Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
One of the most fundamental decisions that an airport operator will make concerning the air- port concession program is the choice of concession contracting approach (also referred to as concession management approach). This decision has implications for all aspects of the conces- sion program. This chapter presents an overview of the four major concession management approaches in use at U.S. airports todayâDirect Leasing, Prime Concessionaire, Third-Party Developer, and Leasing Manager. A âHybridâ approach is also used at some airports, wherein two or more of the four major management approaches are used. This chapter will provide a description of concession management approaches, including a summary of the advantages and disadvantages of each, and a discussion of financial performance by management approach that covers the topics of sales per enplaned passenger, concession space in operation, sales per square foot, and net revenue per enplaned passenger 8.1 Description of Concession Management Approaches In determining the optimal management approach, the airport operator must consider a number of factors, including the following: â¢ The number of terminals at the airport, their layout, and the configuration of concession space and support space â¢ Passenger volumes and demographics â¢ The size and capabilities of the airport operatorâs concessions staff â¢ Private-sector interest in the potential concession opportunities â¢ Projected sales and revenue under each management approach â¢ The airport operatorâs goals and objectives â¢ The airport operatorâs terminal development plans, and the timing of the development â¢ The airport sponsorâs need or desire to attract private capital â¢ The relative difficulty in soliciting and contracting with concessionaires under the airport operatorâs policies and legal constraints â¢ The local political climate 8.1.1 Direct Leasing Direct Leasing offers the airport operator the opportunity to plan the use of terminal concession spaces, identify individual spaces for leasing or bundle spaces into contract packages, and then select the best concessionaire to operate each space or package of spaces. This approach generally provides the airport operator with the greatest amount of control over its concession program and a high degree of competition among concessionaires. 121 C H A P T E R 8 Concession Contracting Approaches
Direct Leasing may occasionally be used to supplement a Prime Concessionaire approach, whereby the airport operator holds some locations out of the larger, multiple location package(s) offered to the Prime Concessionaire(s) to make those locations available to smaller vendors or specialized concession opportunities. Direct Leasing works best when passenger volumes and business terms are adequate to be able to structure contract packages that can stand alone, and a sufficient number of concession- aires are interested to provide reasonable competition. It is less likely that a Direct Leasing approach will provide concessionaires with opportunities to offset low volume or unprofitable locations with returns from successful locations (as, for example, is typical with the Prime Con- cessionaire approach, where the Prime Concessionaire assumes the risk for marginal spaces, which is offset by the overall volume of sales, including those at high-performing spaces). To reduce risks of service deficiencies and concessionaire failures under the Direct Leasing approach, the airport operator must be able to devise business terms and conditions (term length, operational requirements, pricing policies, concession fees, buildout requirements, etc.) appropriate for each opportunity. The competitive nature of the Direct Leasing approach, with its variety of concessionaires and brands/concepts, provides incentive to build out stores in all locations that are considered to be financially feasible, which contributes to increased revenue and greater customer satisfaction. Implementation of the Direct Leasing approach does bring certain challenges. This approach generally requires the airport operator to have a larger staff with more skills and experience than the other concession management approaches because airport staff, under a Direct Leasing approach, must solicit, award, and implement numerous concession agreements and manage a multiconcessionaire operation. In addition, aesthetic coordination and approval of construction activities by multiple concessionaires with different architects and construction teams are required, which adds to the work of the airportâs engineering and development staff. Unlike the Prime Concessionaire and Third-Party Developer/Leasing Manager approaches, the Direct Leasing approach often requires the airport operator to make capital investments in facilities outside of the individual concessionaire locations, such as food courts. In summary, the Direct Leasing approach provides advantages in offering concept and prod- uct variety, price and service competition, opportunities for a number of concessionaires to par- ticipate, and high sales/revenue (as discussed in Section 8.2). However, the airport operator also has greater staff costs and administrative burden in managing multiple tenants and contracts. Perhaps most importantly, the Direct Leasing approach requires the airport operator to fund and construct needed common area concession-related capital improvements or to develop strategies for constructing the common area capital improvements and incorporate them in its contracting strategy. Some of the major airports at which the Direct Leasing concession management approach is used include Dallas/Fort Worth, Denver, Portland, and San Francisco International Airports. Each of these airports has a well-developed Direct Leasing program with participation by a sig- nificant number of local brands and local owners. 8.1.2 Prime Concessionaire Under the Prime Concessionaire approach (sometimes referred to as multiple primes), the airport operator leases all of the concession space in a category to one or two concessionaires. Prime Concessionaires (Primes) generally self-operate most locations and sublease a few loca- tions to meet the ACDBE goal, and/or to provide local or regional brands that may be desired by the airport operator, or for other reasons. 122 Resource Manual for Airport In-Terminal Concessions
