PORT OF SEATTLE
MEMORANDUM
COMMISSION AGENDA
Item No.
5b
Date of Meeting
October 4, 2011
DATE: September 27, 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 (Airport)
(CIP #C800203)
Amount of This Request: $740,675 Source of Funds: Airport Development Fund
State and Local Taxes Paid: $62,000 Jobs Created: 13
Total Project Cost: $1,061,000
ACTION REQUESTED:
Authorization for the Chief Executive Officer to increase the project budget by $740,675 and
advertise and execute a construction contract for the common use lounge at the South Satellite at
the Seattle-Tacoma International Airport (Airport) for a total project cost of $1,061,000.
SYNOPSIS:
There is a strong demand for an Airport-operated common use lounge to serve first and business
class passengers traveling on various airlines that do not have their own branded lounges. A
premium common use lounge (Club International) for airlines serving the Airport is a much
needed facility that helps both existing and prospective carriers, without branded lounges, flying
international routes meet their business plan objectives. Specifically, it will help with the growth
and profitability of routes and allows airlines to offer their passengers a superior pre-boarding
experience comparable to what competitors offer in their branded lounges for premium
passengers.
The availability of a common use lounge may be a decisive factor in a prospective carrier’s
decision to serve this Airport or another destination. Interest in new international routes to this
Airport is now at a level that justifies acceleration of this project so that the new lounge facility
will be ready for business by the second quarter of 2012. Acceleration is currently estimated to
add approximately $90,000 to the overall cost of the lounge renovations. Several current airlines
have expressed strong interest in using an improved Club International, adding to the Airport’s
existing customer base. Additionally, the Airport anticipates marketing the club directly to
passengers on a pay-per-use basis as a new line of business to increase non-aeronautical
revenues.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
September 27, 2011
Page 2 of 7
This project relocates and remodels the Airport's common-use lounge from the mezzanine level
of the South Satellite to the departure level of the South Satellite in space made available by
Delta Air Lines' recent relocation to their new rooftop lounge in the South Satellite and the
subsequent vacation of its existing departure level facility. The new Club International will be
approximately 4,000 square feet, similar in size to the existing location. 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:
The request for design authorization for this project previously outlined how a high quality
premium passenger lounge is an essential component of the airline services targeted toward
premium fare passengers on international flights. The Airport'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 branded lounges on the roof level of the South
Satellite, but they open them up to smaller airlines for additional revenue. Unfortunately, this
accommodation of sub-tenants is still inadequate to accommodate all the international carrier
demand at the South Satellite. The Airport is not trying to compete directly with the branded
airline lounges; however, we endeavor to improve the financial performance of Club
International. This club meets a critical market need for those airlines that cannot be
accommodated as sub-tenants in the existing airline branded lounges nor can justify building or
leasing their own facility.
The Airport offered an unstaffed no-frills common-use club option to airlines for decades.
However, last year the Airport changed the operating and business model for the common-use
club in an effort to improve the level of service. The Airport solicited and selected a third party
company to manage the club and changed the fee model from a fixed per-flight charge to an
individual per-customer charge. The Airport also anticipates marketing directly to passengers on
a pay-per-use basis. This direct-to-passenger marketing is an effort to expand our potential
customer base.
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 existing Club International is configured into two separate 2,000 square foot lounges. This
separation creates challenges in staffing, duplicates maintenance, and impedes the Airport's
ability to offer a standard level of service to customers. Condition is a concern because only one
portion of the facility was improved by the Airport 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
inauguration of their 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; a location close to the gate boarding area offering
outdoor views, daylight, and modern amenities. Relocating Club International to the lounge
space recently vacated by Delta Air Lines on the departure level resolves the configuration,
condition, and location challenges that exist with the current facility.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
September 27, 2011
Page 3 of 7
PROJECT JUSTIFICATION:
Project Objectives:
Interest in new international routes to the Airport is now at a level that justifies acceleration of
this project so that the new lounge facility will be ready for business by the second quarter of
2012. Acceleration is currently estimated to add approximately $90,000 to the overall cost of the
lounge renovations. A premium passenger lounge is of such importance to airlines considering
starting international service to a USA gateway that prospective operators will choose not to
select an airport that does not have a lounge suitable for their premium passengers. Airlines find
the cost of building and leasing a lounge of their own is not financially justifiable if they are
operating only one flight a day. Such carriers look to a partner airline or to the airport authority
to provide lounge service. Beyond the urgency generated by prospective new entrant carriers,
the original justifications remain as follows:
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 a key tool for 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 recently vacated Delta lounge on the departure level of South
Satellite. The project scope includes replacement of architectural finishes, furnishings, millwork,
some restroom fixtures, and the installation of data cable for internet service. Project scope also
includes construction of a glass-wall enclosed “first class” lounge area separate from the rest of
the lounge space.
