Innovative Revenue Strategies – An Airport Guide (2015)

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7 1 Chapter 7 Improvements to Existing Airport Businesses 7.1 Parking, Rental Cars, and Concessions Are Key Revenue Generators 7.2 Major Elements of the Strategy 7.3 Applicaon of the Strategy to Airport Parking 7.4 Applicaon of the Strategy to Rental Cars 7.5 Applicaon of the Strategy to In Terminal Concessions 7.6 Wrap up 7.7 Addional References Improvements to the planning, design, and management of exisng passenger concessions, public parking, and in terminal services at an airport can and will result in net revenue gains to the airport sponsor. This chapter focuses on how airports can manage exisng passenger concessions and services to achieve new revenue. This strategy is most relevant for commercial service airports where passenger dependent acvies are a significant contributor to operang revenues. 7.1 PARKING, RENTAL CARS, AND CONCESSIONS ARE KEY REVENUE GENERATORS Non aeronaucal revenue1 from concessions, public parking, rental cars, and ground leases represents an important share of airport operang revenue. In 2013, U.S. commercial airports generated $18.1 billion in operang revenues; 45% of this operang revenue ($8.2 billion) was non aeronaucal revenue. For many airports, these business segments are important growth areas. Figure 7 1 shows operang revenues from 467 commercial service airports.2 In past years, aeronaucal passenger airline revenue typically surpassed non aeronaucal revenue. 3 In 2011, however, non aeronaucal revenues were larger, and this trend has persisted through the current reporng year 2013. 1 Income to the airport sponsor not derived from aeronaucal uses. Non aeronaucal revenues include income from land rentals and non terminal improved facilies; food, beverage, and retail concessions; rental cars; parking; hotels; ground transportaon; and ulies sale/resale. 2 FAA Report 127, Operang and Financial Summary 3 Income to the airport that comes from aeronaucal uses by airlines, aircra owners, and FBOs. Aeronaucal use is any acvity that involves, makes possible, is required for the safety of, or is otherwise directly related to the operaon of aircra. Aeronaucal use includes services provided by air carriers related directly and substanal to the movement of passengers, baggage, mail, and cargo on the airport. Individuals and businesses, when engaged in the operaon of aircra or flight support, are aeronaucal users. Doing Things Better

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7-2 Figure 7-1: Commercial Airport Opera ng Revenues, 2013 Source: FAA, Form 127, Opera
ng and Financial Summary, 2013 Figure 7-2 examines more closely the sources of non-aeronau
cal revenue for repor
ng airports. For large and medium hub airports, passenger-dependent ac
vi
es, such as public parking and rental cars, are the largest contributors. The situa
on is somewhat different for small and non-hub commercial airports, where ground leases and other non-aeronau
cal ac
vity are propor
onately more significant contributors. Because parking, rental cars, and other concessions represent important and growing revenue producers, it is logical that the sponsors would use innova
ve strategies to improve these exis
ng airport businesses and gain greater net revenues in return. Non-Passenger Aeronau cal Revenue, $1.9 Billion, 10% Passenger Airline Aeronau cal Revenue, $8.1 Billion, 45% Non-Aeronau cal Revenue, $8.2 Billion, 45%

Figure CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7-3 7-2: Commercial Airports Non-Aeronaucal Revenue Sources, 2013 Source: FAA, Form 127, Operang and Financial Summary, 2013 7.2 MAJOR ELEMENTS OF THE STRATEGY A strategy of improvements to exisng airport businesses places a high value on airport strategic and business planning, the importance of seŒng specific goals and objecves , and airport engagement in either self-operaon or acve management of third-party contracts that result in increased net revenues to the airport. As shown in Figure 7-3, the strategy involves five key elements: Management alternaves for airport businesses Non-aeronaucal program development Programs to improve concessionaire or service contractor performance Informaon technology that supports revenue development Monitoring performance Land and Non- Terminal Facility Leases and Revenues 8% Terminal Food and Beverage 7% Terminal Retail Stores and Duty Free 8% Terminal Services and Other 5% Rental Cars (no CFCs) 19% Parking and Ground Transportaon 41% Hotel 1% Other Non- Aeronaucal Revenue 11%

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 4 Figure 7 3: Elements of the Strategy Source: KRAMER aerotek inc., 2014 Improvements to exis€ng airport ac€vi€es and opera€ons could involve many different departments or func€onal areas such as concessions (CN); ground transporta€on (GT); informa€on technology (IT); legal and contracts (LC); proper€es and business development (PD); parking (PK); planning, design, and administra€on (PL); service quality (SQ); and terminal opera€ons (TO). Like the other strategies in this Airport Guide, implemen€ng improvements to exis€ng businesses requires a custom approach because each commercial airport serves unique markets, has different governance and ownership structures, and has different business approaches. 4 This chapter briefly describes each strategy element. The chapter also presents implementa€on techniques from the perspec€ve of airport parking, rental cars, and concessions. 4 The governance structure determines how an airport is managed, operated, and developed. Most airports are owned and governed by ci€es, regional airport authori€es, or coun€es. Some airports are governed by mul€ple jurisdic€ons, states, or unified port authori€es. There are also privately owned airports (mostly general avia€on airports) [ACRP LRD 7]. (1) Management Alternatives •Ways airports develop, manage, and operate revenue and expense ac€vi€es to maximize net revenues: •Self opera€on •Management contract •Direct concession agreement (2) Non-Aeronautical Program Development •Planning and design •Document prepara€on •Solicita€on, offer, and award (3) Performance Improvements •Vendor ra€ng programs •Incubator programs to encourage new offerings •Tenant improvement allowances •Training programs •Exclusive product selling rights •Revenue targets for management contracts (4) Information Technology •Manage, evaluate, improve ac€vi€es using airport informa€on systems •Airport access systems •Point of sale systems •Parking guidance systems •Revenue control systems (5) Monitoring Performance •Ac€ve and organized management of contracts and agreements •Regular mee€ngs and briefings with service providers/concession managers •Compliance reviews •Follow up on vendor ques€ons and customer complaints •Performance benchmarks

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7-5 7.2.1 Element #1: Management Alternatives Airports employ a variety of structures to develop, manage, and operate acƒviƒes on the airport. Figure 7-4 shows the management opƒons that range from extensive airport staff engagement to limited or no involvement. The figure also makes a disƒncƒon between how an airport might manage maintenance and operaƒon expenses versus non-aeronauƒcal revenue generaƒon. The usual goal of direct involvement in maintenance and operaƒons is cost avoidance. The goal of direct management of non- aeronauƒcal businesses is increased revenues to the airport sponsor. Figure 7-4: Airport Management Opons Source: KRAMER aerotek inc., 2014 This Airport Guide focuses on cost avoidance and revenue generaƒon techniques that give the airport operator greater control over assets and airport acƒvity. These techniques include the management opƒons listed in Figure 7-4: airport self-operaƒon; management contracts in which the airport retains control of products and services; and direct service contracts or concession agreements. Other management opƒons, such as consorƒums, privaƒzaƒon, master concessionaires, and third-party developers, are described in Appendix B and are discussed in other ACRP reports listed in the reference secƒon at the end of the chapter. Self-Operaƒon Fee Manager or Management Contract Service Contract Consorƒums Self-Operaƒon Direct Concession Agreement Master/Prime Concessionaires Third-Party Developer Long-Term Airport Management Contract, Lease, or Privaƒzaƒon Maintenance and Operaon Expense Non-Aeronaucal Revenue Generaon Risk/Reward Ai rp or t R ev en ue P ot en ƒa l Ai rp or t R isk Airport Control Third- Party Control

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 6 SELF OPERATION OF REVENUE AND EXPENSE ACTIVITIES With self operaon, airport staff will develop, manage, and operate a parcular airport funcon. Self operaon at small and non hub airports is a more common business pracce, as opportunies exist for cross ulizaon of both equipment and staff. At larger airports, an airport sponsor may self operate a variety of maintenance and operaon funcons, such as terminal cleaning and repairs, electronic systems, mechanical systems, and snow removal. Small hub and non hub airports self operate parking and terminal area operaons and maintenance. Self operaon of other non aeronaucal revenue acvies is less prevalent. Self operaon can result in considerable cost savings and increased net revenues to an airport if labor rates are compeve and the airport operator has sufficient staff to handle a parcular acvity. At some airports, public wage scales and the ability to hire and fire based on performance make the hiring of a fee manager or direct service contractors a lower cost opon. FEEMANAGER ORMANAGEMENT CONTRACT FOR OPERATIONS ANDMAINTENANCE Airport sponsors oŠen retain a contractor to provide experse and labor to oversee a specific maintenance or operaons acvity or suite of acvies. The fee manager or contractor manages the acvity using airport equipment and facilies. In this arrangement, the airport sponsor hires the experse, but retains control over major decision making and pricing and holds the risk associated with the acvity. The manager typically is paid a negoated fee for services rendered. DIRECT SERVICE CONTRACTS AND CONCESSION AGREEMENTS Many airports subcontract a variety of operaons and maintenance services, including those for concessions. The management agreement contractually shiŠs a degree of the risk away from the airport enterprise to the management company. This method also lowers the airport’s level of direct control over daily operaons. Airport revenues from service contracts or concession agreements are highly variable depending on the responsibilies given to the third party and the method used to calculate fees, operang expenses, and revenues. For example, some parking management agreements allow the airport sponsor to retain all revenues less expenses, but without income guarantees from the management company. Typically, a concession agreement provides the airport sponsor a minimum annual guarantee (MAG) plus a revenue sharing agreement above a set threshold of net or gross revenue from the management company. Table 7 1 lists airport funcons that are handled through service contracts or concession agreements. The services are grouped according to those that are revenue generang acvies and those that are maintenance and operaon expense acvies.

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 7 Table 7 1: Examples of Service Contracts and Management Agreements Types of Services Examples of Service Contracts Typical Hub Size Applicaon N on -A er on au tic al R ev en ue G en er at io n Concessions Food and Beverage, Retail, Adversing, Passenger Services All Fuel Storage, Distribuon, Aircra­ Hydrant Fueling Small/Non Hubs Ground Transportaon Shule and Bus Operaons (Public/Employees), Automac Vehicle Idenficaon and Billing Large/Medium Passenger Processing Passenger Loading Bridges Large/Medium/Small Parking Garage and Lot Management, Credit Card and Other Payment Services, Guidance Systems Large/Medium/Small M ai nt en an ce a nd O pe ra tin g Ex pe ns e Airfield/Landside Services Snow Removal, Mowing, Deicing and An Icing Material Storage and Dispensing Equipment All Conveyance Systems Elevators, Escalators, Moving Walkways, Carts, Wheelchairs Large/Medium/Small Electronic Systems Internet/Wi Fi, Fiber Opc Backbone, Website, Digital Signage, CCTV (closed circuit TV), Telephone, Fire Alarm, Security Access System, Public Address, Building Management System, Local Area Networks, Airport Operaons Database, Resource Management Systems All Maintenance Terminal Facilies, Cleaning Terminal Public Areas, Building Electrical, Mechanical, Plumbing Systems, Carpentry and Repairs All Mechanical Systems Heang, Venlaon and Air Condioning All Baggage Equipment Baggage Handling and Inspecon Systems All Safety and Security Law Enforcement, ARFF Small/Non Hubs Ulies Water, Electricity, Natural Gas All Source: Compiled by KRAMER aerotek inc., 2014 WRAP UP OFMANAGEMENT ALTERNATIVES Selecon of a management opon for maintenance and operaon expenses or for revenue generaon acvies is one of the most important elements of this strategy. It is common for airports to use a combinaon of service contracts, management contracts and concession agreements to operate parking facilies, ground transportaon, food and beverage, retail, passenger services and adversing concessions. The next element of this strategy focuses on best pracces for planning, procurement documents, and solicitaons of revenue generaon programs. This element and the remaining elements are described in more detail as they relate to parking, rental cars, and concessions.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7-8 7.2.2 Element #2: Non-Aeronautical Program Development The decision about management structure will dictate how an airport sponsor will go about: (a) planning and design, (b) procurement and document prepara‚on, and (c) solicita‚ons for its various non- aeronau‚cal programs. Figure 7-5 describes the principal components of non-aeronau‚cal program development, whereby careful planning and design translate into procurement documents and, ul‚mately, solicita‚ons. Figure 7-5: Program Planning, Procurement and Solicita ons Source: Michael G. Moroney & Associates, Inc., 2014 7.2.3 Element #3: Performance Improvement The third element of this strategy involves airport ini‚a‚ves to promote innova‚on in the concession program and improve concession opera‚ons, financial performance, and customer service. Element #3 includes: Vendor ra‚ng programs that can result in fast-track contract renewals or bonus points for the highest rated service providers or concessionaires Programs to incubate businesses at airports and to encourage development of new offerings Tenant improvement allowances Training programs to improve customer service in the terminal area Exclusive product selling rights for branded products (e.g., so– drinks, beer or wine, online shopping) Revenue targets for management contracts (such as parking) Performance improvement is an airport ini‚a‚ve that typically entails review of concession policies and development of criteria and metrics to measure concessionaire performance and to promote innova‚on. ACRP Synthesis 48: How Airports Measure Customer Service Performance summarizes techniques airports currently use to measure customer service in the terminal area. A few airports offer Planning/Design •Market Research •Peer Prac‚ces and Procedures •Concept Alterna‚ves •Layout Plan: Size, Uses, Adjacencies •Business Terms: Airport Involvement, Number of Units, Percentage Fees, Investment, etc. •Marke‚ng Program Procurement and Document Prepara‚on •Design Guidelines and Requirements •Procurement Process •Terms and Concepts •Defini‚ons •Airport Role •Requirements, Needs, and Wants •Decision Process •Selec‚on Criteria •Timelines Solicita‚on, Offer & Award •Contract Packages •Solicita‚on Adver‚sing •Bid Review •Plan for Market Penetra‚on •Contemporary Offerings •Business Plan •Selec‚on •Award

