PORT OF SEATTLE

MEMORANDUM

COMMISSION AGENDA

Item No.

Date of Meeting

March 1, 2011

DATE: February 17, 2011

TO: Tay Yoshitani, Chief Executive Officer

FROM: Nick Harrison, Senior Manager, Airport Operations

James Schone, Director, Aviation Business Development

Wayne Grotheer, Director, Aviation Project Management Group

SUBJECT: Common-Use Lounge Remodel at Seattle-Tacoma International Airport

(CIP # C800203)

Amount of This Request: $320,325 Source of Funds: Airport Development Fund

State and Local Taxes Paid: $14,125 Jobs Created During Construction: 16

Total Estimated Cost: $971,000

ACTION REQUESTED:

Request Port Commission authorization for the Chief Executive Officer to (1) authorize design

of the Common Use Lounge (Club International) and (2) competitively procure furnishings and

casework for the lounge. This authorization is for $320,325 of a total estimated project cost of

$971,000.

SYNOPSIS:

A premium common use lounge (Club International) for airlines serving the Airport is a much

needed facility that helps both existing and prospective carriers flying international routes meet

their business plan objectives, specifically the growth and profitability of routes, and allows them

to offer their passengers a superior pre-boarding experience comparable to competitors offering

branded lounges for premium passengers. Several airlines have expressed interest in using an

improved Club International, adding to the Port’s existing customer base. Additionally, the Port

anticipates marketing the club directly to passengers on a pay-per-use basis as a new line of

business which would increase non-aeronautical revenues.

This project relocates and remodels the Port’s common-use lounge from the mezzanine level of

the South Satellite to the departure level of the South Satellite (see Exhibit A). Design will be

completed by a consultant on an existing Indefinite Delivery Indefinite Quantity (IDIQ) contract.

This project is made possible by Delta Air Lines’ construction of a new rooftop lounge and the

COMMISSION AGENDA

Tay Yoshitani, Chief Executive Officer

February 17, 2011

Page 2 of 7

subsequent vacation of its existing departure level facility in late 2011. The Port’s common-use

lounge will occupy the vacated space. The new Club International will be similar in size to the

existing location, approximately 4,000 square feet. Improvements consist largely of new

finishes, new furnishings and other minor cosmetic improvements. This project does not include

creation of any additional floor area.

BACKGROUND:

A high quality premium passenger lounge is an essential component of the airline services

targeted toward premium fare passengers on international flights. The Port’s provision of a

common-use lounge in the international terminal ensures that both existing and prospective

international airlines can meet their business plan objectives, specifically profitability of routes.

British Airways and Delta Air Lines have their own branded lounges, but they open them up to

smaller airlines for additional revenue. Even with this accommodation of sub-tenants, there is

inadequate capacity to accommodate all the international carrier demand at the South Satellite.

The Port is not trying to compete directly with the branded airline lounges; however, we

endeavor to improve the financial performance of Club International. The Port’s Club

International meets a critical market need for those airlines that cannot justify building or leasing

their own facility and which cannot be accommodated as sub-tenants in the existing airline

branded lounges.

The Port offered an unstaffed no-frills common-use club option to airlines for decades; however,

this past year the Port changed the operating and business model for the common-use club in an

effort to improve the level of service. The Port solicited and selected a third party company to

provide management oversight, staffing, and food and beverage service. The fee model has also

changed from a fixed per-flight charge to an individual per-customer charge. We anticipate

marketing directly to passengers on a pay-per-use basis in addition to offering a competitive

product for current and prospective airlines. This direct-to-passenger marketing is an effort to

expand our potential customer base, and factored into the change in fee structure based on an

individual customer charge.

The viability of Club International’s core business and efforts to grow the market is currently

hampered by three key facility factors: poor configuration, poor condition, and poor location.

The configuration challenges in the existing Club International are a result of it being divided

into two separate 2,000 square foot lounges. These separate facilities create challenges in

staffing, duplication of maintenance, and the hamper the Port’s ability to offer a standard level of

service to our customers. The condition of the space is a concern because while one portion of

the facility was improved by the Port in the late 1990s, the other portion is still making use of

original furniture and finishes from SAS Scandinavian Airline’s initial build-out at the

inauguration of service to Copenhagen decades ago. Most significantly, the location of Club

International does not meet the fundamental criteria our airlines customers and their premium

passengers desire and expect. Airlines and premium customers expect an airline lounge to be

close to the gate boarding area and offer views, daylight, and modern amenities.