Schedule:
Begin Design 1st Qtr 2011
Purchase Furnishings and Fixtures 4th Qtr 2011
Advertise for Major Construction Contract 4th Qtr 2011
Begin Construction 4th Qtr 2011
Project Completion 2nd Qtr 2012
FINANCIAL IMPLICATIONS:
Budget/Authorization Summary:
$2,000,000
$939,000
$1,061,000
$320,325
$740,675
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
September 27, 2011
Page 4 of 7
$1,061,000
$0
The budget for this project decreased in the past prior to design authorization. Scope was
reduced 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 at that time.
Recently, we have increased the budget to accelerate construction of this project to meet Airport
business objectives.
Project Cost Breakdown:
This Request
Total Project
Construction Costs
$522,000
$522,000
Airport furnished equipment
$24,300
$173,000
Sales tax
$47,875
$62,000
Outside professional services
$28,000
$100,000
Aviation PMG and other soft costs
$118,500
$204,000
Total
$740,675
$1,061,000
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
9%
Key risk factors
Project delays would in turn delay potential
increased revenue generation and reduce the NPV
of the project.
Project delays could cause the Airport to miss
opportunities to attract new airlines eager to have
new service in place by early 2012.
Potential cost overruns would reduce the NPV.
Revenue from the club is based upon 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.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
September 27, 2011
Page 5 of 7
Project cost for analysis
$1,061,000
Business Unit (BU)
AV Business Development
Effect on business performance
First year (2012) Net Operating Income (NOI)
projected at $430,000.
Based on conservative assumptions related to
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: 17%
NPV: $1,600,000
CPE Impact
None, non-aeronautical project.
The Internal Rate of Return (IRR) and Net Present Value (NPV) calculations are based upon the
conservative assumption of three carriers participating as regular customers. In fact, the Airport
has received written interest in the relocated club from six different carriers. IRR and NPV
projections would drop to 1% and a negative $430,000, respectively, with only two carriers as
regular customers. Conversely, four participating carriers would increase the IRR and NPV to
22% and $2,900,000, respectively.
It’s important to note, when reviewing IRR and NPV, that each carrier's passenger usage is
different. The addition or removal of different carriers has a varying effect on 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, the opportunity for direct to passenger
sales is conservatively understated in this analysis.
Lifecycle Cost and Savings:
This project relocates an existing service into a new location of similar size and function.
Operations and maintenance costs are assumed to be similar to those in Club International’s
current location. Maintenance costs may decrease marginally since there are currently two
kitchens being maintained in Club International’s separated configuration, while the new facility
has only one.
ENVIRONMENT AND SUSTAINABILITY:
This project demonstrates environmental sustainability by reusing existing facilities and
prolonging the life of existing Airport assets. Minimal remodeling of an existing lounge reduces
the potential environmental impact of new construction that would occur if a new Airport lounge
were built or individual air carriers built their own lounge facilities.
STRATEGIC OBJECTIVES:
The Common Use Lounge Remodel project supports two of the Port's Strategies and Objectives.
It 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
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
September 27, 2011
Page 6 of 7
facilities create an environment that can assist in marketing to new international travelers and
positions the Airport to compete for international growth as air carriers expand or change their
flight routes.
BUSINESS PLAN OBJECTIVES:
Moving Club International to a more desirable location with the attractive finishes and
furnishings expected by airlines' premium passengers will better meet the needs of current airline
customers, support marketing for new airline customers to the Seattle market, and improve the
prospects of marketing directly to passengers on a pay-per-use basis.
Airport staff projects potential growth in airline customers from one to three additional carriers
with a move to an improved club on the departure level. The number of annual lounge users
grows from 9,400 to 36,500 annually based on increased usage from additional airlines. In its
present condition Club International is not profitable and is at risk of losing current customers.
Neither market expansion nor improved financial performance is feasible without reinvestment
into a relocated Club International on the departure level within the former Delta lounge space.
TRIPLE BOTTOM LINE SUMMARY:
This project demonstrates environmental sustainability by reusing and updating a recently
vacated airline club facility and converting it to an 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. Current customer demand, as
well as a new business plan, supports the need for investment in 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. Although more
expensive than the proposed remodel on the departure level, this would be a relatively
low cost alternative at $1,127,000. This alternative would improve the condition of the
lounge, but would not improve the existing split configuration nor remedy the less than
desirable location. Additionally, this alternative would not allow the existing mezzanine
space to be utilized for a future remodel of the Federal Inspection Services (FIS) area.
This alternative is not recommended.
2. The Airport 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 would improve both the condition and configuration of the facility. It
would not, however, improve the undesirable location. 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 utilize this space for a future remodel of the FIS area would be lost. This
alternative is not recommended.
COMMISSION AGENDA
Tay Yoshitani, Chief Executive Officer
September 27, 2011
Page 7 of 7
3. The Airport 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 remodel of the vacated
mezzanine space for FIS. This alternative, however, is not recommended because of the
significant capital cost and the availability of the vacated Delta Air Lines lounge on the
departure level. This alternative is not recommended.
4. The recommended alternative is to relocate Club International to the 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 space in the former Club International facility for
use by FIS for customs inspections. 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.
March 1, 2011: Commission Authorization for design, and procurement of furnishings and
casework for the Common Use Lounge at Seattle-Tacoma International Airport.