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.