), American Association of Airport Executives (AAAE), and the Airport Minority Advisory Council (AMAC) for their partnership with us in advocating for the inclusion of concessionaires in the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) and American Rescue Plan Act of 2021 (ARPA). We also recognize the airlines for their assistance in sharing real time information regarding flights, capacity, load factors and passenger counts—all essential to our ability to plan and manage our businesses.

We cannot overemphasize the importance of partnership. As stated in our Facing Facts II paper, airports, airlines, and restaurant and retail operators are deeply intertwined and interdependent—each contributing to an airport’s overall operations and the travel experience. ARRA believes it is in our collective best interest to come together with open communication to restore the passenger experience we had all come to benefit from and enjoy. 

Pervasive and Long-term Impact

ARRA recognizes the economic impact of the pandemic on each of the key aviation stakeholders has been severe, with full rebound yet to be realized. U.S. passenger airlines’ collective pre-tax losses in 2020 topped $40 billion with 2021 first quarter losses approaching another $5.5 billion.1 As an industry, airline cash burn will likely continue through 2021 and it will take years for the airlines to retire the billions of dollars of new debt they took on to survive the pandemic. Similarly, U.S. airports face cash flow pressure and significant setbacks from the resilient and previously stable growth prospects enjoyed since 2010. As of the date of this paper, passenger volume remains on average around 70% of pre-pandemic levels, but, despite current momentum and signs of recovery, we are unlikely to see a return to 2019 traffic until at least 2023,2 with key sectors such as business and international travel not recovering until 2024 or later (if at all). As a consequence of the severe decline in passenger volume and flight activity, ACI-NA estimates U.S. airports will lose $40 billion between March 2020 and March 2022.3

Airport restaurant and retail operators—primes, mid-sized companies, and ACDBEs alike—face a long road to recovery having experienced staggering business losses and incurring massive debt. Global losses for the largest publicly traded companies exceeded $4.5 billion in 2020 with reported newly accumulated debt in the billions, and privately owned companies lost billions more. Meanwhile, restaurant and retail operators must continue to adjust to 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.

​Even if traffic were immediately restored to pre-pandemic levels, concessionaires would not be recovered. With debt as the standard bearer of the day, it will take several years to return to a positive cash position. Our new debt reality must, therefore, 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 programs 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 labor shortage, supply chain disruptions creating shortages and higher costs, and a changing mix of passengers with different spending patterns.

Business Model Flaws Exposed

As airports look to define the ‘new normal’ for commercial operations, and concessions operators continue to navigate the worst year in their business history, fundamental flaws in the business structure have become obvious, suggesting that changes in the leasing landscape are long overdue. The aforementioned challenges critically call for a more equitable balancing of financial risk in concessions contracts.

In many respects, 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: labor, 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.

Alternative structures have been the subject of panel discussions at the recent ACI-NA CEO Forum, Airport Experience News’ (AXN) Virtual Summit, South American Association of Free Stores (ASUTIL) and International Association of Airport and Duty Free Stores (IAADFS) Summit of the Americas, and on ARRA’s COVID-19 Survival and Revival industry calls. The overriding conclusion has been the aviation industry needs to first focus on surviving the pandemic, then address both prepandemic flaws in the business model and new challenges which have surfaced as a result of COVID-19.

Building a Better Model—Surviving Today and Thriving Tomorrow

Facing Facts III looks at the most critical financial and operational components of the business model as they affect the immediate survival of airport concessions through 2022, and their long-term viability—2023 and beyond. We address four key areas of the current business model: 

1. Minimum Annual Guarantee (MAG)
   
2. Capital Investment
   
3. Labor Attraction and Cost
   
4. Operational Flexibility 
   

This paper takes an in-depth look at each of the above elements of the business and operations model, and discusses the current and future needs of operators for survival, revival, and long-term success. ARRA recognizes every airport is different and passenger volume, configuration, governance, financial structure, airline and bond agreements, and concessions program characteristics may impact decisions regarding the future business model as it is applied in any one airport. Therefore, we include several options for adjusting key business terms. This is not intended to be a ‘one-size-fits-all’ nor do we believe it can solve for everything. However, the options and alternative approaches presented here will go a long way toward bringing airports and concessionaires into closer alignment commercially.

We hope these recommendations will provide a basis for the industry to collectively engage in a rigorous discussion of airport concessions to enhance the survival of an industry so critical to providing essential services and a positive guest experience to the traveling public. 

Fact #1
The Current MAG Model is Unsustainable.
The model creates extraordinary, unnecessary risk for operators and does not achieve intended goals

MAGs have been a fixture in the aviation retail and restaurant industry for decades and were introduced to achieve several purposes. However, their lack of flexibility under the current MAG model subjects concession businesses to extraordinary, disproportionate risk, despite no control over a key factor of their revenue stream—the number of potential customers. In particular, MAGs have historically contemplated only a small fluctuation in passenger volume over the course of a year. Dramatic, immediate, and/or prolonged loss of passengers was never contemplated nor foreseen; thus, no plan exists to address such a crisis.

