Retail Impacts

Jan. 8, 2002

Retail Impacts

Concessionaires, airports discuss losses, rent relief, and opportunities

By Lindsay M. Hitch

January 2002

Estimated SHORT-TERM ImpactsOperating Revenue Loss by Source
9/11-9/15 Shutdown/Severe Impact
9/16-9/22 Moderately Disrupted Impact
1 Year Impact (Sept. 2001-02)
Aeronautical Landing Fees
23,000,000
25,000,000
530,000,000
Terminal Rentals
1,527,000
2,740,000
165,238,000
Other Aeronautical
2,577,000
2,538,000
96,180,000
Total Aeronautical
$27,104,000
$30,278,000
$791,418,000
Non-Aeronautical Parking
24,586,000
29,857,000
599,522,000
Concessions
16,280,000
17,527,000
445,794,000
Rental Cars
11,160,000
18,939,000
285,466,000
Other Non-Aeronautical
4,580,000
4,513,000
170,988,000
Total Non-Aeronautical
$56,606,000
$70,836,000
$1,501,770,000
Estimated Total Reduction in Airport Revenues
$83,710,000
$101,114,000
$2,293,188,000

NORFOLK, VA — Airline, airport, and concessionaire representatives met at the 2001 Airport Concessions Analysis Seminar held here recently. Rather than the anticipated heavy focus on security and its effect on concessions, much of the discussion at the conference focused on lost revenues, rent structures, and marketing opportunities.

The Airports Council Internation-al - North America (ACI-NA), which co-sponsors the event with Embry-Riddle Aeronautical University, conducted a survey of 50 large, medium, and small airports to determine the effects of September 11 on airports and concessions. Leonard Ginn, senior vice president of economic and associate affairs for ACI-NA, reports that airports lost $84 million from September 11-15 and $101 million from September 16-22. ACI-NA estimates that U.S. airports will lose $2.3 billion in the 12 months following September 2001.
Non-aeronautical losses (parking, concessions, rental cars, etc.) account for nearly two-thirds of lost revenues. Concessions revenues were down $16.2 million from September 11-15, $17.5 million from September 16-22, and are projected to be down $445 million for the year following September 11.
ACI-NA also conducted a survey of nine airport concessionaires to determine the impact of reduced passenger traffic and restrictions on "meeters and greeters" beyond security. The nine concessionaires operate 2,250 stores at U.S. airports with combined estimated 2000 total revenues of $4.3 billion. The nine companies surveyed will lose $854 million in total revenues over the year.
The survey reveals that the companies polled are in the process of laying off some 9,600 employees, and half plan to permanently close some airport locations while 70 percent are attempting temporary closings. Based on survey responses and their relation to the overall market, ACI-NA estimates that airport concessions losses will total nearly $1.7 billion over the next year, resulting in nearly 20,000 layoffs.

RENT RELIEF

ATA: Carriers Could Lose $7 Billion in 2001

David Swierenga, chief economist for the Air Transport Association (ATA), shared some hard numbers with an audience of concessionaires and airport officials at the Embry-Riddle/ACI-NA Airport Concessions Analysis Seminar.

Swierenga says that the airline industry had been anticipating a loss of $2 billion for 2001 prior to the September 11 attacks. However, in the third quarter alone, the industry experienced a loss of $2.5 billion. As of November the industry had lost $4.7 in 2001, and Swierenga expects that to jump to $7 billion for the year.
He says that prior to September 11 airlines were operating below the break-even load factor (percent of seats filled). Airlines are forecasting 67 percent of seats filled in 2001 and 71 percent in 2002. The break-even load factors for 2001 and 2002 are estimated at 74 and 75 percent, respectively. To break even, the airlines would have to raise prices as demand is decreasing. Inevitably, says Swierenga, the airline industry will lose money in 2002 and possibly 2003 as well.
Labor costs account for 35 percent of an airline’s total operating costs. Flights have been reduced by about 20 percent, while layoffs have accounted for only a 14 percent reduction in the workforce. The majority of those layoffs have been lower-paid employees, rather than spread across the seniority scale.
Airport charges and passenger facility charges (PFCs) have been rising much faster than airline prices, according to ATA. Airline prices have increased 15 percent since 1982. Airport charges have increased 82.9 percent while airport charges including PFCs have increased 138.7 percent in the same timeframe.
Swierenga expects "normal" traffic levels sometime next summer, but says that he expects two very tough years for the airline industry and, in turn, for airports and concessionaires.

Derryl Benton, director of concessions and disadvantaged business enterprise (DBE) programs at Orlando International Airport, explains that after September 11 his tenants complained of lost revenue and diminished passenger traffic, and asked for rent relief. Benton approached the airport to see what could be done, assuming rent relief was a reasonable request. Due to budget constraints and the debt structure of the airport, says Benton, it was not possible for Orlando International to grant rent relief.
Orlando’s operations and maintenance budget makes up 45 percent ($129 million) of its budgeted expenses ($286 million). Debt service makes up another 42 percent ($119 million). The remaining 13 percent consists of fund deposits ($17 million) and debt service coverage ($19 million).
The airport cut its operations and maintenance (O&M) budget by 20 percent to make up for decreased landing fees, PFCs, parking revenues, hotel revenues, and other revenue sources. Salaries and benefits, which make up 29 percent ($37 million) of the O&M budget, suffered the largest cuts. Benton says the airport offered early retirement, established a hiring freeze, and deleted about 20 positions. And as the airport was making cuts in some areas, others, like the police department, required significant increases.

RENT STRUCTURES
Stu Holcombe, senior vice president and director of business development for CA One Services, says that while he can appreciate an airport’s budget constraints he also recognizes the small margins of airport concessionaires.
The airport environment often requires higher capital, labor, and rent costs while also requiring street pricing, thus not allowing the concessionaire to make up for increased expenses. Holcombe reports that CA One has had to cut 700 positions since Septem-ber, and a large reason for that is unrealistic rent structures.
Because airport concessions contracts are bid competitively, operators often bid lower than what they can truly afford in order to get the contract. Holcombe recommends setting a reasonable minimum annual guarantee (MAG), using a percentage for the first year and then reevaluating based on enplanements.
Tom Nolan, Jr., director of airport development for McDonald’s Corpor-ation says it is important for airports to say what they want in the RFP. "If it’s rent, say that up front and plan accordingly in the RFP," says Nolan. He also calls for reasonable flexibility on street pricing — value pricing that would take into account airport versus non-airport retail rent.

OPTIMIZING DWELL TIME
Conference attendees represented several airports of varying size and the concessionaires serving those airports. Some have been impacted more than others by the restrictions of non-ticketed people beyond security. Interest-ingly, the general concensus on whether it is better to be pre- or post-security is mixed.
Those operators with shops beyond security say they haven’t felt a pinch by the lack of "meeters and greeters" in the concourses. The passenger numbers are down, but it’s the passengers that most often make purchases, they say.
Operators with shops pre-security also feel fortunate for their location in most cases. Taking advantage of most travelers passing a shop, however, is dependent on optimizing passengers’ dwell time. Since passengers who arrive two hours early spend most of their time in security lines, pre-security concessions will likely suffer.