At the 2022 ACI-NA Business of Airports Conference, I just had the pleasure of attending, several sessions focused on how challenging it is to successfully build-out, open, and operate an airport concession under current market conditions. Key issues identified included sky-rocketing construction costs, continued supply chain woes, and staffing shortages, all made even more challenging by airport contracting practices that have not adjusted to any of these market changes. Add to these issues a desire of airports to increase the presence of local brands or businesses in their airports, and keep as close to street pricing as possible, and you have a perfect storm. Understanding the hurdles facing concession operators of all sizes can help an airport structure a request for proposals and eventual contract in such a way that all parties are ultimately successful – both operationally and financially. Ultimately, the goal of successful airport concessions is to provide the traveling public with food, beverage, retail, and service options, in an operationally efficient manner that brings revenue into the airport. But since every concession operator of which I’m aware, no matter the size, is a for-profit business, this goal needs to be balanced with the need for the concession operator to also make money. If not, airports will face a future that includes only concession operators that are so large they can afford to lose money in some markets, or smaller operators that will not be able to succeed for the full term of their contract due to operating costs and capital improvement requirements. Neither of these options presents much opportunity to develop thriving local businesses in airport environments.
For airports interested in making adjustments to their concession contracts in order to better include local businesses, whether operating independently or in conjunction with a larger concession operator, or for any airport that wants to structure a concession agreement that is considerate of industry changes, it is important to conduct an honest assessment of the true costs of building out and operating a concession in your particular airport. Think about the differences for the operator between being in a street location and being in the airport, and what those differences may cost. For example: employees need to be badged and have to pass a background check, employee parking may be off-site, all equipment and supplies (and staff) have to come through a secure checkpoint or inspection point, operating days and hours are likely much longer and more restrictive.
Consider your airport’s leasehold improvement requirements for concessions: do you require a per square foot minimum spend on construction? Do you adjust that downward to reflect for cost efficiencies for larger leaseholds? Flexibility in the design of airport infrastructure, such as bringing utilities to the lease line, or installing the grease trap system, or thinking creatively about other common use facilities, can provide the airport the control it might want over design and operation, while decreasing the cost for concession operators, or allowing that cost to be more fairly allocated across multiple locations.
Additional contractual requirements can also impact operating costs, such as the required use of distribution facilities, shared janitorial services, trash removal, recycling, marketing, repairs to common areas, taxes, and utilities. Many provisions of concessions agreements have a real-world cost associated with them, so as an airport evaluates how to increase responsive proposals, including drawing in small, local or minority-owned businesses, it is important to think through what costs you may be inadvertently shifting to an operator that an airport might be able absorb or pay for some other way.
Consider other airport contract requirements that might have a chilling effect on that small or local operator – things like requiring a security deposit to be provided in cash vs. a letter of credit or a performance bond, which both require a smaller out of pocket cost for the operator. Allowing a concession operator to provide a security deposit in a manner other than cash also increases the operator’s liquidity for improvements and operating expenses. As you’re working through concession opportunities, timing is also critical. Airports want locations open and operating as quickly as possible, and so do concession operators, because the only way anyone makes any money is for the location to be open. However, there are real-life impacts to timelines due to supply chain constraints and staffing shortages, and both these factors are also driving increasing construction costs. Flexibility here is key – if an airport believes that a delay is truly within the control of the operator, that is an appropriate time to levy a contract penalty. For other timing impacts though, an airport might decide that a penalty isn’t a required punishment for an already frustrated business partner.
Airports are dynamic, rewarding places to operate a business, but they are also expensive and complex. As your airport considers how to make practical changes to develop concessions, pay attention to wording in requests for proposals or contract provisions areas that might be increasing costs for operators unnecessarily. Consider how your airport might be able to be more flexible and creative in achieving your ultimate goal of providing opportunities for passengers, and making money.
Margaret Martin, CM, founder of Martin Airport Law, LLC, a DBE/ACDBE certified firm, provides legal and consulting support for airports, airport businesses, and public private projects. Martin is the former chief development officer for the Nashville International Airport, where she led all revenue generation functions, aeronautical and non-aeronautical, for the BNA and JWN airports. Martin began her career in aviation as an attorney at Nashville International Airport, and Martin enjoys applying her business acumen and legal experience to solving challenging problems for her clients.