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124 Resource Manual for Airport In-Terminal Concessions Similar to the Direct Leasing approach, the Third-Party Developer approach provides a great degree of competition, as the Developer selects the subtenants for each location (or group of loca- tions) that it deems best able to generate the highest sales and revenues. The underlying premise of this approach is the alignment of Developer and airport operator interests in that both parties function in the role of landlord and do not operate any of the con- cessions. This approach produces highly regarded concession programs with a high degree of customer service and, for this reason, some airport operators are willing to pay the Developer a share of revenues in return for the benefit of having a professionally developed program. Rather than relying on airport staff, the Developer is delegated most decision-making authority, with some agreed-upon approvals retained by airport management, such as approval of the overall concession plan and the final slate of tenants. Most airport operators that have selected the Third-Party Developer approach (such as the operators of Baltimore/Washington International Thurgood Marshall, Philadelphia Inter- national, and Pittsburgh International Airports) have included language in the Developer’s agree- ment that precludes self-operation of any of the spaces to ensure that no conflict of interest exists between the Developer and its subtenants. Another advantage of this approach is that the Third-Party Developer can more freely select and negotiate terms with its potential subtenants, rather than relying on the more rigid solicita- tion process used by the public sector. The Developer is free to negotiate variable or stepped per- centage rents, minimum rents, and other terms that will result in the best terms for both parties. Developers (and their subtenants) are generally expected to invest capital in development of the concession program. The Developer’s investments typically include funding of basic infrastructure needs and development of common areas, such as food court seating and shared concessions sup- port and delivery space. Subtenants are generally required to build-out their facilities; however, on occasion, the Developer may assist in subtenant build-out expenses by providing loans or seed money, particularly for small local businesses and ACDBEs. As with other management approaches, the large majority of investment under the Third-Party Developer approach is made by the tenants operating in the concession spaces. At some airports with older terminals, the Developer approach may be used as a vehicle for improving terminal infrastructure in addition to the quantity and quality of concession space. Baltimore/Washington International Thurgood Marshall Airport is an example of an airport where the Developer approach was used to upgrade basic space and infrastructure in an older terminal area. Because of the comprehensive nature of the Third-Party Developer approach, improvement in the concession program can be significant. For example, at the Baltimore/Washington Inter- national Thurgood Marshall Airport, the Developer made a $20 million investment commitment (exclusive of subtenant investment) and increased sales per enplaned passenger from $5.65 per enplaned passenger in 2004, under the former Master Concessionaire contract, to $8.41 per enplaned passenger in 2008, under the Third-Party Developer approach—an increase of 49%. The Developer approach is also used at Newark Liberty and Boston Logan International Airports, which rank among the leaders in sales per enplaned passenger. For many airport operators, coordinating the design and construction of multiple tenant improvements is an administrative burden for which they are not adequately staffed. The Devel- oper will typically coordinate all subtenant design and construction on behalf of the airport oper- ator, reducing airport staff workload considerably. A concern often expressed about the Developer approach is that the net revenue to the airport enterprise is lower than under other approaches because of the fees required to compensate the Developer for its services. Although the potential exists for increased sales under this compre-

