Aviation infrastructure is facing an over-capacity issue, a situation that will likely continue for the foreseeable future as the industry begins the slow, post-pandemic rebuilding process.
In the weekly concessions industry call hosted jointly by the Airport Restaurant & Retail Association (ARRA) and the Airport Minority Advisory Council (AMAC), two industry veterans discussed ways airports and concessionaires can begin to address what is a looming problem at most airports in the United States.
“What we’re looking at is essentially an industry where the infrastructure is plainly too big,” said consultant Andrew Weddig, noting that airports typically have large swaths of unused space, airlines are parking aircraft and declining new deliveries, and concessions are built-out at levels that far exceed expected passenger numbers over the next few years.
“We typically look at the amount of space that can be profitably operated by concessionaires to meet demand,” Weddig continued, noting that the metric should be “somewhere in the neighborhood” of seven to eight square feet per thousand enplanements. “Right now we are somewhere around 25 to 30 square feet per thousand enplanements – basically three quarters of the program could be considered surplus and will not be generating sufficient profits,” he said.
Consultant Kent Vanden Oever said right-sizing concessions programs is not going to be as straightforward as eliminating a certain amount of square footage. “Not every square foot is the same,” he said, adding that smart planning is necessary to maximize outcomes.
The industry shouldn’t take a “survival of the fittest” approach to culling concessions offerings, agreed Weddig. “There is a great deal of luck involved,” he said. “The hardship of the overcapacity is not evenly distributed.” He noted that some airports have concentrated flights into certain terminals, concourses or clusters of gates, and concessions locations outside those areas have little hope of attracting adequate numbers of passengers. The “do-nothing approach” – simply letting the concessionaires battle to attract passengers – “is what we are trying to avoid.”
ACDBE-certified companies are particularly vulnerable, Vanden Oever pointed out. “Usually their total industry footprint is much smaller,” he noted. “They’re often reliant on a particular sub-segment of the passenger base, like a concourse at a particular airport.” Airports would prefer an approach that allows their ACDBEs a chance to succeed, Vanden Oever added.
A number of potential solutions to the over-capacity problem have emerged in recent weeks. The most prevalent among them are airport initiatives allowing operators to simply give back leased concessions space to airports with no penalties. But Weddig said that approach is ineffective.
“This could appear to be a simple solution to the concessionaires’ problem…” he said. “But it has a gigantic problem to it, a great big challenge, which is the need to pay off the debt. Somebody has to pay back the bank, pay back the investors for the asset that is being given up.”
Vanden Oever said lease suspension is a better, but not optimal, alternative. “It has some significant upside just in terms of being able to hit the pause button and allow time for some recovery before operators have to get in there and run the units again,” he noted. “But there’s still some flexibility that’s required even in a lease suspension scenario.” Vanden Oever pointed out that the industry has taken great pains to stay on-trend with both food and retail, and a unit that stays closed for months or years could be less relevant upon reopening. Also, “oftentimes brand agreements do not initially cover the entire lease term. And if you go into suspension and those brand agreements expire, you may be faced with a situation where that brand cannot come back,” he added.
Both consultants advocated for a proactive and broad reaching approach to managing any shift in commercial offerings. “You’ve got to take commercial planning out of the vacuum,” Vanden Oever said. “There are, I think, some ways that you could get some win-win scenarios if you’re talking at a terminal-wide level to figure out how to reuse space.”
Weddig agreed, noting that airport terminals, and specifically gatehold areas, might need to be tweaked due to social distancing requirements, and excess commercial space could be repurposed for that use.
Looking ahead to any concessions opportunities that might be put out for bid in the future, Weddig cautioned that airport need to shift their expectations. “I think there’s going to be a higher level of scrutiny of any opportunity that comes out in the future,” he said. Concessionaires will “undoubtedly” be more risk averse than in the past. “This will start leading to a change in the basic lease structure.”
RFPs will have “a much higher level of scrutiny for before people will propose,” Weddig said. “That, along within the fewer number of operators, is going to is going to effect the quality of proposals and the number of proposals that any airport receives.”
