Putting the money
where the mouth is
In 1996, on recommendation of the city's mayor and Airport Retail Management (ARM), which manages ORD's concession program, the airport started its value pricing program. "We've actually lowered the percentage that concessionaires are paying the department. We also expect them to lower the prices they charge and we do that based on a market-basket approach," explains Griggs.
The airport has outlined parameters in each agreement to determine the market basket. Concessionaires can shop the downtown central business district, document prices, and the airport takes the average of the prices. Concessionaires are expected to set their prices accordingly.
"We see the revenues over time. With this trend going across the country, people are beginning to understand that they can get a decent product for the same price as their downtown," Griggs states.
Gross revenues have increased from $94.7 million in 1995 to $148 million in 1999. The airport is projected to gross about $153 million before the end of 2000.
MSP is also enjoying the same success from its program. "The revenues tell us that we're going in the right direction," Anderson states.
In 1994 gross revenue was $23.5 million and in 1999 it increased to $95 million.
Rates and Charges
O'Hare structures its leases through a fixed fee format, charging about $33 per sq. ft. The fee increases three percent each year. The airport also charges a percentage of gross receipts and has a minimum guarantee. "If they exceed the minimum then the percentage kicks in based on a sales level. The minimum really fluctuates from base to base, but basically on an annual basis. Eighty percent of whatever they paid us in the prior year will become their new minimum," Griggs explains.
Paul Brown, executive director of ARM, adds that the airport's objective here is not to boost the minimum up to the highest minimum possible. "The minimum is the safeguard to make sure that the city is guaranteed a certain amount of revenue. We want as many people as possible to fit comfortably in the percentage range," he states.
MSP does not charge by square foot at the moment, but intends to in the future. Currently the airport has a minimum annual guarantee measured against a percentage of gross receipts. In the future, concession contracts for various spaces will likely be a minimum of $55 per square foot, states Anderson. There will also be a minimum that MSP will accept in rent from the tenants measured against a percentage of gross receipts.
Anderson says they will determine rates as the process develops by 2003, but at this time they don't have any firm direction from the MSP commission on how they will charge tenants.
Educating new comers
O'Hare has just started working with tenants that have not operated in an airport before. "It's trial by operating. It takes a lot of hand-holding. Everyone thinks that if they get a location at an airport they're going to be a millionaire. They don't understand the constraints of delivering goods...," Griggs explains.
The DOA is in the process of developing a program to help ease new operators into the airport and ensure success. "The last thing we want to do is bring someone local to the environment and have them fail," Griggs says.
According to Brown, airport management works with the operators to help them understand enplanements and the flow of traffic. "It's a little like trying to teach someone to drink from a firehose. It's either on or off... When it's on you have to find a way to capture as much of it as you possibly can," Brown states.
The airport has a planning group on site that works with the city and the airlines to provide periodic reports that summarize enplanement traffic.
"We take that and break it down a step further into gate analysis and load factors and try to figure out where the day peaks and valleys, so we can tell people exactly between what two or three hours of the day they are going to experience the 40 to 50 percent of their traffic that they need to capture a high degree of in order for them to cover costs," Brown explains.
MSP, Anderson explains, makes sure during the RFP process that the potential operator has an established business. New operators such as Solo Squeeze, Anderson says, have a sub-agreement with Host-Marriott. It is then Host's responsibility to monitor the performance of the tenants, he says.
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