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Concession Contracting Approaches 127 in terms of (1) competition, (2) ability to invest capital, (3) the associated airport administrative costs, and (4) the financial return to the airport enterprise associated with each approach. Table 8-2 presents a summary of the advantages and disadvantages of each concession man- agement approach. The following section presents a comparison of the revenue to the airport enterprise produced under each approach. Table 8-2. Summary comparison of concession management approaches. THIRD-PARTY DEVELOPER Advantages: • Lowest administrative burden, as Developer brings professionals with experience in marketing, leasing, developing, and managing food and retail spaces; single point of contact for airport management • Coordinates all tenant design and construction • Generally enters into subcontracts directly with subtenants and is able to negotiate optimal business terms (compared with public procurement requirements) • Does not compete with tenants; shares goal of airport operator in maximizing sales, service • Develops food courts and other common areas; makes investment in common areas, directories, etc. • Variety of shops, concepts, subtenants creates high degree of competition and choices for customers Disadvantages: • Considerable potential sales volumes are necessary for Third-Party Developers to participate • Requires longer term, typically 15 years, for Developer to earn satisfactory returns • Developer takes cut of concession sales, which may reduce airport operator’s concession revenues below potential of other approaches LEASING MANAGER Advantages: • Similar to Third-Party Developer, brings professionals with experience in marketing, leasing, developing, and managing food and retail spaces; single point of contact for airport management • Scope may include coordination of design and construction activities • May (or may not) enter into agreements directly with subtenants; able to negotiate optimal business terms (compared with public procurement requirements) • Variety of stores/concepts operated by different concessionaires creates distinct customer shopping choices and a high degree of competition Disadvantages: • Airport operator has responsibility for common area build-outs • Leasing Manager receives a fee for its services, which may reduce airport concession revenues • Typically works on a fee basis and does not make capital investment in common areas, directories, etc. (continued on next page)

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130 Resource Manual for Airport In-Terminal Concessions Table 8-3. Summary of enplaned passengers, space, and sales by concession management approach—2008. Food & beverage and retail (excluding duty free) Square feet Enplaned Enplaned Sales per Average sales Total sales per 1,000 Concession management approach passengers passengers enplaned per square (millions) enplaned (millions) rank passenger foot passengers DEVELOPER/LEASING MANAGER Newark 17.7 12 $10.57 $ 187.1 8.3 $1,278 Philadelphia 15.8 19 $8.60 $ 136.3 7.3 $1,178 Boston 13.0 20 $10.19 $ 132.3 11.7 $868 Washington Dulles 11.9 21 $8.48 $ 100.5 13.0 $654 Baltimore 10.2 25 $8.41 $ 86.1 8.3 $1,007 Washington Reagan 9.0 29 $9.01 $ 80.8 7.1 $1,269 Total / Average 77.6 $9.32 $ 723.1 9.2 $1,008 DIRECT LEASING Dallas/Fort Worth 29.0 4 $8.39 $ 243.1 7.7 $1,090 Denver 25.7 5 $8.42 $ 216.0 6.1 $1,371 Las Vegas 22.1 7 $10.10 $ 223.1 5.9 $1,721 Phoenix 19.8 9 $8.57 $ 169.8 7.6 $1,123 San Francisco 18.5 10 $11.70 $ 216.8 8.2 $1,422 Detroit 17.5 13 $9.07 $ 158.6 7.4 $1,219 Minneapolis 17.0 16 $8.98 $ 152.3 9.2 $974 Portland 7.2 33 $10.44 $ 74.7 10.8 $971 Kansas City 