INTERNAL AUDIT REPORT

LIMITED CONTRACT COMPLIANCE

SKY CHEFS, INC.

MARCH 2015 – FEBRUARY 2017

ISSUE DATE: MAY 30, 2018

REPORT NO. 2018-06

INTERNAL AUDIT

Sky Chefs, Inc.

March 2015 – February 2017

TABLE OF CONTENTS

EXECUTIVE SUMMARY ................................................................................................................................................. 3

BACKGROUND .............................................................................................................................................................. 4

AUDIT SCOPE AND METHODOLOGY ........................................................................................................................... 5

APPENDIX A: RISK RATINGS ........................................................................................................................................ 6

Sky Chefs, Inc.

March 2015 – February 2017

EXECUTIVE SUMMARY

Internal Audit completed an audit of the Lease and Concession Agreement (Agreement) between the Port

of Seattle (Port) and Sky Chefs, Inc. (Sky Chefs or Lessee) for the period March 1, 2015 through February

28, 2017. The audit was performed to verify compliance with key lease provisions in the Agreement,

including the completeness and accuracy of concession fees paid to the Port.

On September 26, 2014, the Port entered into the Agreement with Sky Chefs. Sky Chefs is the brand

name of LSG Lufthansa Service Holding AG, which is the world’s largest provider of airline catering and

in-flight services, operating in 56 countries. It is a subsidiary of Deutsche Lufthansa AG. Sky Chefs

prepares and delivers meals, beverages, and snacks for domestic and international flights.

The initial term of the Agreement was three years, commencing on March 1, 2014. Sky Chefs exercised

the option to extend the lease term to February 28, 2019, two consecutive periods past the original lease

expiration.

We concluded that the Lessee materially complied with the significant terms in the Agreement.

No issues were identified requiring management response.

We extend our appreciation to Port management, the staff of Aviation Business Development, and to Sky

Chefs, Inc. for their assistance and cooperation during the audit.

Glenn Fernandes, CPA

Director, Internal Audit

RESPONSIBLE MANAGEMENT TEAM

Lance Lyttle, Managing Director Aviation

Jim Schone, Director, Aviation Business Development

James Jennings, Sr. Manager, AV Properties Group

Sky Chefs, Inc.

March 2015 – February 2017

LSG Lufthansa Service Holding AG is headquartered in Germany, while its North American headquarters

are located in Irving, Texas.

The current Agreement (number AIR001849) between Sky Chefs and the Port became effective on

March 1, 2014 for an initial term of three years. Sky Chefs provides in-flight catering service, including the

preparation and distribution of in-flight foods, beverages, and related services to domestic and

international flights out of Seattle Tacoma International Airport.

For the concession rights and privileges, the Lessee pays a monthly concession fee equal to 7% of gross

revenue from Airport Operations and 3.5% of gross revenue from Off-Airport Operations. Off-Airport

Operations include revenues arising from occasional charter activity at Joint Base Lewis-McChord,

Boeing Field, Snohomish County Airport, and Bellingham International Airport.

The agreement also requires Sky Chefs to pay land and building rent. Rent is based on square footage

and is due monthly. Land rent is $14,966 per month and building rent is $25,307 per month.

The table below reflects total concession revenue and land & building rent earned by the Port:

SKY CHEFS, INC.

Fiscal Year

Gross Revenues

Concession Revenue

Land & Building Rent

2015

$49,032,636

$3,428,844

$483,268

2016

51,612,608

3,611,374

483,268

TOTAL

$100,645,244

$7,040,218

$966,536

Data Source: PeopleSoft Financials

BACKGROUND

Sky Chefs, Inc.

March 2015 – February 2017

We conducted this audit in accordance with Generally Accepted Government Auditing Standards

and the International Standards for the Professional Practice of Internal Auditing. Those standards

require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a

reasonable basis for our findings and conclusions based on our audit objectives. We believe that

the evidence obtained provides a reasonable basis for our findings and conclusions based on our

audit objectives.

The period audited was March 2015 through February 2017. After identifying significant provisions

in the Agreement, we performed the following audit procedures:

Revenue Completeness and Accuracy:

• Agreed the data spreadsheets provided by Lessee to the monthly profit and loss sales report and

to the General Ledger.

• Agreed the recalculated concession fees to amounts reported to the Port.

• Verified the accuracy of the concession fees by agreeing the percentage rate applied to the

revenue category and fees invoiced.

• Obtained and reviewed documentation supporting the Lessee’s Annual Certification of Gross

Sales.

• Analyzed deductions in the data sheets to determine whether they were properly classified and

correctly deducted from the gross revenues.

• Tested a judgmental selection of 30 invoices from high revenue volume months (15 selections

from July 2015 and 15 from December 2016). Determined if the amounts on the revenue detail

reports agreed to the amounts invoiced and reflected on bank statements.

• Obtained third party confirmations and from Alaska Airlines for invoices totaling $5,114,486.

Surety Deposit:

• Recalculated annual deposits and validated that they were received timely.

Land & Building Rents:

• Reviewed the PeopleSoft Query results showing the monthly Land & Building Rent, invoiced

to and paid by Sky Chefs, to the Port.

• Traced ACH payments to bank statements, to validate timeliness of payments.

AUDIT SCOPE AND METHODOLOGY

Sky Chefs, Inc.

March 2015 – February 2017

APPENDIX A: RISK RATINGS

Findings identified during the course of the audit are assigned a risk rating, as outlined in the table below. The

risk rating is based on the financial, operational, compliance or reputational impact the issue identified has on

the Port. Items deemed “Low Risk” will be considered “Exit Items” and will not be brought to the final report.

Rating Financial Internal Controls Compliance Public

Port Commission/

Management

HIGH

Large financial

impact

Remiss in

responsibilities

of being a

custodian of

public trust

Missing, or inadequate

key internal controls

Noncompliance

with applicable

Federal, State,

and Local Laws,

or Port Policies

High probability

for external audit

issues and/or

negative public

perception

Important

Requires immediate

attention

MEDIUM

Moderate

financial impact

Partial controls

Not adequate to identify

noncompliance or

misappropriation timely

Inconsistent

compliance with

Federal, State,

and Local Laws,

or Port Policies

Potential for

external audit

issues and/or

negative public

perception

Relatively important

May or may not

require immediate

attention

LOW/

Exit Items

Low financial

impact

Internal controls in place

but not consistently

efficient or effective

Implementing/enhancing

controls could prevent

future problems

Generally

complies with

Federal, State and

Local Laws or Port

Policies, but some

minor

discrepancies

exist

Low probability

for external audit

issues and/or

negative public

perception

Lower significance

May not require

immediate attention

Efficiency

Opportunity

An efficiency opportunity is where controls are functioning as intended; however, a modification would make

the process more efficient