Legislature(1997 - 1998)
03/25/1997 01:32 PM Senate TRA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 125 AIRPORT DUTY-FREE CONCESSIONS
Number 001
CHAIRMAN WARD called the Senate Transportation Committee meeting to
order at 1:32 p.m. and introduced SB 125 as the only order of
business before the committee.
LYDIA JONES , Staff to Senator Ward, read the following sponsor
statement.
SB 125 is a rather simple and straight forward bill designed to
give DOT/PF the flexibility, should it be deemed to be in the
state's interest, to extend the term of the duty free concession at
the Anchorage International Airport. This legislation does not
require nor mandate DOT/PF to take any action whatsoever; rather,
it simply provides the tools and flexibility that may be necessary
to maintain or improve the competitive position of the airport in
the marketplace.
Anchorage International Airport's duty free/general merchandise
concession at one time generated revenues in excess of $100 million
and fees to the state approaching $19 million annually.
Unfortunately, because of the opening of Soviet air space and a new
generation of long-haul jets, the market has drastically declined
and with it the revenues and subsequent fees to the state.
Now, for the good news. The incumbent concessionaire, a group of
Alaskans known as the David Green Group, have almost doubled
revenues in their first year and are equally optimistic in their
second year of operations.
Ms. Jones noted that Deputy Commissioner Kurt Parkan has no
opposition to this legislation.
SENATOR WILKEN recalled that the David Green Group was the largest
retailer in Anchorage at one time and Fairbanks spun off money for
the Fairbanks airport because of that concession. Do all those
rules still apply?
CHAIRMAN WARD stated that the airports are still interlocking. The
Anchorage International Airport does help fund the Fairbanks
International Airport. All revenues would offset revenues to free
revenues to Fairbanks. That cannot be corrected in SB 125. In
further response to Senator Wilken, Chairman Ward said that there
was no change in the contract requirements.
Number 074
SENATOR LINCOLN hoped that items sold at the international airport
would be Made In Alaska items.
CHAIRMAN WARD said that was a point well taken. He noted that
representatives from the David Green Group (DGG) were on line.
PAUL REED , David Green Group, commented that DGG does have an
extensive line of Alaskana products marketed at the shop. Mr. Reed
shared Senator Lincoln's concern because DGG is Alaskan. Mr. Reed
stated that DGG wants to ensure that the shop remains competitive
on an international basis which has lead to the need for SB 125.
Mr. Reed did not see any down side to this proposal.
CHAIRMAN WARD noted that Elizabeth Hickerson and Ross Kopperud are
on line for questions.
SENATOR LINCOLN asked if this would be a competitive bid or would
it automatically be awarded to the David Green Group. If it will
not be a competitive bid, at what point will it go to competitive
bid?
PAUL REED explained that DGG has an existing contract. The intent
is to expand business to meet the international competition.
Anchorage is in between the market/destination which necessitates
competitiveness. Mr. Reed noted that an investment cannot be
amortized over a short amount of time; DGG will only have about two
years left. Mr. Reed pointed out that there was a competitive bid
for the first three bids, nobody bid on the contract. Mr. Reed was
able to assemble an investment group of Alaskans that bid on the
contract which was secured on the fourth bid. With regards to the
length, Mr. Reed said that would be left to DOT to decide what was
in the best interest of the state.
Number 158
SENATOR WILKEN referred to the graphs included in the packet which
illustrate that transit passengers have declined more than half
while the gross revenues have decreased by about one-fifth. Why
would those two areas not experience the same level of decline?
With regards to Chart C, the concessions fees paid to the state
have decreased by one-tenth since 1.6 million passengers. There
again, why would there be a decrease of one-fifth of gross revenues
and a decrease of one-tenth in the concessions fees to the state?
PAUL REED said that those questions relate to what DGG is
attempting to accomplish. When revenues dropped, most of the major
vendors dropped out and discontinued supplying the Anchorage
International Airport or the current concessionaire, Duty Free
Shoppers. During that time, spending dropped dramatically and
Anchorage International Airport was no longer competitive with the
international market. Mr. Reed pointed out that Duty Free Shoppers
felt that they could receive the revenue at one end or the other if
not in Anchorage. DGG recognized that the airport must be improved
in order to attract vendors. The only success has been with
Burberry, a fashion rain gear vendor. Other vendors have indicated
that until the environment is improved, they will not return. All
of that relates to the decreases illustrated in the charts. Mr.
