Metropolitan Airports Commission

Transcription

1 Metropolitan Airports Commission Management and Operations Committee Regular Monthly Meeting Minutes Wednesday, November 03, :00 pm

2 REPORTS B METROPOLITAN AIRPORTS COMMISSION MANAGEMENT & OPERATIONS COMMITTEE REGULAR MEETING Wednesday,, 1:00 p.m. Room 3048A, Lindbergh Terminal - Wold-Chamberlain Field Minneapolis-St. Paul International Airport "CONSENT ITEMS" Call to Order A regular meeting of the Management and Operations Committee, having been duly called, was held, in Room 3048A, Terminal 1-Lindbergh Building, Minneapolis-St. Paul International Airport, Wold-Chamberlain Field. Chair Landy called the meeting to order at 1:00 p.m. The following were in attendance: Commissioners: Landy, Lanners, Harris, McClung, McKasy, Rehkamp Staff: S. Busch, T.W. Anderson, J. Hamiel, D. Probst, J. Nielsen, D. Ruch, S. Wareham, E. Johnson, B. Rineer, J. Greer, E. Podnieks, B. Peters, P. Burke, C. Boyd, M. Kilian, P. Hogan, R. Fuhrmann, B. Zwart, K. Racek, L. Roufs, A. Irish Others: Fred Estes, Estes Gifts & News; Jim Horski, Ampco; Rick Ross, Fredrickson & Byron; Dick Saunders, South Metro Airport Action Council (SMAAC); Butch Howard, Sharon Adler, HMS Host; Janelle Dixon, Eileen Lay, Lisa Hinickle, Minnesota Humane Society (MHS); Gordon Hoff, Minnesota Business Aviation Association (MBAA); Kerry Panner, Caribou; Mary Loeffelholz, Delta OPEN FORUM The Open Forum is a portion of the Committee meeting where persons are allowed to address the Committee on subjects which are not a part of the meeting agenda. No public comments were received. AGENDA ITEMS B1. RECOMMENDATION TO RENEW BAGGAGE SYSTEM MAINTENANCE CONTRACT WITH ALLTECH ENGINEERING CORPORATION CF 2190 The current baggage system maintenance contract with Alltech Engineering Corporation is set to expire on March 31, 2011 and provides for one 3-year renewal should the Commission choose to do so. Alltech s contract calls for them to maintain the Terminal 1-Lindbergh baggage carousels and inbound conveyor system along with the inbound and outbound conveyor system at Terminal 2-Humphrey.

3 Page 2 MAC staff has been pleased with Alltech s performance under the current contract specifications and recommends renewing their contract for a three-year term. COMMISSIONER MCCLUNG MOVED AND COMMISSIONER HARRIS SECONDED THAT THE MANAGEMENT AND OPERATIONS COMMITTEE RECOMMEND TO THE FULL COMMISSION RENEWAL OF ALLTECH S CONTRACT FOR BAGGAGE SYSTEM MAINTENANCE FOR A THREE-YEAR TERM AND THAT THE EXECUTIVE DIRECTOR OR A DESIGNEE BE AUTHORIZED TO EXECUTE THE NECESSARY DOCUMENTS. B2. REQUEST AUTHORIZATION TO ISSUE A REQUEST FOR PROPOSALS FOR A QUICK SERVE FOOD AND BEVERAGE CONCESSION AND TWO BAR CONCESSIONS AT TERMINAL 2 - HUMPHREY CF 2191 Terminal 2 - Humphrey s enplanements continue to grow due to the expansion of airline service, and MAC staff has identified the need for additional food and beverage concessions inside the secured area at the Terminal. Staff is requesting authority to issue a single Request for Proposals (RFP) for one quick serve restaurant located at the north end of the terminal near the Southwest Airlines gates, one full-time bar concession to replace the existing full-time Outpost and one seasonal bar concession to replace the seasonal Outpost near the Sun Country gates. The RFP requires proposers to meet minimum requirements, as well as key business terms, and Staff has designated a review team that will evaluate proposals based on the criteria specified in the RFP. Staff plans to bring a recommendation for award to the Commission in March The anticipated opening dates for the quick service restaurant and the permanent bar will be Fall 2011 and December 2011 for the seasonal bar. COMMISSIONER MCCLUNG MOVED AND COMMISSIONER HARRIS SECONDED THAT THE MANAGEMENT AND OPERATIONS COMMITTEE RECOMMEND TO THE FULL COMMISSION AUTHORITY FOR STAFF TO ISSUE A REQUEST FOR PROPOSALS FOR THE OPERATION OF A QUICK SERVE FOOD AND BEVERAGE CONCESSION AND TWO BAR CONCESSIONS LOCATED AT TERMINAL 2; AND THAT THE EXECUTIVE DIRECTOR OR A DESIGNEE BE AUTHORIZED TO EXECUTE THE NECESSARY DOCUMENTS. B3. REQUEST AUTHORITY TO EXTEND THE TERMS OF THE SECOND AMENDMENT FOR HOULIHAN S RESTAURANT AND BAR CONCESSION AGREEMENT CF 2192 Ms. Laurie Roufs, Assistant Manager Concessions & Business Services, presented background on this item. In September 2007, Creative Host Services, Inc. was awarded a 9-year Agreement to operate a Houlihan s Restaurant & Bar located outside of security at Terminal 1 - Lindbergh. In March 2008, Creative Host (n/k/a SSP America, Inc.) raised three issues affecting Houlihan s target customer base: 1) the number of passengers were beginning to decrease, 2) meeter/greeters and well wishers were also decreasing, and 3) the

