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Airport retailing is taking off.

Real estate professionals who frequently travel by air may have noticed a subtle transformation taking place around them. The character of airport retailing is changing. Pricing by airport retailers is becoming more competitive; the old attitude that "vacationers have saved all year to go on their trip, so $21.95 for a book does not make a difference" is being replaced by a variety of upscale merchandise sold at fair prices in an attractive environment. Rapidly disappearing as well are unappetizing triangular sandwiches prepared in off-site, industrial kitchens and served in cafeteria-style surroundings, replaced with better tasting food served by nationally recognized retailers in bright, airy restaurants. With airplane orders at record highs, new domestic airports being built for the first time since 1974, and several major airport concession contracts coming up for bids in the next few years, emerging trends in airport retailing are ripe for investigation.



Following deregulation--the removal of government control over routes and fares in 1978--the 1980s were a tumultuous time for the industry. The "hub and spoke" concept took hold, and a series of mergers and acquisitions ensured. (1) Among the carriers that disappeard were AirCal, Braniff, Empire, Frontier, Hughes Airwest, Muse Air, Ozark, Pacific Express, Republic, and Western. In total, nearly 200 carriers have ceased operation over the past 13 years. Despite the myriad problems currently facing the industry including a recession, the uncertain price of fuel, overcapacity, and congestion both at airports and in the sky, the long-term outlook for industry growth is decidedly bullish.

The Federal Aviation Administration (FAA) recently predicted that over the next 12 years, passenger boardings on U.S. airlines will increase by 68%, from approximately 485 million in 1989 to nearly 815 million in 2001. (2) Boeing, the giant aircraft manufacturer, delivered approximately 425 airplanes in 1991 and is expected to deliver nearly 450 in 1992, making three consecutive world records. Its order backlog of over $100 billion is the largest of any domestic manufacturer. (3) Takeoffs and landings will increase 29% by the turn of the century, (4) and without a significant increase in airport capacity, more delays will occur. This translates into more time spent in airports by travelers and greater opportunities to generate sales by airport-based retailers, who already frequently average $600 to $800 in sales per square foot.


The "old" concept of airport food is vividly described by Martha I. Finney in her article "The New Appetite for Airport Food": "hot dogs that rolled on their own glistening axis for who knows how long . . . catsup packets that would not tear until they exploded in the direction of your best tie or silk blouse . . . homemade soup floated mysterious globules . . . the disgruntled hairnetted server. . . ." (5) From such a description it is evident why the nature of airport retailing was ripe for change.

A confluence of events over the past five years has spurred a change in the thinking of airport operators and concessionaries (i.e., retailers). The hub and spoke system has resulted in more passenger time spent at airports and in more frequent flight delays. Sophisticated passenger demographic surveys have identified business and pleasure travelers as an extremely affluent group. Increased pressure on municipalities to raise revenues and open businesses to minorities has caused airport authorities to take a harder look at profit-making opportunities associated with airport concessions. Finally, both traditional retailers (ranging from McDonald's to Bloomingdale's) and real estate professionals have begun bringing their skills to the industry.

At Detroit Metropolitan Airport, for example, a snack bar that was converted into one of five domestic airport Burger Kings, nearly doubled its annual sales volume to $3.2 million, about three times the average sales of a Burger King franchise. (6) Since then, a Cinnabon stand that wafts the aroma of freshly baked cinnamon buns into the terminal has also been added. In addition, Turner Broadcasting System recently announced the inception of the Airport Channel, with TV monitors broadcasting news and travel items to terminals in Atlanta, Chicago, and Dallas.



Surveys performed by Airport Interviewing and Research have developed a typical profile of the 1.2 billion business and leisure travelers who annually walk through airports. The average business traveler is 42 years old and earns $65,000 annually; 75% are male. Leisure travelers average 43 years of age and about 60% are female. Each category spends nearly two-thirds of their airport dollars on food and beverages. Once considered simply passengers on their way to a plane, they are now regarded as potential customers with both time and money on their hands. According to this source, the most preferred types of food categories, in order of preference, are family casual, dessert, hamburgers, pizza, coffee shops, and known ethnic. Women travelers generally prefer healthy, low-fat cuisine. Another significant market includes airport employees and "meeters and greeters," people who go to the airport to pick up travelers. (7)

Airport retail facilities are typically open longer hours than traditional retailers. Although historically not always the case, concessionaire rent is now usually determined as a percentage of gross sales. When concession contracts are opened for bids, competing operators state the percentage of revenues they are willing to pay. Usually the company offering the highest percentage is awarded the franchise. Airports also increasingly focus on tenant improvement expenditures and whether an operator qualifies as a minority.

Federal guidelines require a minimum 10% participation of "disadvantaged business enterprises" (DBEs) in retail shops and restaurants at airports receiving federal money. Women and minorities are classified as disadvantaged under these guidelines. (All but two McDonald's U.S. airport locations are DBEs.) The federal government does not determine whether airport contracts are awarded by bid or through negotiations.