Delta's existing facility on the departure level of the satellite will become vacant when it moves

to the new lounge on the roof of the South Satellite in 2011. The Port wishes to capitalize on this

COMMISSION AGENDA

Tay Yoshitani, Chief Executive Officer

February 17, 2011

Page 3 of 7

opportunity by renovating this newly vacant lounge and reopening it as the new and improved

common-use Club International Lounge. This would resolve the configuration, condition, and

location challenges that exist with the current facility. This improved facility will provide an

attractive option for existing international airlines, as well as a key marketing tool for Port staff

to offer to potential carriers considering Sea-Tac for expansion of new international routes.

Remodeling Club International in its current location would require a much more significant

renovation and capital investment and would not solve the problem that the current location of

Club International is not suitable for an airline lounge. This opportunity to move Club

International, with a modest investment, will allow the Port to offer services equivalent to the

other two major airline clubs in the South Satellite. In addition, Delta Air Lines has asked to

lease the existing Club International space on the mezzanine and plans to remodel the area into a

new operations center and pilots base. This future Delta project would increase lease revenue to

the Port.

PROJECT JUSTIFICATION:

Project Objectives:

 Provide an improved common-use lounge facility with services and amenities that meet

current and prospective airline customer expectations.

 Improve the financial performance of Club International.

 Provide an improved lounge which may be key to successful marketing for new

international air service.

 Improve prospects for marketing directly to passengers on a pay-per-use basis.

PROJECT SCOPE OF WORK AND SCHEDULE:

Scope of Work:

This project is located at the soon to be vacated Delta lounge on the departure level of South

Satellite. The project scope includes replacement of architectural finishes, furnishings, millwork,

restroom fixtures and partitions, and the installation of data cable for internet service.

Schedule

Begin Design 1

Qtr 2011

Purchase Furnishings and Fixtures 2

Qtr 2011

Advertise for Major Construction Contract 3

Qtr 2011

Begin Construction 4

Qtr 2011

Project Completion 1

Qtr 2012

COMMISSION AGENDA

Tay Yoshitani, Chief Executive Officer

February 17, 2011

Page 4 of 7

FINANCIAL IMPLICATIONS:

Budget/Authorization Summary:

Original Budget

$2,000,000

Budget Decrease

$1,029,000

Revised Budget

$971,000

Previous Authorizations

N/A

Current request for authorization

$320,325

Total Authorizations, including this request

$320,325

Remaining budget to be authorized

$650,675

The budget for this project decreased through a reduction of scope from a complete remodel to

essentially a replacement of finishes and furnishings. Major restroom improvements and the

addition of shower facilities were also removed from the project scope.

Budget Status and Source of Funds:

This project is included in the 2011-2015 Capital Budget and Plan of Finance as a business plan

prospective project, CIP # C800203. The funding source will be the Airport Development Fund.

Financial Analysis and Summary:

CIP Category

New/Enhancement

Project Type

Renewal & Replacement

Risk adjusted Discount rate

Key risk factors

 Project delays would in turn delay

potential increased revenue generation

and reduce the NPV of the project.

 Potential cost overruns would reduce

the NPV.

 Revenue from club is based upon

Project Cost Breakdown:

This Request

Total Project

Construction Costs

$ 453,300

Port furnished equipment

$148,700

$ 148,700

Sales tax

$14,125

$ 57,000

Outside professional services

$72,000

$ 90,000

Aviation PMG and other soft costs

$85,500

$ 222,000

Total

$320,325

$ 971,000

COMMISSION AGENDA

Tay Yoshitani, Chief Executive Officer

February 17, 2011

Page 5 of 7

actual use via a per passenger fee.

Airline participation in club use can

fluctuate, thus the projected revenue

stream could change based on carriers’

decisions on use of the lounge.

Project cost for analysis

$971,000

Business Unit (BU)

AV Business Development

Effect on business performance

 First year (2012) Net Operating Income

(NOI) projected at $430,000.

 Based on projected growth in expenses,

number of passengers, and lounge use

fee, long-term annual NOI is expected

to be approximately $400,000.

IRR/NPV

IRR: 18%

NPV: $1,700,000

CPE Impact

None, non-aeronautical project

The Internal Rate of Return (IRR) and Net Present Value (NPV) calculations are based upon the

assumption of three carriers participating as regular customers. This reflects conservative

assumptions because the Port has received written interest from six different carriers in regards

to the proposed Club International facility. The IRR and NPV projections would drop to 5% and

($120,000), respectively, with only two carriers as regular customers. Conversely, four

participating carriers would increase the IRR and NPV to 19% and $2,000,000, respectively.

Please note that each carrier’s passenger usage is different, and therefore the addition or removal

of various carriers has a different effect on the calculations. For example, some larger carriers

may have up to 1,000 monthly customers, while a smaller carrier may only have 200 monthly

customers. Additionally, in trying to be conservative, the opportunity for direct to passenger

sales is conservatively understated in this analysis.

Lifecycle Cost and Savings:

The lifecycle cost and savings of this project will be determined as an element of design.

