Wednesday 16 March 2011

.O'Hare concession deal draws fire

Crain's) — The City Council Aviation Committee put off until next month voting on a long-term lease agreement for concessions at O’Hare Airport’s international terminal.

Los Angeles-based Westfield Concession Management LLC won a bidding contest for the 20-year deal last June, and the contract came to the Aviation Committee on Tuesday after months of negotiation. It could have gone to the full council for a vote Wednesday. But aldermen, still stinging from a controversial 75-year parking meter lease, want more time to review the contract, especially after one of the losing bidders said it had offered a better deal to the city.

Westfield, a subsidiary of the Australian mall operator Westfield Holdings Ltd., won a competition in June over the current operator, Chicago Aviation Partners, a joint venture between McDonald’s Corp. and Duty Free Americas Inc. Buffalo, N.Y.-based concession operator Delaware North Cos. also bid on the deal.

The city would receive $45 million to $128 million less over the 20-year life of the proposed deal with Westfield, according to an analysis by Unite Here and testimony Tuesday by Chicago Aviation Partners. The union opposes the type of umbrella contract being considered, claiming it can mean lower revenue for airports and the amount of money available to pay workers.

The contract says Westfield guarantees to pay the city a minimum of about $5.1 million a year from food, news and gift, and duty-free sales in Terminal 5. But Delaware North offered a minimum of about $7.7 million, according to Unite Here, a union that represents more than 1,000 concession workers at O’Hare. Chicago Aviation Partners said Tuesday offered a guarantee of $11.6 million.

Westfield and Delaware North declined to comment on their proposals.

Aviation Commissioner Rosemarie Andolino declined to comment on specifics of the proposals, but testified Tuesday that Westfield was chosen, in part, because it offered the highest investment -- $26 million – in upgrading the terminal. The other competitors offered $17.5 million and $20 million, she said. But Chicago Aviation Partners claimed that it offered to invest $33 million upgrading the terminal. Under the deal, the terminal’s concession space will be overhauled so it can be placed beyond security checkpoints, where travelers will have more time and freedom to shop.

Under the pending deal, Westfield guarantees a minimum of $3 per departing passenger, but only if the number of passengers reaches 1.7 million. Last year, the international terminal had 1.57 million departing passengers. Peak traffic was 2.1 million in 2006.

But concession operators generally pay more than the minimum. The proposed contract calls for Westfield to pay the city 16% of gross sales of Terminal 5 vendors, which have averaged about $35 million.

Delaware North proposed a sliding scale of 10% to 40% because some types of concessions, such as duty-free shops, are more lucrative, according to Unite Here’s analysis. Chicago Aviation Partners used a similar sliding scale, with an average of about 19% of sales, it said Tuesday.

Using an estimate of $40 million in annual sales over the life of the deal, Unite Here predicts Westfield would pay $6.4 million a year, or about 35% less than the $8.7 million under the proposal by Delaware North.

“No matter how you slice it, the Westfield proposal is substantially below what you have from Chicago Aviation Partners,” said former Cook County State’s Atty. Richard Devine, who represented Chicago Aviation Partners.

The proposed deal is 20 years, or about twice the current contract, which Ms. Andolino says is necessary to guarantee a return to the bidder for its construction investment. But the contract could run 25 years or more under terms of the deal, which includes a five-year extension option. Ald. Ray Suarez questioned whether the contract needed to be so long.

Ms. Andolino is trying to crank up concession revenue at the international terminal to at least $11 per passenger, from about $9 per passenger today. Increasing concession revenue would enable O’Hare to reduce the amount it charges airlines in landing fees and terminal rent. Airline payments currently cover about three-fourths of the airport’s operating budgets.

Westfield has concession contracts at New York’s John F. Kennedy International, Newark Liberty International, Miami International and five other major U.S. airports. Unlike other O’Hare concession contracts in which the concession manager also is an operator, Westfield is expected to subcontract news and gift, food, specialty retail and duty-free operations to other companies. Delaware North and CAP are concession operators.
By
Monika Jain

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