US. The Board of Airport Commissioners at Los Angeles World Airports (LAWA) is set to vote on urgent concessionaire relief measures at their next Board meeting this coming Thursday, 16 April. [Clarification: Our earlier report suggested the relief decision had been taken]
“Taking no action would require all concessionaires to pay rents at MAG levels established during normal passenger activity and corresponding sales levels. The approximate 90% decline in passenger traffic makes these MAG payments unsustainable.”
The Board has been asked to approve a LAWA management proposal to move all concessionaires with contracts based on Minimum Annual Guarantee (MAG) fee payments to percentage rent-based agreements. The move would be effective from 1 April to 30 June. In a related move to aid partners, it is proposed that the percentage rent due can be paid in instalments from 1 July through to 1 December (see full details below).
The proposal to alter the contracts for the period (made on 9 April) comes amid a fall of over -90% in traffic and with 68% of concessions closed temporarily.
Three separate agreements cover retail and F&B (including URW, DFS Group, Areas, HMSHost, Hudson, XpresSpa and others); advertising (JCDecaux), and rental cars.
The management recommendation to the LAWA board stated: “This action is necessary to prevent the permanent shutdown of food & beverage, retail, rental car and service concessions, which are a vital part in the operations and financial sustainability of LAX.”
Considering other options available, management said: “Taking no action would require all concessionaires to pay rents at MAG levels established during normal passenger activity and corresponding sales levels. The approximate 90% decline in passenger traffic makes these MAG payments unsustainable.”
The impact of the switch to percentage rent will be a reduction in revenue to the airport of US$24-31 million in the fiscal year.
Background (taken verbatim from the management proposal to the board)
Contractually, concessionaires pay rent to LAWA in an amount equal to the greater of a percentage of gross sales and a MAG. Due to the highly competitive concession environment at LAX, the contractually established MAG are quite substantial. The only exception is the smaller off-airport rental car companies who pay a monthly license fee similar to a MAG.
Despite the high MAG amounts, the concessionaires at LAX have historically performed well because of high passenger volumes and generated sales at levels that pushed their rent payments into percentage rent, meaning that the concessionaires’ businesses were performing at levels that exceeded the ‘minimum thresholds’ and generating sustainable revenues and income.
The passenger declines due to the COVID-19 impact on travel have resulted in sales declines in direct relation to the approximately 90% decline in passenger traffic year over year, based on Transportation Security Administration (TSA) screenings reported for the last week of March 2020.
This decline in sales has forced all concessions at LAX to revisit their operating hours and take other cost cutting measures, including closing some locations and laying off staff. As of March 26, 2020, concessionaires have laid off or furloughed 1,390 staff out of the approximately 4,000 employed prior to the downturn in passenger traffic.
Rent is one of the largest operating expenses for concessionaires along with cost of goods sold and salaries and benefits. Due to the decline in passenger traffic, concession sales have fallen below the percentage rent threshold, and all concessionaires are now subject to MAG rent payments. At this time monthly guaranteed rent payments now greatly exceed monthly total sales.
Paying MAG rent in excess of their monthly earnings, in addition to paying required salary and benefits with depleted earnings is not sustainable for our concessionaire business partners. Without relief, it appears to be difficult for the concessionaires to resume normal operations after passenger traffic has resumed to historical levels.
LAWA has conducted multiple meetings and outreach sessions with the concessionaires to facilitate information sharing as COVID-19 impacted passenger traffic and operating procedures developed.
At these meetings, the concessionaires shared revised operating plans that focus on the safety of their employees and LAX guests in accordance with health department directives, and the emergency measures to alter operating hours they have been enacted in reaction to the passenger traffic declines from restrictions on travel to the U.S. from many international destinations.
As noted above, sales income has fallen to the point where the concessionaires have said that monthly rent obligations exceed monthly income. LAWA also has conducted outreach sessions with labor organizations representing the workers for these businesses. The recently-enacted federal relief law allocates funds to certain airports and airport stakeholders, provided they take particular steps, including keeping their workforces intact.
Although the legislation does not specifically provide relief to concessionaires, they and their employees will be important to the airport’s recovery. Consistent with that legislation, LAWA has developed the following program to provide assistance to our concession business partners.
Proposed In-Terminal Agreement Revisions
To provide assistance to concession business partners, LAWA proposes to amend the terms defined in each of the Concession Agreements… to only require payment of percentage rent instead of MAG. This action is necessary to prevent the permanent shutdown of Food and Beverage, Retail, Rental Car and Service concessions, which are a vital part in the operations and financial sustainability of LAX. Based on differences with the concession operations, LAWA developed the following three temporary relief programs:
In-Terminal Food and Beverage, Retail, and Services Concessions For the in-terminal food and beverage, retail and services concession agreements:
- The Duration Period shall be the period from April 1, 2020 to June 30, 2020;
- Revise the terms of each of these Concession Agreements to only require payment of the specific percentage rents defined in each Agreement instead of MAG;
- Extend the payment period by which these Concessionaires are obligated to pay percent rents accrued during the Duration Period to allow accrued amounts to be remitted in six equal monthly installments from July 1, 2020 through December 1, 2020;
- Extend the time period by which these Concessionaires are obligated to pay in-terminal concession storage rent accrued during the Duration Period to allow accrued amounts to be remitted in six equal monthly installments from July 1, 2020 through December 1, 2020;
- LAWA will not impose any late fees or charge any interest on rent amounts paid in full within this six-month payment period from July 1, 2020 to December 1, 2020.
To qualify
For In-Terminal Concessionaires to qualify for this temporary relief program each concessionaires will be required to:
- a) Comply with all applicable City Ordinances;
- b) Commit to re-employ laid off staff in direct proportion to increases in sales during the recovery period so that on a quarterly basis, employment numbers increase in proportion to sales increases, using December 2019 payroll levels and sales as the basis of full employment/sales;
- c) Maintain health insurance coverage for three months at the same rate and level as prior to the layoffs or reduction in hours for all employees who qualified for health insurance coverage during February 2020. This requirement applies to all employees who have been laid off, furloughed, or experienced reduced hours since March 1, 2020 or may be laid off or furloughed as a result of COVID 19;
- d) Pass along to all sub-concessionaires the same benefits received by the prime and/or Terminal Commercial Manager on a rateable basis;
- e) Have all accounts receivable status current;
- f) Have fully funded Faithful Performance Guarantees (FPG) and agree that LAWA can draw down on the FPG if concessionaire misses any payments; and,
- g) Demonstrate that the concessionaire is not entitled to any business interruption insurance benefits that are redundant to this program
Advertising and Sponsorship Concession – Terminal Media Operator
For the advertising/sponsorship concessionaire agreement… The Duration Period shall be the 90-day period from April 1, 2020 to June 30, 2020;
and, Revise the terms of the Terminal Media Operator agreement to require payment of the specific percentage fees defined in the Agreement instead of MAG.
For the Terminal Media Operator to qualify for this temporary relief program they will be required to:
- a) Comply with all applicable City Ordinances;
- b) Commit to re-employ laid off staff in direct proportion to increases in sales during the recovery period so that on a quarterly basis, employment numbers increase in proportion to sales increases, using December 2019 payroll levels and sales as the basis of full employment/sales;
- c) Have all accounts receivable status current;
- d) Have fully funded Faithful Performance Guarantees (FPG) and agree that LAWA can draw down on the FPG if concessionaire misses any payments; and,
- e) Demonstrate that the concessionaire is not entitled to any business interruption insurance benefits that are redundant to this program