Airport operators may execute agreements with different Prime Concessionaires to operate food/beverage facilities and retail facilities, or the same Prime may operate both categories of concessions. In cases where only one company operates the vast majority of food and beverage and/or retail concessions, the term âMaster Concessionaireâ is used. Use of the Prime Concessionaire approach results in fewer concession contracts for airport staff to award and manage. These contracts are awarded almost entirely to experienced national air- port concessionaires. Additionally, the Prime Concessionaire approach provides for more coor- dinated design submittals, and construction permitting and oversight are required for fewer concessionaires. Overall, this concession management approach places considerably less oversight demand on airport concession staff and construction-related staff than the other concession man- agement approaches. Because of the wider exposure to enplaning passengers in the terminal, Prime Concessionaires are less vulnerable to changes in airline schedules than tenants under Direct Leasing with fewer locations. As a result of their multiple locations within the terminal, Prime Concessionaires are bet- ter able to withstand decreases in sales that may occur at particular locations resulting from factors such as gate closures or reassignments, airline relocations or service reductions, economic down- turns, and construction activities. Prime Concessionaires are also usually large, well-capitalized, established firms with the financial ability to withstand most downturns. In addition to their direct investment in concession units, the Prime Concessionaire also typically invests in the development of common areas, such as food courts and storage and support spaces. The percentage rent and minimum rents are generally higher under the Prime Concession- aire approach as the size of the Prime Concessionaire operations yields financial economies of scale, providing Primes with a greater ability to pay higher rent. At the same time, the Prime Con- cessionaire approach produces lower sales compared with the other approaches (see Table 8-5), which somewhat offsets the higher rents. The Prime Concessionaire approach is used at most small hub airports (e.g., Charleston and Tulsa International Airports) because passenger volumes are not sufficient to support multiple concession operators. The Prime Concessionaire approach is also used at many medium hub air- ports and at some large hub airports. For example, the Hillsborough County Aviation Author- ity uses the Prime Concessionaire approach at Tampa International Airport, contracting with a single Master Concessionaire, and the Port of Oakland uses a single Master Concessionaire for food and beverage and retail offerings, supplemented by a few Direct Leases with specialist oper- ators for a small percentage of the overall concession space at Oakland International Airport. Nashville International Airport, a medium hub, has two Primes for food and beverage services. A significant disadvantage of the Prime Concessionaire approach is that it provides the least amount of competition of any of the concession management approaches, as one or two large con- cessionaires effectively control the vast majority of space in a category. The only real competition under this approach may be between the Prime Concessionaire and its own subtenants, whose store locations and sublease terms and conditions are determined by the Prime. In some cases, the Prime and its subtenants may be competing for the same business, which can cause conflicts. Another possible disadvantage is that the Prime Concessionaire may be reluctant to use its capital funds to build out stores in new locations if such stores would serve as competitors for the Primeâs existing stores or those of its subtenants. 8.1.3 Third-Party Developer Under the Third-Party Developer (Developer) approach, the airport operator leases all loca- tions in a terminal(s) to a specialist company that develops and manages the concession program. Concession Contracting Approaches 123
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 Developerâs 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 Developerâs 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 approachâan 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- 124 Resource Manual for Airport In-Terminal Concessions