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 9 performance reward programs to their concessionaires. Denver Interna€onal Airport’s Premium Value Concessions Program (PVC) is a 36 month ini€a€ve set up to reward top performers in different concession categories with the opportunity to renew contracts through direct nego€a€ons with the airport without going through a compe€€ve bidding process.5 Dallas/Fort Worth Interna€onal Airport offers incumbent vendors a Concessionaire Bonus Points System that gives addi€onal bonus points for excellent sales and customer service performance. Concessionaires can use the points when submi”ng a renewal bid for the concession program through the request for proposal (RFP) process.6 7.2.4 Element #4: Information Technology that Supports Revenue Development Airport informa€on systems are available today in suites or modules to help manage, evaluate, and improve various ac€vi€es at an airport. For example, airport access systems can monitor vehicle entry and exit points, parking transac€ons, parking dura€on, and revenues by parking facility. Parking guidance systems are designed to increase u€liza€on of a parking garage and to assist customers in finding available parking spots. These vehicle/revenue control systems also generate informa€on that can help airport sponsors to collect entry and dwell €me fees, and to customize parking products to bešer match customer demand. 7.2.5 Element #5: Monitoring Performance Even when there is a contractor, developer, or concessionaire in place, airport staff must con€nue to ac€vely manage their programs to get the most out of them. Although a contract or management agreement implies delega€on of responsibili€es, airports that ac€vely partner with their vendors are able to grow the offerings and revenues more effec€vely. The monitoring of the performance of parking, concession programs, or rental cars has specific elements to each par€cular program. Several general principles apply here as well: Airport staff responsible for a par€cular program must understand in detail the terms and condi€ons of the agreement(s) being monitored. In addi€on, it is important to priori€ze the greatest risks and iden€fy what aspects of a par€cular agreement will be tracked. For each agreement, maintenance of a comprehensive and well organized file that includes the agreement, construc€on related documents, insurance cer€ficates, guarantee instruments, opera€ng permits, general correspondence, and memoranda is important. Monitoring and maintenance of complete records both are important so that small issues can be resolved quickly before they become big problems [Adapted from ACRP Report 54]. 5 Denver Interna€onal Airport Concession Management Performance Audit, February 2014, Office of the Auditor, City and County of Denver 6 Dallas/Fort Worth Interna€onal Airport: Incumbent Concessionaire Bonus Points for the Terminal Renova€on and Improvement Program Request for Proposal Process, available at: hšps://www.dfwairport.com/cs/groups/public /documents/webasset/p1_029241.pdf

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 10 Performance monitoring generally will involve: Regular meengs and briefings with service providers and concessionaire managers to check in and to discuss airport trends and upcoming events that may affect business Compliance reviews for customer service, street pricing, quality control, health and safety Follow-up on vendor quesons and customer complaints Review of performance benchmarks [Adapted from ACRP Report 54] ACRP Report 19A: Resource Manual to Airport Performance Indicators provides a number of benchmarks that can be used to track individual contractors and funconal areas, as well. Detailed discussions of how this strategy and its elements can be applied to parking, concessions, and rental cars are presented in the next secons of this chapter. 7.3 APPLICATION OF THE STRATEGY TO AIRPORT PARKING Given that airports already have passenger-dependent, non-aeronaucal revenue programs, what innovaons can be put in place that will improve net revenues to the airport? Because public parking, passenger concessions, and rental cars represent a significant share of exisng airport revenues, improvements to planning, process, and management of these acvies can return large benefits to the airport sponsor. This secon highlights some of the best and current ideas on improving the planning, process, and management of these programs, beginning with airport parking. 7.3.1 Parking – the Largest Non-Aeronautical Revenue Generator Public parking generates the most operang revenue of all non-aeronaucal revenue sources for large, medium, small, and non-hub airports (Table 7-2). Depending on the airport, rental cars and in-terminal concessions occupy a second or third posion in revenue generaon. Not only is parking the largest non-aeronaucal revenue generator, it also is a funcon most o–en handled either by airport staff, through a direct management contract, or using a combinaon of both approaches. Table 7 2: Contribuon of Parking and Ground Transportaon to Operang Revenues, 2013 Airport Hub Type Airports Reporng Parking & Ground Transportaon Total Operang Revenues Share of Total Operang Revenues Large 29 $2,063,037,335 $12,594,081,124 16% Medium 35 $783,238,481 $3,205,785,744 24% Small 74 $385,660,229 $1,495,248,144 26% Non-hub 329 $102,650,641 $806,427,864 13% All Airports Reporng 467 $3,334,586,686 $18,101,542,876 18% Source: FAA, Form 127, Operang and Financial Summary, 2013 As a suite of products, parking benefits from direct management and understanding of parking ulizaon, product mix, pricing, and compeon from off-airport parking establishments. New technologies have improved the ability to analyze parking products and their use, reduce staffing requirements and elevate the level of customer service. The techniques discussed in this chapter

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 11 highlight ways to manage parking, improve product mix, and deliver higher net revenues to the airport sponsor. 7.3.2 Parking Management Alternatives Airports typically maintain a high degree of control over public and employee parking. The four most commonly used management techniques are: self opera‰on, management contract, concession agreement, or a combined approach. PARKINGMANAGEMENT TECHNIQUES PK 5: SELF OPERATION This opera‰onal method provides the airport sponsor with the highest level of control and oversight of daily opera‰ons. Self opera‰on requires the largest number of airport staff posi‰ons and puts the airport on the front line for proper revenue collec‰on and controls, customer service levels, facility opera‰ons, and maintenance. For municipali‰es where the costs of public sector employee recruitment, training, reten‰on, and benefits may be higher than those for equivalent private sector employees, total self opera‰on may not be the lowest cost op‰on. PK 6: MANAGEMENT CONTRACT A management contract allows an airport sponsor to take advantage of the professional services of a specialized company and reduce the number of airport staff dedicated to parking. These companies frequently have experience opera‰ng airport facili‰es na‰onwide and opera‰ng other publicly or privately owned parking facili‰es. This experience, combined with the contractor’s “private employer” status (i.e., poten‰ally lower salary/benefit costs than parking staff employed by the airport or other public agency), o—en translates to lower costs and, thus, higher net revenues for the airport. With this management method, airports can reserve the rights to adjust parking rates, establish customer service standards, and approve the manager’s opera‰ng budget for the parking facili‰es. The management company is reimbursed for authorized expenses and is paid a management fee. The airport sponsor retains all revenues less these expenses, but receives no income guarantee from the management company. PK 7: CONCESSION AGREEMENT Similar to a management contract, a concession agreement allows an airport sponsor to maximize the experience and financial strength of a professional parking concessionaire and minimize the airport staff’s level of direct control of daily opera‰ons. A parking concessionaire typically assumes responsibility for all day to day opera‰ons, facility maintenance, and parking fee collec‰ons. The concessionaire receives a percentage of gross revenues and is required to pay the airport sponsor a MAG amount.7 The MAG protects the airport sponsor in the event of a downturn in parking revenues, but rewards the concessionaire when revenues are higher than the MAG amount. A concession contract 7 A MAG is the minimum annual guaranteed payment submišed in a concessionaire’s bid for each agreement year during the term of the concession agreement. Today, most airport sponsors ask concessionaires to bid a MAG. In some situa‰ons, the sponsor sets the MAG.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 12 minimizes the airport sponsor’s risk exposure and requires the lowest number of airport staff posi‚ons and level of parking exper‚se. PK 8: COMBINED APPROACH Some airports may adopt a combined approach in which the airport, a management company, and/or a concessionaire will manage different parking products. For example, at Dallas/Fort Worth Interna‚onal Airport (DFW), public parking facili‚es are self operated except for a lot that offers trunk to trunk service operated by a management company. DFW also operates employee parking via a management contract and valet parking via a concession agreement [ACRP Report 24]. Adop‚on of innova‚ve technologies like parking guidance systems may also be phased in to a management contract a“er they have been fully installed and tested, and are opera‚onal. COMPARISON OF PARKINGMANAGEMENT TECHNIQUES Table 7 3 provides examples of airports that predominantly use a par‚cular management approach. Table 7 3: Examples of Airports Using Various Parking Management Structures Self Operated Management Contract Concession Agreement Dallas/Fort Worth Interna‚onal Airport Bob Hope Airport (Burbank, California) Bal‚more Washington Thurgood Marshall Interna‚onal Airport Gerald R. Ford Internaonal Airport (Grand Rapids, Michigan) Denver Internaonal Airport Cleveland Hopkins Internaonal Airport Norfolk Internaonal Airport John Wayne Airport (Orange County, California) Dayton Internaonal Airport Sea­le Tacoma Internaonal Airport Los Angeles Internaonal Airport Erie Internaonal Airport Nashville Internaonal Airport Honolulu Internaonal Airport Orlando Internaonal Airport George Bush Interconnental Airport (Houston, Texas) Pi
sburgh Internaonal Airport Norman Y. Mineta San Jose Internaonal Airport Salt Lake City Internaonal Airport San Francisco Internaonal Airport Tulsa Internaonal Airport Sources: ACRP Report 24 and ACRP Project 01 14, 2011 Figure 7 6 shows how the different management structures can affect: (a) airport operang expenses; (b) net revenues to the airport; and (c) customer service. Selecon of management structure ulmately will be based on the airport’s staffing resources, in-house experse, and the best soluon for net revenue growth potenal. As the figure shows, the parcular management structure an airport selects will affect its revenue, expenses, net parking revenue, and level of service offered to customers.

