Page 12 - TFWA World Exhibit 2024 Special Edition

INSIDER

ARRA: Industry at a Crossroads

The Airport Restaurant & Retail
Association issued a call to arms in
September warning that the airport
concessions industry is at a crossroads,
battling many challenges that demand a
change in the business framework if the
concessions part of the model is to be
sustained.
ARRA says that the current situation is
not sustainable, due to four issues: 1. Labor
costs keep climbing. The labor market has
evolved to be vastly different than before
the pandemic, an evolution ARRA believes
is a permanent change. 2. Construction
costs have soared. 3. Interest rates are back
to normal, but a different “normal”; and 4.
Sales per enplanement growth has stalled nonresidential construction costs increased that lenders charge concessionaires has also
and not kept up with costs. 22%. increased: pre-pandemic, the margin was
generally 5%. Today, the margin is 8%.
Labor Interest Rates Total borrowing cost: pre-pandemic, about
Labor costs for all companies that The concessions industry – and 7.5%. Today, about 13.3%.
compete in this market are increasing. everybody in the economy – is also Obviously, this is a significant
An ARRA survey of its members experiencing a substantial increase in hit to a concessionaire’s bottom line.
showed a 38% increase in associates’ interest rates, especially as central banks’ Combine higher interest rates with higher
hourly wage rates from 2022 through strive to control inflation. But, current rates construction costs and an airport operator’s
2023. During this same period, average may not fall back to pre-pandemic levels. debt service on a typical seven year loan is
hourly earnings in the overall nationwide Rather, interest rates have now returned to now 63% higher than before the pandemic.
leisure and hospitality industry increased normal says ARRA.
only 13%. (source: U.S. Bureau of Labor Current interest rates are similar to Sales
Statistics). Moreover, a company cannot levels before the 2008-2009 financial Looking at average sales per
just raise its associates’ wages: these crisis. With central banks working to enplanement as reported in ACI-NA’s
increases trickle through the company’s maintain liquidity and economic stability annual concessions benchmarking survey
whole labor system, its whole P&L. in response to the financial crisis, the low (an annual survey of 70 airports), sales
With widespread pricing constraints rates enjoyed between the financial crisis per enplanement increased steadily from
in the airport concessions industry, and the pandemic may be the exception, 2009 to 2014 to approximately $10.00 per
recovery of these extraordinary costs is not the rule. enplaned passenger (including duty free),
nearly impossible, and as a consequence, The current rates may be normal for but then, essentially plateaus.
profitability vanishes. now on. Looking at the impact of higher Although there has been some growth
interest rates from a concessionaire’s point coming out of the pandemic, on the whole,
Construction of view: baseline interest rates that drive sales rates are lagging inflation by a
The ARRA survey of its members borrowing costs for concessions buildout substantial amount. If sales rates had kept
(representing more than 80% of the U.S. loans (Secured Overnight Funding Rate, pace with inflation from 2018 (the last
concessions industry) shows a weighted the successor to LIBOR) are now about year reported prior to the pandemic), the
average 37% increase in construction 5.3%. Before the pandemic, SOFR hovered industry could have achieved an additional
costs since the beginning of the pandemic. around 2.5%. $1.00 in revenue per enplanement. With
During the same period, economy-wide Moreover, the margin above SOFR 2023 total enplanements recovering to

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