PORT OF SEATTLE
MEMORANDUM
COMMISSION AGENDA
Item No.
5b
Date of Meeting
March 8, 2011
DATE: February 22, 2011
TO: Tay Yoshitani, Chief Executive Officer
FROM: Wayne Grotheer, Director, Aviation Project Management Group
James Schone, Director, Aviation Business Development
SUBJECT: South Satellite Concessions Project (CIP# C800412)
Amount of This Request: $350,000 Source of Funds: Airport Development Fund
Total Estimated Cost: $2,199,000
ACTION REQUESTED:
Request Port Commission authorization for the Chief Executive Officer to authorize design in
support of the South Satellite Concession Project at Seattle-Tacoma International Airport
(Airport). This authorization is for $350,000 of a total estimated project cost of $2,199,000.
SYNOPSIS:
This project includes the modification of the existing South Satellite duty free store footprint,
creation of a new tenant-ready shell for a future duty free tenant, creation of a new food and
beverage shell for a future restaurant tenant, as well as required regulated materials abatement.
The purpose of the project is to modify the front of the South Satellite duty free store footprint in
order to accommodate the installation of an additional passenger escalator. This modification at
the front of the store results in a loss of square footage that can be more than recaptured by
expanding the rear of the store into a former smoking lounge area. Additionally, the project aims
to add much needed food service capacity at the South Satellite to meet passenger demand.
Design will be accomplished by a firm selected via an advertisement that has been earlier
approved by the Commission.
This project is closely tied to the Additional Gate Lobby Project (CIP # C800466) approved by
the Commission on January 25, 2011. The Gate Lobby Project will demolish obsolete glass
partitions, a set of under utilized restrooms as well as a former smoking lounge, which will create
more available square footage for both passenger hold room space and concessions uses. The
coordination of each of the two projects is imperative to the success of both. The projects will
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
February 22, 2011
Page 2 of 7
use the same design team. The design firm has been selected as part of a recently completed
competitive procurement process.
BACKGROUND:
The consolidation of Delta/Northwest’s operations, coupled with continued growth of
international service, is straining the ability of the South Satellite to adequately serve both
airlines and their passengers. To address the challenges presented by the increased passenger
volumes, the Port is making a number of improvements. One such improvement is the addition
of a new 40-inch wide escalator from the Satellite Transit System (STS) train level to departure
(concourse) level where passengers board aircraft. While the new escalator increases capacity,
safety and redundancy, it will, however, impact the adjacent duty free store (see Exhibit A).
Once the escalator is in place, only 2.5 feet of passageway would remain and render the entrance
blocked to passengers. In order to address this impact, the duty free shop must be pushed back
approximately 6 feet. In conjunction with South Satellite gate lobby improvements, the duty free
store has an opportunity to recapture lost frontage square feet by expanding at the rear to
consume a portion of the former smoking lounge. In total, the duty free store footprint would
increase from the current 3,434 square feet to 3,931 square feet.
Due to a modified gate configuration, the Airport has an opportunity to capture 1,556 square feet
of current hold room space for conversion to a new full-service food and beverage location. This
restaurant will provide much needed food service capacity to augment the offerings currently in
the South Satellite food court area.
PROJECT JUSTIFICATION:
The continued growth of both domestic and international departures in the South Satellite has
strained the Airport’s ability to serve passengers with expected food service and retail offerings.
The available square footage for concessions business in the Satellite has only increased
marginally since the facility was built forty years ago.
Duty Free/Retail
The majority of the Airport’s international enplanements (1.4 million in 2010) are concentrated
in the South Satellite, making this the primary location for duty free sales. This store is open to
all travelers (and employees), regardless of destination, and sells high-end luxury brand
accessories, cosmetics, perfumes, luggage and specialty retail merchandise. Only sales of
alcohol and tobacco are limited to passengers departing the U.S. Sales of duty free tobacco and
alcohol achieve the highest spend per enplaned passenger of any concession category, also at
potentially the highest percentage rent. Duty free sales reached $9.23 per enplaned passenger in
2010. Still, staff is confident that there is significant increased revenue potential with a larger
duty free store and cutting-edge operator due to the growth in demand along with enplanement
growth. The new, estimated 3,931 square foot space would still not be large by industry norms,
but it would be larger than the current space and more able to accommodate most operators’
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
February 22, 2011
Page 3 of 7
"store within in a store" concept for merchandising of luxury brand goods and cosmetics, as well
as effective showcasing of duty free tobacco and alcohol.
In combination with a new operator in 2012, staff believes that the duty free store can increase
sales to $8.8 million in its first full year of operation as compared to $7 million in 2010. At the
current percentage rent level (16%), this represents more than $700,000 in additional revenue to
the Port. Staff expects that the planned duty free tender will garner a higher rent offer than 16%.
