Forward:Those of you that have read this blog know that this is a repository for the odds and ends that come out of my writing. I’m saddened that this piece has ended up here. I wrote this for an airport trade publication called Airport Revenue News back in 2009. Unfortunately, it is still relevant today. But that’s not what bothers me. I wrote this, on assignment from ARN and never heard a word back. I did another article for them about the folks who run Phillips Seafoods’ airport locations. I was paid for that. For this I received no explanation as to why it never ran, and why I didn’t get so much as the customary kill fee. I worked hard on this piece, and a lot of nice people helped out including Hudson News, Areas USA, Delaware North, Dunkin Donuts, the Cincinnati Northern/Kentucky International Airport, Raleigh/Durham International Airport, and Miami International Airport. Thanks to all of you. Sorry this didn’t get a bigger audience…Passenger traffic at many airports continues to dwindle as the economy tries to navigate its way out of recession. Fewer people boarding aircraft means fewer customers for airport concessionaires, and many of those operators are looking to their landlords for relief. They seem to be finding it on a variety of levels.
“One of the main items (of) conversation that can be had (between) airports and their operators, if necessary, starts with the Minimum Annual Guarantee (MAG),” says Mike Mullaney, Executive VP of Corporate Strategy and Business Development for The
Hudson Group. “(MAG) is an important part of a contract (and) it’s there to…insure that the airport doesn’t have an underperforming operator, and that (the airport has) a guaranteed revenue stream.”
However, under certain conditions, Mullaney notes, both airport and vendor may need to revisit the MAG. “I think traffic declines….have occurred, along with much thinner spending by passengers…in some markets.” In these instances, the concessionaire may be required to pay the MAG, even though their units are performing at an otherwise high level. “There are just less people in the building,” Mullaney explains, “and the sales have dropped. So a MAG can have the unintended consequence of becoming a penalty to an operator.” He adds, “for example, if (a vendor’s)…sales per enplanement are holding steady or actually increasing, that’s an indication that the vendor is still really maximizing their operation. But if enplanements and penetration are down slightly due to the economy, or airlines, or other things, and your contract is going into MAG, that becomes an unintended penalty to the operator. I think that is one reasonable area that operators and airports can have discussions (about) having a contractual relationship that isn’t economically penalizing to the operator, through no fault of their own.”
Several airports including
Dallas-Ft. Worth (DFW), Cincinnati (CVG), Tampa (TPA) and
Raleigh-Durham (RDU) have reduced or waived MAGs in response to various circumstances related to the downturn. “When Delta first started reporting cuts in traffic here (in 2005),” begins Dave Kellerman, Retail Manager of Commercial & Business Development at CVG, “the (airport board) awarded a 50% reduction in the MAG.” The Kenton County Airport Board (KCAB), which runs CVG, based that reduction on Delta’s anticipated cuts at their Midwestern hub for the following year. “Basically it resulted in most concessionaires paying percentage rent (as opposed to MAG).”
Operators like Hudson though, aren’t looking for MAGS to disappear all together. “Our company position is that the MAG shouldn’t go away,” he states. “MAG…(is) an important fiscal component of airport bonding and other things. It’s really just the level at which MAGS are at where I think airports can have discussions and dialogues with operators to make adjustments.” Mullaney has a firm grasp on such issues having once worked for CVG as that facility’s Manager of Commercial and Business Development.
Matt King, President of Travel and Hospitality services for
Delaware North, takes a broader approach. “I think first and foremost,” he says, “would be (for airports) just to remain flexible. Airports are different and they’ve been impacted differently through the recession.”
One constant at the eighteen airports in which Delaware North operates restaurants, King notes, is that passenger traffic is down. “I imagine that’s true across the country,” he adds. “But they’re down at different levels, meaning some are down single digits and some are down thirty percent. What we’re trying to do is approach the situation on an individual airport basis.”
Delaware North likes to look at a variety of alternatives when it comes to operating under reduced passenger traffic. “The options we like to look at,” says King, “are things like adjusting operating hours, (or) increasing the term of …a contract. In severe cases, where passenger traffic has dropped significantly, like in the 30% range, we like to consider closing some units on a temporary basis.” He notes that they haven’t had to result to the latter scenario.
Kevin Houser, vice president of development for
Dunkin’ Donuts, is another proponent of modifying hours of operation. “Typically many of (our airport) leases have very specific standards as to hours of operation,” he states, “and some concepts have more traction in the A.M. daypart, where others have more traction in the P.M daypart. I think the option of flexible hours certainly would be beneficial.”
Airports are weary about adjusting hours, but most, according to King have been very cooperative. “They don’t like (adjusting hours), as a general rule,” he says. “It might send a bad sign to their constituents and the traveling public. But the fact of the matter is that airport traffic and volume is down and, unfortunately, all of the articles in the national and international press are saying it’s likely to drop further this fall.”
CVG’s Kellerman agrees. “We have lowered the required amount of hours (vendors) have to be open. We also encourage them to reduce staffing during non-peak hours, so that they can take advantage of the busier times. If you have multiple locations…you can do things like stock, clean or something like that.”
Pricing has been another area in which vendors have sought to fine-tune things. Dunkin’s Houser often suggest to his franchisees that they seek permission to move slightly above street pricing. “Maybe get street plus 10 percent or street plus 15 percent,” he says. “The airport can certainly affect that.” Since the airports typically get a cut of the revenue, they’re usually amenable.
“We adjusted our street pricing to a plus 10 percent,” says Ingrid Hairston, Business Development Officer for Raleigh-Durham Airport. “We did get that in to effect (around) May of this year.”
