Title
Phoenix Sky Harbor International Airport Concessionaire Relief - Consideration of Contract Term Extensions (Ordinance S-47259)
Description
Request to authorize the City Manager, or his designee, to amend multiple Phoenix Sky Harbor International Airport (PHX) Terminal 3 and Terminal 4 Food, Beverage, and Retail concessionaire leases to extend the term of the contracts for three additional years, as requested by the concessionaires to help offset the impact of the COVID-19 pandemic.
Report
Summary
The aviation industry continues to struggle amidst the challenging circumstances of the COVID-19 pandemic. Phoenix Sky Harbor International Airport is experiencing a secondary dip in enplanements due to the surge in COVID-19 cases after the holiday season. Enplanements are currently down about 52 percent as compared to last year.
Several rating agency reports have projected an extended negative outlook based on the uncertainty in enplanement recovery. Concessionaires at PHX have been severely impacted by the reduced passenger activity with sales down by 71 percent. Due to the reduced activity as well as the continued financial strain on these businesses, several have been unable to reopen or have reopened with limited business hours. Of the 136 total concessions operating out of PHX, 71 (52 percent) are currently open for business.
In a letter dated Nov. 1, 2020, many of the airport’s small business partners requested contract term extensions in order to refinance existing debt. Currently, the contract terms expire as follows:
- Terminal 3 food, beverage and retail contracts will expire in 2030;
- Terminal 4 food and beverage contracts will expire in 2023; and
- Terminal 4 retail contracts will expire in 2023 or 2024.
On Dec. 17, 2020, staff held a conference call with the Federal Aviation Administration (FAA) Office of Civil Rights to discuss the Airport Concession Disadvantaged Business Enterprise (ACDBE) program. The regional compliance officer expressed appreciation for the efforts of City Council and the airport and for providing Minimum Annual Guarantee (MAG) abatement to the concessionaires, including ACDBEs. The FAA further shared that extension of terms for concessionaires is a viable option for helping concessionaires weather the pandemic. In the case of contract extensions, FAA has eased its requirement for pre-authorization of a concession contract extension if the extension does not exceed three years. This practice is aligned with FAA’s April 4, 2020 guidance to airport sponsors encouraging them to consider the business circumstances created by the public health emergency and assist tenants in staying solvent so they can resume normal operations when the emergency ends.
The current business circumstances for concessionaires and ACDBEs at Sky Harbor are impacted by their capital investments. Sky Harbor's concessionaires invested in the original design, construction, furniture, and fixtures within Terminal 4. Each concession contract also requires a mid-term (five-year) refresh, so the concessionaires invested in the food and beverage refurbishment in 2017/2018. Phase 1 of Terminal 3 opened in February 2019 and Phase II in February 2020, also requiring recent significant capital investment.
Attached to this report is the Nov. 1, 2020 letter (Attachment A) sent from the airport's ACDBEs requesting contract extensions to allow refinancing of their debt for existing airport capital investments (in addition to the MAG relief already approved by Council). Also attached are letters from the majority of the prime contractors requesting contract extensions (Attachments B-F). Several prime contractors have specifically requested three-year extensions to reamortize and payoff the debt for their existing airport capital investments.
The concession leases that will be amended to allow for extended temporary financial relief are lease numbers: 116300; 116653; 131410; 133475; 143718; 143719; 143866; 144047; 144322; 144323; 144324; 145872; 145873; 145977; 146077; 146163; 146458; 146459; 147232; 147258; 147350; 147461; and 150683.
Financial Impact
Extending the contract term(s) three years for Terminal 3 and/or Terminal 4 food, beverage, and/or retail concessionaires would result in no additional cost to the airport, however it would delay the future solicitation and implementation of new contracts.
Concurrence/Previous Council Action
An update on this item was heard at the Transportation, Infrastructure and Innovation Subcommittee on Jan. 6, 2021.
Location
Sky Harbor International Airport - 3400 E. Sky Harbor Blvd.
Council District: 8
Department
Responsible Department
This item is submitted by Deputy City Manager Mario Paniagua and the Aviation Department.