4 Page 3 Terminal 1 - Lindbergh parking ramp was filling up several days per week, forcing potential customers to park at Terminal 2 - Humphrey. Because of these concerns, the following Rent language was adopted within the Agreement: Beginning on the Rent Start Date [September 1, 2008] and continuing through the first twelve (12) months of operations, Operator shall pay as rent to MAC percentage rent. Thereafter, in every Agreement Year, Operator shall pay as rent to MAC the greater of the MAG for that year or the percentage of Gross Sales for that year. The second amendment for Houlihan s Restaurant and Bar Concession Agreement was constructed to further postpone the MAG rent start date from September 1, 2009 to January 1, Since Houlihan s opened, it has not been able to reach the sales level necessary to meet the MAG rent level. With the current MAG abatement period expiring at the end of this year, SSP America, Inc. (SSP) contacted MAC in September to request additional rent relief, citing continuing losses at Houlihan s. SSP s specific request was to continue the elimination of MAG rent and also to eliminate percent rent. MAC and SSP have continued to work together to increase sales through a number of initiatives: coupons, menu adjustments, happy hour offerings, employee menu options, and increased signage. Staff requested financial and cash flow statements from SSP to help justify their request for no rent. Staff was provided with a basic revenue and expense statement which shows a slight profit after operating costs but before depreciation during their past two fiscal years. Staff recommends that the Commission extend the terms of the second amendment through the end of During the extension period MAC will work closely with SSP to review Houlihan s business model and to find ways to increase public awareness of Houlihan s. If sales increase in the next 12 months, the resulting percent rent to MAC will increase as well. In response to questions from Commissioners Ms. Roufs explained that Staff needs time to carefully look at Houlihan s operation to determine if there is a viable solution for that business, or if a different enterprise would offer more potential. COMMISSIONER REHKAMP MOVED AND COMMISSIONER MCKASY SECONDED THAT THE MANAGEMENT AND OPERATIONS COMMITTEE RECOMMEND TO THE FULL COMMISSION THAT THE TERMS OF THE SECOND AMENDMENT WITH SSP AMERICA BE EXTENDED THROUGH 2011; AND THAT THE EXECUTIVE DIRECTOR OR A DESIGNEE BE AUTHORIZED TO EXECUTE THE NECESSARY DOCUMENTS. B4. RECOMMENDATION REGARDING NOW BOARDING LEASE AMENDMENT CF 2193 Ms. Karen Racek, Assistant Manager Airside Leasing & Tenant Relations, presented background on this item. At the end of their first year of operation, gross sales for Now Boarding were significantly less than what was projected in their business plan, resulting

