PORT OF SEATTLE
MEMORANDUM
COMMISSION AGENDA
Item No.
6f
Date of Meeting
November 3, 2009
DATE: September 29, 2009
TO: Tay Yoshitani, Chief Executive Officer
FROM: James R. Schone, Director, Aviation Business Development
Deanna Zachrisson, Manager, Concessions Business
SUBJECT: Amendment to Extend the Lease and Concession Agreement of Smarte Carte,
Inc., provider of airport luggage carts and other passenger services.
REQUESTED ACTION
Request for authorization for the Chief Executive Officer to execute an Amendment (Attachment
A) to the Lease and Concessions Agreement – Attachment B (Agreement) of Smarte Carte, Inc. at
Seattle-Tacoma International Airport (Airport) that would extend the term for an additional 5-year
period as provided for in the current Agreement, under new negotiated terms.
SYNOPSIS
Smarte Carte has an Agreement at the Airport for the term February 1, 2005 - January 31, 2010 to
sell luggage carts to the traveling public. A significant shock to that business occurred in May
2008, when the first air carriers began charging passengers a per-bag fee for checked luggage.
Soon nearly every domestic carrier began charging between $10 - $15 for the first checked bag,
and even more for second and third bags. Luggage cart rentals at the Airport dropped
dramatically as passengers began shedding bags to save money. Smarte Carte quickly began to
struggle in achieving enough sales to cover its minimum monthly guarantee to the Airport.
Despite allowing Smarte Carte to raise its rental fee to $4.00 in October 2008, Smarte Carte has
not generated sufficient sales to cover their monthly guarantee payment to the Airport during 12
of the last 18 months.
While the Agreement provides an option for an additional five-year term, Smarte Carte notified
Airport staff that the company was not interested in continuing to operate the luggage cart
concession under the current terms. Thereafter, staff conducted an analysis of luggage cart
concessions at major U.S. airports. Based on this analysis, staff recommends that it is in the best
interest of the Airport to execute the option to extend the Agreement for another 5 years, but also
to negotiate new terms reflective of current and probable future market conditions.
COMMISSION AGENDA
T. Yoshitani, Chief Executive Officer
September 29, 2008
Page 2 of 6
BACKGROUND
The Airport issued a competitive Request for Proposals (RFP) for a luggage cart concession in
mid-2004. At that time, the Airport was a very sought-after market in the luggage cart business.
This was primarily due to the Airport’s relative resilience in withstanding the swings of the
aviation industry, the dominance of the leisure traveler in its passenger mix and also its distinction
as an “origination and destination” airport. The core customer for a luggage cart is a leisure
traveler with two or more bags. With such a large share of this type of passenger ending their trip
in Seattle, the market was solid and profitable.
As an outcome of the 2004 RFP, the Airport was successful in negotiating a higher percentage
rent than at any comparable airport (see chart below). The Airport negotiated 35% rent on
luggage cart sales as well as sales of any supplemental services such as storage lockers and cell
phone charging stations. Additionally, the Airport negotiated the free provision of luggage carts
to international passengers in the South Satellite Federal Inspection Service (FIS) area. Smarte
Carte agreed to re-stock the South Satellite international arrivals carts at no charge to the Airport.
As a large airport, Sea-Tac also required significant new investment in luggage carts and luggage
cart assembly stations. Smarte Carte invested approximately $700,000 in new luggage cart
infrastructure, and at the Airport’s request, instituted a 25¢ cart return refund to address the
problem of passengers abandoning luggage carts all over the Airport. While the 25¢ refund
lowered revenues for Smarte Carte, it did solve this problem.
Examples of current Smarte Carte lease terms at comparable airports:
Airport Length % Rent Minimum Annual Guarantee Cart Price
Seattle
(SEA)
5 yrs./one 5-yr.
option (2005-10)
35%
$4.00
Los Angeles*
(LAX)
4 yrs. 11 mos.
(2005-10)
55%
$3.00
Las Vegas
(LAS)
3 yrs./ two 2-yr.
options (2005-10)
26%
$4.00
San Francisco
(SFO)
5 yrs./five 1-year
options (since 01)
25%
$4.00 ^SFO pays $1.20 per
cart to provide free in FIS
Salt Lake City
(SLC)
5 yr. option
extended (07-12)
20%
$4.00
Denver
(DIA)
Since 2002, expires
2010
25%
$3.00
Portland
(PDX)
Renegotiated new 5
yr term (2009-13)
15%
$4.00
Minneapolis-
St. Paul(MSP)
Renegotiated new 5
yr term (2008-13)
17%
$3.00^MSP pays $1.72 per
cart to provide free in FIS
*LAX has 7,000 luggage carts compared to most airports having less than 2,000 carts.