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7-13 Figure 7-6: Tradeoffs for Different Management Structures Source: Jacobs Consultancy, ACRP Report 24, Figure H.1, 2009 Increasingly, off-airport compeŠŠon at many airports is moŠvaŠng airport sponsors to diversify and differenŠate their parking products and services. A parking management structure that allows airports to set rates and modify offerings in a Šmely manner can result in greater net parking revenues to the airport sponsor. 7.3.3 Parking Analytics, Product Development, and Technology Airport operators are refining their parking offerings as a producŠve way to enhance and develop revenues. Access and revenue control systems8 have advanced to the point that many airports have the capability to analyze uŠlizaŠon and capacity of each parking product, customer segments, and the impacts of pricing changes on each product. This secŠon focuses on how airports can evaluate their exisŠng parking program, refine the product mix, and monitor performance. To opŠmize parking revenue, airport sponsors must provide value by offering effecŠve parking products, services, and other features that the customer finds desirable. Almost all commercial airports in the United States offer a product mix that includes hourly/short duraŠon, daily parking, and economy/long- term parking. The most expensive parking is closest to the terminal, and it is o™en garage parking. Proximity, price, convenience, and service drive use of other parking products. When garage and close- in parking opŠons by terminals frequently fill, customers may opt for off-airport, trunk-to-trunk parking soluŠons.9 If the customers have a posiŠve experience, the airport may permanently lose this customer. 8 Many airports or their contractors use access and revenue control systems to operate their parking faciliŠes. These systems come in modules that include vehicle access, parking entry, payment, accounŠng, and reporŠng funcŠons. 9 Trunk-to-trunk service is a parking service that picks up customers at the car, delivers them to the terminal, and (at the end of the trip) brings the customers back to the car.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 14 PARKING ANALYTIC AND PRODUCT DEVELOPMENT TECHNIQUES Parking access and revenue control systems make it possible for airports to take a close look at demand and u liza on of specific parking products. Usually the parking development team includes staff and/or outside professionals. The techniques discussed in this sec on are important components of the process to redevelop or enhance a parking program. PK 9: PARKING ANALYTICS AND ALTERNATIVES This technique involves extensive diagnos cs of an airport’s parking products, their use by customers, and their revenue streams. The findings lead to considera on of alterna ve approaches and possible reconfigura on of parking to meet customer demand, maximize parking revenues, and u lize exis ng capacity. The different components of the technique can be highlighted in an outline: Diagnoscs Parking products on and off the airport o Parking op ons (spaces, loca on, pricing, levels of service) o Compe  on from non airport parking facili es (off airport, hotels, etc.) Capacity and u liza on by parking product,  me of day, day of week, and month o Spaces by parking facility o Transac on analysis for each facility o Capacity lot closures (when, how o’en, trends) Demand o Origina ng passengers compared with parking transac ons o Alterna ve ground access op ons (bus, rail, shu“le, taxi) and use o Customer segments, u liza on, trends Customer research o Complaint history o Intercept surveys, online surveys, focus groups Financial performance o Revenue trends by facility, transac on, and space o Opera ng and capital costs o Net margins by facility Airport peer comparisons o Determine comparable airports by size, situa on, known innova on o Compare products and pricing o Conduct interviews Trends at the airport Experience with new parking products, technology, and ways to control the cost of shu“ling passengers from remote lots Value added and complementary customer services to compete with off airport offerings (if this is an issue) How the airport manages hourly/daily rates, pricing differen a on and rate increases

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 15 Transportaon fees for off airport vendors Strategies to manage capacity and develop parking revenues Strength and weakness assessment/conclusions Development of Alternaves Diagnoscs are essenal to establish a baseline assessment of current condions and to idenfy (a) where exisng parking products are/are not meeng customer demand; (b) trends in ulizaon of parking products; and (c) history of pricing and whether parking rates are sufficiently covering costs. The diagnoscs will inform a set of alternaves to address basic parking program objecves. Such alternaves might include: Retain customers by providing access, value, and convenience through a mix of parking offerings that matches demand. Improve operaonal efficiency. Recover costs for both public and employee parking. Grow net revenues. Implementaon The management structure and airport sponsor will dictate how to implement changes in the parking program. Rate increases typically require sponsor approval. To streamline rate adjustments, some airport sponsors will set rates with an annual (and automac) escalaon ed to an index (such as the consumer price index [CPI]). Airports can work with their management companies to improve efficiency and introduce new product offerings. TRACKING PARKING PROGRAM PERFORMANCE PK 10: PERFORMANCE MONITORING Regardless of the management approach to parking, best pracce is to connuously monitor the parking program. A measure of a successful parking operaon is the amount of net revenue available a™er an airport sponsor has paid parking operaons and maintenance expenses, fully allocated indirect costs, airport overhead, and parking facility debt service. It is also crucial for airport staff to know whether customers are selecng airport parking over off airport alternaves, and what they think about the quality of the parking opons at the airport. Figure 7 7 describes four quadrants of performance monitoring.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 16 Figure 7 7: Parking Program Performance Source: Adapted from ACRP Report 19A: Resource Guide to Airport Performance Indicators, 2010 ACRP Report 19A suggests a number of measures that airport sponsors can use to track the performance of their parking program. These include: Parking revenues per originaƒng passenger Average annual gross revenues per parking transacƒon Number of on and off airport spaces per type of parking product Number of parking transacƒons per month per parking product Number of parking spaces uƒlized by parking product during daily peak, as a percentage of total number of parking spaces In addiƒon, monitoring customer complaints and feedback and intercepƒng surveys of parking customers are both effecƒve ways to stay in touch with customers. Price comparisons with peer airports for hourly, daily, and long term rates are also useful, especially where there are mulƒple airports in a region. TECHNOLOGIES THAT SUPPORT PARKING REVENUE DEVELOPMENT PK 11: TECHNOLOGIES THAT SUPPORT PARKING REVENUE DEVELOPMENT Several technological soluƒons have improved customer service, parking facility use, and revenue development. Some of the most promising innovaƒons available today are: Advances in access control systems include opƒons to speed up customer transacƒons and reduce the number of cashiers needed at parking faciliƒes. These systems include: o Pay on foot (POF) Parking Uƒlizaƒon On Airport Parking Capture Rates Customer Saƒsfacƒon Net Revenue Produced

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 17 o Credit card in/out o Automac vehicle idenficaon (AVI) and radio frequency idenficaon devices (RFIDs)10 o Pay by cell phone applicaons o License plate recognion Parking space availability and guidance systems can provide space availability by facility, level, aisle, or space. 11 Typically, sensor technology is embedded in the pavement. Systems can be installed when a garage is built. A more expensive soluon is to retrofit an exisng garage with a guidance system. Customer informaon systems on the Internet, on mobile phones, and on digital signage at the airport idenfy parking availability. Emerging technologies integrate parking informaon at airports into global posioning system (GPS) systems, including in car systems and GPS enabled cell phones. Transportaon or privilege fees enable airports to recover the cost of roadway, traffic control, and terminal curbside costs from off airport parking operators. AVI systems have enabled the collecon of access fees. In addion to or in place of access fees, some airport sponsors charge off airport parking operators up to 10% of gross revenues. Improved signage can help parking customers find available parking products when they enter the airport. Effecve signage within parking facilies can reduce the number of lost vehicles when passengers return from trips. Airports are offering a variety of complementary services to a—ract customers to a higher priced parking product. Advanced reservaons and menu driven payment opons make it possible to guarantee a parking space or choose desired services, such as a car wash, oil change, or electric car charger. Airports are also experimenng with premium parking products that will offer boarding passes and baggage tags at the parking facility or give priority security clearance to passengers who park in a parcular lot or garage. 7.3.4 Parking Wrap-up Given that parking is the largest non aeronaucal source of revenue at most commercial airports, acve management of and improvements to parking products can return significant improvements to net revenues. Digital technologies are available to improve inventory control, monitor performance, and communicate with the customer base. Two ACRP reports offer detailed discussions of parking: ACRP Report 24: Guidebook for Evaluang Airport Parking Strategies and Supporng Technologies and ACRP Report 34: Handbook to Assess the Impacts of Constrained Parking at Airports. 10 AVI idenfies a vehicle as it passes through the range of the system’s microwave or RFID devices. The system requires vehicles to have a transponder or tags that are registered with the AVI system. 11 Parking space availability and guidance systems are inventory and control systems that communicate with parking customers either before arriving at the airport or while they are in the parking facility.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 18 7.4 APPLICATION OF THE STRATEGY TO RENTAL CARS On average, rental cars return 8% of total operang revenues (aeronaucal and non aeronaucal), as shown in Table 7 4. For medium, small, and non hub airports, the relave contribuon of rental cars to total operang revenues is even more significant, in the 11% to 14% range. Table 7 4: Contribuon of Rental Car Concessions to Airport Operang Revenues, 2013 Airport Hub Type Airports Reporng Rental Cars* Total Operang Revenues Share of Total Operang Revenues Large 29 $915,378,283 $12,594,081,124 7% Medium 35 $373,076,651 $3,205,785,744 12% Small 74 $206,885,647 $1,495,248,144 14% Non hub 329 $85,798,399 $806,427,864 11% All Airports Reporng 467 $1,581,138,980 $18,101,542,876 8% *Rental car revenue excludes customer facility charges (CFCs). Source: FAA, Form 127, Opera†ng and Financial Summary, 2013 Because of the importance of rental cars to airport revenues, improvements to the bidding process, contract language, and enforcement of agreements can result in addi†onal net revenue to an airport sponsor. Furthermore, development of consolidated rental car facili†es (CONRAC) or quick turnaround facili†es (QTA) can present a revenue opportunity for airport sponsors to provide common area maintenance, security, and administra†on of shared facili†es at market rates. This sec†on of the chapter discusses how consolida†on in the industry has shaped rental car offerings at airports and presents techniques to improve rental car revenue to the airport sponsor when concession contracts renew. 7.4.1 Impact of Industry Consolidation INDUSTRY TRENDS Significant consolida†on has occurred among rental car companies, which has affected the ways that airports manage on airport rental car companies. Figure 7-8 shows the current market shares of the major rental car companies. In 2013, Enterprise Holdings accounted for 49% of U.S. rental car opera†ng revenues. Hertz and Avis Budget Group accounted for another 47%. Smaller companies, in total, represented 4% of the market.

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7-19 Figure 7-8: Rental Car Company Market Shares, 2013 U.S. Operang Revenues Source: Auto Rental News, FACT BOOK 2014 Figure 7-9 displays a ‚meline of how the industry arrived at this point of consolida‚on, beginning in 1990-91 when Chrysler acquired Dollar and ThriŒy. Most of the consolida‚on was completed by 2009. However, in 2012, Hertz acquired Dollar ThriŒy Automo‚ve (by then the holding company for Dollar and ThriŒy) and sold Advantage. In 2013, Avis Budget acquired ZipCar and Payless, and Hertz opened its Firefly brand to replace Advantage. Each of the three largest players now offers a full suite of premium and value brands. 12 Figure 7-10 shows how the Great Recession of 2008 led to contrac‚on of both revenues and the number of rental cars in the United States. However, the industry has since recovered, with revenues in 2013 at record levels. That said, Figure 7-11, which shows opera‚ng revenue per rental car suggests that, while revenues are increasing, revenue per rental car declined in 2012 and again in 2013.This in turn suggests that rentals for value brands are growing faster than rentals for premium brands. 12 Eleven brands have consolidated into three dominant “brand families” and today represent 96% of the rental car market: Enterprise Holding, Inc.: Enterprise, Alamo and Na‚onal; Avis Budget Group, Inc.: Avis, Budget, ZipCar, and Payless; Hertz Global Holdings, Inc.: Hertz, Advantage, Dollar and ThriŒy. Enterprise Holdings (Alamo, Enterprise, Naonal) 49% Hertz (includes Dollar, ThriŒy, and Firefly) 26% Avis Budget Group (includes Zipcar and Payless) 21% Others 2% Independents 2%

Figure 7-9: Rental Car Consolidaon Timeline Source: Prepared by KRAMER aerotek inc., 2014

