Post-lockdown Overcapacity Must be Addressed as Retailers Head for $3.4 Billion Loss (Part 1 of 2)

by Kevin Rozario (London, United Kingdom)

[This is an abridged version of an article that first appeared on Forbes.com.]

Part 2 of this article will follow on August 19th, 2020.

Retail and restaurant concessionaires across North America are suffering great financial hardship thanks to forced closures of retail locations and travel bans in the wake of COVID19.

Regrettably, there are no easy ways to profitably reopen concession space that is currently shuttered—but the Airport Restaurant and Retail Association (ARRA) offers some solutions that airport landlords should consider.

Losses that started in March 2020 are expected to balloon to $3.4 billion by the end of 2021 if no action is taken according to a newly published forecast from ARRA.

Even with extra seat capacity being returned into the American domestic network this summer, the picture is decidedly downbeat. ARRA’s report called The Survival and Revival of Airport Shopping and Dining says that the businesses it represents “regardless of size will quickly be facing solvency issues”.

The association notes: “The current trajectory… will usher in a wave of permanent restaurant and retail closures that will turn bustling airports – once pulsing with energy – into ‘ghost towns’ even after travel recovers.”

Scheduled seat data from analyst OAG for the week starting July 13, showed that the U.S. market was down 46% versus late January – before coronavirus cases led to a lockdown in Wuhan and other cities in China.

Capacity increases from both American Airlines and United Airlines have reflected some confidence in future demand. Rightly however, ARRA points out that “flights are not passengers: traffic still will not recover this year”.

Risks of Reopening Too Soon

According to Airlines For America, in the week ending July 12, domestic air travel was down by 71% while international – which attracts higher-spending passengers – was down by 90%. Looking at passengers processed by Transportation Security Administration airport checkpoints, daily traffic through July did not break 800,000. Last year at this time, daily numbers were at the 2.5 million level, so ARRA could be right on its forecast.

The association’s report warns that “reopening too soon is a recipe for financial disaster”. It goes on to say: “This is potentially worse than being closed at extremely low passenger volume as costs that can be eliminated when stores and restaurants are closed are now incurred and grow at a faster rate than underlying sales.”

Typically, restaurants cannot return to profitability until they recover at least 85% of sales, and the story is similar for retailers.

Nonetheless, some retailers are attempting a restart. Hudson has begun a reopening program, despite COVID-19 turning a 2019 first quarter operating profit of $15.1 million into a loss of $76.3 million for the same period this year. How its stores perform will not be fully evident until third quarter results come in. Food travel retailer SSP increased its revenue from North America in the six months to March, but that is likely to be its last growth spurt for a while.

Slowly Does It

How can airport stores and eateries open and remain financially viable? By reopening in a smarter, measured way says ARRA. Preferably starting with stores that directly meet traveller needs – coffee, quick-service and convenience outlets – followed by bars and full-service restaurants.

Problems remain for units that will remain closed until passenger numbers pick up strongly. The variable nature of COVID-19 infection rates in the U.S. amid spikes in Florida, California and Texas mean that a big pick-up is not around the corner. The uncertainty has made Goldman Sachs revise its passenger forecasts and presently it does not expect 2019 passenger numbers to be reached until at least 2023.

That is a long wait. Yet the ARRA report suggests that “at our current 25% traffic level, nearly 75% of current program space can be considered surplus”. Retailers are hoping that American airports will get to 35% of 2019 traffic this summer, and 50% before the end of the year.

At these levels, opening every shop and restaurant would dilute each other earning power and risk the viability of them all. In its report, ARRA argues that opening “an appropriate number” of stores based on traffic would give those businesses a fighting chance of being profitable.

[Part 2 of this article will follow on August 19th and outlines ARRA’s strategy for opening concession space in a way that may improve the survival odds for retailers.]

[This is an abridged version of an article that first appeared on Forbes.com.]

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