hensive approach, the higher sales may not be sufficient to offset the Developerâs fees, which usu- ally are in the range of 25% to 30% of subtenant concession rents. The Developer approach also requires a considerable volume of enplaned passengersâtypically, more than 5 million annual enplaned passengersâand considerable space. Therefore, small hub airports and most medium hub airports would not be viable candidates for the Third-Party Devel- oper approach. Pittsburgh International Airport, the first U.S. airport where the Developer approach was used, falls below this threshold as a result of the decline in connecting traffic following the downsizing of US Airways, its hub carrier. However, the airport remains the overall U.S. leader in food and beverage and retail spend per enplaned passenger, at $13.68 in 2008 according to a com- parison of the top 50 performing North American airports published in the Airport Revenue News Fact Book 2009 (Airport Revenue News 2009). (It should be noted that the Developer approach is not fully responsible for the high sales threshold, as the airportâs terminal layout, which requires all passengers go through the same central concessions core on the way to their gates, is ideal.) The level of investment associated with Third-Party Developer agreements also typically requires a longer term, usually 15 years or more, although the terms of the underlying subtenant agreements are generally similar to those under other management approaches. The longer term is needed to amortize the Developerâs common-area and infrastructure investments, which are expensive and often have a long useful life. In some cases, elected policymakers may not support delegating contracting authority to a Third-Party Developer because of concerns about the revenue effects on the airport enterprise and/or the loss of some control over the selection of concessionaires. 8.1.4 Leasing Manager The Leasing Manager approach is similar to the Third-Party Developer approach, with some significant differences. As with the Developer approach, the Leasing Manager brings expertise in commercial leasing and property management and, in return, the Leasing Manager receives a fee for its services. To ensure that no conflict of interest exists regarding the Leasing Managerâs responsibilities, the Leasing Manager typically does not self-operate any spaces. Unlike a Third- Party Developer, the Leasing Manager does not make investments in the terminal. Secondly, the Leasing Manager may or may not provide oversight of tenant design and construction. Third, the Leasing Manager may or may not enter into concession agreements directly with tenants. Fee structures under the Leasing Manager approach can vary. The Leasing Manager may receive a fixed fee for its services and/or a percentage of rentals collected from concessionaires, or some other method of payment may apply. For example, the Metropolitan Washington Airports Author- ity has historically required its Leasing Managers at Washington Reagan National and Washing- ton Dulles International Airports to charge concessionaires the greater of a minimum annual guaranteed rent or a percentage of sales as a concession fee, with the Authority subsequently receiv- ing percentage rents from the Leasing Manager based on the concession fees that the Leasing Man- ager collects. Because the Leasing Manager is not responsible for capital development costs, the fees for its services are lower than the fees under the Third-Party Developer approach. The decision to use a Leasing Manager is a tradeoff between the additional costs connected with its services and the ability of the Leasing Manager to attract tenants and negotiate concession agreements for the airport operator. Airport operators that use Leasing Managers appreciate the contracting flexibility and believe that the overall result is a better program with better tenants, and they also appreciate that the increased revenue from the program substantially offsets the Leasing Managerâs fees. In some cases, elected policymakers may not support delegating contracting authority to a Leas- ing Manager that has no real investment in the airport. Elected policymakers may also not support Concession Contracting Approaches 125
delegating contracting authority to a Leasing Manager if the basis for soliciting and selecting tenants is not transparent or if the costs of the Leasing Manager reduce revenues to the airport operator. 8.1.5 Hybrid Approach Practical considerations may result in the use of more than one contracting approach at an airport. For example, at Seattle-Tacoma International Airport, multiple Prime Concessionaires are used for concessions on the concourses, and the Direct Leasing approach is used in the Cen- tral Terminal, which is themed as the Seattle Marketplace. Further, the Central Terminal mar- keting, leasing, and development was performed by a Leasing Manager on behalf of the Port of Seattle. Airport management believed it could use a conventional Prime Concessionaire approach for its concourses, but the new Central Terminal, a major centralized post-security concession development, was intended to be a showcase, and a Leasing Manager was considered the best way to attract and contract with tenants who may be wary of conventional public-sector contracting practices. The strategy at the Seattle airport was successful. After the Central Termi- nal was opened, airport staff assumed responsibility for its management. At some other large airports, a combination of leasing approaches is also used. For example, at John F. Kennedy International Airport, a Master Concessionaire has executed a food and bev- erage agreement in JetBlue Airwaysâ Terminal 5, and Direct Leasing is used in the airportâs Ter- minal 4, where the concession program is managed by the terminal operator using Direct Leasing. A Third-Party Developer manages the pre-security central terminal retail program at Orlando International Airport, while multiple Primes operate the concessions in other areas of the terminal complex. A Third-Party Developer operates the concessions in the central terminal areas at Miami International Airport, and Primes and Direct Leasing are used in most other areas of the terminal complex. Two Third-Party Developers operate at Boston Logan International Airport, each managing the concessions in two of the airportâs four terminals. For these reasons, the Hybrid approach is more of a contracting strategy than an approach, with the airport operator using each approach as a tool to achieve the best overall program for its unique circumstances. 