Airport Retailers Struggle To Keep Hard-Won Contracts As Revenues Plummet
Retail has taken a hit overall, but airport concessionaires face even bigger challenges. With passenger volumes equaling only 5% to 10% of usual traffic, retailers and restaurants at U.S. airports have faced a dramatic cut in revenues, forcing many to temporarily close and furlough staff.
Despite the incredibly difficult operating environment, retailers are highly reluctant to permanently close airport locations, owing to the competitive process of obtaining them in the first place, as well as the contracts that require them to keep paying their obligations.
U.S. airlines carried 38.7 million passengers in March, 51% lower than during the same month in 2019 and dropping to the lowest level of air travel since September 2001, according to preliminary data from the U.S. Department of Transportation Bureau of Transportation Studies.
Transportation Security Administration checkpoint travel numbers for April painted an even grimmer picture. Only about 3.3 million passengers traveled through U.S. airports in April, compared with 70.1 million people during the same month a year ago — a decrease of more than 95%. Those numbers improved in May, with TSA checkpoints recording 7.17 million people flying last month, down by more than 90% from a year ago.
Corliss Stone-Littles is an airport concessionaire company that operates 65 retail stores across 14 U.S. airports. Those stores include well-known brands like Sunglass Hut, L'Occitane, Johnston & Murphy, Kiehl's and MAC. The business also has a partnership with Hudson Group, a major news and gift shop retailer, and operates several of those stores throughout Chicago O’Hare International Airport.
Company founder Corliss Stone-Littles told Bisnow the only stores operating are the ones in partnership with Hudson Group, because they sell essential items for travelers.
Despite being open, those stores are not generating money for the company. Stone-Littles said profits from the partnership are distributed, but without regular passenger numbers, even they are operating at a loss.
“Right now, we are at zero revenue,” Stone-Littles said.
Corliss Stone-Littles had to furlough the majority of its retail staff. Most of the corporate office staff were retained to carry on essential functions like accounting and office administration, but overall, about 90% of the company’s pre-coronavirus staff are not working right now.
Even without typical payroll costs, airport concessionaires face the question of rent and fees owed to their airport landlord. There is also the issue of the annual minimum guarantee: a sum paid to the airport, regardless of how well the business is doing.
“The minimum annual guarantee is our biggest problem,” Stone-Littles said.
Stone-Littles said that the annual minimum guarantee is usually around 85% of projected sales. For a traditionally high-performing store in a busy airport, that can be a lot of money.
Many airports have waived the annual minimum guarantee, but a few have only offered deferrals. Stones-Littles said deferrals pose a challenge, because it remains unclear where the business will find the funds in the future to make those payments.
“Deferring something isn't going to change the fact that there is no revenue,” Stone-Littles said.
Stone-Littles said that shy of going out of business, retailers like herself will try to maintain airport contracts for as long as possible, because it is so difficult to obtain them in the first place.
Once past security, airport concessionaires have a captive audience. Average times spent by travelers in airports have increased since 2001, thanks to increased security protocols. For that reason, competition to open a store at an airport is fierce, and businesses must bid for the opportunity.
Closing stores could also make it difficult to win future bids, Stone-Littles said.
There is another motivation to avoid closing permanently — most contracts offer no exit scenario for retailers in the current situation. Even if stores go out of business, they will be liable to continue paying their obligations.
“If I close my stores permanently, it doesn't change the contract I signed,” Stone-Littles said.
It is unlikely that business interruption insurance will cover airport concessionaires. Unless an airport explicitly forced retailers to shutter, the stores that closed by choice will be unable to utilize that insurance.
“There is no product out there right now, that I'm aware of, that would cover a situation like this where the only real damage is the lost passengers,” Stone-Littles said.
The Airport Retail & Restaurant Association was founded in January, before the impact of the coronavirus on U.S. travel, with the intent of representing the interests of airport concessionaires. Almost immediately, the organization found itself facing the fallout of the coronavirus pandemic, which has hit its members particularly hard.
