Dallas Love Field Concession Plan

This plan was presented to Star Concessions CEO Gilbert Aranza by Mayor Tom Leppert in a meeting held at
Love Field on August 10, 2010. Present at this meeting were Mayor Leppert, City Council Member Tennell At-
kins, Gilbert Aranza, Star Concessions President Danny Bruce and Star Concessions advisor Ken Carter. The
plan was then presented to Hudson Retail lawyer, Marcos Ronquillo by Mayor Leppert. In the left column you
will find the plan as described by the Mayor. This information has been confirmed by Mr. Ronquillo. On the
right you will find Star Concessions analysis and concerns. This plan is now being referred to as “Option 4”

Mayor’s Plan: Star Concessions’ Analysis and Concerns:

I. Construction Period – Now
through November 2014
A. Current concessionaire con‐
tracts extended through No‐
vember, 2014 (or opening of
the entire new terminal).
B. Minimum Annual Guarantee
(MAG) is waived as of now.
C. When enplanements drop
below 90% of current level,
percent rent drops propor‐
tionately. *Amended
8/13/2010 to 95%
D. No capital investment re‐
quired by the City.
*Amended 8/13/2010: city
will reimbursed incumbents
for unadvertised capital in‐
vestment approve by the city
before expenditure.
*Amended 8/13/2010: City
will reimburse incumbents for
unamortized capital invest‐
ment approved by the city
before expenditure.
B. Since the incumbents are paying percentage rent, which ex-
ceeds the MAG, the waiver of the MAG will have no economic im-
pact until passenger levels decline at the old gates or units close,
neither of which is scheduled to occur until the Spring of 2013
when the 12 gates of the new terminal open.
C.
1. The reduction in the percentage rents does not in itself assure
that the incumbents will not lose money after the initial 12
gates of the new terminal open. The overhead necessary to
sustain the minimum operations left in the old terminal will still
have to be covered as well as other non-variable costs (for
example, the $20 million insurance policy we must maintain to
have our provisioning truck drive on the tarmac where the
planes are will still have to be maintained whether the incum-
bent is supplying one unit or ten units).
2. I assume the reference to a drop below 90% refers to the
gates in the old terminal; otherwise there would never be a
decrease of 10% or more.
D. The City may not require any new investment, but:
1. The Mayor said Star would be expected to take care of the
business “as any businessman would.”
2. We must extend our franchise agreements, which will require
fees of as much as $40,000 per unit, and our franchisors have
indicated that each will require us to bring our units up to cur-
rent image and equipment standards upon extension of our
franchise agreements in the old terminal.
3. In any event, some of our facilities and equipment need refur-
bishment or replacement in order to continue to provide a
good environment and product to our guests.
4. Once the initial 12 gates in the new terminal are opened, the
only unit to remain to service the old gates 1-4 will be the
Chili’s unit. If the City is to carry out its fiduciary duty to all of
Love Field’s passengers, then quick service and walk-away
food and beverage items must be offered to those passen-
gers. In any event, the Chili’s alone with 120 seats cannot
adequately service the 3,000 passengers a day that are ex-
pected to fly out through gates 1-4. The lack of food choices
and inability to properly service passengers with 120 seats will
result in guest complaints and a tarnished reputation for the
food and beverage operator.
Mayor’s Plan:
I. Continued: Construction Period–
Now Through November
2014
D. No capital investment re‐
quired by the City. *Amended
8/13/2010: city will reimbursed
incumbents for unadvertised
capital investment approve by
the city before expenditure.
*Amended 8/13/2010: City will
reimburse incumbents for
unamortized capital investment
approved by the city before
expenditure.
Star Concessions’ Analysis and Concerns:
D.