ARRA recognizes airports also have little control over the number of passengers and, consequently, are subject to similar risk. However, in many instances, airports also enjoy a ‘backstop’ concessionaires do not: airline funding guarantees. Moreover, in the political arena, both airports and airlines enjoy a ‘too big to fail’ status that affords each an effective government guarantee.

The predominant current MAG structure is thought by airports to mainly accomplish the following goals:

MAG Goal 1: Maximize sales/captures rates

INTENT: The MAG holds concessionaires accountable for maximizing sales and capture rate.

FACT: In truth, all concessionaires—multi-national companies, medium-sized national and regional companies, and small local companies alike—are driven internally by and strictly accountable for financial performance in a highly competitive marketplace. Their creditors and investors are the source of accountability, not their MAG obligation. This creates a natural incentive to generate as much business as possible to recover and earn a fair, market-based return on their invested capital.

MAG GOAL 2: Compare competitive proposals

INTENT: MAG serves as a single, objective metric to compare competitive offers during a Request for Proposal process.

FACT: A MAG proposal frames out a single moment in time financially but depends on a number of proposal assumptions. Unanticipated market fluctuations, changes in nearby stores and restaurants, shifts in traffic due to airline schedule changes and gate reassignments, or fluctuations in the number and mix of passengers can all invalidate assumptions and make a proposed MAG untenable. More important, MAG as an evaluation metric fails to predict quality of products, service, or creativity, which, to most airports, should be the primary focus of any evaluation process. Instead, use of MAG creates a disincentive for high-quality products, services, and store finishes since these costly elements tend to reduce MAG and render a proposal less likely to be successful. To improve their chances of a winning proposal, concessionaires may cut costs and increase MAG (increasing its own risk), but in the process, effectively defeat program goals for many airport sponsors. 

MAG GOAL 3: Support airport bond financing

INTENT: Concessions MAG payments give an airport a guaranteed revenue stream to support bond financing.

FACT: Some have asserted restaurant and retail concession MAGs are a critical component in the process of securing airport revenue bonds. The reality is that revenue from in-terminal restaurant and retail concessionaires, and MAGs in particular, are not a ‘make it or break it’ financial component within the overall funding scheme of an airport. Revenues from restaurant and retail concessions at U.S. airports are less than 8% of total airport revenue, according to Federal Aviation Administration (FAA) data. The simple fact is airports do not rely on MAGs from in-terminal restaurant and retail operations to secure the airport’s financial performance. At best, they are of lesser concern to rating agencies versus other revenue sources with much greater weight in the airport financial structure. In fact without adequate traffic, reliance on MAGs can cause outright business failure and weaken an airport’s financial position due to prolonged revenue loss of a dark space, since procurement processes typically do not allow for an immediate re-leasing of space. Despite the above deficiencies of the MAG model, MAGs had not presented a significant concern during periods of robust and extended economic growth. Stores and restaurants generally outperformed the minimum during these periods, and contracts were paid in percentage rent. But, given the unprecedented COVID-19 enplanement decline, severe sales losses, and uncertainty regarding returning passenger traffic, the current MAG model has emerged as unworkable now and unsustainable over time. Airports across North America have recognized this and almost all MAGs were waived in 2020 and part of 2021.

Variable Rent Needed

During periods of volatility, concessionaires cannot pay rent disproportionate to passenger volume. ARRA proposes adjustments to the MAG model which address these deficiencies, protects against dramatic fluctuations in traffic, and ensures concessions operators can nimbly respond to market changes. Our recommendations would allow for time sensitive and efficient adjustments which move away from the fixed rent approach of the past to a variable rent structure and more equitable distribution of risk. Variable rent would return the MAG model to one that connects revenue to the airport to actual enplaned passengers at any point in time. With flexibility to respond to market changes, this would reduce revenue disruption to our airport partners.

The recommendations below include immediate relief to ensure the survival of concessions businesses through the pandemic, and long-term alternatives to better align the commercial relationship between concessionaires and airports. 

Recommendations for Short-term Survival

• Continue MAG waivers until zone/terminal enplanements reach at least 85% of 2019 levels.
  
• Apply CRRSAA and ARPA federal relief funds to enhance and extend MAG waivers.
  
• Suspend or reduce Common Area Maintenance (CAM), marketing, utility, and other incidental expenses proportionate to the decrease enplanements.
  
• Include new variable MAG model in all future RFPs.

Recommendations for Long-term Prosperity

• Variable MAG that adjusts with terminal (zone where applicable) enplanement levels vs. prior year or base year. No MAG floors.
  
• Suspend MAG once zone enplanements decline by 20% for two consecutive months.
  
• Include new variable MAG model in all future RFPs.

Fact #2
Capital Investment Model Needs to be Restructured.
A fair return on investment (ROI) is unachievable given escalating construction costs which have severely impacted prime and ACDBE operators.

