by Paul Brown, President, Paul Brown Consulting
Financial troubles for airlines could mean they take a less aggressive role in retail planning, and result in more opportunities for airport retailers. Paul Brown, a consultant with experience at O’Hare, Midway, and Seattle-Tacoma airports, shares his thoughts on changes in airport funding and the impact on concessionaires.
Bad news: The 40-year honeymoon between airports and airlines is over.
Airports have never operated their concessions independently of the airlines. Airlines have traditionally been involved, sometimes directly, sometimes behind the scenes, in determining how an airport’s retail and food and beverage plan is put together. In addition, because of the residual nature of many airport financing relationships (in which airlines foot the bill for the residual shortfall in airport revenues at the end of a financial period), airlines usually have had much to say on how airport capital is spent, how space is allocated, and how an airport’s request for proposal (RFP) respondents are selected.
However, it is not likely that the previous level of airline territorialism will be warranted in the future. The priorities of airlines and airports have started to diverge in light of the current economic environment. As airlines slowly retract from and refine the hub approach, they will continue to file for bankruptcy, missing the occasional lease payment to airports. Meanwhile airports, hungry for cash, will attempt to more prudently manage their inflows in a self-sufficient manner. This pressure will require that airports seek long-term viability from their concessions programs. In short, they will have to rely on their concessionaires more than ever before.
The impacts of airline financial woes on concessions programs will not be limited to the reassignment and decommissioning of gates and hold rooms. The aggregate impacts on airport concessions programs are likely to be varied and far-reaching.
Effect #1: An adjustment to the deal-making balance of power between concessionaires and airports. This is simply the result of concessionaires continuing to learn how to protect themselves from air industry downturns, especially since the impact of the 9/11 attacks. Basically, concessionaires still want to get into airports, but they’re a little wiser than they were ten years ago. Here’s what we can expect over the next five years:
Deal cautious concessionaires. Moving forward, concessionaires want to see financial deals that work, which will require airports to be more creative in attracting desirable retailers and restaurateurs. In order to command high, 20 percent and above rents, airports will need to possess the same winning qualities looked for in street real estate transactions: good visibility, good traffic (enplanements), and good access (post-security locations for most airports).
A pragmatic approach to minimum rent. Many airports (and even some developers) are beginning to see that high-minimum rents that forever escalate, irrespective of major shocks to enplanement levels, contribute to tenant failure. Although the high minimum rent approach works in shopping centers seeking to weed out the weaker merchants, it is a crude, unforgiving hammer in airports where enplanements can vanish overnight due to catastrophe or airline closure. Because of political and budgetary pressures, airports will (and should) be more motivated than shopping centers to preserve full occupancy conditions.
Longer lease terms. Airports, leery of the mall manager’s worst enemy, the vacancy factor, are beginning to offer longer lease terms to tenants, contrary to pre-9/11 trends. It is not uncommon today to find five-year term deals for even the smallest of retailers. Before, airports were content to offer the two- or three-year deal in attempts to minimize commitments and keep the retail concept "fresh."