Taking leadership amid crisis in North America
Dallas Fort Worth International Airport Executive Vice President Revenue Management Ken Buchanan assesses the impact of the COVID-19 crisis, talks about what true partnership means and says that the Texan hub is well placed for eventual recovery. By Dermot Davitt.
Dallas Fort Worth International was among the first airports in North America to respond to concessionaires’ calls for relief when the COVID-19 crisis struck. In early April its board ratified a crucial plan to move commercial partners from Minimum Annual Guarantee-based (MAG) fee models to a rent structure based on a percentage of sales. Its relief programme for hard-pressed F&B operators and retailers was backdated to 1 March and now runs to March 2021, costing the airport tens of millions of Dollars in revenue.
The initial move and subsequent extensions of relief were in keeping with DFW’s status as one of the region’s most progressive and commercially minded airports.
Speaking on a call last week organised by the Airport Restaurant & Retail Association (ARRA) and Airport Minority Advisory Council (AMAC), DFW Executive Vice President Revenue Management Ken Buchanan said that the airport was able to act quickly as it already had a strong fix on the challenges facing business partners.
Ken Buchanan: DFW had acted to assist its partners even before the pandemic struck
F&B partners, like all concessionaires, have been reeling from the impact of crisis; in a progressive step, DFW is allowing companies to hand back space without penalty
He said: “Even before COVID-19 hit, we had been supporting our concession partners. The challenges we saw including rising capital and labour costs, and our Growth & Partnership (GAP) programme was our response. We changed our pricing policy; we extended over 100 leases and we did other things to positively impact the bottom line of our partners.
“Then COVID-19 happened. We had all of the partners’ data so we had the information to make quick decisions and build a case to bring to our executive team to offer immediate support.”
In doing so, the company helped point the way for other airports.
Buchanan added: “We have asked a lot of our partners in their build-out, their investment in the experience and in technology, and they stepped up. Now with this catastrophe, the question for us was ‘are we going to step up and live up to what we’ve preached about partnership’? It’s not just a cliché. We wouldn’t be in the position we are in financially without the partners’ support. Now we are able to support and encourage them and demonstrate what partnership looks like in return.”
Another major step, just approved by the board, was to accept any space that a concessionaire wants to relinquish, without penalty or repercussions to their lease.
“We are still over -40% down on last year in traffic and so we have more concessionable space than demand calls for. Many spaces are still closed and partners are not paying rent on those, but if they have to make a strategic decision to give back space, then we want to be able to free them of that space without penalty.
“We still want these companies to be part of DFW’s future. We will see if that is enough to right size our programme. We strive to be at 8-10 sq ft of concession space per 1,000 passengers. In some terminals we’re close but in others there is a gap.
“With international travel curtailed we have a lot of space, much more than demand, especially in retail [in Terminal D]. If you believe international traffic will lag behind domestic, and you have three years remaining on your lease, you may need to assess that and make a decision in the best interests of your company. We don’t want to be a barrier for you to make that decision.”
Like every other actor in the system, DFW was blind-sided by the crisis.
“The impact was quickly felt in the industry and at our airport, within communities and globally,” said Buchanan. “DFW prides itself on being a global hub and gateway to many markets. When those markets shut down, we immediately felt the impact on our revenues and partners in duty free and speciality retail in our international terminal, and then across all five of our terminals.
With little international traffic, Terminal D partners are likely to feel the impact of lost business for some time to come
“To have 90%-plus traffic turned off so fast is something we have ever experienced. It was very traumatic.”
The rarity of the crisis means that the industry has to share knowledge quickly, something Buchanan said that airports are doing.
“The airport concessions community is a tight-knit group and we are open with each other. We share with our peers at other airports. But airports are so different from each other, from their financing to their markets to how they are organised. When we talk about DFW those conditions cannot necessarily be replicated or applied to others.