An industry survey in 2008 showed that comparable airports to Sea-Tac were receiving between
20-30% percentage rent for duty free. Because there is no available square footage for specialty
retail in the satellite, the duty free store must achieve the dual objective of high duty free sales
for departing international travelers as well as specialty retail sales for all travelers.
Food & Beverage Service
Current food service units in the South Satellite include one full-service restaurant/bar, one quick
serve burger unit, a small Asian sushi/noodle bar and a specialty coffee unit which serve
approximately 2.5 million enplanements annually. Existing restaurants have no available
footprint for expansion. Food & beverage sales in the South Satellite in 2010 reached a
mediocre $2.91 per enplaned passenger, compared to the airport average of $5.55. The 2010
sales per enplaned passenger for food & beverage in the North Satellite reached $3.77, 30%
higher than the South Satellite. This metric indicates that there is inadequate
capacity/productivity as well as issues with the existing concepts. Without additional food
service in the South Satellite, the airport will not be able to provide adequate food service or
capitalize on easily available revenue. The proposed second full-service restaurant will offer not
only the highest level of customer service (full-service wait staff vs. quick serve counter service),
but also the greatest revenue share for food and alcohol service sales to the Airport, due to the
higher percentage rent on alcohol sales. This restaurant also would be an excellent opportunity
for a local, small business operator.
The new South Satellite restaurant would mirror the configuration of the North Satellite with its
newer 1,774 square foot restaurant (Bigfoot Food & Spirits). In 2010, this North Satellite
restaurant achieved $2.5 million in sales without cannibalizing sales at the other full-service
restaurant. This suggests that the South Satellite restaurant, assuming an appealing concept and
skilled operator, should be able to achieve sales in the neighborhood of $2 million, or
approximately $1,500 per square foot, in its first full year, providing about $300,000 in new
revenue to the Airport.
As another means of comparison, the North Satellite has 6,832 square feet of food service
capacity to support approximately 3 million annual enplanements (2.27 square feet/1000
enplanements). The South Satellite has 4,170 square feet of food service capacity to support
about 2.5 million enplanements (1.67 square feet/1000 enplanements). On this measure, the
South Satellite has 26% less restaurant capacity than the North Satellite. Even with the addition
of a new restaurant in the South Satellite, there will still be less square footage for concessions
than in the North Satellite.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
February 22, 2011
Page 4 of 7
Highest/Best Use Considerations
In an extremely constrained terminal space such as the South Satellite, the Airport must give
careful consideration to the highest/best use for any number of activities. These considerations
must first and foremost balance the sometimes competing needs of operational uses and
commercial revenue uses (which often also have important value for passengers). For example,
the need for additional escalator capacity will trump the needs of concession operations, as the
escalator installation will cause the relocation of the duty free store as well a foreign currency
exchange location.
Concession uses also often compete with the need for passenger hold room space. The
International Airline Transportation Association (IATA) has established aviation industry
metrics which rate the adequacy of hold room space grade A to E (A is best, E is worst). The
Airport’s South Satellite hold rooms (gates S-10 through S-16) currently rate an “E” based on
square footage available per passenger. Even with the additional square footage allocated to
concessions, the combined improvements (i.e. glass partition removal, restroom demolition,
podium relocations) in the area will bring the new space to a grade “C” rating. This suggests that
the Airport will achieve an adequate balance between operations and concessions needs; not
taking into account that the concession spaces will “hold” passengers as well. In particular, the
restaurant represents a revenue-generating seating area.
With regard to competing categories of revenue opportunities, the Airport focuses on the
“primary” needs within food service, duty free/retail, and passenger services. Food service will
typically generate the highest spend per passenger with the least sensitivity to economic
conditions. As an exception, however, duty free shopping as a type of retail normally commands
the highest spend per passenger due to high product price point and the affluence of the duty free
shopper. At the South Satellite, both needs are extremely important to meet. The current and
future growth of international travel at the satellite presents a tremendous opportunity for
revenue, while food service is in dire need of added capacity to meet current demand. Based on
staff’s understanding of the concession business, the Airport is confident that both planned
spaces will achieve their customer service and revenue goals.
PROJECT SCOPE OF WORK AND SCHEDULE:
Scope of Work:
This project will modify the existing duty free store. The front of the existing duty free store
location will be relocated to the west by approximately 6 feet and the project will utilize a former
smoking lounge to provide a larger footprint for the duty free which will improve the revenue
potential for the duty free business. In addition, the project will create a 1,500 square foot full-
service restaurant.