Airport restaurant and retail operators annually build and refurbish thousands of restaurants and retail stores across the United States and Canada to create attractive and welcoming environments for the travelling public. In recent years, the demand for facilities with high-end finishes and visually dynamic design has become the norm, making new facilities significantly more capital intensive than might be strictly necessary to serve meals and sell merchandise. However, insomuch as higher quality stores and restaurants enhance the overall travel experience, they are an important component of modern concession programs. But they are expensive. While street-side restaurant and store construction costs vary regionally and range between $100 to $400 per square foot, based upon the project scope, an overall average for airport restaurants ranges between $1,000 and $1,400 per square foot and for retail stores between $400 and $800 per square foot.

Moreover, over the past decade, construction costs have been rising at an alarming rate. The Turner Building Cost Index— which measures costs of non-residential building construction—increased 46% from 2001 to the first quarter of 2021. This has substantially outpaced consumer price inflation—a proxy for concessions pricing—which, during the same period increased only 19%. In fact, the second and third quarters of 2020, a recessionary period at the beginning of the pandemic, were the only times the Turner Building Cost Index fell since 2010. But the respite from steady cost increases was short-lived: the first quarter of 2021 saw construction costs once again inch up as raw material and labor costs started to increase. We anticipate construction costs will steadily increase over time with the risk exacerbated by escalating inflation.

While the anticipated return on investment should normally alleviate any concerns regarding the initial capital costs, a number of factors often make the investment far from a sure bet:

• The scope of the project frequently changes dramatically from the commitments made in the initial RFP which typically increases costs. A common element of scope creep is a base building that is not turned over as anticipated causing concessionaires to absorb an alarming amount of additional base-building costs. These costs dramatically increase the amount of investment and negatively impact the profits and ROI of the business. 
  
• Term lengths have been stagnant while capex costs have escalated for years resulting in very high increases in depreciation expense and debt service relative to a slower pace of growth in sales.

Construction costs had reached a fever pitch prior to the COVID-19 crisis, 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 prepandemic debt service.

In addition, the vast majority of ACDBEs are joint venture partners with prime operators. Under the joint venture structure, they are not able to fully participate in federal government relief programs such as the Payroll Protection Program and Main Street Lending, and their eligibility for the Restaurant Revitalization Fund remains unclear. As noted in ARRA’s Facing Facts II paper, ACDBEs face daunting financial challenges, and according to the FAA, “small and disadvantaged firms are particularly vulnerable during these uncertain times.”4

ARRA recommends the industry adjust its approach to capital investment to ensure concessionaires can successfully fund, build, and operate businesses at the levels of quality airports and passengers have come to expect. These recommendations would stabilize the significant and untenable risk airport restaurants and retailers are expected to absorb, while also strengthening the ACDBEs ability to enter the market, survive and grow.

2020 has been an incredibly difficult year for our industry, it has also been a year which brought airport restaurant and retail operators together. Only one year after ARRA’s founding, ARRA Members can proudly say they speak with one voice on topics which impact our businesses.

The hard work of the ARRA Board of Directors and Members has been nothing short of inspiring as we came together to ensure our members were in the best possible position to survive the crisis. The following report is meant to review the accomplishments of ARRA during 2020, and highlight our key areas of focus for the coming year.

Let’s hope for bluer skies in 2021 as well as continued collaboration and partnership.

Most sincerely,
Pat Murray, Chairman
Rob Wigington, Executive Director

- Clark Sharpe, President
Shellis Management Services
ARRA Survival & Revival Forum
September 9, 2020

- Ricky Smith, Executive Director
Baltimore/Washington International Airport
April 22, 2020

Emerged as the Voice of Airport Restaurateurs & Retailers

Represented airport concessions industry with local, national and international media and industry publications and webinars

• Developed collaborative relationships with airport industry organizations including, Airports Council International-North America (ACI-NA) and World (ACI), American Association of Airport Executives (AAAE) and Airport Minority Advisory Council (AMAC) to address COVID-19 impacts and common interests
• Established working relationships with Federal Aviation Administration (FAA), Office of Civil Rights, U.S. Department of Transportation (DOT), Transportation Security Administration (TSA), and Department of Homeland Security (DHS) officials, on issues affecting ARRA Members, such as concessions relief and assistance, FAA and TSA policies, passenger security screening data and airport badging of concessions employees and furloughed employees

Survival and Revival Forums

• Created weekly COVID-19 Survival and Revival Call-In Forum for the concessionaires and aviation industry partners
• Calls emerged as vital forums for engaging airlines, airports, concessionaires and aviation industry
• 33 sessions since March
• Weekly audience of 700-800 listeners
• Speaker highlights: FAA Associate Administrator for Airports Kirk Shaffer, ACI World Director General Angela Gittens (ret.), Founder/Chairman Moodie Davitt Report Martin Moodie, Former Secretary of Transportation James Burnley, IV as well as wide range of airport directors, airline executives, restaurant and retail leaders, and aviation and concessions industry experts

Facing Facts Reports

• Issued three reports:
  • Financial Impact of COVID-19 on Airport Restaurant and Retail Concessionaires
  • Facing Facts 1: The Survival of Airport Dining and Shopping
  • Facing Facts 2: The Survival and Revival of Airport Dining and Shopping
• The reports focused on the devastating business impact of the pandemic, the dramatic operational realities facing ARRA members, needed actions from airports and governments and a call to shift the concessions paradigm going forward to employ a new business model which more appropriately addresses the economic realities our businesses face
• Distributed widely to airport directors, senior airport staff, government officials and greater aviation industry