5.5 39 $4.97 $ 27.5 11.1 $449 Total / Average 162.3 $9.14 $ 1,481.9 7.6 $1,196 HYBRID Chicago O'Hare 34.0 2 $8.58 $ 291.9 3.5 $2,453 New York - Kennedy 23.9 6 $11.84 $ 282.8 9.2 $1,286 Houston Bush Intercontinental 21.6 8 $4.73 $ 102.2 4.1 $1,152 Orlando 18.2 11 $9.29 $ 169.4 8.6 $1,082 Miami 17.0 15 $9.92 $ 169.0 9.3 $1,073 Seattle 16.1 18 $9.60 $ 154.4 7.1 $1,354 New York - LaGuardia 11.6 23 $8.79 $ 101.7 7.7 $1,140 Chicago Midway 8.2 31 $8.24 $ 67.8 5.2 $1,573 Total / Average 150.6 $8.89 $ 1,339.2 6.6 $1,355 PRIME CONCESSIONAIRE Atlanta 45.1 1 $7.55 $ 340.5 4.2 $1,812 Los Angeles 29.9 3 $8.93 $ 267.2 4.9 $1,817 Charlotte 17.4 14 $8.12 $ 141.0 4.6 $1,775 Fort Lauderdale 11.6 22 $6.77 $ 78.5 6.6 $1,020 Salt Lake City 10.4 24 $7.39 $ 76.8 5.8 $1,275 Tampa 9.1 26 $8.66 $ 79.2 10.3 $840 Houston Hobby 9.1 27 $3.04 $ 27.7 2.8 $1,067 San Diego 9.1 28 $8.02 $ 72.7 5.5 $1,470 St. Louis 7.2 32 $7.70 $ 55.5 10.0 $771 Cincinnati 6.8 34 $7.28 $ 49.5 16.1 $453 Oakland 5.7 37 $6.26 $ 36.0 3.1 $1,992 Total / Average 161.4 $7.59 $ 1,224.6 5.7 $1,330 Count DEVELOPER/LEASING MANAGER 77.6 6 $9.32 $ 723.1 9.2 $1,008 DIRECT LEASING 162.2 9 $9.14 $ 1,481.9 7.6 $1,196 HYBRID 150.7 8 $8.89 $ 1,339.3 6.6 $1,355 PRIME CONCESSIONAIRE 161.4 11 $7.59 $ 1,224.6 5.7 $1,330 Total / Average 551.9 $8.64 $ 4,768.9 6.4 $1,347 34 Note: Cleveland Hopkins airport reported on food and beverage sales but not retail and is excluded from the analysis. Source: Top 34 airports reporting data to Airport Revenue News for food and beverage and retail Calendar Year 2008. (Airport Revenue News 2009). ience retail; therefore, the analysis does not show either category for the Prime Concessionaire approach. (Excluding those two airports, the other airports where the Prime Concessionaire approach is used had specialty retail sales averaging $1.09 per enplaned passenger). The Devel- oper/Leasing Manager approach produced sales per enplaned passenger that were $0.68 or 8% above the average for all approaches and $1.73 or 23% above the Prime Concessionaire average. The Developer/Leasing Manager approach resulted in the highest average total retail spend per enplaned passenger, followed by the Hybrid and Direct Leasing approaches. The results for the

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Concession Contracting Approaches 131 Table 8-4. Summary of revenue, revenue per enplaned passenger, and average effective percentage rent by concession management approach—2008. Food & beverage and retail (excluding duty free) Enplaned Enplaned Revenue to Revenue per Effective Total sales Concession management approach passengers passenger airport enplaned percentage (millions) (millions) Rank (millions) passenger rent DEVELOPER/LEASING MANAGE R Newark – 12 $ – $ – – – Philadelphia – 19 – – – – Boston – 20 – – – – Washington Dulles – 21 – – – – Baltimore 10,242,269 25 86,089,458 11,662,602 $1.14 13.5% Washington Reagan 8,976,979 29 80,842,249 10,283,012 $1.15 12.7% Total / Average 19,219,248 $ 166,931,707 $ 21,945,614 $1.14 13.1% DIRECT LEASING Dallas/Fort Worth – 4 $ – $ – $0.00 – 14.1% Denver 25,650,243 5 216,042,542 30,394,834 $1.18 12.7% Las Vegas 22,086,022 7 223,100,666 28,427,558 $1.29 13.6% Phoenix 19,816,493 9 169,782,675 23,162,937 $1.17 13.9% San Francisco 18,528,274 10 216,789,473 30,127,331 $1.63 15.4% Detroit 17,495,850 13 158,602,837 24,355,204 $1.39 14.4% Minneapolis 16,955,473 16 152,343,897 21,983,508 $1.30 11.6% Portland 7,150,857 33 74,669,450 8,643,246 $1.21 10.6% Kansas City 5,527,549 39 27,459,508 2,913,361 $0.53 13.7% Total / Average 133,210,761 $ 1,238,791,048 $ 170,007,979 $1.28 HYBRID – Chicago O'Hare 2 $ – $ – $0.00 – New York - Kennedy 6 – – $0.00 – – 12.6% Houston Bush Intercontintal 21,623,261 8 102,230,762 12,923,227 $0.60 14.2% Orlando 18,238,277 11 169,404,326 24,108,082 $1.32 12.9% Miami 17,035,400 15 169,021,114 21,752,300 $1.28 13.5% Seattle 16,084,939 18 154,428,491 20,828,036 $1.29 – New York - LaGuardia 23 – – $0.00 – Chicago Midway 31 – – $0.00 – – 