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 21 Figure 7 10: Comparison of U.S. Rental Cars and Annual Operang Revenue Source: Auto Rental News, FACT BOOK 2014 Figure 7 11: Annual Operang Revenue per Rental Car (United States) Source: Auto Rental News, FACT BOOK 2014 15,000 16,000 17,000 18,000 19,000 20,000 21,000 22,000 23,000 24,000 25,000 1,500,000 1,550,000 1,600,000 1,650,000 1,700,000 1,750,000 1,800,000 1,850,000 1,900,000 1,950,000 2,000,000 2000 2002 2004 2006 2008 2010 2012 U .S .O pe ra n g Re ve nu e (M ill io ns ) U .S .C ar si n Se rv ic e Rental Cars Revenue $9,000 $9,500 $10,000 $10,500 $11,000 $11,500 $12,000 $12,500 $13,000 2000 2002 2004 2006 2008 2010 2012 Re ve nu e pe rC ar pe rY ea r

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 22 7.4.2 Rental Car Management Alternatives TECHNIQUES TO MANAGE RENTAL CAR CONCESSIONS The consolidaon of the rental car industry and maintenance of individual brands gives airport operators choices about how to manage the rental car concessions. CN 5: DIRECT CONTRACTS WITH INDIVIDUAL BRANDS OR BRAND FAMILIES Airports typically enter into direct contracts with rental car companies. However, the airport branding policy has varying revenue and administrave implicaons. If an airport solicits bids from brand families, there will be fewer contracts to manage. Having fewer brands offered at the airport is likely to reduce compeon and the level of service to the traveling public. When determining brand policy before preparing the rental car solicitaon, it is suggested that an airport sponsor consider: Size and configuraon of available space for rental cars on airport property Ease of reallocaon of available space Degree to which the rental car market splits between on and off airport locaons Compeve environment for brand families and independents Rental car demand and implicaons for future facility plans such as a consolidated rental car facility (CONRAC) or quick turnaround facility (QTA) Potenal consequences of prohibing, permi‘ng, or requiring single, dual, or mul branding CN 6: CONRACs AND QTAs Figure 7 12: Rendering of 5,400 Vehicle Rental Car Facility at Seale Tacoma Internaonal Airport Source: Seale Times 2008 In the early 1980s, airports began to develop rental car facilies that housed all on airport rental car companies and their associated operaons, including rental counters, customer service, administrave offices, ready/return parking, fueling, and maintenance facilies (see Figure 7-12). CONRAC facilies can

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 23 be located in garage structures or remote sites on the airport, and are financed typically with a pledge of proceeds from customer facility charges (CFCs).13 Table 7 5 lists some CONRAC facili‹es. Most of these examples involve larger airports and substan‹al rental car demand. Generally, an airport that has greater than 700,000 enplaned passengers can support a CONRAC where individual rental car companies operate their own facili‹es. However, even an airport with 300,000 enplaned passengers could support a CONRAC, par‹cularly if facili‹es were cross u‹lized. Table 7 5: Examples of Consolidated Car Rental Facilies at U.S. Airports and CFCs Airport Year Facility Opened CFC Fee (as of Feb. 2011) Albuquerque Interna‹onal Sunport 2001 $3.90/day Bal‹more/Washington Interna‹onal Thurgood Marshall Airport 2003 $3.75/day Cleveland Hopkins Internaonal Airport 1998 $2.50/day Dallas/Ft. Worth Internaonal Airport 2000 $4.00/day$2.20/day transportaon fee Fort Lauderdale Hollywood Internaonal Airport 2005 $3.95/day/7 day maximum Hartsfield Jackson Atlanta Internaonal Airport 2009 $4.50/day George Bush Interconnental Airport (Houston) 2003 $3.00/day$4.49/day transportaon fee Kansas City Internaonal Airport 2007 $3.00/day$2.00/day transportaon fee McCarran Internaonal Airport, Las Vegas 2007 $3.00/day Memphis Internaonal Airport 2012 $4.00/day Miami Internaonal Airport 2010 $4.00/day Louis Armstrong New Orleans Internaonal Airport 2012 $6.20/day San Francisco Internaonal Airport 1998 $20.00/transacon San Jose Internaonal Airport 2010 $10.00/transacon Sea le Tacoma Internaonal Airport 2012 $5.00/day Phoenix Sky Harbor Internaonal Airport 2006 $6.00/day$0.77/day facility maintenance fee Ted Stevens Anchorage Internaonal Airport 2007 $4.87/day Source: Ricondo & Associates; rental car company websites; compiled by KRAMER aerotek inc., 2011 13 A CFC is a fee required by an airport sponsor (established by state law, local ordinance, or resoluon) to be collected by the car rental companies from customers. CFCs collected are generally dedicated funds to pay for the cost of a CONRAC or rental car service facilies or the infrastructure that serves these facilies. CFCs vary from $1.50 to $8.00 per vehicle contract day or $2.25 to $10.00 per transacon. CFCs are usually established ahead of a CONRAC project and are currently in place at more than 110 U.S. airports. CFCs can be used to finance, design, construct, and operate: Consolidated airport car rental facilies Common use transportaon systems that move passengers between airport terminals and consolidated car rental facilies, including acquision, operaon and maintenance of vehicles (for use in that system), and bus maintenance facilies Terminal modificaons solely to accommodate and provide customer access to common use transportaon systems Terminal roadway and curbside improvements, ulies, access roadways, and environmental remediaon

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 24 Some smaller airports operate consolidated QTAs and ready/return spaces. An airport sponsor may construct a quick turnaround facility separately or as a part of a CONRAC. Quick turnaround facili€es are usually located in a garage near the terminal to provide refueling, fluid top off, and washing services for the rental car agencies that serve the airport. These services can be provided by the airport via direct contract, by individual rental car companies, or by consor€ums. Table 7 6 provides examples of QTAs and their CFCs. Table 7 6: Examples of Consolidated QTAs at U.S. Airports and Their CFCs Airport CFC Fee (as of Feb. 2011) Abraham Lincoln Capital Airport, Springfield, IL $2.25/transac€on Burlington Interna€onal Airport, Chi”enden County, VT $2.00/day Durango La Plata County Airport, La Plata County, CO $1.00/day The Eastern Iowa Airport, Cedar Rapids, IA $1.62/day Erie Internaonal Airport, Erie, PA $3.50/day/ 5 day maximum Fresno Yosemite Internaonal Airport, Fresno, CA* $10.00/transacon Greater Binghamton Airport, Binghamton, NY $2.00/day Monterey Regional Airport, Monterey, CA* $10.00/transacon Northwest Arkansas Regional Airport, Bentonville, AR $3.00/day Northwest Florida Beaches Internaonal Airport, Panama City, FL $3.00/day Quad City Internaonal Airport, Moline, IL $3.00/day Santa Barbara Airport, Santa Barbara, CA* $10.00/transacon Tulsa Internaonal Airport, Tulsa, OK $2.60/day Valley Internaonal Airport, Harlingen, TX $3.75/day Yampa Valley Regional Airport, Hayden, CO $4.00/day Yeager Airport, Charleston, WVA $3.00/day * State law regulates CFCs in California. Source: Ricondo & Associates; rental car company websites; compiled by KRAMER aerotek inc., 2011 CONRACs and QTAs offer efficiencies by moving rental car companies to shared facilies, which can somemes reduce ground transportaon costs, improve customer service, and more easily address environmental compliance. Consolidated facilies can also provide a series of benefits to the airport sponsor and rental car companies. First, CONRAC facility financing methods recover the cost of facilies from passengers renng cars, not from the rental car companies. Rental car companies do not have to pay a poron of their rental income to the airport sponsor for rental car facilies. Airports also can allocate an appropriate amount of infrastructure cost to CONRACs, thus somewhat reducing infrastructure and overhead costs assigned to other cost centers at the airport. If an airport has developed a CONRAC or QTA, reducons in rental car fleets may result in less CFC revenue and

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 25 necessitate inclusion (and acvaon) of a conngent rent clause to cover capital and operang costs of the CONRAC. 14 CONRACs and QTAs (Figure 7-13) also present a revenue opportunity for the airport sponsor to provide shared services at market rates. These could include common area maintenance, security, and administraon of the facilies at a 15% markup. At QTAs, airport sponsors could sell fuel directly to the rental car companies and provide maintenance, security, and administraon services at retail markup. If the airport sponsor does not have in-house staff to perform these funcons, they can arrange for direct service contracts to do the same. Lastly, airport sponsors could require off airport rental car companies to pick up their customers at the CONRAC. This would focus customer a•enon on the CONRAC as the rental car center at the airport. Figure 7 13: Tampa Internaonal Airport Rental Car Quick Turnaround Facility Source: Creave Contractors, Inc. and Hillsborough County Aviaon Authority 14 On airport rental car companies typically pay the MAG or privilege fee and rent on all the facilies they use, including: rental car counters, office space, storage space, and ready/return stalls. In the terminal, the rents are based on the prevailing rental rate paid by the airlines for similar space. For other facilies, ground rent is charged for the space occupied and set to recover all direct and indirect costs associated with the space, including an allocated poron of debt service. CFCs are intended to cover CONRAC debt service, coverage and operaons, and maintenance. If the CFCs are insufficient to cover the costs and expenses associated with the CONRAC, airport sponsors can include a provision in rental car concession agreements to remedy deficiencies through collecon of conngent rents to produce enough revenue for the CONRAC to pay all obligaons when due.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 26 7.4.3 Rental Car Administrative Improvements Airports can achieve higher net revenues through careful preparaon of bid documents, definion of terms, rents, levy of off airport privilege fees, and a connuous audit program. Each of these administrave improvements is described in the next set of implementaon techniques. CN 7: DEFINITION OF TERMS IN RENTAL CAR AGREEMENTS Given that concession fees are the principal source of revenue to the airport sponsor from rental car companies, definion of terms is parcularly important. The majority of airports will require a percentage of gross revenue or a MAG, whichever is higher. In concession agreements with rental car companies, the definion of gross revenues determines the amount owed to the airport sponsor. Opmizing revenue from car rental concessionaires involves ghtly defining gross revenue. Gross revenue typically is determined by the total charges on the face of a customer’s contract receipt, excluding taxes, CFCs, insurance proceeds, and the wholesale transfer of salvage vehicles. The definion of gross revenues should also include add ons, such as GPS rentals, addional driver fees, fuels sales, insurance fees, and other extra charges. CN 8: BID DOCUMENTS AND CONCESSION AGREEMENTS Contracts with rental car companies are an area where administrave improvements could make a big difference in revenue results to the airport sponsor. As menoned in CN 7, defining what is and what is not included in the gross revenues is crical. For example, if there are taxes, are they counted as part of gross revenue or not? Branding policy will also guide the bidding process. Some airport operators prefer to contract with individual brands; others will negoate a contract with the brand family. If an airport sponsor levies a CFC, the calculaon method of the CFC is very important. For most airports, the CFC is based on a day or fracon of a day rental, but this must be clearly defined in the contract. For example, somemes a rental car customer may keep a vehicle for one or more addional hour(s) beyond the 24 hour period. Unless the contract specifies that the CFC must be included, the rental car company may charge a rental fee for the addional hour(s) but not charge the addional CFC fee, which goes back to the airport sponsor. Some airports are sensive about how and where rental car companies list the CFC on a customer’s rental car contract. Because the CFC is a pass through fee to pay off debt service, some rental car companies list it below the line as an individual fee and call it an “airport tax.” Airports can spulate in concession agreements what the CFC is called and where it is placed on customer rental contracts. The bid documents and concession agreements must include a clear explanaon of rights and obligaons to be offered to rental car concessionaires. The rights and obligaons generally require the rental car concessionaire to operate a full service rental car concession and to operate under the brand name(s) in its proposal.