8.1.6 Summary of Concession Management Approaches No single concession management approach can or should be universally applied. Airport operators must decide which approach offers the best outcome in light of the opportunities and challenges it presents. This decision is best made after careful analysis of the costs and benefits of each approach. Table 8-1 presents a high-level summary of the relative strengths of each approach 126 Resource Manual for Airport In-Terminal Concessions Competition Capital investment Airport administrative costs Financial return Direct Leasing High High High High Prime Concessionaire Medium High Low Medium Third-Party Developer High High Medium Medium Leasing Manager High n.a. Medium Medium n.a. = Not applicable. Table 8-1. Summary of relative strengths of major concession management approaches.
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. Concession Contracting Approaches 127 THIRD-PARTY DEVELOPER Advantages: â¢ 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 â¢ Coordinates all tenant design and construction â¢ Generally enters into subcontracts directly with subtenants and is able to negotiate optimal business terms (compared with public procurement requirements) â¢ Does not compete with tenants; shares goal of airport operator in maximizing sales, service â¢ Develops food courts and other common areas; makes investment in common areas, directories, etc. â¢ Variety of shops, concepts, subtenants creates high degree of competition and choices for customers Disadvantages: â¢ Considerable potential sales volumes are necessary for Third-Party Developers to participate â¢ Requires longer term, typically 15 years, for Developer to earn satisfactory returns â¢ Developer takes cut of concession sales, which may reduce airport operatorâs concession revenues below potential of other approaches LEASING MANAGER Advantages: â¢ 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 â¢ Scope may include coordination of design and construction activities â¢ May (or may not) enter into agreements directly with subtenants; able to negotiate optimal business terms (compared with public procurement requirements) â¢ Variety of stores/concepts operated by different concessionaires creates distinct customer shopping choices and a high degree of competition Disadvantages: â¢ Airport operator has responsibility for common area build-outs â¢ Leasing Manager receives a fee for its services, which may reduce airport concession revenues â¢ Typically works on a fee basis and does not make capital investment in common areas, directories, etc. Table 8-2. Summary comparison of concession management approaches. (continued on next page)
8.2 Financial Performance by Management Approach A number of factors are involved in the choice of concession management approach, but the one factor that is universally considered is revenue to the airport enterprise. In this section, the financial performance of the various concession management approaches is analyzed in terms of the sales and revenue performance of airports where each management approach is in effect. Financial performance was analyzed using data for the busiest 35 airports in the United States, mostly large hubs (and a few medium hubs), regarding concession space, sales, and revenue data 128 Resource Manual for Airport In-Terminal Concessions DIRECT LEASING Advantages: â¢ Direct relationship between airport operator and concessionaires â¢ Variety of stores/concepts operated by different concessionaires creates distinct customer shopping choices and a high degree of competition â¢ Airport operator controls overall scope of program Disadvantages: â¢ Requires the most airport staff time and expertise due to variety of individual concession agreements to award and manage â¢ Airport operator has responsibility for common-area build-outs â¢ Design and construction activities by many different firms increases workload for airport operator â¢ Greater risk of failure, as individual agreements must be self sufficient; greater exposure to traffic risks â¢ If local businesses are targeted, training will be required; there may be operating risks associated with inexperienced concessionaires PRIME CONCESSIONS Advantages: â¢ Only a few points of contact for coordination of design and construction activities, depending on number of primes â¢ Primes typically handle common-area build out, such as food courts â¢ Requires less airport staff time (compared with Direct Leasing) with fewer, larger concession agreements to manage â¢ Prime subleases to ACDBEs and others on behalf of airport Disadvantages: â¢ Less competition than other management approaches â¢ Variety of stores/concepts offered are often more limited due to pre-established agreements with certain brands â¢ Approach (on average) results in development of less space compared with other approaches â¢ Prime concessionaire may be in competition with sub-tenants â¢ Lower sales compared with other approaches, although percentage rents are typically higher Table 8-2. (Continued).