13.4% Total / Average 72,981,877 $ 595,084,693 $ 79,611,645 $1.09 PRIME CONCESSIONAIRE 13.5% Atlanta 45,090,314 1 $ 340,549,351 $ 46,098,718 $1.02 16.4% Los Angeles 29,928,150 3 267,219,616 43,891,036 $1.47 Charlotte 14 – – $0.00 – – 19.1% Fort Lauderdale 11,586,568 22 78,464,793 14,990,435 $1.29 Salt Lake City – 24 – – $0.00 – 18.7% Tampa 9,142,879 26 79,203,615 14,800,410 $1.62 16.8% Houston Hobby 9,120,970 27 27,720,844 4,652,298 $0.51 14.4% San Diego 9,066,343 28 72,708,235 10,487,922 $1.16 12.0% St. Louis 7,207,890 32 55,470,330 6,678,414 $0.93 Cincinnati 34 – – $0.00 – – 16.5% Oakland 5,749,093 37 35,993,456 5,928,517 $1.03 15.4% Total / Average 126,892,207 $ 957,330,240 $ 147,527,750 $1.16 Count 13.1% DEVELOPER/LEASING MANAGER 19,219,248 2 $ 166,931,707 $ 21,945,614 $1.14 13.7% DIRECT LEASING 133,210,761 8 1,238,791,048 170,007,979 $1.28 13.4% HYBRID 72,981,877 4 595,084,693 79,611,645 $1.09 15.4% PRIME CONCESSIONAIRE 126,892,207 8 957,330,240 147,527,750 $1.16 14.2% Total / Average 352,304,093 $ 2,958,137,688 $ 419,092,988 $1.19 22 Note: Cleveland Hopkins airport reported on food and beverage sales but not retail and is excluded from the analysis. Source: Top 34 airports reporting data to Airport Revenue News for food and beverage and retail Calendar Year 2008. (Airport Revenue News 2009). Prime Concessionaire approach were again last, trailing the Developer/Leasing Manager approach by $1.07 per enplaned passenger. The Prime Concessionaire approach also resulted in $0.64 per enplaned passenger below the overall average for all concession management approaches. Table 8-6 presents a comparison of the average spend rate per enplaned passenger for the 34 air- ports included in the analysis for each concession management approach. The highest spend rate per passenger for each sales category is indicated in boldface. The Prime Concessionaire approach had lower than average rates for total spending, food and beverage spending, and retail spending

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Concession Contracting Approaches 133 Table 8-7. Ranking of sales per enplaned passenger by management approach —2008. Sales per enplaned passenger - rank among management approaches Food and Specialty retail Convenience Total Total retail beverage (1) retail (1) Direct leasing 2 1 1 3 3 Prime concessionaire 4 4 4 n.a. n.a. Developer/leasing manager 1 2 2 2 1 Hybrid 3 3 3 1 2 n.a. = Not available. (1) Two airports in this category do not break out specialty retail from total retail. Source: Airport Revenue News 2009. Data for 2008. sionaires had only 61% and 69% of the total retail space compared with the Developer/Leasing Manager and Direct Leasing approaches, respectively. Table 8-9 presents a comparison of concession space per 1,000 enplaned passengers with the overall average for the concession management approaches on a percentage basis, with the val- ues presented in Table 8-8 expressed as a percentage of the overall airport average. The highest percentage for each sales category is indicated in boldface. The data suggest that the airports where the Developer/Leasing Manager approach is used have, on average, more space than the average of the 34 airports analyzed. On the other hand, airports where the Prime Concessionaire approach is used have less space than the average of the airports analyzed. The data presented in Tables 8-8 and 8-9 suggest that • Third-Party Developers/Leasing Managers are incentivized to develop the most concession space at airports, as additional space maximizes overall sales and revenue to the airport enter- prise, and these concession managers share in the revenue. As private companies, Third-Party Developers (and Leasing Managers) have more latitude in negotiating business terms and entering into leases. Airports where the Third-Party Developer/Leasing Manager approach is used performed slightly below airports where the Direct Leasing approach is used in sales per enplaned passenger in the food and beverage category, but