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 27 Although it may be tempng to review other airports’ rental car concession bid documents, every airport has unique situaons and requires a custom set of documents. CN 9: RENTAL CAR FACILITY RENTS (IF NOT IN A CONRAC) For maximum revenues, rental car companies should be required to pay rent on all facilies they use at the airport, including rental car counters, office space, storage space, and ready/return stalls. If rental car concessionaires have on airport service facilies, they should pay a ground rent for the space they occupy. The rental rate for this space should be revised at least every 5 years. In addion to concession fees, rental car companies pay rents for counter, office, and storage space in the terminal building. These rents are based on the prevailing rental rates paid by the airlines for similar space. The rental rates paid by the rental car concessionaries should recover all direct and indirect costs and debt service allocable to the space. Rental car concessionaires pay for automobile ready/return spaces where their automobiles are staged for customers. Generally, ready/return spaces are allocated to specific companies based on criteria, such as MAG bid, proporon of revenue paid to the airport sponsor, or number of rental car transacons. Most concession agreements for rental car companies provide for periodic adjustment of ready/return spaces among companies based on acvity or concession fees paid to the airport sponsor. The rental car concessionaire should be responsible for the maintenance of their ready/return spaces and should be responsible for the cost of signage and corporate idenficaon (if not in a CONRAC). CN 10: OFF AIRPORT PRIVILEGE FEE Many airports levy a privilege fee to off airport rental car companies that is equal to the privilege fee paid by on airport rental car companies. Although it is not necessary to do so, some airports offer a somewhat lower privilege fee for off airport operaons in recognion of the off airport rental car companies’ busing costs. Off-airport rental car companies located within 5 miles of the airport should be required to pay a privilege fee on all transacons. To protect on airport rental car market shares, it also is appropriate for airport sponsors to levy privilege fees to recover the roadway, and to cover traffic control and terminal curbside costs from off airport rental car companies. These transportaon fees can be a percentage of gross revenue, a charge per day, a charge per trip, or a charge per transacon. CN 11: AUDITS Regular audits of rental car companies allow airport sponsors to determine that they are faithfully following the terms of the concession agreement. Mistakes can happen at the individual contract level. Auditors can verify that the rental car concessionaires are using the proper definions of gross revenue in the calculaon of concession fees, not using unauthorized offsets or exclusions, and not excluding rental car transacons that may occur at fixed base operator locaons or private hangars. Airport sponsors also can consider a staggered program of enforcement that includes audits of a few rental brands each year so that, in a span of 3 years, each brand has an audit. Because of the complexity of rental car transacons compared to other airport operaons, internal auditors or auditors familiar

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 28 with rental car concessions and contracts are preferred to complete the audits. It may be cost effec­ve to have the auditors receive special training for audi­ng rental car opera­ons. CN 12: ENVIRONMENTAL MITIGATION When dra„ing concession agreements for rental car companies, it is important to include provisions for monitoring of state and federal environmental regula­on compliance by rental car companies. Airport sponsors may choose to retain an a†orney that specializes in environmental law to make certain that adequate provisions are made explicit in the agreement. CN 13: TRASH RECYCLING Many airports have established programs for trash recycling. Airport sponsors can include rental car companies in these programs when rental car contracts renew. CN 14: LETTERS OF CREDIT Bank le†ers of credit that name the airport sponsor as the sole beneficiary to the rental car company are an excellent safety net to secure faithful performance of lease terms, including payment of rent and clean up. In the event of a bankruptcy, bank le†ers of credit are beyond the reach of the bankruptcy court; consequently, they provide security of payment to the airport sponsor. Le†ers of credit are typically nego­ated as part of an agreement. It is important for an airport sponsor to monitor the le†er of credit throughout the term of the contract, however, to confirm that adequate funding is maintained to cover the terms of credit. 7.4.4 Rental Car Wrap-up Airports typically manage rental car concessions directly. Consolida­on within the industry allows airport sponsors to reconsider what branding policy and mix of rental car products will best serve their market. Airport managers can solicit bids from individual brands or brand families. Both on airport and off airport rental car companies deliver revenues to the airport sponsor first from a MAG or privilege fee of 10% of gross revenues. If the airport has a CONRAC and/or QTA, the airport sponsor can also collect CFCs and, poten­ally, fees from maintaining and managing shared or cross u­lized facili­es and ground transporta­on. Lastly, airports can earn revenue by selling fuel to rental car companies. When an airport sponsor rebids rental car concessions, there is opportunity to ­ghten up defini­ons and terms of contracts. Because rental car concessions are one of an airport’s top non aeronau­cal revenue sources, a†en­on to the bid process, contract terms, and on going management and enforcement of contracts could reap substan­al addi­onal revenues to an airport sponsor.

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 29 7.5 APPLICATION OF THE STRATEGY TO IN TERMINAL CONCESSIONS 7.5.1 The Concession Opportunity In terminal concessions consist of food and beverage, retail, duty free, and other shops and services. These tradi…onal revenue generators can return considerable opera…ng revenues to an airport sponsor. Table 7.7 summarizes the contribu…on of concessions to overall opera…ng revenues in 2013. Concessions represent 11% of opera…ng revenues at large hub airports and 7% at medium hub airports. At airports with fewer passengers, the contribu…on of concession revenue is less; however, concessions contribute 9% to airport opera…ng revenues overall. Table 7 7: Contribuon of Food and Beverage, Retail, and Services to Operang Revenues, 2013 Airport Hub Type Airports Reporng Food & Beverage, Retail, and Services Total Operang Revenues Share of Total Operang Revenues Large 29 $1,324,940,135 $12,594,081,124 11% Medium 35 $223,970,863 $3,205,785,744 7% Small 74 $88,744,251 $1,495,248,144 6% Non Hub 329 $20,330,499 $806,427,864 3% Total 467 $1,657,985,748 $18,101,542,876 9% Source: FAA, Form 127, Opera
ng and Financial Summary, 2014 Concession programs are a cornerstone of passenger dependent non aeronau
cal revenue. Consequently, one growth path for increasing non airline revenues is to improve the concession program to achieve greater concession sales with exis
ng airport passengers. Table 7 8 shows 2012 average sales per enplanement for different types of concessions. Table 7 8: Concession Sales per Enplaned Passenger, 2012 (Excluding Duty Free) U.S. Hubs Number Reporng Enplaned Passengers (EP) Food & Beverage Sales/EP Specialty Retail Sales/EP News & Gis Sales/EP Total Sales/EP Large Hubs 22 447,537,720 $6.14 $1.76 $1.90 $9.79 Medium Hubs 15 89,841,431 $5.74 $1.28 $2.12 $9.14 Small Hubs 13 30,187,067 $5.34 $1.33 $2.65 $9.32 Total Sample 50 567,566,218 $6.07 $1.65 $1.92 $9.64 Source: R. Chinsammy Consul
ng, Airport Revenue News Fact Book 2014 Current average expenditures per transac
on at U.S. airport concessions are es
mated at $10 to $18 for food and beverage; $20 to $40 for specialty retail; and $7 to $10 for news and gi„s [R. Chinsammy Consul
ng]. These transac
on averages suggest that there is considerable room to increase sales from the exis
ng enplaned passengers, and reason to take a close look at achieving increased revenue for airport concessions.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 30 Table 7 9 esmates capture rates (transacons per enplaned passenger) using an average expenditure per transacon of $14 for food and beverage, $25 for specialty retail, and $8 for news and giŠs. In 2012, U.S. airports had a capture rate of 37% of enplaned passengers for food and beverage, 6% for specialty retail, and 20% for news and giŠs. Even assuming one transacon per enplaned passenger regardless of category of purchase, approximately 35% to 40% of passengers are not making any purchases. That is where opportunity lies. Table 7 9: Esmated Percent of Enplaned Passengers Using Concessions, 2012 Capture Rate U.S. Hubs Number Reporng Food & Beverage Specialty Retail News & Gis Large Hubs 22 42% 8% 22% Medium Hubs 15 40% 6% 25% Small Hubs 13 37% 6% 31% Total U.S. Sample 50 42% 7% 23% Sources: R. Chinsammy Consulng, Airport Revenue News Fact Book 2012, Transacon & Capture Rate Analysis No longer can an airport sponsor simply put out a bid request for food and beverage, merchandising, and adversing, then wait for responses. Today, such an ad hoc plan will yield sub opmal results and could leave millions of dollars untapped. Concessions remain an area of innovaon and change because they affect the overall quality of passenger experience and represent growth potenal for both concessionaires and the airport sponsor. The three important elements of this strategy are: (1) how the airport sponsor manages concessions; (2) improvements to the planning and contracng process; and (3) airport programs to encourage innovaon and achieve deeper penetraon into exisng concession acvity. In this Airport Guide, Chapter 3: Customer Focus presented new ideas to improve actual offerings and services to customers. 7.5.2 Concession Management Alternatives ALTERNATIVES TOMANAGE IN TERMINAL CONCESSIONS Airport sponsors can use five different management techniques to run in terminal concessions: Direct Contract – The airport leases individual locaons or small groups of locaons directly with the concessionaire. Fee Manager – The airport has an agreement with a third party to develop, market, lease, and manage the concessions without directly operang any of them. The fee manager does not invest in facilies or operate concessions. A fee manager receives compensaon for services provided. Master Concessionaire – The airport leases all space in a category to a single operator. A master concessionaire can operate all of the concessions in several categories (food/beverage and merchandise) or may sublease some of the locaons to other operators.

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7-31 Prime Concessionaire – The airport leases packages of loca ons to one or two prime concessionaires, each of which has mul ple loca ons (more than 3) within the airport. Third-Party Developer – The airport has an agreement with a third party to develop, market, lease, and manage the concessions without directly opera ng any of them. The third-party developer nego ates concession leases on behalf of the airport sponsor. Developers receive a por on of concession revenue for the services provided. Developers can be required to make investments in facili es, equipment, and common spaces. Each management approach may deliver strong financial results for the airport sponsor. Which approach is best will be highly dependent on the size of airport, the governance of the airport, and the number of airport staff available to develop or direct the concession program. The following sec ons describe and compare management techniques. CN-15: DIRECT CONTRACTS WITH IN-TERMINAL CONCESSIONAIRES With the direct contract alterna ve, all concession agreements and management contracts are between the airport sponsor and the concessionaire or management contractor providing the services. This approach provides the airport sponsor with the most control over its concession programs. The direct contract approach also tends to enhance compe  on among concessionaires. Figure 7-14 shows a diagram of the direct contract alterna ve. Figure 7-14: Direct Contract Alternaƒve Source: Michael G. Moroney & Associates, Inc., 2014 The direct contract alterna ve results in the highest overall revenue to the airport sponsor. The airport sponsor controls price and service compe  on, concepts, product variety, and number of concessionaires par cipa ng. This approach tends to op mize revenue. This technique requires an experienced concession management staff and can result in higher staff costs and administra ve costs because of management responsibili es over mul ple concession contracts. Furthermore, it can require the airport sponsor to finance, construct, and maintain common areas, such

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7-32 as food courts, or incorporate the construcon of such areas into its direct contracts with concessionaires. For a direct contract alternave to be praccal, airport management must have the freedom to make mely business decisions with a minimum of polical consideraons. When the polical structure or procurement policies impede mely decisions, other management alternaves may produce stronger financial results. Airports such as Dallas/Fort Worth Internaonal, Indianapolis Internaonal, Denver Internaonal, Portland Internaonal, San Francisco Internaonal, and McCarran Internaonal (Las Vegas) use the direct contract approach and have developed acvely managed programs with in-house staff that offer a variety of locally owned and operated establishments. Chapter 8 includes a case study of the Indianapolis Internaonal Airport concession program. CN-16: FEE MANAGER ALTERNATIVE The fee manager alternave involves the airport sponsor contracng with a third party to provide concession development and management services. In essence, the fee manager acts as the “concession management department” of the airport sponsor. All concession agreements are between the airport sponsor and the concessionaires. Fee structures vary. The fee could be a fixed fee or a percentage of rents collected. Because the fee manager is not responsible for invesng in improvements, the fees are lower than those that are paid to a third-party developer. Figure 7-15 shows the structure of the fee manager alternave. Figure 7-15: Fee Manager Alternave Source: Michael G. Moroney & Associates, Inc., 2014 Some airport sponsors prefer this approach because there is more flexibility and control for the airport—and, at the same me, the airport benefits from the knowledge, contacts, and experience of the fee manager, which can result in increased revenues. However, some airport sponsors may not allow (or favor) delegaon of contracng authority to third-party managers who are not also investors in the airport.

