Leaders of the four largest concessions companies in North America on Wednesday stressed the importance of continuing partnerships with airports as a means to weather the business downturn the pandemic has wrought.
Roger Fordyce, CEO and director of Hudson; Steve Johnson, president and CEO of HMSHost; Gregg Paradies, president and CEO of Paradies Lagardère; and Michael Svagdis, president and CEO, SSP America convened on an industry call hosted by the Airport Restaurant & Retail Association (ARRA). The four executives updated listeners on the current states of their organizations and offered outlooks for the future of the airport concessions business.
One common theme among the four executives was the importance of airport partnerships over the past year as concessions sales in airports were decimated by the sharp downturn in passenger traffic.
Fordyce pointed to the “tremendous partnerships” that had emerged between concessionaires and airports, along with airlines, resulting in various forms of relief. Those efforts “have been a key and instrumental part of our ability to sustain the business throughout some very, very tough times,” he said.
Industry organizations including the American Association of Airport Executives, the Airports Council International – North America (ACI-NA) and the Airport Minority Advisory Council were helpful in securing federal aid for the industry, Johnson noted. He also praised airport executives for their willingness to work with concessionaires. “We’re all part of the same ecosystem,” he said. “And so many of our airport partners could not have been better to work with as they navigated this time with this.”
Not surprisingly, all four companies have struggled over the past 10 months as passenger numbers tumbled in March 2020 and remained suppressed throughout most of the summer and into the fall.
For 2020, revenue at Paradies Lagardère was down about 60 percent, Paradies said. “To break it down a little bit more, retail performed slightly better than dining…. We also have a fairly large business in Canada, and Canada was worse than the U.S., [due to] the regulations in place in regard to traveling.
“The good news is second half of the year we were able to reduce our cash burn quite a bit,” Paradies continued, noting that among other measures, the Paradies Lagardère team took pay cuts. He also said about 90 percent of airports partnered with the company “in a very positive way to help us through 2020.”
Johnson recalled being at the Airport Experience Conference in March 2020 with other industry leaders, speculating that the then-nascent virus could have a negative impact of up to 40 percent. “Little did we know we weren’t even close,” he said.
“When sales dropped to 97 percent, we began to recognize true nature and length of this catastrophe,” Johnson continued. “Each of the concession operators, whether larger or smaller, I think was faced with the same issues: mountains of MAG and historically high fixed costs and millions of dollars of capital investment either already spent or needing to be spent in 2020 or 2021.” He noted the cooperation of airport partners, saying “without them working with us on rental abatements and store closings and hours of operation, I think this might be a very different phone call in the end.”
Nevertheless, HMSHost continues to struggle with revenues at about 35 percent of 2019 levels and about 50 percent of stores open. “We’re losing money every day as we operate,” Johnson said, noting the fixed costs of salaries, insurance and debt obligations. But in the depths of the pandemic the “only goal” was survival. “I think luckily we’ve done that and we’ve done that through a lot of help from a lot of people,” he said, adding that “2021 does give us the opportunity to rebuild the industry and our organization as the world recovers from this virus.”
For Hudson, Fordyce said 2020 was a year of “balancing” – deciding which and how many stores to open and ensuring the safety of staff and customers. He said the company spent much of the year “trying to sustain our liquidity and our financial health throughout this, not just on behalf of ourselves, but also our ACDBE [joint venture] partners and subtenants,” noting that the impact on smaller businesses was greater due to lack of scale.
Like others, Fordyce has seen some signs of encouragement this year. “We’re excited about some of the business we saw during the holiday season,” he said. “But obviously January is bringing back a little bit of a taste of reality that we still have a long way to go.”
SSP America saw the same spark over the recent winter holidays. “In the last two weeks of the year during the holiday season, we saw sales come back,” Svagdis said. “It created great energy level within our organization because it really showed people that the aviation industry will come back and we’ll come back strong. But we were still 65 percent to 70 percent down and still weren’t profitable. The good news was the sales brought a great positive mindset to our people in the field,”
Full year numbers for SSP were even more daunting. “We’re 80 percent down over prior year in the U.S., 90 percent in Canada,” Svagdis said. “We’re lowering our cash burn [but] still losing money every month. And we have about 40 percent of our units open.”
A Year of Two Halves
The aviation industry is likely looking at a year of two distinct halves for 2021, the executives agreed. Paradies says he expects “the first half [to be] very challenging and the second half, hopefully much better.”