Reed noted that Japanese passengers, who spent more, were replaced
with Korean, Chinese, and Taiwanese passengers. DGG has developed
a market with products that appeal to these new groups of
passengers.
With regard to the concessions fees paid, DGG has a contract with
a minimum guarantee with a percentage of rent. DGG began paying at
12 percent and will be at about 17 percent at the end of this
month. As DGG's revenues increase so do the revenues to the state.
Mr. Reed believed that Alaska is receiving more from this contract
than DGG.
CHAIRMAN WARD informed the committee that Deputy Commissioner Kurt
Parkan and Director Morton Plumb have joined the teleconference.
He asked if anyone would like to testify.
KURT PARKAN , Deputy Commissioner of DOT, said that he was available
to answer questions.
Number 244
LYNN KLASSERT , General Manager for the David Green Group, mentioned
that in the past the Anchorage International Airport benefitted
from the additional traffic and had a competitive edge. DOT was
advised that those good years would not be a long standing trend,
but no one listened. The David Green Group has been able to come
in and focus on the remaining market and identify the products
being sought by the customers. However, the vendor community will
not supply DGG unless the store is renovated. The aforementioned
graphs illustrate the upswing trend. Mr. Klassert stated that
flexibility is being requested for the renovations. The
competition is gearing up to put in bigger facilities because of
the trend of more purchasing at airports. If Alaska does not do
the same, market share will be lost. Mr. Klassert did not want to
see a repeat of the past.
Mr. Klassert informed the committee that he was the controller for
Duty Free Shoppers from 1981 through 1992 which afforded him
knowledge of the history of the airport. Mr. Klassert emphasized
that with any business, unless an investment is made there will not
be growth. SB 125 provides an opportunity for the airport to work
with DGG to grow.
SENATOR WILKEN noted that DGG has three years left in the existing
contract. The language speaks to the fact that the department may
extend a contractor for the sale and delivery. If SB 125 passes,
what happens three years from now?
KURT PARKAN specified that the contract would be up in the year
2000. Mr. Parkan was unsure to the extent which SB 125 would be
able to address the extension of the existing contract.
SENATOR WILKEN understood the bill to say that within the next 36
months, DGG will request another contract from the department. The
department would extend the contract as under SB 125, if determined
in the best interest of the airport and the contractor. When is
someone else afforded the opportunity? Senator Wilken believed
that this could be rolled for 10 years and no one would have the
benefit of the free market to test the validity and productivity of
the lease.
Number 320
KURT PARKAN agreed with Senator Wilken. The intent of SB 125 is to
allow the department to make some best interest determinations to
extend a contract. Mr. Parkan was unclear as to how that relates
specifically to DGG. That there is a belief that because the
contract is in place now, the change of term would be a material
change. Mr. Parkan seemed to think there was a problem with a
material change to an existing contract.
SENATOR WILKEN asked if SB 125 addressed one 40 month extension
beyond the end of the current extension. KURT PARKAN believed that
SB 125 allows the department in statute to extend a concession
contract if determined to be in the best interest of the state.
Currently, the department has the ability to place a clause
allowing for an extension. SB 125 states that specifically in
statute.
SENATOR WILKEN posed the following situation that the DGG could, 10
years from now, ask for an extension and the department would
decide whether to grant that extension depending upon the market.
When is there opportunity for another vendor to bid on the
contract? KURT PARKAN explained that the state could determine it
in the best interest of the state and the airport to have a
competitive bid. SB 125 provides some flexibility that the airport
can use in determining whether to make an extension or not. In
further response to Senator Wilken, Mr. Parkan agreed that an
expression of interest to bid on the concessions from another party
at the next time the contract is available would be an impetus for
a competitive bid.
SENATOR WILKEN suggested adding an (h) provision in Section 1 which
speaks to what the department would utilize in considering whether
to open for bid or continue the current contract. There are
probably five or six major components which could be used to decide
the best interest of the state balanced with the interests of the
current concessionaire.
MORTON PLUMB , Director of the Anchorage International Airport,
commented that Mr. Parkan's comments reflected his views as well as
his staff's views.