“Other airports want to see their partners succeed, so if they hold back I don’t think that is because they don’t want to help. They are working very hard and trying to figure it out. I’m sure they will all try to do what is best for their business partners, airlines, communities and customers.”
At other airports, ARRA and AMAC members have highlighted what they see as preferential treatment offered to other partners, notably airlines. What status do concessionaires have relative to others at DFW, Buchanan was asked?
“I see this like a five-point star,” he said, “each of which relies on the success of the other. We have the airlines, the community, the airport, business partners plus our customers. We have to balance all five of those. In doing so we have to stay true to our purpose.
“DFW is the economic driver of North Texas, with 300,000 jobs depending on the airport’s success. We connect this marketplace to the rest of the world. It has over US$50 billion of economic impact.
“Balancing all of that is not easy. Everybody thinks we say yes to everyone but we don’t. We say no much more often. We said yes to our concession partners because they touch on several points in that star: the community, business partners and customers. So when we deploy our resources we try to make a big bang that has overall impact.
“Our concessions play a big role here. I have over 4,000 employees that work for concessions, all of whom help to make DFW work. That’s a lot of people. In return they are in the community supporting their families and the economy. Our purpose as an airport goes beyond supporting the airlines or other partners. We are trying to balance our support for all of those.”
That also means flexibility, allowing partners to hand back spaces, or other measures. Airports and concessionaires each need to take responsibility, he added.
DFW stepped up with rent relief very early in the crisis (3Sixty Duty Free in Terminal D pictured)
“With the model we have of a third party to deploy capital, to sustain that you have to give people an opportunity to make a reasonable return on their investment. If they cannot, how does that benefit the airport? It’s no good for the five pronged star if people have to walk away from business or stay in knowing there is no light ahead.
“For some there will have to be adjustments to the business model. At DFW we had made adjustments already. Zenola [Campbell] and her team had fought very hard to do this, recognising that capital costs had done from US$300 per sq ft to US$1,200 per square foot.
“We had to be more flexible. We are evolving our own model all the time. We set our own MAGs and don’t mind our partners making money. We set a tight window on percentage rents. I don’t want to you to come to DFW and promise me a huge percentage rent when we both know the business cannot sustain it. You’ll be coming back a year hence asking for a new agreement. We don’t want that.”
Encouragingly, recovery has begun, with daily passenger traffic heading towards 100,000, making DFW perhaps the world’s busiest passenger airport in this early phase.
Buchanan said: “We have fared pretty well comparatively. We are up on 50% of last year’s departures for this period and climbing, which is well ahead of trend. We will hit 100,000 departures a day in July, which is credit to how American has maximised use of the hub. They have said that DFW would serve more connections for them than before. They are dropping five routes to Asia from Los Angeles, which makes DFW the main transpacific gateway for American. That’s a big deal for us.”
There is uncertainty of course, but DFW is aiming to minimise that by at least having various potential futures planned and budgeted for.
“We don’t know what tomorrow holds, never mind next month or next year,” said Buchanan. “We just do the best with the forecast we have. One thing we are doing at DFW is scenario planning so we are in a position to make clear fact-based, quick decisions. As an organisation we have about four different possible scenarios and in each what decision would need to be made to protect and sustain and support our business.
“We are trying to be thoughtful and honest, but I do hope that the scenario is the V curve and not the W curve.
“As we come out of this, given American’s long-term strategy to maximise DFW, we think that we will fare better than most airports. When many are planning for two, three or four-year recovery, we think we can get back in maybe 12-18 months as American executes on its strategy. I look ahead quite positively.”
The Moodie Davitt eZine
Issue 281 | 16 July 2020
The Moodie Davitt eZine is published 12 times per year by The Moodie Davitt Report (Moodie International Ltd). © All material is copyright and cannot be reproduced without the permission of the Publisher. To find out more visit www.moodiedavittreport.com and to subscribe, please e-mail firstname.lastname@example.org