“Our optimistic view for [calendar year] 2021 is for traffic to be down 35 percent for the year,” Paradies continued, noting that the company is expecting a higher percentage downturn in the first half of the year, and more robust activity in the latter half. The more conservative prediction of the company is passenger traffic to be down 50 percent for the year; again with the brunt of the downturn in the first half.
Fordyce noted that it’s crucial that the industry work to convince travelers that flying is safe. He anticipates a strong uptick during the summer months but says “obviously that has a lot [to do with] well the vaccine distribution occurs throughout North America.”
The pace of recovery is important, but potential long-term alterations altered to route structures will also play a role in how recovery is felt throughout North America. “How are airlines going to adjust?” asks Svagdis. “What are they going to do differently?” He noted the hub-and-spoke that carriers could downsize or eliminate flying some of the spoke routes to smaller markets. Operators serving those markets “could be impacted dramatically,” he said.
Both Svadgis and Johnson lamented the fact that the sales lost during and following this pandemic will be lost forever – they can’t be “made up” at some future time.
“Recovery is hard to see because I’m not sure we’ll gain back what we’ve lost,” Johnson said. “I think that we’ll come back to a new normal, but I’m not sure recovery is in the future for us.
“I think that, you know, in the year 2023 or 2024, when people begin to invest again, then you’ll see the industry start to take off,” Johnson continued. But even with increased passenger numbers over the next several years, “as we all try to dig out from the debt that we’ve taken on to survive, it’s going to be tougher to see that recovery. I still think the industry’s good, solid, I’m bullish on it, but I think we have a long fight over the next four or five years to get back to where we were.”
Shoring Up ACDBEs
Participants on the call represent the four largest companies in the North American concessions industries, but they all have a stake in the health of smaller, Airport Concessions Disadvantaged Business Enterprise-certified companies. The major companies often partner with ACDBE firms for airport contracts.
Paradies said many ACDBEs survived due to a combination of airport lease leniency, government assistance and “doing a good job controlling their controllables.” But he suggests banks could start to put the squeeze on repayment of loans, especially if airport rent relief and government loans begin to dry up. “These loans could be called that could put the small operators out of business very quickly. We’re very concerned. The small operators, small companies are really what adds to the diversity and rich richness of airports in our industry,” he said, calling for continuation of both government and airport assistance.
The need for partnerships again became a focal point, with Johnson saying that airports, prime concessionaires and ACDBEs – along with perhaps the Federal Aviation Administration, the program administrator – need to work together to ensure survival.
“I think 2021 is going to be about finding solutions,” Johnson said. “Part of that is making sure that the ACDBE program stays strong and viable.”
Svagdis agreed, noting that major small business operators have put everything, including their homes, into their businesses. The overall industry, he says, needs to do “everything we possibly can do to help them. We all need to make that a priority in 2021 if we want to continue to thrive within the aviation industry.
While all operators are trying to return to financial viability, they’re also attempting to identify how their businesses should change to meet the needs of passengers going forward.
“[One challenge is] understanding the long-term changes – whether it’s shopping or dining habits – that COVID may have on what we considered normal in the past,” Fordyce said. “I think innovation and adaptability are going to have to become key words. I think partnership is going to have to become a much stronger word within our industry.” He also noted the ongoing efforts to support frontline employees.
Partnerships will continue to be crucial going forward, Paradies added, but a new approach is also warranted. “The typical lease model is broken,” he said. “It was broken pre-pandemic and we really see it clearly in a pandemic.” Paradies said a profit-sharing model, unusual but in place at Charlotte Douglas International Airport (CLT), is desirable.
Logistics are also going to be challenging. With many airport employees furloughed, bringing them back on board as passenger traffic increases will require coordination, Svagdis points out, noting badging requirements for airport workers.
“Imagine when not only all of us [operators], but the car rental companies, others, it’s just going to wreak havoc on our business and could slow things down dramatically,” Svagdis said. He’s also worried about right-sizing concessions programs. “It comes down to supply and demand,” he said. “And if we have too much supply…and that’s not managed well, we could be at 80 percent or 70 percent versus 2019 and still not be profitable. It’s going to be a key hurdle for us.”
Johnson said another challenge will be continuing to ensure financial health for all, which could mean long-term changes in things like minimum annual guarantees and capital spending requirements. “How can we make sure that our airport partners really understand what it is that we’ve been through so that we can work together on the solution?” he asked. “To me, that’s going to be airport by airport, sitting down with them and making sure that they fully recognize what this has done to our business and our partners’ businesses, and how it’s affected our people. And if we can get them to do that, I have great hope that we’ll find our way through this.”