“As an industry we need to increase our agility and flexibility”

“The conversations we are having about new brands and openings means that when we get back to a more normal Heathrow and a more normal travel landscape, you will have a vibrant travel retail business that passengers will love.” That’s the note of positivity rung by Heathrow Airport Retail Director Fraser Brown as he assesses a market at first scarred and now being reshaped by the impact of COVID-19. The financial consequences of store and restaurant closures over the past year led to exits for partners such as John Lewis, Thomas Pink, Cath Kidston, Mulberry, Carluccio’s and Casual Dining Group, with Dixons recently announcing its departure from all airports. But it hasn’t all been a story of departures. Thomas Pink has been replaced in T2 by a new bookstore, Saint Laurent will take over the former Mulberry site, and the airport has plans for most of the Casual Dining Group locations. In May, for example, Australian F&B specialist Airport Retail Enterprises partnered with Surrey brewer Big Smoke Brew Co to open a new craft beer and food concept in T2. Beyond this, last year WHSmith opened its new ‘blended essentials’ concept, while Pret A Manger has invested heavily in T2 space after it took over the EAT business. Speaking to The Moodie Davitt Report as Heathrow prepared to announce another major retail name to join the line-up, Brown sums up the business situation today. “From a retail and a food & beverage point of view business has clearly been incredibly challenging,” he says. “The losses continue to mount. We are very fortunate about the amount of credit facilities we have available, but we are utilising debt rather than running a profitable business at the moment. And sadly, many of our retailers and food & beverage operators are in the same position, either because of their businesses on the High Street or their overall exposure to travel retail.

“Brands who are looking at the medium to long term can see, just as we see, that this travel retail business will come back strong, and they are prepared to invest now”

– Fraser Brown

“As it stands today, at T2 and T5, the vast majority of the retail and food & beverage outlets are open and you can have quite a normal travel retail experience. At T5 for example the main duty free shop is open, all luxury is open, Boot’s, WHSmith and Dixon’s are open, and you can even get your shoes shined. “There is enough demand even at 10-15% of our usual passenger numbers because we are concentrating activity in two terminals. Not all of our F&B is open, because without the right levels of capacity it doesn’t make economic sense, but we do have some sit-down dining as well as grab & go. The latter is popular partly as many airlines are not offering their usual service onboard either.” Brown doesn’t sugar-coat the challenges COVID has brought, but says it’s important to look at the big picture. “Some businesses have left Heathrow sadly, as they weren’t able to financially withstand COVID. LVMH decided to close Thomas Pink at Heathrow, Mulberry and John Lewis terminated and Dixons, not only at Heathrow but across UK travel retail took a decision – not just COVID related – to withdraw from the business. That was also related directly to the government decision on how it dealt with VAT in a post-Brexit Britain. “But beyond that we are seeing new entrants at Heathrow too. In T5 we will have the swimwear brand Orlebar Brown, plus others to be confirmed soon. The key message is that even in a tough trading environment, it is heartening that brands who are looking at the medium to long term can see, just as we see, that this travel retail business will come back strong, and that they are prepared to invest now.

“We know also that food & beverage is a challenge on margins, and some of those operators have gone. So we are looking at F&B operators that haven’t worked at Heathrow before. It is heartening to see people prepared to come and talk to us. And they can see past the short-term problems, which is great.” As reported, Dixons took the decision to leave travel retail, a move partly based on the government controversial move to end tax free sales and VAT rebates for outbound tourists from 1 January. Now, as it sees out its term at Heathrow, Dixons’ spaces are being tendered, with interest among potential occupants high, says Brown. “First, on the issue, the judicial review [taken by Heathrow, Dufry and Global Blue -Ed] came to a conclusion in May and while the review agreed with many points that we made, ultimately it upheld the government’s position. We fundamentally think that is wrong. It is bad for travel retail, it is bad for retail in general, it is bad for consumers. It’s also bad for Britain in terms of jobs. Effectively, we are exporting travel retail demand and travel retail economic activity to high streets in Europe, around the world and to other airports. So we will continue to make our case on that. “On technology, the Dixons contract was concluding by the end of the year, so we were going out to tender anyway. There are eight Dixons stores at Heathrow across the four terminals plus some vending around the gate areas. We are right in the middle of tender evaluation so we cannot say much about that the process. But I can say that we have been really impressed by the quality and thoroughness of the bids that we have had. And again, that gives us real validation of our confidence in the medium term for travel retail. We will be challenging whoever is successful to evolve the retail of the category, what it looks like and the experience that we are going to give our passengers.” Interest in the tender suggests that other companies can see past the challenge of losing the tax free element of the offer, to the potential upside. Brown says: “Clearly it is more difficult but it is not impossible. And it requires collaboration and mature discussions between brands, retailers and the airport operator. The approach that we have taken with our existing business partners is that mature approach. It has been tough for everybody. “An airport operator, as a landlord, is not the bank of last resort for the travel retail business, as I have said before. But that doesn’t mean that we are tone deaf to the challenges that the travel retail business faces. And what the team have been able to demonstrate here is that through honest, adult, direct conversations with our business partners, the relationships are actually stronger today than they were pre-COVID. They are not always easy conversations to have around some of the commercial challenges. But by having honest conversations, by sharing our views of the market with those business partners, we will come out of this with a strong set of brands and retailers that will deliver a great shopping experience.” Brown is speaking against the backdrop of the continuing deep crisis for the company, and the industry, in terms of passenger traffic and sales. In 2020, Heathrow retail revenue declined by -67.6%, driven by reduced passenger numbers (-72.7% to 22.1 million) and cuts to the mix of services available. For 2021, the airport company’s Investor Report for June forecasts that retail income will decrease by -19.2% to £189 million compared to 2020 (which had the benefit of a strong first two months). Retail revenue per passenger, which climbed +18.6% year-on-year to £10.58, is forecast to be £8.79, lower than under Heathrow’s base case scenario. Combined, it means that total aeronautical and retail income per passenger is forecast to be £37.26 under a base case scenario in 2021, behind the 2020 figure of £39.84. The renewed outlook, detailed in the Investor Report, factors in the continuing political caution around border controls and the expected gradual addition of countries to the UK government’s ‘green list’ over the year. The base case for traffic is for 21.5 million passengers in 2021, representing a -2.7% decline compared to 2020 but a dramatic -73.4% decline versus 2019. That is a 15.6 million reduction in passengers compared with December 2020 guidance, and reflects “the impact of five months of significant travel restrictions and cautious gradual reopening now expected during the months ahead”.

