Retail Impacts
Concessionaires, airports discuss losses, rent relief, and opportunities
By Lindsay M. Hitch
January 2002
Estimated SHORT-TERM ImpactsOperating Revenue Loss by SourceNORFOLK, 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
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.