5 Page 4 in an operating loss. Under the original Lease Agreement, rent is paid for ground plus building plus 9% of gross sales. Building rent escalates 2.5% per year. In February 2010, the Commission approved the elimination of percent rent through December 31, 2010 while continuing ground plus building rent to allow more time for the new concept to operate and mature. Although revenue is growing at Now Boarding, sales levels remain far below those projected. As a result, Now Boarding continues to struggle to meet operating costs and cover their capital investment of $4.4M. Now Boarding continues to look for ways to reduce operating expenses while increasing sales levels. Marketing efforts to the leisure traveler have been highly successful, while sales to the weekday business traveler continue to be challenging. Representatives of Now Boarding, therefore, approached staff in August with a second request to reduce or eliminate the percent rent, permanently, due to continued light weekday sales and future sales projections insufficient to recover the capital investment. Following examination of Now Boarding s sales, sales projections and operating costs, staff believes that modifying the rent formula for an additional three (3) years is the appropriate action. Therefore, staff is requesting a modification to the terms of the Agreement to reflect total rent as the greater of ground plus building rent (essentially becoming a Minimum Annual Guarantee) or a variable percentage of annual gross sales for the period of January 1, 2011 through December 31, Staff is proposing this adjustment based upon the following considerations: 1. MAC would receive, at a minimum, the ground plus building rent each year ($174,000), which remains significantly greater than the $30,000 in annual rent MAC received under the property s previous lease. 2. Now Boarding offers a high quality, award winning, customer service never before offered at MSP, while receiving excellent customer satisfaction ratings. 3. Now Boarding s $4.4M facility investment ranks as one of the larger investments by a tenant over the last several years. At the end of the lease term (2023), MAC will take possession of the improvements. In response to questions from Commissioners Ms. Janelle Dixon, President and CEO of Animal Humane Society and CEO of Now Boarding, explained that the proposal helps Now Boarding meet operating costs, not investment revenues. The occupancy rate at Now Boarding is highest during the weekend, because many fewer business travelers use the boarding service during the week. Instead, a large portion of clients are using the daycare services during the week. Also, occupancy in the cat condos runs at about 25%. Ms. Dixon also discussed marketing activities, and Mr. Hogan, Public Affairs & Marketing Director at MSP, indicated that his team has assisted in the marketing efforts to promote Now Boarding. He indicated that several advertising methods are already in use at MSP, including display screens, the MSP coupon book, and the MSP website. In response to a Commissioner question, Ms. Dixon said that it is premature to know if the Now Boarding property/facility might be used for other purposes (via discussion with MAC) if pet boarding services continue to struggle for an extended period of time. Commissioners asked further questions to better understand the structure in place for determining rental fees paid by Now Boarding to MAC. Mr. Brian Peters, Manager,

6 Page 5 Commercial Management & Airline Affairs, clarified the structure and reiterated to Commissioners that the current proposal will be limited to a three year term and that the percentage rent requirement increases on an incremental basis as sales levels increase. COMMISSIONER REHKAMP MOVED AND COMMISSIONER MCCLUNG SECONDED THAT THE MANAGEMENT AND OPERATIONS COMMITTEE RECOMMEND THAT THE FULL COMMISSION AMEND NOW BOARDING S AGREEMENT TO MODIFY THE RENT TO TOTAL RENT EQUAL TO THE GREATER OF GROUND PLUS BUILDING RENT (MINIMUM ANNUAL GUARANTEE) OR A VARIABLE PERCENT RENT OF GROSS REVENUES AND THAT THE EXECUTIVE DIRECTOR OR A DESIGNEE BE AUTHORIZED TO EXECUTE THE NECESSARY DOCUMENTS. B5. RECOMMENDATION TO CONTINUE CURRENT STREET PRICING POLICY CF 2194 Mr. John Greer, Assistant Director Concessions and Business Development, presented background on this item. When MAC bid the concession batch contracts in 2004, one of the new requirements of the Lease called for each tenant to operate under a Street Pricing guideline. This meant that products sold at MSP were required to be priced comparably to items sold at similar locations outside the airport. This program was designed to establish consumer confidence in airport vendors pricing, potentially increasing the volume of purchases at MSP. MAC staff and the concession tenants went through an extensive process to provide and verify appropriate street pricing information on products sold at MSP. This effort required the updating of pricing information on 25 percent of each tenant s merchandise each quarter. While staff and concession tenants had taken appropriate measures to be in compliance with the Street Pricing policy, there were two issues that needed to be addressed if this policy were to be viewed as a success. First, while MAC had taken steps to establish a Street Pricing program for its concession operation, Delta had not adopted the same program on the G Concourse, thus creating an environment with two different pricing structures in the same terminal. This created customer confusion and resulted in tenants who operated venues in both locations using two separate pricing structures. Second, it was difficult to effectively advertise street pricing to customers when only a portion of the airport was, in fact, street priced. For street pricing to be successful, it needs to be promoted; and to be promoted, it needs to be consistently applied so customers don t feel misled when shopping on Concourse G. With Commission approval, Staff enacted the following modifications to the policy in November 2008: Concession tenants were allowed to price products at no more than ten percent (10%) above Street Pricing for a twelve (12) month test period commencing December 1, At the conclusion of the test period, MAC would re-evaluate the street pricing covenant. Also, MAC would only allow the new pricing policy to remain in effect if, at MAC s sole discretion, each operator was in good standing with respect to all lease provisions in all leases between the operator and MAC. Otherwise, the new pricing policy would be rescinded for those in violation.