The contrast with the picture 18 months ago could not be more stark. Heathrow was coming off a strong 2019 as Europe’s largest airport and the UK’s only hub with over 80 million passengers served. The traffic light system is just one of many challenges faced by Heathrow as it battles to remain competitive. Brown says: “Revenues fell by over -60% last year because obviously for any airport operator, revenue is fundamentally driven by passenger numbers, by what we then charge the airlines for those passengers and what we generate in the retail business, the car parking business, Heathrow Express and so on. We have been running only two operational terminals and a single runway for much of the past year. “We had had some support from the UK government furlough scheme for employees, though that is due to wind down in September. What is very clear, though, is that aviation will be one of the last sectors [to open]. We continue to challenge government, along with others in industry, to assist the sector but it is a concern. “The support for other sectors has been far greater to date. For example the UK has a system of property business taxes in the form of rates. Even within the UK devolved governments such as those in Northern Ireland and Scotland have provided full rate relief to their airports. But Heathrow continues to pay over £10 million a month, as a fixed cost to our business, with no relief at all.” Ensuring the return of travellers is the biggest issue, one on which Heathrow says it will support government with information and resource, as well as continuing with robust measures to keep sanitisation and safety levels high. “The most important thing is safely opening markets,” says Brown. “And our position is really clear. We must give clarity. We are pleased to see the government announce new markets that are on the ‘green list’ [from late June these include Malta, the Balearic Islands and some Caribbean destinations -Ed]. They are not the largest of our markets but we want to see these positive steps. “This is not only about people going on holiday. It’s about connecting with friends or family, or going on business. “We contend that airports and aviation are a force for good. They make the world, if not physically, then practically smaller. They connect cultures, they connect countries, they connect friends, family, trade. Heathrow was the largest port in the UK by value of goods pre-pandemic, which is an amazing statistic. But because there are fewer planes running, there is less capacity in the belly hold for cargo. There is this idea of the UK as a pro trading nation. Well you can’t be a pro trading nation if you cannot physically move goods around. So it is really important that we get this sensible, risk-based approach to reopening travel again. We are pushing and are pleased to hear government talk in positive terms about citizens who have been double vaccinated having more freedom to travel. “We need this reopening without quarantines, as quarantine is a significant, practical barrier. So too are all of the testing requirements to be released from quarantine. It is logistically and incredibly expensive. The UK is charging VAT on a COVID test, which is different from other markets. It makes it impractical for families.”

“One thing that will come out of COVID is that we need to increase our level of agility and flexibility”