Advocacy for Federal Airport and Concessions Relief

• Developed federal government affairs program focused on inclusion of concessionaires in federal airport COVID relief legislation 
• Achieved $200 million dedicated to minimum annual guarantee (MAG) and rent relief for concessionaires as part of $2 billion emergency funding for airports in final COVID relief bill enacted by Congress and the Administration in December. 
• Built coalition, developed joint positions and lobbying strategy with ACI-NA, AAAE and AMAC, and the International Association of Airport Duty Free Stores, American Car Rental Association and National Parking Association 
• Achieved inclusion in House-passed and Senate legislation ARRA and airport stakeholder coalition joint proposal for $13.5 billion, including approximately $3.5 billion dedicated to full abatement of MAG and rents 
• Worked with Congress and Administration, including Treasury Department and Small Business Administration (SBA), to expand eligibility, terms and concessionaires’ participation in federal assistance through the Payroll Protection Program (PPP), Main Street Lending Program (MSLP) and other SBA and Treasury grants and lending initiatives 
• Worked with Senate Commerce, Science & Transportation Committee Chairman and key committee and congressional leaders to include airport restaurateurs and retailers in Restaurant Stabilization Fund legislation 
• Provided testimony to numerous congressional committees on the need for federal relief and importance of the Airport Concessions Disadvantaged Business Enterprise (ACDBE) and DBE programs

Protecting Concessionaires’ Business Interests

• Built advocacy/communications outreach urging airports to provide full abatement of minimum annual guarantees (MAGs), rents and fees during financial crisis 
• Joined airline/airport associations urging state/local officials to recognize unique airport operating environment before imposing dining/shopping restrictions affecting concessions  Advocated moratorium on RFPs and RFQs 
• Issued ‘call to action’ urging ARRA members to utilize health/ safety procedures based on National Restaurant Association and CDC guidelines to protect travelers and employees

Looking to the Year Ahead……

As we enter 2021 we confront a global pandemic which continues to rage in the U.S., infecting millions and overwhelming the aviation ecosystem and all its stakeholders. Even with the arrival of long-awaited vaccines, it will be some time before passenger confidence in air travel is restored. Meanwhile, losses continue to mount for airport restaurant and retail operators, many of whom face solvency issues as they look to 2021. Against this backdrop, ARRA is prepared to continue its work addressing COVID-19 impacts and recovery, while taking on the financial, operational and policy issues concerning concessionaires pre- and post-pandemic.

In 2021, ARRA’s priorities will include:

• Strengthen and expand ARRA’s voice on behalf of restaurant and retail operators 
• Build on ARRA’s partnership with airports and the aviation industry 
• Collaborate to rebuild traveler confidence and passenger traffic in order to achieve a full recovery 
• Address issues of common concern to airports and concessionaires: Protecting traveler and employee safety, reopening and recovery, overcapacity of concession space, financial challenges, access to capital, revenue needs and generation, restoring and elevating the customer experience, future business models and innovative technology solutions 
• Promote business growth and the financial viability of concessions operators in the current and post-pandemic environment 
• Support ACDBE retail and restaurant operators and protect and enhance the federal ACDBE program 
• Support airport funding needs and federal airport and infrastructure investment

​Amplify your voice!
JOIN ARRA!

The founders of ARRA formed the Association with the knowledge that while our members participate in other trade groups, none has the sole purpose to represent the interests of airport restaurateurs and retailers. The ARRA founders knew we needed a forum and a collective voice to advocate our specific shared interests.

​2020 was an unprecedented year in aviation. The pandemic and subsequent business catastrophe put an exclamation point on the need for restaurateurs and retailers to join forces as an association. Our $10 billion industry is a key partner for airports, airlines, and others in aviation. We enhance the air traveler experience by delivering a wide array of outstanding food, beverage and retail products and services. We contribute billions of dollars for airport operations and growth. We enrich local economies, employing more than 125,000 local employees who raise families and patronize businesses in their communities. We have earned our place at the table, our voice in the conversation.

As you have seen in the previous pages, ARRA has accomplished much in its first year. Your Association has worked effectively with aviation and government leaders and decision makers on a variety of issues affecting our members and the industry. ARRA has become the critical voice and forum for airport restaurant and retail operators during this time of crisis. ARRA will continue to be your voice and forum during the many challenges that lie ahead on the flight path to our collective recovery and prosperity.

ARRA’s membership has grown quickly in its first year. But there is strength in numbers and our industry – your industry – needs your active voice and commitment now more than ever.