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7-33 The Metropolitan Washington Airports Authority (MWAA) uses the fee manager approach at Ronald Reagan Washington Na…onal and Washington Dulles Interna…onal airports. CN-17: MASTER OR PRIME CONCESSIONAIRE ALTERNATIVE With the master concessionaire approach, the airport sponsor leases concession space in a par…cular category (e.g., food and beverage or merchandise) to a single operator. A prime concessionaire approach involves the airport selec…ng one or two concessionaires for different loca…ons in the airport. Prime and master concessionaires operate most of the concession units themselves. They may sublease a minimum number of concessions to meet the sponsor’s Airport Concessions Disadvantaged Business Enterprises (ACDBE) goal, to provide local or regional brands, or to sa…sfy other requirements. Figure 7-16 shows a diagram of this alterna…ve. Hartsfield-Jackson Atlanta Interna…onal, Tampa Interna…onal, and San Diego Interna…onal airports use prime concessionaires. Figure 7-16: Prime Concessionaire Alternave Source: Michael G. Moroney & Associates, Inc., 2014 Some airport sponsors have agreements with one prime concessionaire to operate food and beverage facili…es and another prime concessionaire to operate merchandise facili…es. Other airport sponsors can have the same prime concessionaire operate both categories of concessions. Concession revenues and minimum rents15 tend to be higher with a prime concessionaire because of the greater opera…onal efficiencies with a larger opera…on. 15 A minimum rent per month is the smallest amount of rent owed by a tenant when rent is based on a percentage of gross sales.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7-34 With fewer responsibilies and contracts to administer, the prime concessionaire alternave requires fewer airport staff to manage concessions. This approach tends to yield the least amount of compeon, however, because one or two prime concessionaires control the enre concession program, concession space, and the terms and condions for subleases. CN-18: THIRD-PARTY DEVELOPER ALTERNATIVE With a third-party developer approach, the airport sponsor enters into a contract with a developer (via a lease) to prepare and manage a concession program for the terminal(s). The airport sponsor leases all concession space in the terminal(s) to the developer. Developers typically invest capital into (a) basic infrastructure and development of common areas, (b) logiscs space for storage and delivery, and (c) shared services for concession support. Developers may self-operate a concession or, in some agreements, they must delegate operaons to other concessions by sub-agreement. Figure 7-17 shows the structure of the third-party developer alternave. Figure 7-17: Third-Party Developer Alternave Source: Michael G. Moroney & Associates, Inc., 2014 This management alternave maximizes compeon because the developer selects the concessionaires that will opmize revenues. Developer concession programs generally produce a high level of customer service and sasfacon. Airport sponsors that select this alternave are willing to pay the developer a percentage of revenue in return for the professional experience, skill, judgment, and network of concession operators. The developer’s fee can be as much as 20% to 30% of gross concession revenues. The third-party developer alternave can produce the greatest level of revenue of all the alternaves, but because the developer’s fee may be high, net revenue to the airport sponsor can be less than with other approaches. Airport sponsors using this alternave believe that the developer can generate significantly more gross revenue than other alternaves; so much so, that the airports’ shares of revenue will be higher than alternaves even a›er accounng for the developer fees. An addional benefit of this alternave is that the developer can expedite concession and subcontract agreements that might not be possible with public-sector contracng. Piœsburgh Internaonal Airport was one of the first airports to embed the mall concept into an airport terminal and use a third-party developer. Today, airports with larger numbers of passenger enplanements and available space are typical candidates for this management alternave.

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 35 Balmore/Washington Internaonal Thurgood Marshall Airport used a developer to improve older terminal infrastructure and update concession spaces. Boston Logan Internaonal and Newark Liberty Internaonal airports also use the developer alternave. CN 19: COMBINED MANAGEMENT APPROACH Some airports use a combinaon approach that suits specific locaons in a terminal to achieve the best program. For example, Orlando Internaonal Airport contracts with a third party developer for the pre security central terminal concession area. For other locaons in the terminal, it uses a group of prime concessionaires. Sea‘le Tacoma Internaonal Airport uses mulple prime concessionaires in the different concourses and uses direct leasing with a fee manager for the central terminal. According to the Airport Revenue News, in a 2012 survey of 35 airports, nine of the top 35 U.S. airports used direct contracts; 11 used prime concessionaires; six used third party developers; and nine used a combinaon of approaches. None of the top 20 airports used the master concessionaire alternave. Table 7 10 provides airport examples of the different concession approaches. Table 7 10: Airports Using Different Concession Models Direct Contract Master/Prime Concessionaire Third Party Developer Fee Manager Combined Approach Dallas/ Fort Worth Internaonal Charleston Internaonal Boston Logan Internaonal Washington Dulles Internaonal John F. Kennedy Internaonal (Prime: Terminal 5; Direct: Terminal 4) Denver Internaonal Minneapolis St. Paul Internaonal Newark Liberty Internaonal Ronald Reagan Washington Naonal Orlando Internaonal (Prime/ Developer) Portland Internaonal Nashville Internaonal Pi‘sburgh Internaonal Miami Internaonal (Prime/Direct/Developer) San Francisco Internaonal Tampa Internaonal Oakland Internaonal (Prime/Direct) Tulsa Internaonal Seale Tacoma Internaonal(Prime/Direct) Examples of Companies Delaware North Co. AirMall USA HMS Host Internaonal MarketPlace Development SSP Group Ltd. Wes­ield Concession Management The Paradies Shops Sources: LeighFisher, ACRP Report 54: Resource Manual for Airport In Terminal Concessions and KRAMER aerotek inc., 2014

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 36 MANAGEMENT APPROACHES COMPARED Each management model has strengths and weaknesses. Direct contracts offer an airport sponsor more control over concession agreements and management contracts. Direct contracts also lead to higher total revenue received from concessionaires, and more opportunity for local businesses to par„cipate in programs. Direct contracts can result in higher airport administra„ve costs and require addi„onal airport management talent and „me to manage the programs. The fee manager approach brings experienced professionals to the concession program and provides a single point of contact for the airport. The airport sponsor can retain more control over the concession program and will take responsibility for capital investment in common areas of use. The prime/master concessionaire model results in fewer contracts and agreements for airport staff to manage, as the concessionaire is responsible for management and administra„on of the concession subcontracts. This model can result in less compe„„on because there are fewer poten„al operators. The third party developer model o‡en results in high customer sa„sfac„on, usually the highest gross sales, and a wide variety of individual concession concepts. However, developer fees reduce revenue to the airport. Table 7 11: Comparison of Concession Management Models CN 15 Direct Contract CN 16 Fee Manager CN 17 Master/Prime Concessionaire CN 18 Third Party Developer Potenal for Improving Net Revenues High Medium High Medium Medium Airport Assumpon of Risk High Medium High Medium Medium Airport Capital Investment High High Medium Medium Airport Administra ve Burden High Medium Medium Low Low Variety in Concession Programs High High Medium High Complexity to Implement Medium High Ini ally High Ini ally High Ini ally Poli cal/Ins tu onal Challenges Low High High High Source: Michael G. Moroney & Associates, Inc., 2014 SELECTING AMANAGEMENT ALTERNATIVE An airport sponsor should select its concession model(s) based upon considera on of the following factors: The demographic and volume of the airport’s passengers Terminal area layout, terminal building geometry, and layout of concession space and support areas The size and experience of airport staff to manage the various programs and the airport sponsor’s willingness to fund administra ve costs

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7-37 Level of interest on the part of third-party developers, fee managers, and concessionaires to operate at the airport Airport net revenue es…mates under each management alterna…ve The degree of airport autonomy and flexibility to develop and manage its concession and customer service programs given the airport sponsor’s policies, procedures, and legal structure The unique issues and opportuni…es present at the airport Capital requirements and the airport sponsor’s ability to a‹ract private capital with each alterna…ve Terminal development plans Opportuni…es and flexibility to op…mize revenue during the course of the contract Selec…ng the appropriate management alterna…ve for an airport can result in greater revenue, less administra…ve and other costs, and preserva…on of the airport sponsor’s capital. 7.5.3 Concession Program Planning and Administrative Improvements Five key factors contribu…ng to a successful concession program are: (1) organiza…onal preparedness and pre-planning; (2) adherence to best administra…ve prac…ces; (3) the support of mo…vated par…cipants at the right levels in the organiza…on; (4) a fresh mix of concession offerings targeted at the airport’s customer segments; and (5) strategic loca…on of concessions pre- and post-security to encourage shopping. The sec…ons that follow discuss the planning, design, and solicita…on improvements for in-terminal concessions and the adver…sing necessary to achieve addi…onal non- aeronau…cal revenue from exis…ng businesses. New ideas for product offerings and adver…sing are discussed in Chapter 3: Customer Focus. Concession process improvements focus on “doing things right,” which means the airport sponsor must invest in developing concession plans and policies that are unique to the airport and contain informed, contemporary approaches that op…mize revenue and services and resemble a private-sector business plan. Figure 7-18 shows poten…al areas of improved planning, solicita…on, and management of concessions. Figure 7-18: Concession Process Improvements Source: Michael G. Moroney & Associates, Inc., 2014 Figure 7-19 outlines a concession program planning process that commercial service airports of all sizes can accomplish. The process involves seven development steps and a management step. The process includes a planning component, design guidelines and requirements, and a solicita…on and award phase, followed by on-going management of the program. The next sec…ons discuss each component. Concession Program Goals Concession Planning Contrac…ng, Terms & Condi…ons, Solicita…on, & Award Concession Management

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7-38 For a detailed discussion of agreements, procurement processes, and management of concessions, please consult ACRP Report 54: Resource Manual for Airport In-Terminal Concessions. Figure 7-19: Overview of Planning, Design, Solicitaon, and Management of Concession Programs Source: Michael G. Moroney & Associates, Inc., 2014

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 39 “If you don’t know where you’re going, you will end up somewhere else.” – Yogi Berra STEP 1 – CN 20: PROGRAM STRATEGY, VISION, GOALS, AND OBJECTIVES Concession Working Group To develop successful concession plans, faciliŠes, and documentaŠon, it is useful to form a mulŠ disciplinary working group that represents the following mix of skills: Concessions program development Airport finance Concessions/commercial legal ProperŠes and terminal operaŠons Terminal planning/shopping center architect Local jurisdicŠon purchasing requirements At larger airports, staff will have many of these skills. Smaller airports may need to engage outside consultants, planners, and a–orneys. Because airport funcŠons within the terminal area are changing, a mulŠ disciplinary working group will help to determine what opportuniŠes might exist, not only to improve but also to expand the exisŠng footprint of the concession program to include areas that are no longer leased by the airlines. In addiŠon, older areas of the terminals, old phone banks, or other customer service ameniŠes that are no longer needed can be repurposed for be–er use. All concession programs evolve over years. Maintaining conŠnuity of the working group to review performance and, periodically, to refresh the concession program will help to evolve the airport’s program. Vision Statement A concession program must have direcŠon to be effecŠve. Thus, a vision statement and long term goals are useful to focus staff and advisers on what the airport sponsor has determined is important. A vision statement is a vivid descripŠon of a desired outcome that inspires, energizes and helps create a mental picture of achievement of goals. It can be a direct statement, such as this one developed by Denver InternaŠonal Airport: “A Concession Program that is among the best in the world offering value, excitement and wide range of culinary and retail experiences and services that evoke a strong sense of place reflec
ng the best of Denver, Colorado and Rocky Mountain West.” Long Term Goals Goals for the concession program are broad statements about the airport sponsor’s intenŠon to maximize generaŠon of revenues, fulfill the long term public service goals inherent to the operaŠon of public use faciliŠes, and a–ract investment of private capital to the development of the airport.

