The Airport Restaurant and Retail Association (ARRA) warned this week that concessions operators are in a “perilous position” due to a confluence of external changes partially caused by the pandemic. The organization warned that the current model for airport concessions is not sustainable.
“We have arrived at an urgent situation where airports and concessionaires must together make a choice about how to go forward,” ARRA said in its “Industry At A Crossroads” report. “If we evolve the model to meet the new business environment, then we can maintain the service levels that we’ve all come to expect, that our customers have come to expect: great looking stores and restaurants, recognized brands, and exceptional hospitality. If we don’t change the model, we will likely regress as an industry back to an era of limited offerings and generic concepts.”
“As the industry moves into this critical period, the choices we together make today will shape not only the future of airport concessions but also the broader passenger experience for years to come,” the report continued. ARRA points to four contributing factors to the current untenable situation for concessions operators.
Labor costs are a key culprit, with ARRA saying that the hourly wage for associates working in concessions locations has increased 38% over the past two to three years. In contrast, average hourly earnings in the overall nationwide leisure and hospitality industry increased only 13%, the organization said, citing U.S. Bureau of Labor Statistics data. “With widespread pricing constraints in the airport concessions industry, recovery of these extraordinary costs is nearly impossible, and as a consequence, profitability vanishes,” ARRA said.
Construction costs are also weighing down profitability, ARRA says. A survey of its members (representing more than 80% of the US concessions industry) shows a weighted average 37% increase in construction costs since the beginning of the pandemic. During the same period, economy-wide non- residential construction costs increased 22%, ARRA said, citing the Turner Construction Building Cost Index for 2024Q1 vs. 2019 annual average.
While the higher interest rates of the past several months are endured by all, ARRA says the current rates likely represent a new normal, and the industry needs to adjust. “Obviously, this is a significant hit to a concessionaire’s bottom line,” the report said. “Combine higher interest rates with higher construction costs and an airport operator’s debt service on a typical seven- year loan is now 63% higher than before the pandemic.”
ARRA data shows sales per enplanement in 2022 and 2023 were at their highest levels since at least 2009, exceeding $12 per person for the first time. ARRA says, however, that “on the whole, sales rates are lagging inflation by a substantial amount. If sales rates had kept pace with inflation since 2018, “the industry could have achieved an additional $1.00 in revenue per enplanement,” the group said.
ARRA called the current situation a “big deal” and urged airports to work with concessionaires for a new approach. “The bottom line: concessions contracts starting today earn no return on equity, nor return of equity,” the report said. “This is not the picture of a sustainable business model … for anybody, for any business.”