COMMISSION AGENDA
T. Yoshitani, Chief Executive Officer
September 29, 2008
Page 3 of 6
The Airport’s luggage cart concession was very healthy until May 2008, when the first baggage
fees went into effect. Smarte Carte’s revenues began to decline as more carriers, including
dominant carrier Alaska Airlines, began adding and/or raising baggage fees, as well as adding
penalties if not paid online instead of at the Airport. Smarte Carte’s sales dropped 8.4% in 2008
(with this drop occurring in the last 7 months of the year), and sales-to-date in 2009 are down an
additional 12.4% - despite a 33% increase ($3 per cart rental to $4) in the cart rental fee in
October 2008. On a month-by-month basis, Smarte Carte has only achieved adequate sales to
support their minimum monthly guarantee to the Airport in the peak months of leisure travel.
The new baggage fees are consistent with the overall à la carte pricing model adopted by the
airlines in recent years, which also includes fees for onboard food and entertainment and fuel
surcharges. The U.S. Department of Transportation reports that the financial benefit to the top
ten baggage fee revenue-generating airlines was more than $1.1 billion for 2008, and 2009
revenues from baggage fees are expected to be close to $3 billion for these carriers. Staff
predicts baggage fees will continue and are likely to increase.
Normally, it would be to the Port’s advantage to competitively re-bid any new concession.
However, in this down economy, there have been compelling reasons to delay certain competitive
RFPs. For example, the Port has delayed the competitive RFP for the Airport’s duty free business
for one year. In this instance, the concession concept is fundamentally sound, and the market is
expected to improve in the short-term. Unfortunately, staff sees no such favorable turn-around
for the luggage cart business in the short-term. The fundamentals of the luggage cart market are
more likely to be even less favorable in one year, or even in 5 years.
Staff has considered carefully the likely outcome of a new competitive bid for the luggage cart
concession. The two competitors who bid against Smarte Carte in 2005 (SafeSkies and Swissport)
are both no longer in the luggage cart business. Of the top 50 U.S. airports, Smarte Carte holds
the luggage cart concession in 45 airports. The remaining airports are divided between three
providers. One German-owned, New York-headquartered provider holds the concession for
Boston and Philadelphia airports, but has not bid on any new opportunities recently. Another
provider is a parking garage management company that also offers a luggage carts at airports
where they manage parking garages. This company has not bid on any luggage cart concessions
in approximately the last six years. A third company holds luggage cart concessions at some
smaller airports, and recently withdrew from competitive bid processes in Fort Lauderdale and
John Wayne (Orange County), where both contracts were awarded to Smarte Carte.
In June 2009, Portland International Airport (Oregon) renegotiated a new five-year lease with
Smarte Carte at lesser terms than their preceding contract (see above chart). There are no known
local or regional luggage cart companies. Based on this market scenario, staff anticipates that the
likely outcome of a competitive tender would be a lack of competition and ultimately less
favorable financial terms than offered in this proposed negotiated extension. Staff believes that
COMMISSION AGENDA
T. Yoshitani, Chief Executive Officer
September 29, 2008
Page 4 of 6
Smarte Carte is the only luggage cart vendor with enough resources and market position to be
able to operate a robust and reliable luggage cart service at the Airport, and also provide the best
possible financial returns in the marketplace.
In summary, three main factors suggest that a competitive process now, or in near future, is not in
the Port’s best financial interest:
Steep decline of the luggage cart business
As stated above, the luggage cart business has declined dramatically since May 2008.
Another measure of this decline is the average number of checked bags per passenger has
declined 20% since 2007 (see Attachment C).
Smarte Carte’s dominant position in the market
Nearly all of the top 50 U.S. airports have Smarte Carte as their sole vendor. While there
are some competitors, none has the scale or resources of Smarte Carte. It is a declining
business that is not favorable for new entrants or small businesses.
Costly required infrastructure investment at Sea-Tac
The requirements for new equipment, including approximately 2,000 luggage carts would
be a significant investment for any new vendor, in excess of $1 million. It is unlikely that
a competitor to Smarte Carte would be interested in investing this level of new capital into
a weak business model.