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 40 Examples of goals for a concession program include: Enhance customer service and the overall customer experience Encourage healthy compe­­on Enhance the passenger experience through designs that offer interes­ng and exci­ng concepts and mo­vate passengers to patronize the concessions Represent the best local, regional, na­onal, and interna­onal concepts – use local brands to create a sense of place Provide travelers’ necessi­es Maximize non airline revenue in a manner that is consistent with the airport’s public service role to reduce the impact of airport costs on airlines Develop the concession program with a cost structure that will permit concessionaires to comply with street pricing requirements without undue economic burden Op­mize small and local businesses and ACDBE opportuni­es Provide for periodic re concep­ng and facili­es refreshment to keep the concessions program fresh and vibrant Recruit top local, regional and na­onal food and beverage and retail brands and concepts Achieve a cost effec­ve approach to investment in concession space for both the airport and concessionaires (i.e., adding terminal space for concessions, construc­ng concession support areas, and providing u­li­es and other investments necessary to present a high quality concession program) Program Objecves Objec­ves are realis­c and measurable targets established to evaluate and track progress during implementa­on of a concession program. Objec­ves are typically short term and achievable within a specific ­meframe. Examples of program objec­ves are: Recruit and nego­ate a direct contract with two local specialty retail vendors for the terminal in the third quarter Increase gross sales of post security concessionaires by 5% over the next 12 months Having a coherent concession program strategy facilitates the maximum genera­on of—and raises the likelihood of—private capital investment in development of the concession program. The strategy will also help staff focus on program priori­es. STEP 2 – CN 21: SELECTION OF CONCESSION MANAGEMENT ALTERNATIVE This step involves evalua­on and selec­on of the concession management model or combina­on of models: Direct contract Fee manager Master/prime concessionaire Third party developer Selec­on of a concession management model will affect the airport’s approach to solicita­on and management of the programs.

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 41 STEP 3 – CN 22: MARKET RESEARCH Surveys Airport size, the mix of passengers (origina­ng/connec­ng, domes­c/interna­onal, and business/leisure travelers), and customer demographics all figure into program design. To help build an effec­ve concession program, airports oŒen survey customers to determine preferences for services, products, brands, needs, wants, and desires. ACRP Report 26: Guidebook for Conduc ng Airport User Surveys provides guidance in crea­ng and implemen­ng an effec­ve survey. Many commercial service airports are striving to monitor current concession programs and revenue performance. Some airports have staff that can undertake market research in house; other airports work with their prime and master concessionaires to accomplish the same. An on going marke­ng research program is useful to determine: Customer sa­sfac­on with exis­ng concessions Passenger profiles (domes­c, interna­onal, leisure, and business) Enhancement opportuni­es based on exis­ng and projected spending pa–erns The traveling public’s needs and wants concerning future poten­al mixes of concession brands and concepts Performance Measures and Peer Airport Comparisons The following performance measures also are useful market research tools to evaluate concession programs: Recent enplaned passengers history Sales by retail and food/beverage Sales per enplaned passenger Sales per square foot by retail and food/beverage Type of concession management models in use If the airport sponsor operates more than one terminal, benchmarks should be collected separately for each terminal. Similar data is available from the ACI NA Benchmarking Survey for other airports. Airports that par­cipate in the survey have access to other airports’ data. Detailed Concession Analysis When an airport plans to rebid a concession space or group of stores, a more detailed analysis would look at results from specific establishments. Relevant data for this type of analysis includes an evalua­on of Food and merchandise offerings Passenger sa­sfac­on Capture rates

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 42 Concession layouts Pricing informaon and relaonship to street pricing (how much is the airport pricing premium) Sales per square foot by concession unit Revenue history by month for three to 5 years Revenue history for food/beverage (by unit and by type—casual dining, “grab and go,” bar, etc.) Revenue history for merchandise (by unit and by type—convenience; specialty; and, where applicable, duty free) Revenue history for adversing Revenue to the airport Revenue to the concessionaires Demand Analysis and Forecasts As a part of the market research effort, concession demand analysis and forecasts are typically developed and updated periodically. The purpose of the demand analysis is to determine the extent to which the current concession programs serve exisng customer segments and the amount of space required to meet future requirements. The demand analysis idenfies the potenal size of the concession program given the quanty and consumpon characteriscs of passengers and the exisng facility characteriscs. This will guide facilies planning and consideraon of alternave concession branding and mix when it is me for a refresh of the concession program. STEP 4 – CN 23: COMMERCIAL PLAN To ensure that the program includes a full range of concessions, the airport sponsor (in conjuncon with a master concessionaire, prime concessionaire, or concession developer, depending on the model used) prepares a commercial plan. The plan idenfies the opmal use of each space within the terminal complex to maximize achievement of the concession program goals. The commercial plan includes space, business, and offerings plans that define specific types of uses for each space, as well as an overall concession mix that will meet the needs of passengers in each area of the terminal. The results of the market research, performance measures, and demand analysis in Step 3 help determine new direcons for the commercial plan. The commercial plan is updated periodically (at least every 5 years; earlier if a significant event occurs) to reflect changes in terminal use or passenger demand. The plan provides the underlying raonale for each concession opportunity. STEP 5 – CN 24: FACILITIES REQUIREMENTS Steps 4 and 5 are likely to be concurrent efforts. Step 5 begins with an analysis of the exisng physical condion of concession areas to determine the strengths, weaknesses, and opportunies that each space offers. The purpose of this analysis is to determine pa˜erns of passenger use and to idenfy new opportunies that could become part of the program design.

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 43 Preparaons for facility requirements begin with an assessment of concession space and amount of square footage by: (a) concept; (b) type; (c) unit producvity; (d) unit locaons; (e) layouts; (f) relaonship to flows, crical adjacencies, and market segmentaon; and (g) way finding and signage. This analysis of exisng condions evaluates the impacts of exisng terminal and concession designs. Site evaluaons focus on design, traffic flow, and obvious customer service issues to determine the effecveness of facilies. It is crucial to idenfy factors that could affect concession performance and enhance concession exposure and funconality. From the analysis of exisng condions and projecons of passenger enplanements, an airport’s concession planning team can develop a concession plan that idenfies individual concession units by locaon and size. As a part of this evaluaon, the concession development team plans adjacencies, way finding, and expansion possibilies. Guides are available to an airport sponsor for determining the amount of concession space necessary to serve given volumes of passengers. Some planners use the metric of 10 square feet of concession space per 1,000 enplaned passengers. The findings of the commercial plan and facilies requirements analysis become a document that contains design guidelines and requirements. STEP 6 – CN 25: PROCUREMENT METHODS Regardless of the concession model selected, there are three typical procurement methods: Compeve bidding to prescribed specificaons Compeve proposals, based on prescribed specificaons Negoaon with a single concessionaire on a sole source basis Compe ve Bidding to Prescribed Specifica ons Over the years, compeve bidding to prescribed specificaons has been used for those concessions or third party developer situaons in which it was difficult (or impossible) to differenate providers of services, income to be generated, and quality of services or products. In bidding to prepared specificaons, the bidder that offers the airport sponsor the highest guaranteed revenue wins the award. Compevely bid concession agreements typically have had long duraons. In the past, this approach has resulted in problems with quality of service, high prices, and less than opmal revenue to the airport sponsor. Using such compeve bid agreements for food and beverage or specialty retail concessions has lost favor. However, compeve bidding for rental car, baggage cart, and foreign exchange contracts is common. Compe ve Requests for Proposals Compeve RFPs are solicited for those concessions or third party developers for which the service type, business volume, services or products quality, and management capability and depth can be clearly differenated among concessionaires. This method involves issuing an RFP with minimum qualificaons idenfied in the solicitaon. A selecon commi›ee evaluates each proposal and selects

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 44 the concessionaire with the best proposal for negoaon of final terms and condions. On arriving at an agreement, the concessionaire receives the concession award. Solicitaon of most in terminal concessions and adversing contracts is done by RFP. Concessions frequently awarded by this process include parking, retail merchandise, food and beverage, and adversing. Direct Negoaon Direct negoaon is normally used only if services offered are patented, unique, or available only from one concessionaire. In many communies, local law requires that all privileges be awarded on a compeve basis; in these communies, direct negoaon is not allowed. Comparison of Procurement Methods Of the three methods of awarding concession privileges, the most rigid is compeve bidding to prescribed specificaons. If compeve bidding is used, it is virtually mandatory that the highest dollar bid (by a financially qualified organizaon) be accepted. The most flexible method of awarding concession privileges is by direct negoaon, where the award of the privileges can be based on an evaluaon of qualificaons established by the airport sponsor. The method of inving compeve proposals by RFP is neither as rigid as compeve bidding to prescribed specificaons nor as flexible as negoaon, but does permit evaluaon of all factors and the awarding of privileges on a basis other than the highest dollar bid. Consequently, the airport sponsor may somemes select lower dollar guarantees in the interest of ensuring a given level of investment and the desired level of service. Legal Basis of the Compeve Process As discussed above, most o‘en airport sponsors use the compeve process to select concessionaires. The following is a summary of the legal reasons for this approach. Under federal statute 49 CFR Part 23, and various grant assurances, an airport sponsor is required to grant leases of real property on a compeve basis. Further, an airport sponsor is required to award concession contracts to the enty that (1) proposes development or ulizaon that fulfills the airport sponsor’s land use and development criteria for the property; (2) demonstrates an economically feasible program that will produce a market value rental return to the airport sponsor over the term of the lease; and (3) possesses the financial capacity and managerial ability to develop and maintain the property at its highest and best use over the term of the lease. The federal statute and various grant assurances require an airport sponsor to (1) take all necessary and reasonable steps to ensure non discriminaon in the award and administraon of contracts; (2) not use quotas or set asides for ACDBE parcipaon, but follow the airport sponsor’s adopted and FAA approved ACDBE Program; (3) not enter into long term exclusive concession agreements (unless approved by the FAA); and (4) not use any local geographic preference.

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 45 Qualificaons of Proposers and Bidders Perhaps the most important aspect of awarding concession privileges, regardless of the method used, is determining each prospecƒve concessionaire's ability to meet certain financial, management, and experience requirements. Before any concession award process (bid, proposal, or negoƒaƒon) begins, the airport sponsor formally establishes a stated level of qualificaƒons and experience that any prospecƒve concessionaire must meet to qualify. For many concession privileges, it is important that concessionaires have airport experience. The qualificaƒons and experience requirements are parƒcularly important when awarding privileges in new or expanded terminal faciliƒes. Qualificaƒons and experience requirements can be formulated carefully, to reflect (1) Federal Trade Commission rulings concerning anƒtrust and nondiscriminatory pracƒces, and (2) the requirements of the regulaƒons for minority business enterprises (49 CPR Part 23). If a compeƒƒve process is used, the airport sponsor should schedule pre proposal and pre bidding conferences (except in those instances where services are standard) and invite representaƒves of interested organizaƒons to a˜end the conference. Pre proposal and pre bidding conferences are extremely useful in exchanging informaƒon between the airport sponsor and the concessionaires. They provide a forum whereby the concessionaires can gain an understanding of the goals and desires of the airport sponsor. Similarly, they provide a means for the airport sponsor to obtain insight into management and operaƒonal problems of the various types of concession operaƒons, as well as advice on sizing, locaƒon, and concession support requirements. Determining Concession Fees In general, except for parking, the financial return to the airport sponsor from concessions should be based on the greater of (1) a MAG or (2) a percentage of the concessionaire’s gross receipts from sales, where gross receipts are clearly defined in the agreement. Some airports also include a provision for profit sharing when gross receipts exceed a threshold established in the agreement. Just as the definiƒons and terms of parking and rental car agreements must be well defined (because they determine the calculaƒon method of the airport’s revenue), the terms of concession agreements also must be well defined and comprehensive. The basic components of concession fees are: MAG or Percentage Rent – Concession fees paid to the airport sponsor are usually based on the greater of two numbers: a MAG or a percentage of the concessionaire’s gross receipts from sales. The percentage of gross receipts usually falls in the 10% to 15% range, although duty free is somewhat higher, and adverƒsing is considerably higher. Profit Sharing – An evolving trend is for airports to parƒcipate in the profit generated by a concessionaire or other lessee on airport property. Typically, the airport sponsor has a standard agreement with the lessee that sets the MAG or percentage of gross receipts, whichever is higher. Once a certain level of business is a˜ained, a profit sharing formula is acƒvated. This

