Length of commercial contracts likely to increase within the airport sector, finds survey

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Management-consulting firm Kinetic Consultancy has released the findings of a professional survey examining the future of commercial (retail) contracts in high-traffic areas, including airports.

Compiled from the responses from professionals active in the high-traffic industry, the report is centered around the theme of commercial contracts between landlord and retailer and how they will shape the future of high-traffic locations including airports, rail and public transportation and shopping centers, among others.

Survey respondents – of which nearly 50% were directly linked to the airport sector – were asked if they believed that the biggest impact on commercial revenue for high-traffic locations will be driven by its commercial contracts. Some 45% agreed, 40% disagreed and 14% gave a ‘neutral’ response.

A key element of the survey explored respondents’ views on how the length of commercial contracts might change, accelerated by the manifold contract issues that have arisen in the Covid-shaped world, with the lifeblood consumers at various stages having completely dried up in high-traffic locations.

On average, airport professionals believe those future commercial contract lengths will increase. That significantly differs from professionals directly involved in the retail industry who on average believe the commercial contract lengths will shorten.

Kinetic Consultancy observed that shorter retail contracts were already evident, spurred by an ongoing pop-up trend fuelled by the pandemic.

The report goes on to discuss in detail the key commercial contract areas of investment responsibilities and contract flexibility, with a particular focus on airports.

Martijn Steur, the report’s co-author and managing director at Kinetic Consultancy, said, “Covid forced real estate owners and operators to be more flexible in write-offs and in payments. These actions were necessary but also resulted in a higher debt and an uncertainty leading to a longer duration required to earn back lost income and pay those debts, which in turn will require longer contracts.

“Revenue growth for many high-traffic locations has been dependent on visitor/passenger growth. Revenue per passenger for most airports, for example, is under great pressure. There seems to be a difficulty monetizing the once unique retail offer of combining big brands and a large audience, towards a customer base that has all the products one click away at home and on the go.

“The demise of this retail revenue is offset only partially by an increase in customer spending on direct consumable goods. When looking at contract length from a financial perspective it is logical to think that when the debt increases and the ability to pay back each month does not, that total length needs to increase,” he said.

Highlighting the framework of the Volatility, Uncertainty, Complexity and Ambiguity (VUCA) World in a high-traffic context, the report discusses the challenges that airport retail environments face when trying to be flexible in the built environment.

Reflecting on contract flexibility, Steur said, “Slowly, commercial contracts are moving away from just the transactional towards a more purposefully ‘experience design’ perspective, including a more holistic approach to the location.”

Key questions
Respondents of the survey took part in a one-minute survey in which they answered several multiple-choice questions and shared their perspective on the subject of commercial contracts in more detail.

Asked about the most prominent shift in contracts, the two options most selected by survey respondents were ‘the increasing number of partnerships through, for instance, joint ventures’ (42%) and ‘the increasing use of a more flexible rent base’ (39%).

Finally, exploring a potential new revenue area for high-traffic locations such as airports, the survey gauged respondents’ views on data sharing as a driver in commercial contracts. The most popular view (59%) was that they would ‘be a part of future contractual agreements’.

The second most selected view was that data will ‘be a primary source of value creation between partners’ (22%), underlining the probability that data/data sharing will be a central element of future commercial contract agreements. Interestingly however, almost 20% believe that this sharing of data will not happen in the next five years and some question whether it will happen at all.

Juriaan van Waalwijk, report co-author and business and insights consultant at Kinetic Consultancy, said, “New insights will support relevant scenarios and allow the industry and its leaders to start planning to operate in the new normal or in the temporary abnormal. Learning from other high-traffic locations is quite common in the areas of trends and consumer insights; with overlapping business dynamics it seems beneficial for airports and their leaders to learn from insights on commercial contracts as well.

“There is nothing like a deep crisis to prompt taking a good hard look at the things we have always done and see if they still make sense. A sense of urgency has been created to start moving and innovating for both landlord and retailer and we have set out with our report to highlight what the nature of these changes needs to be,” he said.

To view ‘Shaping high-traffic commercial contract strategies in a fast-changing world’ in full, click here.

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Dan originally joined Passenger Terminal World in 2014 having spent the early years of his career in the recruitment industry. As online editor, he now produces daily content for the website and supports the editor with the publication of each exciting new issue. When he’s not reporting on the latest aviation news, Dan can be found on the golf course or apprehensively planning his next DIY project.

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