Airport Retailers, Facing Painful Long-Haul Recovery, Contemplate Changing Business Model

The airport industry is facing a lengthening runway to recovery.

Passenger traffic is averaging between 50% and 75% below normal levels across U.S. airports. That's an improvement from the early days of the coronavirus pandemic, but now that peak summer travel season is over, traffic volumes are expected to drop off even further in the fall and winter months.

That is hitting retailers and restaurateurs in airports hard. The airport concessionaire industry estimates it could lose $3.4B, or more than three years' worth of profits, by the end of 2021.

Forecasts for full recovery extend as far as three to four years out, prompting airport concessionaires to seriously think about whether the entire business model needs to be overhauled.

U.S. airlines carried 21.4 million passengers in July, the most recent data available, 73% lower than during the same month in 2019, according to preliminary data from the U.S. Department of Transportation Bureau of Transportation Studies. Though much lower than usual, July was an improvement from the early days of the pandemic: In April, U.S. airlines carried only 3 million passengers, down 96.1% from a year ago and the lowest monthly total in BTS records dating back to 1974.

Under the Coronavirus Aid, Relief, and Economic Security, or CARES, Act passed in March, U.S. commercial and general aviation airports received $10B in federal economic relief to support continuing operations and replace lost revenue. However, there was no official requirement for those funds to be used to waive concessionaire debt, leaving individual airport landlords to decide how to deal with their restaurant and retail tenants.

Airport Restaurant & Retail Association Executive Director Rob Wigington said that over the past few months, ARRA and several other industry organizations have been advocating for $3.5B in relief specifically for airport concessionaires, as well as an additional $10B for airports in the next federal economic relief package.

“We've been sounding the alarms that we've got to get relief from Congress and relief from airports on minimum annual guarantees and rents and other [financial] assistance. And that is still our battle,” Wigington said.

“These companies ... are really stuck until air travel starts to come back. They can't do anything to try to market or bring in customers into the airport until the passengers are confident that they could be safe to fly again.”

In an analysis released in May, S&P Global Ratings predicted that global passenger air traffic volumes in 2020 will be 50% to 55% lower than 2019 volumes. However, the firm revised that outlook in August and predicted that 2020 passenger volumes will be 60% to 70% lower than last year.

“We now expect 2021 air passenger traffic to decline 30%-40% compared with the 2019 base, and foresee a more gradual recovery to pre-COVID-19 levels by 2024,” S&P Global said.

Crews Hospitality President and CEO Nick Crews, a member of ARRA’s board of directors, said $3.5B in federal aid could provide anywhere between nine months and 15 months of rent relief for airport concessionaires.

“It's critical that our industry obtains this next round of relief in order for our members to survive this ongoing pandemic and downturn in traffic,” Crews told Bisnow.

“And that's still just a tip of the iceberg of what's needed for our overall industry to bounce back and be the economic generator that we are in the airport ecosystem, in the regions that we operate.”

Though most businesses have already furloughed or laid off their staff, airport concessionaires are facing the question of how to pay rent, as well as the minimum annual guarantee, a fixed sum paid to the airport, regardless of business performance.

Areas USA Inc. CEO Carlos Bernal said that despite being six months into the crisis, the level of assistance and relief can still vary wildly from airport to airport. Some have provided rent deferrals and minimum annual guarantee waivers, while others continue to expect rent on time.

“They understand the challenges, but at the end of the day, they're like, ‘Well, you know, we feel for you, but the minimum rent’s due on the first of the month,’” Bernal said.

Aside from the minimum annual guarantee, rent and utility fees, many airport concessionaires are also carrying a significant debt burden from building out their storefronts.

“Our cost of building out in these public assets is anywhere from five to seven times higher than what it is to build out a restaurant or retail store on the street,” Crews said.

For Bernal, the pandemic has shone an unforgiving light on the traditional airport concessionaire model. That model, where costs are largely based on projected air passenger traffic, simply doesn’t work when people aren’t traveling.

“The retailers and restaurateurs are assuming 100% of the risk in this business model. And that has to change,” Bernal said. “To stick to a deal structure that's no longer relevant doesn't make any sense.”

Amid expectations that travel volumes could remain depressed for another three to four years, Byrd Retail Group CEO Judy Byrd said that as an industry, airport concessionaires will need to seriously reconsider what the appropriate business model is, particularly as many operators are small minority-owned businesses that are now facing a tremendous debt burden.

“We're just hopeful that our airport partners will be working with us on exploring new business models in the future,” Byrd said.

It is too early to guess exactly what an alternative business model in the U.S. could look like. Global consultancy ICF noted several options, including eliminating minimum annual guarantees and shifting to airport-concessionaire joint ventures.

“Airports should consider alternative methodologies for managing and operating their concession programs for concessions to remain viable business options,” ICF said. “While it may never be 'business as usual' again, the airport and its business partners need to adjust to a new normal.”

Crews, Bernal and Byrd all have mixed portfolios of retail and restaurant operations across several U.S. airports. Crews said his firm focused first on reopening news and gift stores to provide travelers with essential items. Now he is starting to reopen quick-service restaurants or fast-food locations.

The ability to reopen a store or restaurant location varies from airport to airport, depending on passenger traffic, as well as what other retailers have opened. If too many other stores have opened their doors but traffic remains low, it could make more sense to remain closed.

“I think it varies ... based off the airport and the traffic, and its overcapacity issue, and who else is open in those terminals. So it could vary depending on the airport or the terminal that you're in. But generally, our company has been able to maintain retail locations using gift and now starting to open QSR locations,” Crews said.

Bernal noted that airport concessionaires are also dealing with varying social distancing requirements at different airports, depending on which city and county those facilities are in.

“That also adds another layer ... of complexity, in terms of what you can open, can't open and how many people you could be servicing,” Bernal said.

For now, ARRA and its members continue to lobby for federal aid and hope for a vaccine. But without either of those things, the near-term prospects for airport retailers remain grim.

“As this thing continues, it's bleaker and bleaker for these companies to just survive, and hope to come out the other end,” Wigington said.