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7-46 allows an airport to offer a lower basis for inial startup of commercial acvity and services, and to share in profitability once the business is established. The profit sharing arrangement can be defined in agreements in a number of ways, such as a percentage (25% to 50%) of net revenues,16 a fixed sum, or a sliding scale based on profitability. The exact terms of profit sharing must be carefully defined in agreements, especially if net revenues are the determining factor for acvaon of a revenue sharing formula. Figure 7-20 shows how profit sharing can add to airport operang revenues. Other Fees and Charges – In addion to concession fees based on gross receipts or a MAG, concessionaires pay for rent of back offices and storage, common area maintenance (CAM) fees, logiscs support (which may involve a central receiving dock, warehouse, and delivery to concession spaces), ulity costs, and, possibly, contribuons to a markeng fund. Figure 7-20: Profit Sharing Schemac Source: Michael G. Moroney & Associates, Inc., 2014 For most concession privileges in the terminal building (food and beverage, news/gišs, and any other merchandising concessions), the airport sponsor establishes the percentage(s) to be paid by the concessionaires and the dollar amount of the lowest acceptable minimum annual guarantee (MAG). If the concession privilege is to be awarded on a compeve basis, the bidders and proposers bid the minimum guarantee (in excess of the stated acceptable minimum), and the privilege is awarded based on the highest dollar guarantee. The minimum fee and any percentage fees are set on an annual basis, but are typically paid in monthly installments. STEP 7 – CN-26: CONCESSION DOCUMENTS General concession documents consist of solicitaons, concession informaon documents, and concession agreements. It is crucial that the solicitaons and agreement be clear, concise, and 16 Net revenues are gross revenues less operaon and maintenance expenses, capital costs, and taxes, if any.

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 47 comprehensive. The concession documents are subject to federal, state, and local laws and regula…ons, and to airport policies and rules. Ul…mately, improving the quality of documents will contribute to stronger financial results. As airport sponsors develop sound contemporary documents, ques…ons and issues will arise that require addi…onal study and research. Through this process, competent documents will evolve that are tailored to the individual airport and the desired concession program. The process helps to: (a) eliminate the possibili…es of misunderstanding or missta…ng the concession privileges offered; (b) properly exploit the revenue opportunity; and, (c) realize the sponsor’s desired financial results. Ideally, airport sponsors will standardize agreements based on types of tenants and concessionaires. In this way, each type of tenant or concessionaire on the airport is governed by the same terms, condi…ons, covenants, and standards as others of the same type. Solicitaons The concession RFP typically requires the following elements in a proposal: Transmi•al le•er and submi•al checklist Execu…ve summary Statement of qualifica…ons o Years of experience in airport concessions (minimum 3 to 5 years) o Demonstra…on of proposer’s ability to generate sales o Company’s legal organiza…on and history o Other airport concession opera…ons and references o Financial statements and capability Concept and brand development plan o Use of na…onal/local brands o Merchandise o Menus Facili…es Plan (design, materials, capital investment) Management and opera…ons (staff, organiza…on, training) Par…cipa…on plan for ACDBEs Financial projec…ons for revenue and expenses Marke…ng and promo…on plan Signed statement of airport sponsor policy and pricing preferences Proposed bonds, guarantees or sure…es References Outreach – Generang Interest in Airport Solicitaons One important way to improve the quality of concession bids and earn higher revenue for the airport is to adver…se the RFP widely. Airport staff can develop and maintain email lists of companies that have expressed interest in past or future concession opportuni…es. Solicita…ons can be adver…sed on the airport website, in local newspapers and business publica…ons, as well as in airport industry

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 48 publicaons. In addion, airport sponsors can list their solicitaons on the websites of ACI NA and the AAAE. Review of Proposals Because concession contracts are large and, ulmately, affect the passengers’ experience of the airport, airport sponsors o‡en convene selecon panels to review the proposals. The panels consist of industry experts, airport staff, and representaves of the airport sponsor. The panel evaluates the element of each proposal based on criteria published in the RFP. The panel also considers the concessionaire’s capacity to: Sasfy the minimum qualificaons Construct, operate, and make money on the concept and business plan described Demonstrate adequate financial resources to perform and adhere to the terms of the concession agreement Meet the ACDBE target The panel reviews the concessionaire’s financial performance at other airports, idenfies the highest ranking proposals, and interviews those candidates. STEP 8 – CN 27: COMMUNICATIONS ANDMONITORING This last step involves on going management of the concession program. Effecve communicaon is the key to administraon of a quality concession program. It is important that concessionaires receive feedback from the airport sponsor concerning concession operaons and public percepons. Likewise, it is important for the airport sponsor to understand the operaonal and market issues confronng the concessionaire. Communicaons tend to be the best at airports that have a formal communicaons program with their concessionaires that includes regular meengs, communiqués, and reports. Formal concessions policies, together with formal concession plans, provide tools for: (a) management control of the process; (b) mely execuon of required acons; and (c) monitoring and measuring of success. The airport sponsor has a quality assurance role in the management and administraon of concession agreements that can involve a number of operaonal pracces, including: Adherence to the performance standards in the concession agreement Hours of operaon Pricing policies (street pricing, street plus a percentage, other comparave basis) Cleanliness and upkeep of concession space Handling of waste Level and quality of customer service Compliance with safety standards and regulaons Freshness of the concept – incorporang trends Compliance reviews Working with underperforming concessionaires

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 49 Feedback to concessionaires Response to public complaints Delivery and transportaƒon of the product through the terminal Performance indicators Overall evaluaƒon of concessionaire performance17 The airport sponsor needs to communicate regularly with concessionaires regarding the results of quality assurance checks. Each concessionaire needs to know that the airport sponsor is monitoring operaƒons and is available to consult on issues affecƒng concessionaire success. The best pracƒce for monitoring performance also involves regular inspecƒons of concession faciliƒes to assure that the level of maintenance, cleanliness, and appearance meets the requirement of the concession agreements. Furthermore, airport sponsor audits of concessionaires will determine whether the financial and program terms of the concession agreement are being observed. Regular audits help to alert and resolve any departures from the agreements before they become a major issue with financial consequences for the airport and the concessionaire. This is the primary level of an airport sponsor’s due diligence responsibility. 7.5.4 Wrap-up on Concessions Given a relaƒvely low rate of concession spending per enplaned passenger at U.S. airports, improved planning, solicitaƒons, and management of concession programs hold strong potenƒal for improving net revenues to the airport sponsor. This strategy is applicable to the full spectrum of airports. Larger airports tend to have more mature concession programs; however, elements of their concession programs always can be strengthened and improved. Smaller airports generally do not have as defined an approach to concession programs as larger airports o•en do. These airports could see significant improvements in revenue by employing a disciplined and organized approach. Airport sponsors employ a variety of management alternaƒves to develop and manage concession programs. Direct contracts with concessions provide a way for the airport to handpick the establishments desired in the terminal and increase direct revenue flows back to the airport sponsor. However, direct contracts involve greater financial risk for the airport and more staff ƒme to manage the program. Some airports are employing a hybrid approach with a combinaƒon of direct agreements with concessionaires or service providers, prime concessionaires, or a third party developer. Regardless of the management alternaƒve, good concession programs require on going staff a˜enƒon, discipline, and focus to opƒmize the quality of the programs and financial results. 17 ACRP Report 19A: Resource Guide to Airport Performance Indicators idenƒfies the following core and key performance measures for concessions: o Concession revenue to the airport as a percentage of total operaƒng revenue o Concession revenue to the airport per enplanement o Concession gross sales per enplanement o Concession gross sales per square foot o Concession net revenue to the airport per square foot

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 50 The resources required to implement a vibrant concession program will vary by size of airport and by management model selected. At non hub and small hub airports, staff for concessions may be one part „me employee or one full „me employee; at medium and large hub airports, dedicated concession staff ranges from two to more than six employees. For airports with smaller staffs, the services of outside professionals with experience in concession program development may be required. Improvements to concession program design o‰en require upda„ng or modifying the terminal building. This is a normal part of improvements to the concession program. With security checkpoints a permanent func„on in the terminal area, balancing concession offerings both before and a‰er the checkpoints presents an opportunity to reach different customers, to expand the concession program, and to increase concession revenues to the airport sponsor. With a carefully planned and executed concession program, the resources expended should be more than recovered over the life of the concession program. 7.6 WRAP UP At most commercial service airports, passenger dependent concessions and services represent the largest share of non aeronau„cal revenue. The three most significant revenue genera„ng ac„vi„es are parking, rental cars, and concessions. This strategy focuses on how airports can manage exis„ng passenger concessions and services to achieve new revenue. For planning, design, and management ini„a„ves to be successful, they must have the support of the airport sponsor’s governing group (e.g., city council, county commission, authority board, and advisory board). The key to developing support is to keep these governing groups informed about the goals, objec„ves, and achievements of ini„a„ves. Likewise, maintaining regular communica„on with concessionaires and service providers contributes posi„vely to a vibrant program and compliance with concession agreements and contracts. This chapter has concentrated on best prac„ces with respect to the planning, process, and management of exis„ng passenger dependent businesses. 7.7 ADDITIONAL REFERENCES ACRP LRD 7: Airport Governance and Ownership (Kaplan Kirsch & Rockwell, LLP), Transporta„on Research Board of the Na„onal Academies, Washington, DC, 2009 ACRP Report 19A: Resource Guide to Airport Performance Indicators (Oliver Wyman Inc., JDB Associates LLC, TJB Avia„on LLC, and Trillion Avia„on), Transporta„on Research Board of the Na„onal Academies, 2011 ACRP Report 24: Guidebook for Evalua ng Airport Parking Strategies and Suppor ng Technologies (Jacobs Consultancy, Walker Parking Consultants, Mannis Group, and DMR Consul„ng), Transporta„on Research Board of the Na„onal Academies, Washington, DC, 2011

CHAPTER 7 – IMPROVEMENTS TO EXISTING BUSINESSES 7 51 ACRP Report 26: Guidebook for Conduc ng Airport User Surveys (Jacobs Consultancy, Aviaon System Consulng, LLC, JD Franz Research, Inc. & J.P. Cripwell Associates), Transportaon Research Board of the Naonal Academies, Washington, DC, 2009 ACRP Report 34: Handbook to Assess the Impacts of Constrained Parking at Airports (Ricondo & Associates, Inc., DMR Consulng, Resource System Group Inc.), Transportaon Research Board of the Naonal Academies, Washington, DC, 2010 ACRP Report 54: Resource Manual for Airport In Terminal Concessions (LeighFisher and Exstare Federal Services Group, LLC), Transportaon Research Board of the Naonal Academies, Washington, DC, 2011 ACRP Report 66: Considering and Evalua ng Airport Priva za on (LeighFisher, Eno Transportaon Foundaon, Kaplan Kirsch & Rockwell, LLP, University of Westminster, Vondle & Associates, Inc.), Transportaon Research Board of the Naonal Academies, Washington, DC, 2012 ACRP Synthesis 31: Airline and Airport Airline Consor ums to Manage Terminals and Equipment (AvAirPros), Transportaon Research Board of the Naonal Academies, Washington, DC, 2011 LCOR, Inc., D. A. Sigman, JFK Terminal Four: Successful PPP in New York State, 2006 Ricondo & Associates, Inc., James Branda, “Rental Car Customer Facility Fees and Financings,” presented at ACI Economics and Finance Conference, Miami, FL, May 2010

INNOVATIVE REVENUE STRATEGIES – AN AIRPORT GUIDE 7 52