CVG as well has allowed vendors to move above street pricing levels, at least for the time being. “Going back to July of last year,” Kellerman explains, “the board allowed street pricing plus 10 percent on a temporary basis. We’ll look at that again at the end of this year.”
King says that the airports in the Delaware North portfolio have also been very cooperative in terms of being open to ideas that can help the operator run more efficiently. “They’re all trying to work through (the recession),” he says. “We don’t have any airports in our portfolio that have been obstinate, or difficult. What they want is information. They want to make a fact-based decision, so if we can show them the statistics on how our revenue is off, and how if we open a unit an hour later in the morning, it really won’t have an impact on the overall concession revenue.” The airports have listened.
Opening later of course, or closing earlier, helps control one of the biggest operating expenses, payroll. If an adjusted flight schedule leaves a concourse with significantly fewer passengers in a particular day-part, cutting labor can help control costs, without negatively affecting the customer experience. “There’s no sense in paying someone to stand around,” King says.
Even as the overall number of flights falls though, contracts are still being bid and awarded. The negotiation process doesn’t seem to have changed much either, even in this sluggish economy. “Overall, we’ve had a very strong first half of 2009 with a lot of new contracts,” says Hudson’s Mullaney. “Our company position is this…you have to look at each contract opportunity in and of itself and make sure that it’s a strong, viable marketing contract over the term.”
Accessing risk has always been part of the process, and while the economy injected some caution into the equation, Hudson continues to move forward. “We’re all hoping that the economy and air traffic has hit the bottom of the trough, and that we will slowly build from here. We have to be a little bit more conservative in our projections and planning, but…we have not past on an opportunity, or elected not to proceed with an opportunity because of concerns about traffic (or) economics. We’re in this business for the long term and you’ve got to take the tough times with the good times.”
Similarly, not much has changed for Delaware North, save for giving a bit more scrutiny to some of the wording in the leases. “I think we’re trying to pay attention…to the language around operating hours,” says King, “and trying to get (the airport) to give us some more discretion there. We’re trying to be careful with the rent, but right now…my sense is that the concessionaires are not approaching (bids much)…differently than they have been, in the hopes that business will recover.”
Ramon Bourgeois, Regional Manager for
Areas USA, says that his company, and the airports in which they operate, are working together in another area. “I think what the airports can do, and most of them are doing it right now, is to work side by side with the concessionaires in ways to increase…check average and increase traffic at (store) locations.”
Dave Kellerman feels that trying to raise the check average is a little underrated by some vendors. “It’s so powerful,” he says, “that even in hard economic times, I can name a few concessionaires here in Cincinnati, that have done that. Their neighbor’s sales have gone down, but their sales have gone up through proper training, suggestive selling and (having) a more aggressively customer-friendly atmosphere.” If the concessionaire can, as he puts it, “capture more of what’s being left on the table,” it helps the dollar per ticket average, as well as overall sales. “Which will in turn help the airport because (under most) contracts… airport revenue is generated through percent of sales.” Even more so with reduced MAGs.
With fewer passengers coming into the airports, it is of course more vital than ever for vendors to capture the business of those who are flying. Bourgeois cites
Miami International’s efforts to help in that area. “(They have brought) musicians to the airport, so people actually stop and listen to the music and look at the shops… then spend a dollar here, a dollar there.”
Letting vendors extend lease lines, and place items just outside of their locations, is also helpful, and something more and more airports are allowing. Kellerman points out that CVG, long before the current downturn, encouraged their vendors to come out a little past the lease line. “It wasn’t too long ago, concessionaires did not do that,” he says. “We basically….with the…RFP and developments in 2002 and 2003, encouraged lease line selling. We think it’s something that is essential to the concept itself.” Of course the airport doesn’t want to see vendors dragging items out into the middle of the concourse, but they do realize that merchandise and displays are eye-catching and can in turn drive traffic into a location. “That’s how malls do it, that’s how street stores do it, and that’s how airports should do it.”
The folks at Raleigh-Durham aren’t entirely sold. “We’re pretty darn strict,” laughs Hairston. “To be fair, we are. And that’s for a variety of reasons, not the least of which is ease and convenience of using the building.” That makes sense, because if you impede travelers from making their way down the concourse, they’ll show their resentment by not stopping, or by shopping some place else.
When trying to drive more traffic into a store or restaurant, vendors will sometimes introduce new products. While airports seem to be all for expanding a location’s offerings, they still must be mindful of lease agreements with other vendors. “We have pretty strict and tight agreements which specifically lay down what product categories (can be in the units),” says Kellerman. The airport is all for driving sales, but they also want to make sure each shop keeps it uniqueness. “We don’t want cannibalization,” he adds. “For instance, would we let a restaurant carry newspapers? The answer there would be ‘no.’ That’s a pretty core product of the news and gift locations. We…encourage (vendors) to pick up new item that we would be likely to approve.”
Another party that can be helpful to both airport and concessionaire is
The Transportation Security Administration (TSA). “The amount of time it takes passengers to go through a checkpoint is very, very important to us,” Bourgeois insists. “When you see those big lines, we are losing money. We need those (passengers) to get through a checkpoint as fast as possible, so they have time to stand in our stores and shop.” He says that TSA has been very cooperative in responding to the vendors’ concerns at the airports Areas is in. That’s not surprising though, when you consider that, though TSA isn’t concerned with profits, they too want to deliver good customer service.
Tough times bring people together, and it seems the current downturn has brought a greater level of understanding to the airport/concession relationship. “We both have a responsibility to communicate,” says King, “and to make sure that the channels of communication stay open. It’s no secret that airports are struggling, concessionaires are struggling, it’s just a sign of the times. If we’re communicating it makes the process less painful.”