Join us by visiting www.arra-airports.com

Unless Congress acts quickly, many of these companies may not have a future. Without immediate federal aid, restaurants around the country, and those that operate within airports in particular, will be unable to sustain their operations, retain and rehire employees, or meet continuing expenses and debt, to stay in business. Airport concessionaires are uniquely disadvantaged by the environment in which they operate. Since they operate within airport terminals, they are unable to serve the general public or institute ‘drive-by’ or pick-up and delivery services that have helped other restaurants weather the pandemic. Further, airports are very challenging environments in which to start up and operate a business. These companies face large upfront capital expenditures, high construction costs, limited access to capital, high rents and minimum annual guarantees that are required to operate in airport spaces, and higher operating costs due to the federally regulated safety and security requirements at airports. They are totally dependent on the historic volumes of passengers to sustain their businesses. At present, and for the foreseeable future, they cannot generate enough business no matter what state and local restrictions are lifted to allow more dining in local restaurant and business establishments. They remain suppressed by the lack of air passengers. Until air passenger traffic returns to near or at pre-pandemic levels, airport concessionaires will not be able to survive or recover, nor aid airports and local communities in their recovery. Local jobs, tax revenues and economic activity that airports and their concessionaires deliver are at stake. 

In talking to our members around the country and in every airport, the story is the same. Business has effectively come to a standstill, and won't return until people feel comfortable and safe to travel, and begin flying in much greater numbers. Revenues for airport restaurants/concessionaires are completely correlated with air travel levels. The harsh reality is that pre-pandemic travel levels are still a long way away, possibly years.

For airports like the Charles M. Schulz–Sonoma County Airport in Santa Rosa, CA, the Sacramento International Airport in Sacramento, CA, Eppley Airfield in Omaha, NE, and the Central Nebraska Regional Airport in Grand Island, NE, today there are countless restaurants and concessionaires. Absent aid, if trends follow national estimates, it is possible that over 60% of those locally owned, small businesses, will close permanently. You have the ability to protect these businesses until the aviation market, and the specific markets airport concessionaires serve inside airport terminals, can stabilize. It is an imperative for our members, and your constituents.

Airline travel has been devastated by the COVID-19 pandemic, and the restaurant/retail airport industry has been particularly impacted. We have experienced, and continue to experience, mounting losses in jobs and revenues. Beyond air carriers and airport operators, our members--airport concessionaires--are the third major partner in the aviation ecosystem that serve air travelers. Airport concessionaires completely transform empty airport terminals into vibrant shopping and dining destinations that, prior to the pandemic, generated $10B in sales annually and employed more than 125,000 workers in steady jobs that provide good pay and benefits and opportunities for advancement. Moreover, airport concessionaires contribute $2.5B in non-aeronautical revenue (approximately 10% of all airport operating revenues) to airports under contracts and agreements that deliver services that travelers and airports need, notably dining services, that fuel airport operations, development, bond financing, and growth.

Our first priority right now is to survive. For our members to survive in the short-term, we need at minimum:

• $3.5B in relief for airport concessionaires; and
• $10B for airports in the next COVID-19 package. 

It is vital that these funds be added to any final negotiated legislation on COVID-19 relief. ARRA, together with the Airport Minority Advisory Council (AMAC), the International Association of Airport Duty Free Stores (IAADFS), the American Car Rental Association (ACRA) and the National Parking Association (NPA), along with the airport trade associations—the Airports Council International-North America (ACI-NA) and the American Association of Airport Executives (AAAE)—are united in requesting at least $13.5B in grants to airports, with $3.5B dedicated to provide Minimum Annual Guarantee (MAG) and rent abatement to concessionaires at the nation’s airports.

While many of our members operate much like a traditional restaurant, their operating environment is very, very different. We cannot do takeout. We cannot have spaced out seated. Our market is specific and unique. It is sort of like a field of dreams – build it and they will come – but for us, we built it and financed it, and right now, the aviation market says they will not come. That leaves us with significant investments, and virtually no customers. We cannot be creative like our outside restaurateur colleagues. Make no mistake, our outside colleagues are hurting badly too, so this is not us versus them, but we are different in the markets we serve. It is an important distinction, and leaves us both vulnerable for 3 different reasons. Operating within the heavily restricted airport environment, airport concessionaires are highly dependent on passenger traffic for their customers and sales. After a period of record passenger growth, within only a few months the pandemic cost airports and their concessionaires about 95% of their passengers and business. Concessionaires were forced to furlough 80%-95% of their employees, close the vast majority of their stores, and drastically reduce operations for those few that were able to continue operating.

​Since the start of this pandemic, two out of three restaurant employees have lost their jobs. Restaurants, on average, laid off 91% of their hourly workforce and 70% of salaried employees due to COVID-19 related closures; 50M jobs were at risk worldwide in the travel and tourism sector, which accounts for 10% of the global gross domestic product (GDP). The restaurant industry expects to lose up to $240B by the end of 2020. 61% of operators say existing federal relief won’t prevent more restaurant layoffs, and 56% of restaurants have at least $50,000 in new debt as a result of COVID-19. Lastly, according to the James Beard Foundation, nearly 60% of restaurants made $1.5M or less in revenue the last fiscal year, needing $100,000 over the third quarter to remain viable for a reopening. These numbers are indicative of the fact that this industry has been among the hardest hit. 

