As international air traffic continues to tank this year, airports have suffered a catastrophic hit to their revenue, with retail—a major profit driver—under the most intense pressure ever due to the lack of passengers.

“2021 is starting off worse than 2020 ended, and that is saying a lot,” said IATA’s director general and CEO in a statement related to the poor January data, released last week. Covid vaccination programs now underway may help restore domestic economies, but aviation still faces harsh government travel restrictions worldwide.

The pandemic has, however, been a moment of enlightenment when it comes to concession contracts, long regarded by travel retailers as requiring reform. A recent leader in The Economist put some airports’ take from their retail tenants’ sales as high as 40%, a level that pushes concessionaires to drive a hard bargain with brands on margins, and in turn affecting prices, or choice of available products, for passengers.

Disastrous as it has been, the pandemic may have made airports appreciate the importance of retailers to their financial ecosystem in a way that may change their future relationship. A December 2020 survey from airports group ACI Europe, an arm of Airports Council International, found that 84% of gateways in the region had renegotiated, or were in the process of renegotiating, their retail contracts with concessionaires.

Retailers have also sounded more positive about their relationships with landlords. On social media, Dag Rasmussen CEO of one of the biggest duty-free operators, Lagardère Travel Retail, said: “There have been difficult conversations but I feel we have collectively built greater resilience and forged deeper ties.”

Ties that bind

Retail—in all its forms—is a revenue segment that allows airports to deliver in other areas and, over the years, gateways—whether in public ownership or not—have become more reliant on it.

That’s why across Europe and in Asia many airports like London Heathrow, Paris Charles de Gaulle and Milan Malpensa, funnel 100% of passengers through walk-through shops after security, to maximize spending. These retail bazaars thus become unavoidable and are an annoyance to those travelers who just want to get to their departure gate and relax with a coffee. But they are also essential to the financial health of the airport.

“It is always surprising to see complaints about airports as places where people can have a shopping experience,” Olivier Jankovec, director general of ACI Europe tells Forbes.com. “Imagine instead nothing other than tap water and benches right before the boarding gate. European operators have invested to create positive spaces with excitement, joy and an identity.”

‘Joy’ may be stretching it a bit, but there is genuine retail glitz, with big brands and exclusive products not available downtown attracting interest. Behind it all lies the serious business of the airport financial model.

“Most airports in Europe would not be able to carry out investments—including decarbonization—without non-aeronautical revenues, of which retail is the largest contributor. There is no doubt that without retail, airport charges would need to increase,” notes Jankovec. Duty-free shopping can be as much as 80% of an airport’s total retail concession revenue, though the range is typically 40% to 60%.

Which is why The Economist’s call for the end of duty-free—which generated worldwide sales of just over $86 billion in 2019—was greeted with incredulity by ACI Europe and the European Travel Retail Confederation. Especially at a time when the aviation industry needs every penny it can get.

ETRC secretary general Julie Lassaigne told us: “Aviation needs to drive its biggest ever recovery effort and ETRC is eager to redress any misconceptions about airport shopping. Our economic studies clearly demonstrate the significant contribution that duty-free and travel-retail make to the transport sector.”

Among ETRC’s claims are that:

• * Discretionary passenger income from shopping—rather than a reliance on taxpayer support—represents a voluntary contribution to aviation financing which benefits airports, airlines and passengers
• By financing airport investment via concession fees and rent payments, duty-free supports better airports, more routes and connectivity for passengers
• Airlines benefit from lower airport charges, enabling lower passenger fares and better facilities
• Retail has become an integral part of the travel experience.

In a social media post, Raoul Spanger, chief operating officer at German travel retailer Heinemann, says: “Shopping is, and will remain, an important part of travelling. We observe in our worldwide airport stores—if allowed to be open—that the few people who fly also buy.” There were 75% fewer passenger in German airports last year so any retail purchasing is seen as a welcome boost to near-empty coffers.

Testing times for U.K. tax-free

The Economist argues that the original thesis for creating duty-free and tax-free shopping was based on a “questionable wheeze” related to a no-man’s-land-style tax-free zone when crossing borders, and that it has become “a tax-avoidance scheme for jet-setters.” If the perk was removed those travelers would still shop the paper believes. That’s probably true, but perhaps not on the same scale.

Time and again it has been shown that price is a factor when travel shopping. Duty-free price comparison apps like Jessica’s Secret in China have flourished precisely because the Chinese, among the biggest luxury spenders in the world, can research where to buy sought-after brands at the best prices. Hainan’s duty-free sales more than doubled last year because the tax-free allowance was tripled in July 2020 and the island is now attracting a slew of new retailers.

Conversely, the removal of the tax rebate scheme in Britain, worth a 20% discount to foreign travelers taking goods out of the country, is expected to dent sales and jobs, not just at airports but across the country. Top-end department stores like Harrods and Selfridges, which rely on high-spenders from China and the Middle East, could be worst affected as luxury brands warn of a sales hit.

A report from the Centre for Economics & Business Research for tax refund provider Global Blue and New West End Company, which represents about 600 U.K. and international retailers in London’s West End, makes a gloomy assessment.

Using customer research from Global Blue the study states that abolition of tax-free purchasing would cut the number of U.K. visitors by 31% or five million and that their spending would be reduced by over $8.3 billion (£6 billion).

Paul Barnes CEO of the Association of International Retail (AIR) tells Forbes.com: “Tax-free sales, apart from in Hainan, are virtually zero across the world right now because there is not much international travel due to the pandemic. When travel resumes, high spenders who travel a lot will choose to shop in Paris or Milan and skip Britain for shopping, even if they choose to come here. They may also spend less time in the country.” That will mean lost revenue to the wider hospitality industry.

High-rolling travelers spend disproportionately more on tax-free shopping. In 2019, 13% of them accounted for 42% of all tax-free shopping in Britain and the top 1% account for 20% of it. That elite group splash out an average £60,000 each year according to AIR and their average £12,000 tax refund will be a major motivator in their choice of destination.

When travel resumes, the U.K. will be a good case study in whether duty-free and tax-free schemes incentivize travelers to shop, both at airports and downtown—and to what extent the abolition of such schemes will have on Britain’s retail and wider tourism economy. By the time that data rolls in it may be too late for some businesses.