Facing Facts: The Survival of Airport Shopping and Dining

Fact #1
Air Traffic Will Not Recover This Year

Enplanement projections on which any short-term relief plan for airport concessions is based, should be cautious and conservative given the current sharp level of traffic decline and complete uncertainty surrounding the duration of the COVID19 pandemic. Since the declaration of the public health emergency four months ago, airline passenger traffic fell more than 95% from 2019 (pre-pandemic) levels. During May, there was a slight recovery. According to Airlines for America (A4A), the trade association of U.S. airlines, for the week ending May 24: 

• Air travel (onboard passengers) fell 89%. 
  
• Flights are down system-wide 74%. 
  
• Domestic flights are down 68%. 
  
• International flights are down 95%, and 2020 are expected to be half of flights in 2019 
  
• Airlines have idled over 3,000 planes -- 50% of their fleets 

As noted by American Airlines CEO Doug Parker, “We are all going to be in it for the long haul, but that doesn’t mean we will all be flying around the same number of airplanes. We are all building our airlines in a way that doesn’t anticipate having 2019 revenues in 2021.”

While some airports have started to see small upticks in traffic, they have been sporadic and inconsequential relative to airlines, airports, and airport business partners. By every indication, recovery will be slow, an outlook shared by airlines and industry analysts alike. Traffic projections to the contrary should be justifiably viewed with skepticism, if not disregarded as wholly and unreasonably optimistic. Passenger volumes took 3 years to recover from 9/11 and 7+ years following the 2007-08 global financial crisis. In this environment, where the survival of thousands of concessions businesses is at stake, it is imprudent to use a “best case” scenario as the basis for structuring rent relief proposals.

Fact #2
Airport Restaurant and Retail Operators Can’t Pay Minimum Annual Guarantee (MAG) During Recovery and Survive

There can be no recovery without abatement of fixed rent or Minimum Annual Guarantee (MAG) through December 2020 at a minimum, and discounted percentage rent until traffic returns to at least 80% of 2019 baseline. 

• In the April 28, 2020, white paper, Financial Impact of COVID‐19 on Airport Concessions, ARRA Executive Director Rob Wigington characterized the impact of not having passengers and corresponding sales for operators as devastating. This is a fact. 
  
• 15%-20% of 2020 budgeted sales are dedicated to pay rent (Minimum Annual Guarantees, Percentage Rent, Storage Rent, Common Area Maintenance and other fees) and another 10-12% for debt service. With no sales or little sales, these expenses grow magnificently as a percentage of sales. Moreover, it’s important to shift the mindset from percentages to actual dollars. If an operator can manage all the other expenses in its P & L well (including cost of goods and products, employee wages, taxes and building expenses) they would still lose millions. The survival equation becomes one that has nothing to do with being profitable, but only how much cash a business has on hand, and how many months it can survive based on the payments drawn down on that sum. 
• Operators cannot afford to pay full rent until at least 80% of the traffic returns. Until then, rent will need to be financially feasible and phased in. It seems disingenuous and illogical for anyone to demand rent when they know an operator is losing money and working hard to remain solvent. This is like “getting blood from a stone” as an operator paying this rent would only serve to shorten the time until they are forced out of business. 
  

Fact #3
Deferral Is Not Relief

Deferring MAG is not a viable solution. Simply stated, lost sales in April, May, June, and later are gone forever and will never be available to support the rent being deferred. If rent is deferred until late 2020, 2021, or even a later date, rent will actually double during the period operators are expected to repay deferrals. But, sales will not double and, once again, MAG will force businesses into a negative cash position.

• Monthly cash flow during a normal period is inadequate to pay deferred rent. As shown in the representative P&Ls above, in the budgeted normal month, EBITDA – the only cash available to pay deferred rent – is less than rent, indicating there is not enough cash flow to repay deferrals, even during normal times.
  
• For demonstration purposes, a business that did $10M in aggregate sales, would be paying $3.5M in rent on $7.5M in sales. This would topple any operator’s Profit and Loss statement. There would be no dollars in that equation to pay for raw goods, products or employees. This would only serve to put the operators out of business quickly. If a deferral is intended to “buy time” to allow an airport time to find a permanent solution, that would be logical. However, if truly contemplated to be paid in the future, it is not feasible under any scenario, or sustainable by restaurant and retail operators. 

Fact #4
The COVID-19 Financial Crisis is Devastating All Operators – Large and Small

Martin Moodie, Founder of the Moodie Davitt Report, was recently asked about the payment of MAGs in global concession contracts during the pandemic. He noted that there are airports who erroneously believe that operators, particularly ones operating globally, “have the money to pay MAG.” Moodie went on to say that the rent and MAG challenge exists in every market worldwide. The perception is that a large company can withstand poor performance in one market by making up for it in others. However, in this case of global impact, the scale of the larger companies works against them as every market in which they operate has been affected. Each market around the world is suffering much the same way, and the problem becomes multiplied by the size and scale of the companies.

• Losses in passengers and corresponding sales worldwide have put large companies in danger of insolvency as every business they operate is at risk. 
  
• In early March each of the public companies in the airport concessions industry raised cash to remain solvent. That cash is being used for survival. With no sales, these businesses are losing money each day. Just like all companies in this business, large and small, they are operating at a barebones level until business returns. 
  
• These businesses now face the challenge of repaying debt in a market that won’t recover for years. 

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