The impact on airport concessionaires is even worse given the depressed air travel industry and their inability to adapt to alternative means of generating business and sales during the pandemic, such as drive-thru, delivery and carry-out.

Most airline, Federal Aviation Administration (FAA), and industry projections show that it will be at least 18-36 months, and possibly five years, before the aviation industry returns to normal. Without immediate federal relief, many airport concessionaires and other restaurants around the country will not survive. Since these companies operate in a highly restricted and federally regulated airport environment, they will live or die based on air travel numbers, which have been and will continue to be significantly impacted by government policies, travel restrictions, airline schedules, public confidence in the health and safety of air travel, and other factors over which they have no control. Whether the Congress appropriates targeted relief funding to airport concessionaires will be the determining factor in their survival.

In our reports (attached for the hearing record) Facing Facts: The Survival and Revival of Shopping and Retail Concessions at Airports, ARRA demonstrates that concessionaires cannot survive at current traffic levels, and have little chance until passenger traffic returns to near pre-pandemic levels. Airport restaurant and retail concessionaires will lose an estimated $3.4B between now and the end of 2021. In the next 18 months, they will lose 3 years of profit.

The CARES Act (Phase III) provided passenger air carriers with $50B and air cargo carriers with $8B. Airports received $10B and air carrier associated contractors received $3B in immediate financial aid and for future recovery. Airport concessionaires received $0.

The $3.5B and the additional $10B airports and concessionaires are requesting are vital to the airport community, and we urge you to ensure that it is included in any legislation aiding the industry. These funds will help sustain airports and speed their recovery by helping them offset the drastic loss of operating revenue, meet debt service obligations, and provide MAG and rent abatement to airport concessions operators. Like the airlines and airports, concessionaires also need additional financial assistance for continuing operating expenses, debt payments, and reopening and rehiring employees to 4 be part of the airport and aviation industry’s recovery. ARRA is supportive of programs such as the Paycheck Protection Program (PPP) and Main Street Lending Program (MSLP), however these programs are not designed for concessions businesses operating within airports and do not meet their needs given their unique circumstances and operating characteristics and the slow recovery of the aviation system. These companies cannot retain or rehire employees when the aviation industry and air travelers are operating at 50-70% below normal levels. We support improvements to programs that are designed to enable airport concessionaires to benefit, and other legislative and administrative initiatives to give them better access to federal grants and no- or low-interest loan programs, such as Small Business Administration (SBA) lending programs, and other forms of financial assistance. There are also a host of tax incentives that would further encourage travel and spending, and we want to further discuss those benefits with you as the Subcommittee continues to look at this critical issue.

The requested $13.5B for airport and airport concessions relief—necessary to help airports and concessionaires survive the months ahead—in combination with additional grants and loan programs targeted for airport concessionaires, will help ensure the continued vitality of restaurants, food and beverage and retail operators and other concessions businesses that have been disproportionately impacted by the pandemic.

We are submitting this statement to urge Congress to pass financial relief and assistance specifically for airport restaurateurs and retailers given the unprecedented and long-term detrimental business impact caused by the pandemic. If airport concessionaires do not receive this critical relief, many will cease to exist.

For these reasons, ARRA urges Congress to SAVE OUR INDUSTRY and include financial relief and direct assistance to airport concessionaires as it works to mitigate the severe economic and public health impacts of this unprecedented pandemic.

We are committed to working with the Committee on measures that will further aid our industry and the nation’s recovery.

​Thank you.

​The DBE program is essential to remedy discrimination and its effects on women- and minority-owned businesses while ensuring all businesses can compete for Federal transportation dollars on a level playing field.

DOT’s DBE program, since its inception, has been devoted to combatting discrimination, and the continuing effects of past discrimination, in federally assisted highway, transit and airport programs and projects. ARRA fully supports the core goals and objectives of the DBE program, which are to level the playing field by providing small businesses, like the airport concessionaires within our membership, that are owned and controlled by socially and economically disadvantaged individuals, with fair and 2 significant opportunities to compete for federally funded transportation contracts and compete in contracting and business opportunities,

The ACDBE program has been instrumental in providing opportunities for small minority and women owned disadvantaged companies to participate in the aviation industry and the airport concessions business. Airports are very challenging environments in which to start up and operate a business. These companies face large upfront capital expenditures, high construction costs, limited access to capital, high rents and minimum annual guarantees (MAGs} that are required to operate in airport spaces, and higher operating costs due to the federally regulated safety and security requirements at airports.

Even with the DBE/ACDBE programs the barriers to entry are many and substantial. The challenge of survival has never been greater than it is now during the COVID-19 pandemic. While ACDBEs have grown under the Department of Transportation and Federal Aviation Administration’s guidance and oversight, and opportunities expanded during the period of continuous growth of air travel, we now face a real threat to the ACDBE program and many small companies and individual owners/operators.

Operating within the heavily restricted airport environment, airport concessionaires are highly dependent on passenger traffic for their customers and sales. After a period of record passenger growth, within only a few months the pandemic cost airports and their concessionaires about 95% of their passengers and business. Concessionaires were forced to furlough 80-95% of their employees, close the vast majority of their stores and drastically reduce operations for those few that were able to continue operating. Unlike other restaurants and retail operators, airport concessionaires cannot conduct business with the general public outside the airport environment, and thus have not been able to sustain any business through drive-thru, delivery or carry-out sales. They are totally captive to the number of air travelers at the airport. 

