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Corporate Profile: BAA USA
Travel Markets Insider / October 2003

By Larry Luxner

Mark Knight can hardly keep up with the dizzying pace of lucrative retail opportunities springing up every day at airports across the United States.

Knight is regional director of BAA USA, a wholly owned subsidiary of London-based BAA plc. As such, he's in charge of the company's efforts to secure contracts with airports to manage their retail concession programs.

"Normally, we see maybe one or two retail opportunities coming out each year. Right now, we're pursuing five opportunities," he said in a phone interview from his Pittsburgh headquarters.

"Quite frankly, this is unprecedented. When we first did our Pittsburgh contract 10 years ago, we just assumed that because of its overwhelming success, many other airports would go with this sort of approach. We did see a flurry of activity, but nowhere what we're seeing today. It's a function of the challenging nature of the industry."

Since 9/11, he said, once-complacent airports are now looking for every penny they can squeeze out of their tenants.

"Airlines are hammering the airports for more revenue to reduce their costs, so the retail programs that were once not considered particularly important are now being looked at very closely," Knight explained. "So they're now seeking assistance to develop their retail programs to the maximum."

And that's great news for companies like BAA, which Knight says is "a very small player" in the U.S. airport concession industry, though he declined to reveal sales figures.

BAA USA was founded in 1992 by the parent company, which is itself an outgrowth of the old British Airport Authority, privatized by the Thatcher government during the 1980s. It is recognized for its retail developments at London's two main international airports, Heathrow and Gatwick.

At present, BAA USA has three contracts. The biggest is with the Indianapolis Airport Authority to manage Indianapolis International Airport in its entirety, including all retail operations. Knight says that's an "unusual contract" because there are only a handful of such arrangements in the United States.

Last year, Indianapolis reported $24.4 million in retail sales, based on 3.45 million emplanements and an average of $7.11 per passenger.

BAA also has two retail contracts: one with the Allegheny County Airport Authority for Pittsburgh International Airport, and the other with the Massachusetts Port Authority for Terminals B, D and E at Boston's Logan International Airport.

"BAA is wholly owned by BAA plc, so we're part of a large group with expertise and financing," said Knight, estimating that the company has around 300 direct employees at Indianapolis and another 20 on the payroll in Pittsburgh and Boston.

"In the past, we've had various missions and dual approaches to the business. We were looking to potentially privatize an airport or take a long-term lease on an airport or terminal, and also seek retail-type contracts. But 18 months ago, we took a decision to focus our business development efforts strictly on retail. We have found that operating in larger airports let us add the most value."

According to Airport Revenue News, Pittsburgh led the nation last year in airport retail sales per passenger ($8.63), though BAA says that if services are included, the actual figure would be closer to $9.50.

Last year, BAA won a 10-year extension to manage the 100,000-square-foot Airmall at Pittsburgh, which recorded 9.0 million emplanements in 2002. BAA will now run the Airmall through the end of 2017, rather than 2007 as originally envisioned.

As part of the deal, BAA promised to commit $10 million on infrastructure and capital improvements at the Airmall, which has 110 stores, restaurants and other service providers.

Knight explained the way such deals typically work.

"We provide an investment in the facility and commit to a certain minimum guarantee. Then we propose a revenue-sharing plan. We collect the largest pot of revenue we can from our tenants, then we share that pot with the airport. The majority of the revenues go to the airport, so it's in the airport's best interest for developers to make money."

The percentage developers agree to pay airports on overall sales is a key factor in who wins the bid to develop a given project. While those percentages vary, the airport typically gets two-thirds, with the developer keeping the remaining one-third.

"In the past, airports would just hire consultants," he said. "What we're talking about are partnerships. We share the financial risk, and we bring in expertise and capital to build retail infrastructure."

In order to keep up with the airport retail boom, BAA has boosted its budget for business development by 40-50% over last year, said Knight. A big chunk of that will be spent at Boston-Logan, which reported 11.3 million emplanements last year and per-passenger expenditures of $6.18, translating into nearly $70 million in 2002 retail sales.

BAA is spending $10 million, and its retail partners another $15 million, to develop 84,000 square feet of retail space in Terminals B, D and E.

In addition, said Knight, "we are in discussions with Massport concerning the expansion of retail opportunities in Terminal B, which would significantly increase the number of stores as well as capital expenditures by another 50% across the board."

Terminal E alone has 37,707 square feet of retail concessions, up from the previous 25,536 square feet; at least 1.2 million meals are expected to be served each year in the terminal's new 10,000-square-foot food court.

Ten operators have been added, eight of which are new to the airport; these include Borders, McDonald's and Basics, a new health and beauty concept being launched by The Hudson Group.

According to a BAA press release, "with the street pricing policy in effect at Logan, backed by BAA Boston's 'no ripoff guarantee,' customers are assured they'll pay no more for goods and services at the airport than they would pay for the same in a Boston shopping mall."

What BAA hopes for are more retail development contracts like the ones it enjoys in Pittsburgh and Boston.

Although BAA lost the chance to develop 40,000 square feet of retail space at Miami International Airport when its original contract award was rescinded a few months ago, the company isn't turning its back on South Florida just yet.

Within the next few months, said Knight, Miami will be putting out RFPs for "a pretty significant retail package" totaling about 200,000 square feet of space at the north and south ends of the terminal.

In Boston, Massport is putting out RFPs for 38,000 square feet of new space in Terminal A, which is being reconstructed, as well as 23,000 square feet of food and beverage concessions in Terminal C.

"Dulles Airport has put all of its food and beverage concessions out on the street, and they're looking for a developer/manager to manage and lease that program," he said, adding that in Minneapolis, an RFP will soon be released, with pre-bidding scheduled for late October.

But the largest opportunity by far could be Baltimore-Washington International Airport, which has a proposal to lease, develop and manage the entire airport.

"When it's all said and done, it'll be around 140,000 square feet of space," said Knight, adding that BWI's $52 million in retail sales could "easily be doubled, so over the 10-year contract, gross sales would be somewhere in excess of $1 billion."

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