Southwest Airlines’ Senior Advisor Bob Montgomery and Cheryl Nashir, acting chief commercial officer at San Francisco International Airport (SFO) each struck an upbeat tone Wednesday as they called for all segments of the travel industry to work together to overcome the effects of COVID-19.
They outlined the strategies they’ve undertaken to survive thus far, as travel declined by as much as 95 percent or more for a time when the pandemic hit the U.S. en masse in March. And they discussed how they will move forward, looking for financial stability and eventual recovery, during a weekly industry update call hosted by the Airport Restaurant & Retail Association (ARRA) and the Airport Minority Advisory Council (AMAC).
Nashir noted that SFO, with its long-standing history of working with local, small and minority-owned businesses, knew it needed to quickly do something to help its tenants when the effects of COVID hit. Rather than wait until it could go through a lengthy city approval process that would have taken a couple months, airport staff took steps it was immediately able to enact by offering rent forbearance, deferring payments for April and May.
The airport also looked at cost cutting related to professional services contracts, capital improvement programs and other areas in order to stabilize the organization and to keep costs to airlines as low as possible.
“This is the most unpredictable event any of us have ever been involved in,” said Nashir, adding that SFO plans to stagger re-openings, allowing operators to stay closed until there is a supportable number of passengers in the terminal to support businesses. “We think allowing tenants to remain closed until it makes sense – [until] there is a supportable number of passengers in terminals to support the re-opening – we think that’s the partnership we’re exhibiting right now. There’s probably more to come.”
The airport also is looking into contract extensions, turning rent deferrals into abatements and into suspending costs, such as cleaning reimbursements and trash, that typically get passed along to operators.
Montgomery, who has held several positions with the company in airport affairs going back to the late 1970s, says the airline is focused on right-sizing its schedule with the idea of breaking even by mid-2021. He told listeners that no party should get a free ride. He discussed the “airport ecosystem,” where concessionaires, airlines and other operators each pay portions of the fees and said unilaterally changing any facet of the equation to the benefit of one party could hurt others.
“The economic environment remains cloudy,” he says. “It’s very dark and hard to see through. We shouldn’t feel pressure to solve it in the short run.”
He did note, however, that airports are among the most credit-worthy entities in transportation, with most sporting investment-grade credit ratings, both because of the strength of the population that flies and the existence of reserve funds that have been built up for a “rainy day.”
“Guess what, it’s raining,” he said, adding that airports could help immensely by dipping into those funds and CARES Act funds to lessen the burden on its partners. “It’s pouring.”
Nashir and Montgomery both touched on the practice of including Minimum Annual Guarantees (MAG) in airport contracts. Nashir noted that at SFO, as part of lease language, they have been suspended until there are two consecutive months of recovery.
Montgomery says he regularly hears from concessions partners complaining about how contracts are out of date, submitting bids is expensive and pricing is too high.
“Given the pandemic and the effects, I can’t see anyone ever entering into a contract with a MAG again,” he said. “I’m not smart enough to know what replaces it, but I can’t see that as a primary feature going forward.”
He says airports and their partners need to “find the silver lining in this cloud and come up with good, practical ways to reduce the cost of bidding for these wonderful concessions and we have to figure out a good way to price them.”
Nashir and Montgomery both noted that the pandemic does provide an opportunity to work together as partners to better the industry. “There has never been a greater time for us to understand and improve the way we do business together,” Nashir said.
Montgomery cited Southwest CEO Gary Kelly, who has been noting publicly how the Spanish Flu that claimed millions of lives around the world between early 1918 and mid-2020 was followed by the “Roaring Twenties,” a decade of recovery, economic growth and prosperity.
“We know the sun is going to come up tomorrow,” Montgomery says. “And when it does, we want to be prepared to dance in that sunshine.”