7 Page 6 After re-evaluating the street pricing test in November of 2009 MAC determined that the new program was a success for both MAC and the tenants. Staff brought back a recommendation to the Commission that month to continue the test for another year, which the Commission supported. Staff is requesting authority to amend the current agreement with its concessions tenants to extend the current Up to 10 Percent Above Street Pricing policy for the remainder of the lease term period dates. With the prolonged downturn in the economy, Staff believes that an extension of the current pricing policy will support concession tenants in their pursuit of profitability, and will generate substantial revenue from additional food and beverage sales. Staff will continue to closely monitor this program and, if necessary, will re-evaluate the street pricing covenant and report back to the Commission. Staff will reserve the right to terminate this action on 60 days notice to the tenants if deemed necessary or prudent. In response to questions from Commissioners, Mr. Greer confirmed that Staff continues to perform spot checks on merchandise pricing at the airport concessions in comparison to their counterpart locations in the metro area. Mr. Greer said that very few pricing discrepancies have been found. Given lease terms, the time frame for this proposal for any given concession would be five years, at the most. COMMISSIONER LANNERS MOVED AND COMMISSIONER HARRIS SECONDED THAT THE MANAGEMENT AND OPERATIONS COMMITTEE RECOMMEND TO THE FULL COMMISSION THAT CONCESSION LEASES BE AMENDED TO EXTEND THE CURRENT UP TO 10 PERCENT ABOVE STREET PRICING POLICY FOR THE REMAINDER OF THE LEASE TERM; AND THAT THE EXECUTIVE DIRECTOR OR A DESIGNEE BE AUTHORIZED TO EXECUTE THE NECESSARY DOCUMENTS. B6. CONCESSION LEASE UPDATE CF 2195 Mr. Eric L. Johnson, Director, Commercial Management & Airline Affairs, presented background on this item. A little over a month ago representatives from HMS Host approached MAC staff with a request to extend the lease terms of their existing batch agreements. In exchange for this proposed action Host has offered to reinvest in the concession program by providing a set amount of funding to be used at MAC s discretion to either re-concept weak operations or update tired but successful operations. As you will recall, individual concession locations were combined and leased together under batch agreements. These batches were used to combine stronger locations with weaker locations in order to provide services throughout Terminal 1 - Lindbergh. This provided balance for the concession program and insured that no concessionaire had an advantage over another. The current concession batch leases begin to expire at the end of 2012, with the final agreements expiring at the end of However, the current timeline is complicated by the uncertainty associated with the timing of the Long Term Comprehensive Plan (LTCP). Some of the issues related to the LTCP that complicate the concession rebid process include the possible relocation of airlines from Terminal 1 - Lindbergh to Terminal 2 - Humphrey, a planned remodel of the E Concourse,

8 Page 7 modifications to the security check points, and changes to the G Concourse that may include additional gates and a people mover. The combination of these issues not only makes the re-bid planning difficult but also clouds the value of future concessions for potential operators. Staff is in the process of reviewing the proposal from Host to gauge potential impacts to existing leases and the planning process. Staff is also planning to initiate discussions with other concession operators (Delaware North and SSP America) regarding lease extensions. Staff will explore whether they are willing to offer similar reinvestment capital in exchange for extensions. Staff plans to bring a more detailed discussion regarding this issue, along with a proposed action, to M&O in December. In response to questions from Commissioners, Mr. Johnson explained that there is a provision in the lease agreement regarding supplemental rent which was to begin once the amortization period ran out. He added that MAC needs to review the scope of investment tied to each lease agreement and also the time period of amortization of each location. Also, Staff plans to compare current lease terms with HMS Host s proposal. Commissioners acknowledged the complexity of the bidding process and noted that a key benefit of the last round of negotiations was the volume of business offered to bidders, and asked how Staff will preserve the size of biddable batches while staggering the bidding process. In response, Mr. Johnson said that by keeping them together in blocks, concessions at MAC still offer an attractive volume of business to bidders, and the batch model is a program that drives substantial interest in the industry. THIS IS AN INFORMATIONAL ITEM ONLY; NO COMMITTEE ACTION IS REQUIRED The meeting was adjourned at 2:05 pm.