performed better in the retail cat- egory. On the whole, airports where the Third-Party Developer/Leasing Manager approach is used performed only about 2% better in sales per enplaned passenger than airports where the Direct Leasing approach was used, or about $0.23 per enplaned passenger. Table 8-8. Concession space per 1,000 enplaned passengers by management approach—2008. Square feet per 1,000 enplaned passengers Food and Specialty retail Convenience Total Total retail beverage (1) retail (1) Direct leasing 7.6 4.8 1.9 1.0 2.9 Prime concessionaire 5.7 3.7 n.a. n.a. 2 .0 Developer/leasing manager 9.2 5.9 2.0 1.3 3.3 Hybrid 6.6 3.9 1.5 1.1 2.6 Average—all airports 7.0 4.4 1.5 1.1 2.6 n.a. = Not available. (1) Two airports in this category do not break out specialty retail from total retail. Source: Airport Revenue News 2009. Data for 2008.

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134 Resource Manual for Airport In-Terminal Concessions Table 8-9. Concession space per 1,000 enplaned passengers as a percent of the overall management approach average—2008. Square feet per 1,000 enplaned passengers as percent of average Food and Specialty retail Convenience Total Total retail beverage (1) retail (1) Direct leasing 109% 108% 123% 92% 110% Prime concessionaire 81% 84% n.a. n.a. 77% Developer/leasing manager 1 32% 135% 129% 124% 127% Hybrid 94% 90% 100% 101% 100% Average—all airports 100% 100% 100% 100% 100% n.a. = Not available. (1) Two airports in this category do not break out specialty retail from total retail. Source: Airport Revenue News 2009. Data for 2008. • Airports utilizing the Direct Leasing concession management methodology are also incen- tivized to develop more space as the additional space maximizes overall sales and revenue to the airport enterprise. With more specialist food and beverage and retail tenants competing for business, airports that utilize the Direct Leasing management approach perform better than airports where either the Hybrid or Prime Concessionaire approach is used. Airports where the Direct Leasing approach is used rank second in terms of developed concession space. • Airports where the Prime Concessionaire approach is used had the lowest ratio of space to passengers. In most cases, the operators of these airports must work through the Prime Con- cessionaire to develop additional space. A right-of-first-refusal clause is typically included in agreements with Prime Concessionaires, which gives the Prime Concessionaire first choice on developing space. However, the airport operator must convince the Prime Concessionaire that the marginal contribution from additional concession space will exceed its marginal cost, that is, it will not reduce the Prime Concessionaire’s return on investment, particularly if the new space will compete with existing space. The additional investment may also lower the overall return on investment under the Prime Concessionaire agreement. 8.2.4 Sales per Square Foot Sales per square foot is a measure of the productivity of concession space, and can be an indi- cator of or surrogate for assessing concessionaire profitability, as the measure relates investment (square footage) with sales. Sales per square foot is not a measure of profitability for the airport enterprise, however, as airports with very limited concession space may have high sales per square foot and at the same time are likely to have low sales per enplaned passenger. Sales per enplaned passenger is the best measure of overall concession performance. Table 8-10 shows the sales per square foot for each concession management approach, by cate- gory. The highest sales per square foot for each sales category is indicated in boldface. The Prime Concessionaire approach produces the lowest overall sales per enplaned passenger (see Table 8-5) and the highest sales per square foot. High sales per square foot may be good for concessionaires, in that it indicates good return on investment, but it is not necessarily good for the airport opera- tor, which could maximize total sales and revenue by developing more space. For example, Newark Liberty, John F. Kennedy, Boston Logan, and Portland International Airports have some of the highest total spend rates, while their average sales per square foot are near or below the overall aver- age (see Table 8-3). 8.2.5 Percentage Rents Of the 34 airports included in the analysis, 22 reported net revenue data. Based on the reported data, the average effective rent can be calculated. The effective rent is total revenue divided by total