Number 378
SENATOR LINCOLN said that the language is vague. Senator Lincoln
understood that DGG has a contract to the year 2000 and under SB
125 would allow a 40 month extension beyond the year 2000. Is that
correct? PAUL REED said that he was not sure that 40 months would
be necessary. It will take a certain number of months to amortize
this contract. Mr. Reed clarified that an open ended time is not
being requested because without a competitive bid process DGG would
not have received the contract in the beginning. DGG is willing to
invest money in the contract for expansion, but Mr. Reed pointed
out that it would take a year to build the expansion which leaves
only two years in the contract. DGG would not be able to get its
money back in that two years by amortization. Mr. Reed emphasized
that DGG is attempting to make the airport more interesting for
other bidders besides DGG.
SENATOR LINCOLN said that DGG views SB 125 as extending the
contract for 40 more months beyond the remaining three years. PAUL
REED agreed with Senator Lincoln's assessment. SENATOR LINCOLN
inquired as to the reasoning behind 40 months. LYNN KLASSERT
explained that based on IRS rules and the amount going into the
extension, to receive a return on that investment requires three
and a half years minimum. Although DGG has three years left in the
contract, that gives DGG about six and a half years to receive that
return. The IRS rules specify about seven years to amortize an
investment. The six months was requested so that the contract
would not terminate during the summer, the busiest period for the
location.
SENATOR LINCOLN asked if the expansion would occur with the
existing facility or by increasing the floor space. LYNN KLASSERT
informed the committee that when DGG opened the space in 1995, the
space was almost doubled from that of the previous concessionaire.
Mr. Klassert stated that DGG has acquired 3,000 square feet on the
west end of the main store, but the investment has not come
together yet. SENATOR LINCOLN noted that when she was at the
Anchorage International Airport she had a difficult time finding a
chair. The area and the shop was packed. LYNN KLASSERT noted that
the bulk of the business occurs between 12:00 a.m. and 5:00 a.m.
Mr. Klassert agreed that the area is constrained. The plan is
geared around the growing commodities in the world market which are
fragrances and cosmetics; the space for that area is to be tripled.
Other products such as apparel and leather goods are growing
commodities. Mr. Klassert noted that renovations for Alaskana
products are planned.
Number 467
SENATOR LINCOLN proposed the following amendment: line 6, after
"contract" insert "for up to 40 months". Senator Lincoln offered
Amendment 1.
SENATOR WILKEN was concerned about specifying the 40 months.
Perhaps, there may be a time when a contract longer than 40 months
is desired depending upon the best interest of the state. Senator
Wilken said that he would like to offer an amendment regarding the
definition of the best interest of the state.
KURT PARKAN said that there was no problem with the 40 months,
although it does seem to be a bit arbitrary and takes away some of
the flexibility of the airport.
CHAIRMAN WARD objected to Amendment 1 because the purpose is to
provide flexibility to the airport with safeguards. This bill
ensures that contract extension is in the best interest of the
state.
Upon a roll call vote, Senators Ward, Wilken, and Green voted "Nay"
and Senator Lincoln voted "Yea", therefore Amendment 1 failed to be
adopted.
SENATOR WILKEN offered Amendment 2 which would create subsection
(h) defining the best interest of the state. Senator Wilken
identified the following as important benchmarks: the revenue given
to the state from the sale of goods, the revenue given to the state
with regards to lease payments, the customer service record, and
the current lease amount as compared to existing commercial airport
leases.
CHAIRMAN WARD objected and asked if the amendment would identify
the best interest of the state in conjunction with the airport.
SENATOR WILKEN agreed that the motion was to add a subsection (h)
defining the best interest of the state.
CHAIRMAN WARD withdrew his objection.
SENATOR WILKEN mentioned that those on line were welcome to be
involved in determining the benchmarks.
LYNN KLASSERT said that he agreed with Senator Wilken's proposal.
The term of 40 months is not as important, the term is whatever the
airport believes to be in the best interest of the operator and the
airport itself.
Number 537
Upon hearing no objection, Amendment 2 was adopted.
SENATOR WILKEN moved to report CSSB 125(TRA) out of committee with
individual recommendations and accompanying zero fiscal note.
Without objection, it was so ordered.
There being no further business before the committee, the meeting
was adjourned at 2:12 p.m.
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