Annual O&M implications will be validated during this design phase of the project.

ENVIRONMENT AND SUSTAINABILITY:

This project demonstrates environmental sustainability by reusing existing facilities and

prolonging the life of existing Port assets. This improved Club International will allow for more

suitable utilization of existing lounge facilities at the South Satellite. This reduces the potential

environmental impact of new construction that would occur if a new Port lounge were built or

individual air carriers built their own lounge facilities.

COMMISSION AGENDA

Tay Yoshitani, Chief Executive Officer

February 17, 2011

Page 6 of 7

STRATEGIC OBJECTIVES:

The Club International Lounge Remodel project supports two of the Port’s Strategies and

Objectives, notably:

This project promotes the Port’s strategic goals to “Ensure Airport Vitality” and “Be a Catalyst

for Regional Transportation Solutions” by providing international airlines with one of the facility

amenities they need to be profitable and grow their business. Additionally, attractive and

functional lounge facilities create an environment that can assist in marketing for new

international travelers and positions the Port to compete for international growth as air carriers

expand or change their flight routes.

BUSINESS PLAN OBJECTIVES:

The Port wishes to improve its common-use Club International lounge so that it meets the needs

of current airline customers, supports the marketing for new airline customers to the Seattle

market, and improves the prospects of marketing directly to passengers on a pay-per-use basis.

Port staff has determined that Club International should be moved to a more desirable location,

and have an attractive level of finishes and furnishings on par with airlines’ premium passenger

expectations to do so. Port staff projects potential growth in airline customers from one to three

carriers with a move to the departure level, and with the proposed improvements. The number of

annual lounge users would grow from 9,400 to 36,500 annually based on this increased usage

from additional airlines. In its present condition, Club International is not profitable and is at

risk of losing current customers. Any market expansion and/or improved financial performance

is not feasible without reinvestment into Club International.

TRIPLE BOTTOM LINE SUMMARY:

This project demonstrates environmental sustainability by reusing and updating an existing

airline club facility and converting it to a Port airport lounge that provides our airline customers

with the amenities they need to support and grow their business. It also provides pay per use

customers with a comfortable space to relax and recharge during air travel. Current customer

demand, as well as a new business plan supports the need for investment into Club International

to increase club use and create a positive net operating income.

ALTERNATIVES CONSIDERED AND THEIR IMPLICATIONS:

1. The Port could perform minimal improvements to Club International in its existing

mezzanine level location. Minimally required improvements would include health code

upgrades to the kitchen, new furnishings, finishes, and data cabling. This would be a

relatively low cost alternative at $1,127,000. This alternative would improve the condition,

but would not improve the existing split configuration and the less than desirable location.

Additionally, this alternative would not allow Delta Air Lines to lease the potentially vacated

mezzanine level space for their operational needs. This alternative is not recommended.

2. The Port could completely remodel and update Club International in its existing mezzanine

level location. The initial cost estimate of $3,582,000 for a full renovation is expensive, but

COMMISSION AGENDA

Tay Yoshitani, Chief Executive Officer

February 17, 2011

Page 7 of 7

would improve both the condition and configuration of the facility. It would not, however,

improve the undesirable location of the facility. The mezzanine level location would still

suffer from a lack of natural daylight and separation from gate hold rooms even with a

significant capital investment. Additionally, as in Alternative 1, the opportunity to lease the

area to Delta Air Lines for their operational offices would be lost. This alternative is not

recommended.

3. The Port could create a new Club International facility on the roof of the South Satellite,

similar to the British Airways and Delta Air Lines lounges. A new facility on the roof of the

South Satellite is estimated to cost $5,419,000. This option would add new leasable space to

the South Satellite and still allow Delta to occupy the vacant mezzanine space. This

alternative, however, is not recommended because of the significant capital cost and the

availability of the soon to be vacated Delta Air Lines lounge on the departure level.

4. The recommended alternative is to relocate Club International to the soon to be vacated

Delta Air Lines lounge on the departure level of the South Satellite. At $971,000, this is the

most cost effective and best strategic alternative because it remedies all the configuration,

condition, and location challenges of the existing facility. This option also has the potential

to generate the most new revenue based on the significantly improved location. This

recommended action also frees up leasable space in the former Club International facility for

Delta Air Lines to move a large portion of their operational offices to the South Satellite from

the Main Terminal. Delta has specifically requested first consideration for this space. This

alternative is recommended.

OTHER DOCUMENTS ASSOCIATED WITH THIS REQUEST:

Exhibit A – Sea-Tac International Airport South Satellite Terminal.

PREVIOUS COMMISSION ACTION:

November 30, 2009: Commission Authorization for Architectural IDIQ for use by staff at

Seattle-Tacoma International Airport.