5. The 8/13/2010 amendment with respect to unamortized reim-
bursement is illusory because the Mayor told Star that he, the
Mayor, expects all expended capital to be recovered in 2011
and 2012. The Mayor repeatedly stated that no capital invest-
ment will be needed. For this amendment to have any validity,
the amount of capital to be approved by the city needs to be
determined now. I have previously sent the city detailed esti-
mates of this cost. The amortization period needs to be con-
sistent with the normal useful life of the asset acquired (5-7
years for equipment; 10 years lease hold improvement) not
over the 42 month construction period (or as the Mayor said,
2011 or 2012.)
Mayor’s Plan:
II. New Terminal Food and Beverage
A. As many RFP’s as possible. If
there are 40 units, then there
would be 40 RFPs, with some
pairing of units, kept to a mini‐
mum; for example, a landside
unit with a secured side unit.
B. Incumbents will have a right of
first refusal on 25% in value of
the units (not by square foot‐
age or number of units). City
staff is to assign values to each
unit.
C. Proposals will be evaluated
and winners selected.
D. If incumbents are awarded
25% or more in value of the
units, then there is no right of
first refusal as to any addi‐
tional units
Star Concessions’ Analysis and Concerns:
A.
1. The enplanements projected for Dallas Love Field will not be
able to sustain more than two operators, much less the possi-
bility of having 24 or more operators, and certainly there
should be no cap on the number of units one operator can
have. There are 24 airside food and beverage units and not
less than four landside food and beverage units. This is also
inconsistent with Southwest Airlines’ statements in its letters to
the City that Dallas Love Field should not have any more than
one operator for food and beverage and one operator for re-
tail.
2. This plan sets up a recipe for failure and will be catastrophic
for small businesses. This plan will completely decimate ser-
vice at Dallas Love Field due to financial pressures resulting in
poor quality operations.
3. The cost to issue and review multiple proposals and to man-
age this program will be extremely burdensome on City staff.
B. Since there is not a standard by which unit values will be as-
signed, it is not possible to render an opinion on what “25% in
value” means. As I stated in the prior section, this airport cannot
sustain multiple operators. An allocation of square footage that
would support a viable food and beverage concession business
would total 40% of the total food and beverage space
(approximately 15,622 square feet); depending on the relevant
economic factors (length of contract, capital investment, street
pricing, mandated commodities, etc.), as little as 10,936 square
feet of space (28% of the total) could be viable, but that viability
is a function of the type of service (full service vs. quick service/
walk-away), branding, size of unit, and location of unit. Drawing
units out of a pot randomly cannot determine viability.
C. What points will be given for incumbency? Will the City chal-
lenge the FAA to allow the award of preferential points to local
businesses and local minority/women-owned businesses? This
is an issue in many city councils across the country.
D. There is no incentive to take the risks involved in operating in
the old terminal during the construction period. The units that will
be the subject of the right of first refusal should be incremental
(or in addition) to any units awarded to the incumbents through
the RFP process.
Mayor’s Plan:
II. Continued: New Terminal Food
and Beverage
E. If incumbents win less than 25%
in value of the units, then the
following happens (assume for
this purpose that an incumbent
wins 15% in value of the units):
1. The assigned number (1‐40)
of all units with values of 10%
or less will be dropped into a
pot. Incumbent will draw a
unit number and must match
the economics of the winning
proposal for that unit or for‐
feit that percentage of value.
*Amended on 8/13/2010: In‐
cumbent must provide compa‐
rable brand.
2. If the incumbent accepts
the unit whose number was
drawn and that unit was as‐
signed a 10% value, then the
drawings stop.
3. If the incumbent accepts
the drawn unit whose number
was drawn and that unit was
assigned a value of less than
10%, then another drawing
will be held with units whose
assigned values are less than
or equal to the value needed
for the incumbent to have
25% of the value. This process
will be repeated until the in‐
cumbent has been awarded,
forfeited, and/or accepted
units with 25% of the assigned
values.
Star Concessions’ Analysis and Concerns:
E.