reported in the Airport Revenue News Fact Book 2009 for calendar year 2008 (Airport Revenue News 2009). Airports with passenger traffic less than that of the least busy of the top 35 airports (i.e., below 5.5 million annual enplaned passengers) are considered too small for the Third-Party Developer approach; generally, the Prime Concessionaire or Direct Leasing approach is used at these air- ports. Therefore, only the busiest 35 airports, which are capable of supporting and implementing any of the concession management approaches, were considered in the analysis. Because of incomplete reporting of sales data, Cleveland Hopkins International Airport was eliminated from the analysis. At the time this analysis was conducted, the airport was in transi- tion from the Prime Concessionaire approach to the Third-Party Developer approach. Pittsburgh International Airport (which has the highest spend rate per enplaned passenger in the United States) was also excluded from the analysis as it falls outside of the top 35 airports in terms of num- bers of enplaned passengers. 8.2.1 Classification of Airports Each airport included in the analysis was classified according to its management approach. Air- ports where two or more management approaches are used were placed in the Hybrid classifica- tion. The Hybrid approach, as referred to in this section, should be considered an eclectic approach and not an end in itself. Some airports classified as Hybrid have Third-Party Developer agreements, including New Yorkâs John F. Kennedy International and LaGuardia airports, and Bush Inter- continental Airport/Houston. Miami and Orlando International Airports employ Direct Leasing, Prime Concessionaire, and Third-Party Developer approaches. Including these airports allows all of the airports to be classified and compared in terms of average sales, space, and revenue. The Third-Party Developer and Leasing Manager approaches have many similarities, with the lack of investment on the part of the Leasing Manager being the major difference. Therefore, the two categories were combined for this analysis. Table 8-3 presents a summary of enplaned passengers, sales, and space by concession man- agement approach for the airports included in the analysis. Six airports used the Third Party Developer/Leasing Manager management approach, 9 used the Direct Leasing approach, 8 used the Hybrid approach, and 11 used the Prime Concessionaire approach. Table 8-4 presents a summary of revenue received by the airport operator from food and bev- erage and retail sales, revenue per enplaned passenger, and effective percentage rent for the airports included in the analysis (i.e., airports that provided revenue data to Airport Revenue News). 8.2.2 Summary of the Analysis Table 8-5 presents a summary of sales per enplaned passenger for each concession management approach calculated using the total sales at airports in each category divided by total enplaned pas- sengers. Where indicated, an average for all airports included in this analysis is shown. The highest sales per enplaned passenger for each sales category is indicated in boldface. Table 8-5 shows that, on average, the Third-Party Developer/Leasing Manager approach produced the highest total spend rate per enplaned passenger, followed by the Direct Leasing and Hybrid approaches. The Prime Concessionaire approach had the lowest average sales per enplaned passenger. In the food and beverage category, the highest spend rate was achieved under the Direct Leas- ing approach, followed closely by the Developer/Leasing Manager approach and the Hybrid approach. The Prime Concessionaire approach again resulted in the lowest spend rate. The Direct Leasing approach produced the highest specialty retail spend rate, followed by the Developer/Leasing Manager and Hybrid approaches. Information on retail spending for two air- ports where the Prime Concessionaire approach is used was categorized by specialty and conven- Concession Contracting Approaches 129
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 130 Resource Manual for Airport In-Terminal Concessions Concession management approach Enplaned passengers (millions) Enplaned passengers rank Sales per enplaned passenger Total sales (millions) Square feet per 1,000 enplaned passengers Average sales per square foot 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 34 $8.64 $ 4,768.9 6.4 $1,347 Food & beverage and retail (excluding duty free) 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). Table 8-3. Summary of enplaned passengers, space, and sales by concession management approachâ2008.