Airport officials around the country are increasingly concerned with the high retail prices charged at airports, and many are now weighing the impact of reduced prices on sales volume. Airports in Washington, D.C. and Boston have benefited from lowering retail rents, which permits lower prices and causes higher revenues for authorities from increased sales. Most interesting is the percentage of gross revenues that fows to airport authorities; 26% or almost $3 million of the $11.5 million in sales generated by six retail companies at New Orleans International Airport in 1990 went to the city's Aviation Board for rent. Sales volume averaged $1.65 for every passenger using the airport. (8)

At Florida's Fort Lauderdale/Hollywood International Airport, the Concession Air food and beverage operation paid authorities nearly 50% of sales in 1990, a result of an overly optimistic 1975 contract guaranteeing $300,000 in minimum monthly rent payments. The lease has subsequently been restructured and extended for an additional five years.

In American Airlines-dominated Nashville International Airort, Concession Air is the prime food and beverage contractor with 18 locations. When American announced a 23% reduction in flights in June 1989, air traffic immediately diminished, and retilers who had struggled during the two years since the new terminal opened found themselves with high overhead and reduced sales. Rents typically averaged about $36 per square foot plus 18% to 26% of sales. Because the Nashville Airport Authority is a nonprofit entity, any loss in revenues has to be made up by airlines through increased landing fees.

Airport concession contracts generally fall into one of the following three categories:

1. Direct leases with individual operators in which lease rents are usually calculated as a percentage of revenues or, less frequently, based on the size of the retail facility.

2. Management contracts by which revenues flow directly to the airport after deduction of a management fee.

3. Umbrella or developer contracts under which one operator subcontracts with various concessionaires to provide actual merchandising.

The next section offers a closer look at the experiences of four airports around the country.


Direct lease agreements have historically provided the least amount of landlord/airport operator control over shop operations, especially pricing and merchandising. Despite stipulated lease terms and conditions, if a tenant is current with monthly rent payments a landlord/airport operator can exert little influence. This type of arrangement was used at Atlanta Hartsfield International Airport until September 1980. For various reasons, including the fact that several concessionaires left the airport while still owing money, management began to review their approach in 1978, in conjunction with construction of a new terminal building.

As a major hub airport--70% of passenger traffic involved plane transfers--the city did not want to undertake the financial burden of building a facility larger than neccessary for local residents. Using the airport's lease to the airlines of the entire new terminal building as a model, management solicited bids from single operators to oversee all of the airport's concessions except for parking facilities, rental car company operations, and a bank. The winning bidder, a joint venture between Dobbs Houses, Inc., and Paschal Brothers, a local minority-owned busness, offered the airport the greater of a percentage of airport revenues or minimum payments totalling at least $240 million over 15 years. Some modifications followed because the city was disappointed with the meager number of small companies involved in operations.


Authorities at Washington National Airport wanted to attract a variety of food and beverage purveyors as well as comply with federally mandated guidelines concerning minority business enterprises, but did not want to commit the time and expense necessary to issue requests for proposals (RFPs) for each entrepreneur. A 10-year agreement (plus a 5-year option) was ultimately signed with Innovative Aircourts, Inc., run by a real estate developer with 25 years of shopping center experience. The airport receives a percentage of gross revenues, ranging from 4% for employee food to a maximum of 12% for some restaurants, with a $16-million guarantee over the 15-year life of the contract. The arrangement is apparently successful, with National now boastinga diverse roster of eateries including McDonald's, Everything Yogurt, Vie de France, Frank & Stein, and Jerry's Sub Shob. An operator was even added to cater to the airport's 20 million taxis per year that pick up passengers at the airport. All told, Innovative Aircourts, Inc., now runs over 30 restaurants and bars aggregating more than 50,000 square feet. Airport food and beverage sales increased from $1 million in 1987 to an anticipated $17 million in 1992, while the airport's share for the corresponding years is $1 million and $1.8 million respectively. (9)


Facility managers at Dallas/Ft. Worth International Airport have begun taking a more active role in lease negotiation and retailer pricing decisions, although Dobbs Houses, Inc., remains the airport's food and beverage contractor. Recognizing the perception, and in many cases the reality, that airport shops are vastly overpriced, management has lowered some rents in conjunction with the advent of airport approval on pricing. One trend cited by officials is more competitive pricing of children's food, while letting the market decide the prices of more extravagant items, such as "a shrimp cocktail and a martini." Next on the agenda of airport officials is a plan to attract higher profile stores or even construction of an upscale shopping center. Toward that end, a 10-year master plan for retail development at the airport has been commissioned, which will focus in part on ways to feature Texas and the Southwest.


Not all airports can boast success stories. A case in point in Phoenix's Sky Harbor Airport where travel is dominated by locally based America West Airlines. When the airline relocated from Terminal 3 to Terminal 4 in November 1990, the number of passengers using the old terminal was expected to drop by 70%--from 13 million annually to 4 million--and several retailers announced they would not renew their leases that expired in January. (10) Making matters worse, in June 1991 America West became the fourth large U.S. carrier to file for bankruptcy. (11) The loss of a major carrier was not the only difficulty facing retailers at Terminal 3. Their problems were exacerbated by the most stringent airport security measures in the history of commercial aviation, enacted on January 16, 1991, as a direct result of the Mideast War as well as the 1985 hijacking of TWA flight 847 and the Christmas 1988 bombing of Pan Am flight 103. Airport studies have shown that almost half of meeters and greeters stop for a snack. Expanded security measures restricted concourse concession access to passengers only, and as a result sales at some stores declined by as much as 50%.