Schedule:
Contract for Design March 2011
Complete Design July 2011
Request Commission Authorization to Advertise for Bid July 2011
Bid/Award August 2011
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
February 22, 2011
Page 5 of 7
Notice to Proceed November 2011
Duty Free & Restaurant Shells Complete March 2012
(Additional timeline for final tenant build-out and commencement of business is contingent upon
selection of concession operators).
FINANCIAL IMPLICATIONS:
Budget/Authorization Summary:
$6,000,000
($2,544,000)
$2,199,000
0
$350,000
$350,000
$1,849,000
Project Cost Breakdown:
Construction Costs
$0
Sales Tax
$0
Outside Professional Services
$262,000
Port Costs
$ 88,000
Total
$350,000
Budget Status and Source of Funds:
The budgeted cost for this scope of work was included in the 2011-2015 capital budget and plan
of finance under CIP# C800412, South Satellite Concessions Project. The funding source will be
the Airport Development Fund.
Financial Analysis and Summary:
In order to determine the return on this investment, assumptions were made – using baseline
historical data – regarding sales/revenue potential for each concession unit (as detailed above in
the Project Justification). Additionally, the analysis factored estimated construction costs. The
escalator project which impacts the front of the duty free store will bear a cost of $300,000.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
February 22, 2011
Page 6 of 7
CIP Category
Revenue/Capacity Growth
Project Type
Business Expansion
Risk Adjusted Discount Rate
9%
Key Risk Factors
Selection of concession operators does not
take place in a timely fashion to take
advantage of construction completion.
Nominal Construction Cost for Analysis
Duty free: $1,010,000 / Restaurant: $889,000
Business Unit (BU)
Non-Aeronautical (Concessions)
Effect on business performance
NOI after depreciation
IRR/NPV:
IRR: 12%
NPV: $1,200,000
Payback: 5 years
CPE Impact
Less than $0.01 due to $300,000 of
construction cost borne by the escalator
project (treated as terminal costs with 80%
allocated to the airline rate base).
ENVIRONMENT AND SUSTAINABILITY:
The principles of LEED commercial interior standards will be applied as applicable to the
selection of new materials for the Airport shell portion of the work.
STRATEGIC OBJECTIVES:
The project ensures Airport vitality by providing the traveling public with the concession
offerings expected while providing the Port with critical non-airline revenue. This project also
has the potential to provide an entrepreneurial opportunity to local, small business in the food &
beverage sector.
ALTERNATIVES CONSIDERED AND THEIR IMPLICATIONS:
Alternative 1: Move forward with the South Satellite Concessions Project. Modify the existing
duty free store footprint to maximize sightline potential and increase square footage, and create a
move-in ready shell space for a future tenant. Build a shell space for a future, 1,500-square foot
full-service restaurant. Both units would be designed and built for occupancy as soon as possible
and operationally practical. This is the recommended solution.
Alternative 2: Do not modify the existing concessions footprint in the South Satellite. A 'do
nothing' approach would assure that revenue from food service concessions remains far below
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
February 22, 2011
Page 7 of 7
the Airport average. The current food service operators are under contract through 2016, thus
the Airport could not expect any changes to their offerings or capacity. Lack of adequate
customer offerings in food & beverage would continue to prevail.
The current 3,439 square foot duty free store location would be reduced in size due to the
installation of the new escalator in front of the store, necessitating a push-back of the store front
entrances. A loss of square footage will reduce the amount of inventory available for sale and
reduce sales potential. There is no available square footage for any other duty free or specialty
retail elsewhere in the satellite. This is not the recommended solution.
Alternative 3: Move forward with either the modified duty free store footprint or new
restaurant, but not both. There is no justification for choosing to solve one, but not both,
problems identified in the South Satellite. Both projects will produce new revenue to the Port.
This is not the recommended solution.
OTHER DOCUMENTS ASSOCIATED WITH THIS REQUEST:
Proposed location of duty free and food & beverage concession.
PowerPoint presentation.
PREVIOUS COMMISSION ACTION:
On November 2, 2010, Commission authorized the execution of an IDIQ professional services
contract for design services in the amount of $400,000 in support of anticipated capital
improvement projects related to South Satellite Concession and Gate Lobby Projects at Seattle-
Tacoma International Airport (Airport). No funding was associated with this authorization.
On January 25, 2011, Commission authorized both design services and the use of Port Crews in
support of the Additional South Satellite Gate Lobby Space Project at the Seattle-Tacoma
International Airport (CIP # C800466). This authorization was for $414,000 of a total estimated
project cost of $1,257,000. This project will use the same design team and be coordinated
through construction.