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 Concession Contracting Approaches 131 Concession management approach Enplaned passengers (millions) Enplaned passenger Ran k Total sales (m illions) Revenue to airport (millions ) Revenue per enplaned passenge r Ef fe ctive percentage rent DEVELOPER/LEASING MANAGE R Newar k â 12 $ â $ â â â Philadelphi a â 19 â â â â Bos to n â 20 â â â â Washington Dulles â â â â â â â â â 21 â â â â Baltimore 10 ,2 42,269 25 86 ,0 89,458 11,662 ,6 02 $1.14 13.5% Washington Reaga n 8 ,976,979 29 80 ,8 42,249 10,283 ,0 12 $1.15 12.7% Total / Aver ag e 1 9,219,248 $ 166,931,707 $ 21,945,614 $1.14 13.1 % DI RECT LE AS IN G Dallas/Fort Wo rt h 4 $ â $ â $0.00 â Denver 25 ,6 50,243 5 216,042,542 30,394 ,8 34 $1.18 14.1% Las Vega s 2 2,086,022 7 223,100,666 28,427 ,5 58 $1.29 12.7% Phoeni x 1 9,816,493 9 169,782,675 23,162,937 $1.17 13.6% San Francisco 18 ,5 28,274 10 216,789,473 30,127,331 $1.63 13.9% Detr oi t 1 7,495,850 13 158,602,837 24,355,204 $1.39 15.4% Minneapolis 16 ,9 55,473 16 15 2,343,897 21,983 ,5 08 $1.30 14.4% Portland 7,150,857 33 74 ,6 69,450 8,643 ,2 46 $1.21 11.6% Kansas Ci ty 5,527,549 39 27 ,4 59,508 2,913 ,3 61 $0.53 10.6% Total / Aver ag e 1 33,210,761 $ 1,238,791,048 $ 170,007,979 $1.28 13.7 % HY BRI D Chicago O'Har e 2 $ â $ â $0.00 â New York - Kennedy 6 â â $0.00 â Houston Bu sh Inter co nt in ta l 2 1,623,261 8 102,230,762 12,923,227 $0.60 12.6% Orlan do 18 ,2 38,277 11 169,404,326 24,108,082 $1.32 14.2% Miami 17 ,0 35,400 15 16 9,021,114 21,752 ,3 00 $1.28 12.9% Seatt le 16 ,0 84,939 18 15 4,428,491 20,828 ,0 36 $1.29 13.5% New Yor k - La Guardi a 23 â â $0.00 â Chicago Midway 31 â â $0.00 â Total / Aver ag e 7 2,981,877 $ 595,084,693 $ 79,611,645 $1.09 13.4 % PR IME CONCESSIONAIRE Atlanta 45 ,0 90,314 1 $ 34 0,549,351 $ 46,098,718 $1.02 13.5% Los Angele s 2 9,928,150 3 267,219,616 43,891,036 $1.47 16.4% Charlott e 14 â â $0.00 â Fort La uderdal e 1 1,586,568 22 78 ,4 64,793 14,990 ,4 35 $1.29 19.1% Salt La ke Ci ty 24 â â $0.00 â Tampa 9,142,879 26 79,203,615 14,800,410 $1.62 18.7% Houston Hobby 9,120,970 27 27,720,844 4,652,298 $0.51 16.8% San Dieg o 9 ,066,343 28 72,708,235 10,487,922 $1.16 14.4% St. Louis 7,207,890 32 55 ,4 70,330 6,678 ,4 14 $0.93 12.0% Cincinnati 34 â â $0.00 â Oaklan d 5 ,749,093 37 35 ,9 93,456 5,928 ,5 17 $1.03 16.5% Total / Aver ag e 1 26,892,207 $ 957,330,240 $ 147,527,750 $1.16 15.4 % Count DEVELOPER/LEASING MANAGER 19 ,2 19,248 2 $ 166,931,707 $ 21,945,614 $1.14 13.1% DIRECT LEASING 133,210,761 8 1 ,2 38,791,048 170,007,979 $1.28 13.7% HYBRID 72 ,9 81,877 4 5 95,084,693 79,611,645 $1.09 13.4% PRIME CONCESSIONAIR E 1 26,892,207 8 9 57,330,240 147,527,750 $1.16 15.4% Total / Aver ag e 3 52,304,093 22 $ 2,958,137,688 $ 419,092,988 $1.19 14.2 % Food & beverage and retail (excluding duty free ) 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). Table 8-4. Summary of revenue, revenue per enplaned passenger, and average effective percentage rent by concession management approachâ2008.