ARRA Executive Director Rob Wigington told Bisnow that as many as 80% of airport concessionaires are Airport Concessions Disadvantaged Business Enterprises, or ACDBEs: small, disadvantaged, women-owned businesses that operate retail and restaurants at airports, often operating in conjunction with larger companies.
“The highest priority is for the airports to provide a waiver, abate rents that are due each month, so these companies can just survive, stay afloat,” Wigington said. “At the same time, we need Congress, and we are urging Congress to provide grants and loans for these companies for their business operations so that they can continue to do the things that they need to do to sustain business.”
ARRA has called for U.S. airports to issue a 12-month waiver on rent for concessionaires, and is monitoring the various relief measures offered on an airport-by-airport basis. Wigington also said the organization has urged Congress to provide an additional $5B for concessionaires in the form of loans and grants, to sustain them during the recovery period.
Under the CARES Act, U.S. commercial and general aviation airports received $10B for economic relief. That funding was awarded to support continuing operations and replace lost revenue resulting from the sharp decline in passenger traffic and other airport business.
“In turn, we expect, and Congress expected, and the administration, the [Federal Aviation Administration] expects that airports will look to provide relief to the concessionaires, since these grants were intended to make up for those lost revenues,” Wigington said.
Some airports, like San Francisco International Airport, have provided forbearance of rent and fees for April and May, and are exploring other options like phased reopenings and lease modifications.
Chicago city officials passed a concessions relief program that allows the Chicago Department of Aviation to provide financial assistance to concessionaires at O’Hare and Midway International Airports. Relief may not exceed three years, and will include workforce retention requirements.
Stone-Littles noted that the CARES Act funds did not earmark any specific requirements pertaining to the distribution of concessionaire aid by airports, and that each airport landlord has offered different terms.
“It's been a hodgepodge of, each airport, you have to work with each one individually,” Stone-Littles said.
Berkeley Research Group Managing Director Keith Jelinek said that like other retailers outside of airports, many stores associated with brands that are either liquidating or slimming down portfolios will likely go by the wayside and not reopen.
“Airport space for leases is higher in cost on a square foot basis than most retailers that have locations outside of airports, and logistics to move product into these locations comes at a higher cost. Both are key factors in determining if the store can survive, combined with predicting how long it will take for passenger traffic to return to ‘normal levels,'” Jelinek said.
The summer months are usually the busiest of the year for airport concessionaires. For her own businesses, Stone-Littles estimates that about 80% of annual profits are earned during the three months of summer. Her goal now is to reopen as many stores as feasible within the next 60 days.
The biggest challenge is the “lotions and potions” portion of the business, like skin care and makeup, which rely on samples. Instead of leaving samples out, Stone-Littles said the company is considering having team members individually hand them to customers to minimize the risk of contamination.
“We've already been discussing how to do sampling without too much contact,” Stone-Littles said. “Some of my products are less vulnerable, and some are more vulnerable.”
With so few people choosing to travel right now, it is too early to identify any permanent changes in consumer trends. As a result, the future of the airport tenant mix is also uncertain.
Wigington said it is critical for companies continue to sanitize, social distance and protect both employees and the public. As consumers regain confidence, it will be easier to see how passenger preferences have changed, in terms of shopping and eating.
The estimated length of recovery varies. Global passenger air traffic volumes in 2020 are expected to be 50% to 55% lower than 2019 volumes, according to an analysis from S&P Global Ratings. That recovery is anticipated to stretch through 2023, reflecting operational challenges and consumer behavior unknowns.
Wigington said that ARRA had heard multiple forecasts from airline and industry experts, which all point to a long period. It could even be as long as five years until passenger traffic returns to its former level.
“It's hard to get folks to understand, even if you start to come back and you get back from 5% of the traffic to maybe 50% to 60%, which is going to be a ways before we get there, that's still not an operation that these companies can sustain,” Wigington said.
“If we don't see much more relief, and urgently, from the airports, we certainly will see companies fail.”