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Concession Contracting Approaches 135 Table 8-10. Sales per square foot by concession management approach—2008. Sales per square foot Food and Specialty retail Convenience Total Total retail beverage (1) retail (1) Direct leasing $ 1,196 $ 1,176 $ 1,577 $ 1,230 $ 1 ,051 Prime concessionaire n.a. n.a. $ 1,343 $ 1,330 $ 1,323 $ 1,467 Developer/leasing manager $ 1,008 $ 936 $ 917 $ 1,136 Hybrid $ 1,355 $ 1,351 $ 1,014 $ 1 ,858 $ 1,361 Average—all airports $ 1,234 $ 1,210 $ 991 $ 1,685 $ 1,275 n.a. = Not available. (1) Two airports in this category do not break out specialty retail from total retail. Source: Airport Revenue News 2009. Data for 2008. sales, and takes into account different rent structures for tenants in the same category. The results are shown in Table 8-11. Only the total retail average percentage rent is shown for the Prime Con- cessionaire approach as two airports did not break out their space and sales into specialty retail and convenience retail sub-categories. The average effective rent for all airports was 14.2%. Airports using the Prime Concessionaire approach had the highest effective rent, 15.4% overall, or 1.2% percent of sales above the group average. Third-Party Developers had an average effective rent of 13.1%, or 1.1% below the group average. Direct Leasing airports averaged 13.7%, or about 0.5% below the overall average. If the sales for each approach were equal, this might suggest that the Prime Concessionaire approach would yield the highest revenue. However, the sales are not equal for each management approach. Adjusting the average percentage rent shown in Table 8-11 for the difference in sales per enplaned passenger shown in Table 8-5 results in the following effective percentage rent for each manage- ment approach, as shown in Table 8-12. The effective percentage rent for an airport or a category can be calculated by dividing the rent paid to the airport by the sales. Note that it is possible that high Minimum Annual Guarantees may result in high effective rents as the total Minimum Annual Guarantee may exceed the percentage rents that would be due under the concession agreement. When the difference in sales performance for each management approach is factored in, the dif- ference in the effective rent narrows considerably. Direct Leasing results in the highest overall return on sales (14.5%), followed by the Developer, Hybrid, and Prime Concessionaire approaches. The Prime Concessionaire approach, which results in the highest average rent, compares less favor- ably when the difference in sales performance for each approach is considered. In the food and bev- erage category, the Developer/Leasing Manager approach produces the highest return on sales, Table 8-11. Average percentage rent by management approach and category—2008. Effective percentage rent Food and Specialty retail Convenience Number of Total Total retail beverage (1) retail (1) Airports 8 Direct leasing 13.7% 12.5% 15.7% 15.7% 15.7% 8 Prime concessionaire 15.4% 14.1% n.a. n.a. 17.9% 2 Developer/leasing manager 13.1% 12.7% 13.1% 14.6% 13.8% 4 Hybrid 13.4% 12.1% 13.8% 16.4% 15.2% 14 Average—all airports 14.2% 13.0% 15.6% 16.6% 16.1% n.a. = Not available. (1) Two airports in this category did not break out specialty retail from total retail. Source: Airport Revenue News 2009. Data for 2008.

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