per enplaned passenger. All other approaches resulted in above average total rates for food and beverage and total retail. Table 8-7 summarizes the ranking of concession management approaches in terms of sales per enplaned passenger for each category (food and beverage, specialty and convenience retail, and total retail). 8.2.3 Space Comparison The data suggest that differences in the performance of the concession management approaches may result, in part, from the differences in the quantity of concession space developed under each approach. Figure 5-2 in Chapter 5 presented the relationship between the amount of concession space (per 1,000 enplaned passengers) and the average spend per enplaned passenger. The data show that, on average, airports at which the Developer/Leasing Manager approach is used have considerably more concession space in service for food and beverage and overall retail services. Table 8-8 shows the average concession space per 1,000 enplaned passengers organized by con- cession management approach and major category. At airports using the Developer/Leasing Man- ager approach, there is typically less convenience retail space, but more specialty retail space in operation, and the most overall retail space in service. At airports using the Prime Concessionaire approach, the lowest total concession space was allocated for food and beverage and specialty retail, and the highest was allocated for convenience retail. In terms of total retail space, Prime Conces- 132 Resource Manual for Airport In-Terminal Concessions Sales per enplaned passeng e r Total Food and beverage Specialty retail (1) Convenience retail (1) Total retail Direct leasing $ 9.14 $ 5.60 $ 1.99 $ 1.54 $ 3.53 Prime concessionaire $ 7.59 $ 4.89 n.a. n.a. $ 2.69 Developer/leasing manag e r $ 9.32 $ 5.56 $ 1.82 $ 1.94 $ 3.76 Hy brid $ 8.89 $ 5.32 $ 1.56 $ 2.00 $ 3.56 A verageâall airports $ 8.64 $ 5.31 $ 1.53 $ 1.80 $ 3.33 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. Total Food and beverage Specialty retail (1) Convenience retail (1) Total retail Direct leasing 106% 105 130% 86% 106% Prime concessionaire 88% 92% n.a. n.a. 81% Developer/leasing manager 108% 105% 119% 108% 113% Hy brid 103% 100% 102% 111% 107% A verageâall airports 100% 100% 100% 100% 100% Percent of Average Sales per Enplanement 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. Table 8-5. Passenger spend rates by concession management approachâ2008. Table 8-6. Sales per enplaned passenger by management approach as percent of group averageâ2008.
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 â¢ 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. Concession Contracting Approaches 133 Total Food and beverage Specialty retail (1) Convenience retail (1) Total retail Direct leasing 2 1 1 3 3 Prime concessionaire 4 4 n.a. n.a. 4 Developer/leasing manager 1 2 2 2 1 Hybrid 3 3 3 1 2 Sales per enplaned passenger - rank among management approaches 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. Square feet per 1,000 enplaned passengers Total Food and beverage Specialty retail (1) Convenience retail (1) Total retail Direct leasin g 7 .6 4.8 1. 9 1 .0 2. 9 Prim e concessionai re 5. 7 3 .7 n. a. n. a. 2. 0 De vel oper /leasing m anager 9. 2 5 .9 2. 0 1 .3 3. 3 Hy br id 6. 6 3 .9 1. 5 1 .1 2. 6 Av er ageâall 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. Table 8-7. Ranking of sales per enplaned passenger by management approach â2008. Table 8-8. Concession space per 1,000 enplaned passengers by management approachâ2008.