Unless Congress acts quickly to provide immediate aid, many of the DBE/ACDBE companies, the program itself and the important benefits these programs provide our nation’s airports, highway and public infrastructure will be lost.

In talking to our members around the country and in every airport, the story is the same. Business has effectively come to a standstill and passengers won't return until people feel comfortable and safe traveling again.

Airline travel has been devastated by the COVID-19 pandemic, and the restaurant and retail airport industry has been particularly impacted. We have experienced, and continue to experience, mounting losses in jobs and revenues. Beyond air carriers and airport operators, our members, airport concessionaires, are the third major partner in the aviation ecosystem that serve air travelers. Airport concessionaires completely transform empty airport terminals into vibrant shopping and dining destinations that enhance the travel experience, generate $10B in sales annually and employ more than 125,000 workers in steady jobs that provide good pay and benefits and opportunities for advancement. Moreover, airport concessionaires contribute $2.5B in non-aeronautical revenue to airports (approximately 10% of all airport operating revenues) under contracts and agreements that deliver services that travelers and airports need and fuel airport operations, development, bond financing, and growth. 

For our members to survive, and continue to make the DOT DBE/ACDBE program vibrant and effective, we need at minimum: 

• $3.5B in relief for airport concessionaires; and
  
• $10B for airports in the next COVID-19 package. 
  

It is vital that these funds be added to any final negotiated legislation on COVID-19 relief. ARRA, together with the Airport Minority Advisory Council (AMAC), the International Association of Airport Duty Free Stores (IAADFS), the American Car Rental Association (ACRA) and the National Parking Association (NPA), along with the airport trade associations—the Airports Council International-North America (ACI-NA) and the American Association of Airport Executives (AAAE)—are united in requesting at least $13.5B in grants to airports, with $3.5B dedicated to support Minimum Annual Guarantee (MAG) and rent abatement for airport concessionaires at airports across the country.

In our reports (attached for the hearing record) Facing Facts: The Survival and Revival of Shopping and Retail Concessions at Airports, ARRA demonstrates that concessionaires cannot survive at current traffic levels and have little chance until passenger traffic returns to near pre-pandemic levels. Airport restaurant and retail concessionaires will lose an estimated $3.4B between now and the end of 2021. In the next 18 months, they will lose 3 years of profit.

Most airline, FAA and industry projections show that it will be at least 18-36 months, and possibly five years, before the aviation industry returns to normal. Without immediate federal relief, many DBE/ACDBEs and other concessionaires will not survive. Since these companies operate in a highly restricted and federally regulated airport environment, they will live or die based on government policies, travel restrictions, airline schedules, public confidence in the health safety of air travel and other factors over which they have no control—including whether the Congress appropriates targeted relief funding.

Airport concessionaires include more than 3,500 small minority and women-owned businesses who operate under the Congressionally authorized ACDBE program, which is administered by DOT/FAA. These businesses’ survival is threatened by the pandemic’s disproportionate negative impact on them. Our fear is that many airport concessionaires will fail to weather this storm without significant financial assistance from the federal government and relief from airport rents and MAG payments. Air travel demand must increase substantially beyond what it is now for airport concessionaires to generate sufficient revenue, meet airport rent obligations, pay debt service and rebound as the key component of the aviation system that they were prior to the pandemic.

The CARES Act (Phase III) provided passenger air carriers with $50B and air cargo carriers with $8B. Airports received $10B and air carrier associated contractors received $3B in immediate financial aid and for future recovery. Airport concessionaires received $0. 

The $3.5B and the additional $10B airports and concessionaires are requesting are vital to the airport community, and we urge you to ensure that it is included in any legislation aiding the industry. These funds will help sustain airports and speed their recovery by helping them offset the drastic loss of operating revenue, meet debt service obligations and provide MAG and rent abatement to airport concessionaires. The requested $3.5B for airport concessionaires MAG and rent abatement is the first step in assuring companies survive in the short term but like the airlines and airports, many ACDBEs and 4 airport restaurant and retail concessionaires will also need additional financial assistance for continuing operating expenses, debt payments, and reopening and rehiring employees to be part of the airport and aviation industry’s recovery. ARRA is supportive of programs such as the Payroll Protection Program (PPP) and Main Street Lending Program (MSLP), however these programs are not designed and do not meet the needs of airport concessionaires given their unique circumstances and operating characteristics. We support improvements to these programs that are designed to enable ACDBEs and concessionaires to benefit, and other legislative and administrative initiatives to give airport concessionaires, and ACDBEs in particular, better access to federal grants and no- or low-interest loan programs, such as SBA and MSLP lending programs and other forms of financial assistance.