For any business that encounters a sudden and severe change to its basic business model, it is
imperative for the survival of that business to find new market niches and other sources of
income. Staff sees evidence that Smarte Carte is seeking to diversify its business model to
include other supplemental services, as allowed in their current lease, such as cell phone charging
stations and freestanding massage chairs. Under the extension, staff would encourage Smarte
Carte to propose new sources of revenue, all of which would command the same percentage rent
to the Port as the core luggage cart business. Such additions to their service mix would be subject
to Port approval.
SCOPE OF AGREEMENT
The draft Amendment, as well as the Agreement, accompany this request for authorization. If
approved, Airport staff will proceed to execute the Amendment.
COMMISSION AGENDA
T. Yoshitani, Chief Executive Officer
September 29, 2008
Page 5 of 6
Below are the proposed new financial terms:
Seattle % Rent MAG* Guarantee Other
Current
35%
90% of previous
year’s rent
Monthly guarantee,
no reconciliation
25¢ cart return, free FIS
cart service
Proposed
22%
80% of previous
year’s rent –
starting at
$317,000 in 2010
Annual guarantee,
annual reconciliation
25¢ cart return, free FIS
cart service
*Minimum Annual Guarantee
In comparison to other airports, it may appear that the new proposed percentage rent negotiated
with Smarte Carte is less than currently found at many other airports. However, this is misleading
because most of the percentage rents found at comparable airports are for contracts originated
before the airline luggage fees came into effect. In other words, when many other airports
received 25% percentage rent, the Airport had achieved a much higher percentage of 35%. As
staff is beginning to see in evidence at airports in Portland and Minneapolis-St.Paul, it seems
reasonable to expect that airports generally will receive much lower percentage rents once they
also begin entering new contract cycles.
STRATEGIC OBJECTIVES
This proposal supports the strategy of “Ensuring Airport and Seaport Vitality” by ensuring
viability for businesses at the Airport.
FINANCIAL IMPLICATIONS
The luggage cart concession already has been affected negatively by market trends, which will
impact the financial return to the Port. Smarte Carte will pay the Port $542,000 in 2009, which
corresponds to 90% of 2008 rent paid to the Port. Smarte Carte will not achieve sales levels
adequate to generate percentage rent above this amount. For 2010, Smarte Carte estimates that
Port revenue at 22% of gross sales on luggage carts sales will reach at least $316,827, which is
the guaranteed annual minimum payment proposed for the first year of the amended Agreement.
Smarte Carte will pay the greater of 22% of gross sales or the minimum annual guarantee.
ECONOMIC IMPACTS
The continuation of the Smarte Carte luggage cart concession will preserve eleven jobs based at
the Airport.
COMMISSION AGENDA
T. Yoshitani, Chief Executive Officer
September 29, 2008
Page 6 of 6
ALTERNATIVES CONSIDERED/RECOMMENDED ACTION
Alternative 1: Eliminate Luggage Cart Service at the Airport
Passengers are traveling with fewer bags, which have greatly diminished the demand for
luggage carts. In fact, luggage carts – at $4 a cart – have become a very discretionary
purchase. It would be possible to consider eliminating the service; however, the Airport has
a significant number of international travelers who find a luggage cart more of a necessity
than a luxury. In the interest of maintaining a level of customer service for travelers who
require luggage carts, this is not a recommended alternative.
Alternative 2: Issue Competitive Request for Proposals
Staff believes that a competitive RFP for the Airport’s luggage cart business very likely will
lead to one or both of two potential outcomes: Smarte Carte as the only bidder for the
business, and less favorable financial terms than those proposed in this negotiated extension.
This is due to Smarte Carte’s ability to leverage its market dominance to propose a lower
percentage rent in an RFP process. It also is highly unlikely that the luggage cart market will
recover in the short-term to make a competitive RFP fruitful. This is not a recommended
alternative.
Alternative 3: Extend the Smarte Carte Agreement under Proposed Terms
Under any possible scenario, the financial terms the Airport previously commanded for its
luggage cart concessions are unrealistic to achieve in the future. Due to the rise of airline
baggage fees, it is necessary to adjust our revenue expectations to the current and future
potential. Staff believes that this negotiated extension provides the best possible financial
compensation, while also assuring the continuation of an appreciated (and often expected)
customer service offering. This is the recommended alternative.
PREVIOUS COMMISSION ACTION
None.
ATTACHMENTS
Attachment A – First Amendment to Lease and Concession Agreement for Luggage Carts and Lockers
Attachment B – Lease and Concession Agreement for Luggage Carts and Lockers
Attachment C – Graph: Decline in Average Checked Baggage per Passenger.