Food and beverage service is not the only aspect of airport retailing that is changing, particularly on the international scene. Frankfurt Airport, boasting one of the highest sales-per-unit levels in all of Germany, contains a multilevel mall with more than 130 shops including a boutique-sized branch of Harrod's, the eminent English department store, as well as a supermarket, three movie theaters, and even a bowling alley. In February 1991, Harrod's also opened a 3,000-square-foot facility in Toronto's new Terminal 3, the first airport shopping mall in North America. London's Heathrow Airport, the world's largest international hub, is fighting to change its repurtation of having only high-priced merchandise best suited for window shopping. A recent liquor advertisement boasted "1/2 price at Heathrow, And That's Guaranteed." (12) McDonald's now has locations in London Gatwick, Singapore, Frankfurt, and New Zealand airports.

Duty-free shops sell products without import fees and sales taxes, also called value-added taxes in Europe. Shannon Airport in Ireland opened the first airport duty-free shop in 1947, although Amsterdam's Schipol Airport now has probably Europe's largest such facility. One of the largest operators is Duty Free International, Inc., with 1990 airport sales of more than $25 million. Duty Free boasts a total of 30 locations amounting to 25,000 square feet of selling space at 7 international airports, selling such luxury items as Hermes scarves, Cartier watches, and Gucci leather goods. (13) Attempting to capitalize on high-spending foreigners coming to the United States, Duty Free recently tripled its selling space at John F. Kennedy (JFK) International Airport in New York from 3,700 square feet to more than 11,000 square feet.

Also at JFK are two Bloomies Express stores, operated by Bloomingdale's, the trendy New York City fashion-oriented department store. A dozen more are planned over the near term, ultimately increasing to as many as 35 in 15 airports. Significantly, Bloomingdale's has negotiated with airport authorities to enable it to profitably sell merchandise at the same prices as in traditional locations.


The airline industry is growing; U.S. airlines spent about $2 billion in the last two years buying international routes and related assets. British Airways recently opened a $120-million terminal at JFK International Airport in New York, and Boeing is exploring the possibility of building a 650-passenger plane, 20% bigger than today's largest jets.

Construction has begun on a $2.4-billion airport in Denver, scheduled to open in October 1993. Situated on 53 square miles of recently annexed city land, it will serve as a hub for both Continental and United Airlines. Speculation occasionally surfaces about new airports in Austin, Texas, and on Chicago's Southeast Side. Other planned projects include a $3000-million international terminal in Atlanta, a new $700-million terminal in Pittsburgh, and a $2-billion redevelopment already under-way at Newark International Airport. Overseas, an expansion of New Tokyo International Airport is underway, and a $16-billion airport project is planned in Hong Kong.

U.S. travelers remain the key to the airline industry. Nearly half of all worldwide traffic originates in the United States. Over the next few years, approximately $400 million of domestic concession contracts will come up for bids, including locations at Dallas/Ft. Worth and Atlanta. As airport retailing moves into the mainstream, opportunities for real estate professionals to use their marketing, site selection, and valuation skills, among others, will also increase.

(1) There are approximately 29 "hub" airports in the United States from which airlines send out their fleets to numerous "spoke" cities and towns at the rate of about 14,000 flights per day.

(2) "FAA Predicts Big Jump in Air Traffic, Portending More Crowds, Few Bargains," The Wall Street Journal (March 2, 1990): B1.

(3) "A Maverick Takes a Flier," Barron's (June 24, 1991): 40.

(4) "FAA Predicts Big Jump in Air Traffic."

(5) Martha I. Finney, "The New Appetite for Airport Food," Airport Magazine (July/August 1991): 11.

(6) The Wall Street Journal (October 4, 1991).

(7) Finney, 11.

(8) "High Rents Equal High Prices at Airport Shops," New Orleans City Business (March 11, 1991): 13.

(9) "The Changing Face of Concession Management?" Airport Magazine (July/August 1990): 11.

(10) "3 Airport Shops To Shut Over Drop In Riders," The Arizona Republic (December 1, 1990): E-1.

(11) The others are Continental Airlines, Pan Am, and Midway. As of this writing, TWA remains on the brink.

(12) Financial Times (July 18, 1991): 14.

(13) Duty Free International, Annual Report (January 1991): 5.

Howard C. Gelbtuch, MAI, is director of Real Estate Advisory Services for Coopers and Lybrand, New York City, where he is involved in worldwide valuation and consulting assignments. He received a BS in finance from New York University and an MBA in real estate from the Bernard M. Baruch College of The City University of New York.
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Author:Gelbtuch, Howard C.
Publication:Appraisal Journal
Date:Apr 1, 1992
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