â¢ 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. â¢ 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 Concessionaireâs 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 134 Resource Manual for Airport In-Terminal Concessions Total Food and beverage Specialty retail (1) Convenience retail (1) Total retail Square feet per 1,000 enplaned passengers as percent of a ver age Direct leasing 109% 108% 123% 92% 110% Prim e concessionai re 81% 84% n.a. n.a. 77% De vel oper /leasing m anager 132% 135% 129% 124% 127% Hy br id 94% 90% 100% 101% 100% Av er ageâall 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. Table 8-9. Concession space per 1,000 enplaned passengers as a percent of the overall management approach averageâ2008.
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, Concession Contracting Approaches 135 Total Food and beverage Specialty retail (1) Convenience retail (1) Total retail Sales per square foot Direct leasing $ 1,196 $ 1,176 $ 1,051 $ 1,577 $ 1,230 Prime concessionaire $ 1,330 $ 1,323 n. a. n. a. $ 1,343 Developer/leasing manager $ 1,008 $ 936 $ 917 $ 1,467 $ 1,136 Hybrid $ 1,355 $ 1,351 $ 1,014 $ 1,858 $ 1,361 Averageâall 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. Number of Airports 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% 8 Developer/leasing manager 13.1% 12.7% 13.1% 14.6% 13.8% 2 Hybrid 13.4% 12.1% 13.8% 16.4% 15.2% 4 Averageâall airports 14.2% 13.0% 15.6% 16.6% 16.1% 14 Effective percentage rent Total Food and beverage Specialty retail (1) Convenience retail (1) Total retail 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. Table 8-10. Sales per square foot by concession management approachâ2008. Table 8-11. Average percentage rent by management approach and categoryâ2008.
with Direct Leasing a close second. In the total retail category, the Direct Leasing approach pro- duces the highest return on sales, followed by the Hybrid, Developer, and Prime Concessionaire approaches. The Prime Concessionaire approach would produce the highest return on sales if all manage- ment approaches resulted in identical sales. However, this is not the case. The Direct Leasing and Developer/Leasing Manager approaches, each of which creates incentives to develop the most space and the highest sales, produce higher revenues, as shown in Table 8-12. Figure 8-1 presents a comparison of the average sales per enplaned passenger and average effective rent by concession management approach. The columns represent the average sales per enplaned passenger (labeled on left axis) and the diamonds represent the average effective per- centage rent (labeled on right axis). 136 Resource Manual for Airport In-Terminal Concessions Num ber of Airports Direct leasing 14.5% 13.2% 20.4% 13.5% 16.7% 8 Prim e concessionai re 13.5% 13.0% n. a. n. a. 14.5% 8 De vel oper /leasing m anager 14.2% 13.3% 15.6% 15.7% 15.7% 2 Hy br id 13.8% 12.1% 14.1% 18.3% 16.3% 4 Av er ageâall airports 14.2% 13.0% 15.6% 16.6% 16.1% 14 Effectiv e per centage rent adj usted fo r differ ences in sales per form anc e Total Food and beverage Specialty retail (1) Convenience retail (1) Total retail 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. $8.64 $7.59 $8.89$9.14$9.32 14.2% 15.4% 13.4%13.7%13.1% $5.00 $6.00 $7.00 $8.00 $9.00 $10.00 $11.00 $12.00 Developer Direct Hybrid Prime Average Concession Management Approach Av er ag e Sa le s pe r E np la ne m en t 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% Av er ag e Ef fe ct ive P er ce nt ag e Re nt Source: Airport Revenue News 2009. Table 8-12. Effective percentage rent by management approach adjusted for sales performanceâ2008. Figure 8-1. Comparison of average sales per enplaned passenger and average effective rent by concession management approach (food and beverage and retail)â2008.