– Fraser Brown

London as a destination is the poorer for its hub airport being effectively closed to many travellers, he adds. “People want to come to London. Heathrow relies on a vibrant London, and London relies on a vibrant Heathrow. And at the moment, neither are working in the way that we would want. “We encourage government to keep opening up, taking the facts in a measured way, and we will be here to support them. There is huge demand, and airlines are ready to put capacity back in quickly. “We are encouraged to see the G7 development with the UK and US governments setting up a joint travel task force under the Atlantic Charter. They recognise the value of trade between the two countries and that requires having open borders. It’s a market worth billions of pounds and every day it is closed is hurting everybody.” Before the crisis Heathrow was moving towards development of its third runway, which has been given the green light by regulators. Since the crisis began and traffic has plummeted, there has been speculation about whether this project would proceed. On this, Brown and his colleagues at Heathrow are emphatic. “We were pleased at the decision by the judiciary to uphold the position of the government that a third runway at Heathrow is the right solution to delivering additional runway capacity in the UK. Clearly, it is a very challenging time for aviation to be thinking about expansion. But our position is that having seen passenger demand grow really strongly when markets are open, business will come back quite quickly. “We are very confident about that. And therefore we will, at the appropriate time, restart that work with colleagues and government. So any talk that a third runway is dead is absolutely not the case. That is not what we believe will be right for the country. In the UK, Heathrow is a national asset, because of its role in terms of passengers and cargo. And it is really important that we back those national assets to become the 21st century trading nation that post-Brexit UK is seeking to be.” Since 17 May, when international travel reopened from the UK, demand has sharpened even with the uncertainty caused by the changing traffic light policy. Heathrow has been flexing its operations to cater to that growing demand over time. Terminal Three reopened for passengers arriving on direct flights from ‘Red List’ countries several weeks ago, and that facility moved to T4 on 29 June. Brown says: “That will allow us the flexibility to reopen T3 for arriving and departing passengers when countries go onto the relevant lists or travel restrictions are eased, or airlines can see enough demand and flying activity increases. “T2 and T5 are open and we will be ready to open T3 soon. We have done a lot of testing work, the building is coming out of hibernation, the retailers are stocking up and so on. We just need the green light from government to open markets.” Until that point the challenge of fewer travellers means low sales levels, but on a positive note, those who are travelling are spending, as the retail revenue per passenger figures above underline. Brown says: “Not having the passenger numbers means you don’t have the sales density, which economically for the airport and for the retailers and brands is difficult.

“Having said that, what we are seeing is increased spend on a per passenger basis and an increased participation in retail. So people who are coming are engaging in retail. And that addresses one of the worries we all have had in the industry: would passengers be so concerned about COVID, not touching things, not engaging, and go through an airport with the sole purpose of getting on the aircraft and not looking left or right. “I’m pleased to say that has absolutely not been our experience. We have spent a lot of time and money, and still do every day, making sure that the airport is safe. But we now see confidence among consumers to go into the stores and the food & beverage outlets. And they are spending money, which is great vindication of the validity and the longevity of travel retail. If airport operators, brands and retailers continue to evolve the offers and make sure that we are relevant, and deliver a great service, we can be confident in the future despite the position we are in right now.” It’s not only about the in-store experience: digital is a key consideration too. Brown says: “We are thinking really hard about how we ramp up the work with the brands and retailers on the digital experience. We know from the High Street that people are still going into the stores, but they are treating them more like a fulfilment centre. “They are going in to try things on but they are also very clear about what they want beforehand. And what we need to do, working with the brands and our own platform, heathrow.com, is to make sure that more of our retail offer is visible digitally, and we will be investing money in doing that. We will have click and collect style places where people can purchase and have it brought to one central point. We will be starting to trial that before the end of the year in T5. And as we go into 2022, we will start to roll that out. “That gives us an opportunity also to work with brands that don’t want a physical store in an airport. And we can also work with brands that we don’t currently have space for. So it broadens the offer and gives more brands the opportunity to engage with what we know is a wonderful demographic.” There are other upsides for consumers too. Duty free on liquor in particular (introduced on 1 January) represents a big opportunity, with Brown highlighting the work that Dufry is doing with its key partners to promote the new allowance regime to UK travellers since the UK formally left the EU. “I would also call out WHSmith, which like Boot’s have done a fabulous job, staying open through the past year. WHSmith have also refitted their stores through the lockdowns so when passengers come back in number, they will see the latest format.” Looking much further ahead, to a new consumer post-crisis, is no easy task, but there are some fundamentals that Heathrow will rely on.

“Nobody yet knows what the passenger recovery will look like,” says Brown. “Our assumptions are led by a belief that visiting friends and family will come back quickly, that short-haul leisure will lead early demand, and then you get into longer haul leisure and then business. We do not believe this idea that business travel is dead. People will still want to reconnect, and that includes meeting a new customer or supplier, or attending a conference. “We are confident about that but we don’t yet know how the demographics will look in the short to medium term. Heathrow is demographically very diverse because of the number of flights to different destinations and we see that coming back, even if markets such as India and Brazil don’t recover so quickly in the short term. We see a lot of markets returning, and we see a demographic that will be attractive to the brands that we work with. “We are looking case by case at what is the right retailer or brand for a space. We don’t see luxury as any kind of busted flush. In fact, demand is still strong worldwide for authentic quality brands with a story to tell. And we can help those brands and those retailers tell that story at Heathrow and they can still be successful. We see that in early trading from the luxury brands both in T2 and T5.” To build on that momentum of recent weeks, the immediate challenges need to be overcome, and beyond that, some different thinking at industry level will be required. Brown says: “We need to see passengers coming back, what the demographics look like and then overcome the VAT position. Those are three complications. But they are not insurmountable. We are going to take a step by step approach, we will evolve the business, we will listen to the brands and the retailers. And most importantly, we will watch what the passengers are doing. “It’s about evolution and here, one challenge I would give to the industry today, my team included, is how quickly we evolve things. It would be fair to say that airports and travel retailers haven’t always been the fastest paced at reacting to change in the market. One thing that will come out of COVID is that we need to increase our level of agility and flexibility. We have demonstrated that flexibility in the way that we have dealt with our partners over the last 15 months. And that idea of flexibility will stand us in good stead for the recovery.”