1. Without knowing if there will be a range of acceptable eco-
nomic terms set forth in the RFPs, it is not possible to agree
now to the matching proposed. Proposals may be submitted
that will attempt to “buy” the business for many reasons that
are not in the best interests of the City of Dallas. For that rea-
son, minimum and maximum MAGs, percentage rents, and
capital investments should be established, all in light of the
street pricing policy and the use of mandated commodities.
Furthermore, national and international operators such as
Delaware North (CA-1, Buffalo, NY), Select Service Partners
(SSP, Sweden), HMS Host (Italy), Arias (Spain), Concessions
International (Atlanta), Westfield (Australia), BAA (England),
and Marketplace (Boston) will propose on every package and
will be able to offer higher rents based on potentially being
awarded 75% of the value of the units (after the 25% right of
first refusal). Incumbents would be asked to match rents that
an operator of a majority of the units in value offered, but then
would be saddled with an economic minority in value of the
units.
2. Next, even if the economic terms are acceptable, the incum-
bents may be unable to match the brand proposed by the win-
ning proposer. Will the City accept a brand in the same cate-
gory as the winner? For example, if the winning proposer sub-
mits California Pizza Kitchen and I want to use Papa John’s
Pizza, will that be allowed?
3. In general, the more units one can operate at a single airport,
the greater rent it can pay and capital it can invest because its
overhead can be spread over more sales.
4. There is something inherently wrong in asking someone to take
the time and money needed to submit a proposal and at the
same time telling that proposer that even if its proposal is ac-
cepted there is at least a one in four chance of losing because
of the right of first refusal process. How will the mix of tenants
be controlled under this plan?
Mayor’s Plan:
II. Continued: New Terminal Food
and Beverage
F. Provisions of contracts in new
terminal:
1. Term: Food and Beverage:
7‐9 years with two 1‐year op‐
tions (at City’s discretion), Re‐
tail: 5‐7 years with two 1‐year
options (at City’s discretion)
2. Street Pricing: Flat, no
mark‐up.
3. Rights Retained by City
A. Right to determine
which brand of water is to
be sold by all concession‐
aires
B. Right to determine
which non‐alcoholic bev‐
erages will be sold by all
concessionaires
C. Right to determine
which coffee will be sold
by all concessionaires
D. Right to set up vending
machines wherever City
desires for whatever
products City desires
F. Alcoholic beverage sales
will be reserved to the in‐
dividual operator
*Amended 8/13/2010:
The TABC license for alco‐
hol in public areas to be
put out to bid
G. Termination for con‐
venience would require
City Council approval.
Star Concessions’ Analysis and Concerns:
F.
1. The term needs to be a function of rent to be paid, capital in-
vestment made, street pricing policy, use of mandated com-
modities (water, bottled beverages, etc.), location of units, and
other factors such as the need for support space outside of the
unit. In my case, in order to bear the risk of operating losses in
the old terminal, City staff and the consultants agreed to add
two years to the ten year primary term to offset that risk.
2. Again, street pricing is one factor that needs to be balanced
with rent to be paid and length of term, capital investment,
length of contract, location of units, etc. City staff and consult-
ants should weigh in on all of this.
3.
D. Every experienced operator will tell you that mandating
the use of certain commodities may provide an eco-
nomic benefit to the City, but that economic benefit is
passed on to the operators in the form of higher costs.
That cost to the operators is nothing more than the
imposition of rent in another form, which at some point
could cause the failure of the business.
F. City is passing up revenue by not allowing an operator
to obtain a roof license for the sale of alcoholic bever-
ages in the secured public spaces. With our current
passenger base (which is expected to be less than half
of the potential passenger base at the new terminal)
we currently sell over $560,000 of alcoholic beverages
in the public areas per year and pay at least $101,000
annually in rent to the City on those sales. That reve-
nue would be lost.
* The 8/13/2010 amendment assumes that the TABC
would allow anyone this privilege. This is not so. The
city will lose millions of dollars of revenue and rent be-
cause of this mistake. Professionals need to weigh in.