The requested $13.5B for airport and airport concessions relief—necessary to help airports and concessionaires survive the months ahead--in combination with additional grants and loan programs targeted for airport concessionaires, will help ensure the continued vitality and survival of DOT’s ACDBE program. ACDBE firms and concessionaires at airports across the country desperately need the support of Congress in order to assure the survival and speedy recovery of our industry and the nation’s economy.

We are submitting this statement both to voice our strong support for the DBE and ACDBE programs and to urge Congress to pass financial relief and assistance specifically for airport restaurateurs and retailers and ACDBEs given the unprecedented and disastrous long-term business impact caused by the pandemic. We are also attaching for the record the statements and testimonials of individual ACDBE companies in strong support of the DBE/ACDBE program. If airport concessionaires do not receive this immediate critical relief, many will cease to exist and this critical program will disappear

For these reasons, ARRA urges Congress to SAVE OUR INDUSTRY and include financial relief and direct assistance to airport concessionaires as it works to mitigate the severe economic and public health impacts of this unprecedented pandemic. 

Thank you.

ABOUT ARRA

ARRA represents the companies who operate restaurant and retail stores and shops at airports across the U.S. More than 80% of ARRA Members are ACDBEs—small minority and women-owned businesses. ARRA’s mission is to work collaboratively with the airport community and the aviation industry on matters of policy decision-making, with a collective impact on restaurant and retail operators, and also to empower small, minority, women-owned, and disadvantaged businesses to participate in and contribute to the aviation industry.

Attachments:
Letters and testimonial statements from ACDBE companies
​ARRA Reports: Facing Facts 2: The Survival and Revival of Airport Shopping and Dining-July 2020 Facing Facts: The Survival of Airport Shopping and Dining-June 2020

As air travel is an essential service, airports and airlines have continued to operate throughout the pandemic, despite passenger counts that have dropped drastically. Airports have concession operations that provide food, beverage and seating for passengers, and airports and airlines operate lounges that serve both food and beverage. Both concessions and lounges have benefits for passengers beyond just food and beverage service, such as seating, Wi-Fi access, rest rooms and other services necessary during travel. Safety is our number one priority, and our industry strives to safely accommodate our passengers and employees through the airport and on our aircraft.

To that end airports and airlines have implemented extensive measures throughout the travel journey to help protect the traveling public during this global health crisis. The airline industry has developed a “Fly Healthy. Fly Smart.” campaign to amplify these efforts, which include face covering requirements, health acknowledgements and enhanced cleaning procedures. As part of this commitment, airports and airlines with lounges have moved to pre-packaged, self-serve food and beverage offerings to reduce touch points.

However, recent state directives ordering certain bars, clubs, lounges, and restaurants to close and/or eliminate indoor dining are being interpreted by some county health departments to include airport concessions and airline lounge service. Airlines, airports and concessionaires in some locations are being informed that while they can offer food, it cannot be consumed within the concession or lounge space and all seating must be removed from the restaurants and lounges. 

This leaves passengers with only one place to find seating to consume food and beverage – in the airport holding area. When airports and airlines designed their post-security spaces, they factored all seating, not just holding area seating, into the equation to ensure seating and space for all passengers. Eliminating entire areas of available seating forces more people into less space to find a seat, which runs counter to current CDC and state health department guidelines on physical distancing.

We believe airports and airlines should utilize all available space within the airport environment to enable safer travel and social distancing. We respectfully request that you clarify these state orders relative to indoor food service on airport property as soon as possible in order to enable airlines and airports to serve food that can be consumed on-site in restaurants and lounges, provided reasonable efforts are made to maximize physical distancing, cleaning and customer and employee safety.

In this challenging time, we need the flexibility to be able to use all our available space behind security to enhance distancing between passengers in the airport environment. Please let us know if you have any questions about this request. 

Sincerely,

Sean Williams
​Vice-President
​State and Local Government Affairs
​Airlines for America
swilliams@airlines.org

Matthew Cornelius
Executive Vice President
Airports Council International – North America
mcornelius@airportscouncil.org

Rob Wigington
Executive Director
Airport Restaurant & Retail Association
rob@arra-airports.com
​

As representatives of airports and a broad group of airport concessionaires, Airports Council International – North America (ACI-NA); the American Association of Airport Executives (AAAE); the Airport Restaurant and Retail Association (ARRA); the Airport Minority Advisory Council 2 | Page (AMAC); the American Car Rental Association (ACRA); the International Association of Airport Duty Free Shops (IAADFS); and the National Parking Association (NPA) fully support at a minimum the $10 billion in proposed assistance for airports under active discussion as part of the ongoing negotiations on the next phase of coronavirus relief. Collectively, we also ask that Congress provide an additional $3.5 billion in federal assistance to allow airports to provide “minimum annual guarantees” (MAGs) and rent relief for airport concessionaires. We are confident that this can be done in a way that ensures that airport concessionaires receive critical relief without unduly burdening airports. We have attached legislative language that we all agree would accomplish that goal.

Funding for airports and concessionaires is critical to the recovery of our aviation system and the broader economy. We urge the inclusion of critical assistance for both groups as part of the relief bill currently being assembled by Senate and House leaders.

Thank you for your consideration.

​​Sincerely,