Saturday, February 15, 2003

DFS spar over
airport contract

Lingle's representatives argue
for the value of competition
in Hawaii's airport concessions

By Russ Lynch

The Lingle administration yesterday came out solidly in favor of competition in the sale of duty-free goods at Hawaii's airports and at off-airport sites.

But the sole concession holder, DFS Group, had support from other businesses for its view that maintaining a monopoly is the best way to go. DFS has had the exclusive right to sell duty-free goods to foreign-bound travelers in Hawaii for decades.

At a state Senate committee hearing yesterday, there was no opposition to a separate measure that would let the state give airport concession contractors a rent break when unexpected events occur, such as the tourism decline after the Sept. 11 terrorist attacks.

That could help DFS. The state says DFS owes it more than $36 million in back rent under its contract, which runs through May 31, 2006. The pact requires it to pay the state at least $60 million a year for the right to run airport duty-free shops and a duty-free outlet in Waikiki. DFS has argued that deal was signed before the 9/11 attacks slashed the flow of Japanese tourists, the bread and butter of the duty-free business.

State officials supported giving the airports the right to adjust contracted rents when circumstances clearly call for it, but they held to the view that a monopoly in the duty-free business is bad.

Attorney General Mark Bennett; Gov. Linda Lingle's senior policy advisor Randy Roth; and Rodney Haraga, director of the state Department of Transportation, told the hearing that allowing more than one duty-free concession would protect the state in the event one fails or doesn't make its payments. They were joined in that view by Stephanie Ackerman, a senior executive at Aloha Airlines and president of the Airlines Committee of Hawaii. Ackerman said the 19 airlines her committee represents have to pick up the tab for airport costs if duty-free revenues fall.

But representatives of DFS and other airport concession contractors said competition was tried more than 20 years ago and the state lost out when one of the concessions failed, having paid the state only $2.6 million out of a bid amount of more than $240 million. In that case, the Honolulu Airport duty-free contract was divided in two and a subsidiary of Host International one won of them, beating out DFS, which had had the contract in one form or another since the 1960s. Eight months later the Host operation failed and DFS once again had a monopoly.

Bennett said multiple concessions would help the state when one company runs into financial problems. In addition, the state should be able to decide whether each airport should have a separate duty-free concession, he said.

However, DFS said state revenues and Hawaii visitors would all be hurt by opening the duty-free concession to competition.

"At a time when many airport concessions are still far from normal pre-9/11 sales, we wonder why the idea of further damaging state revenues from the duty-free concession would be considered," Sharon Weiner, DFS Hawaii group vice president of administration, told the hearing, conducted by Sen. Cal Kawamoto.

She was supported by Peter Fithian, owner of Greeters of Hawaii, who has had flower and greeting concession at the airports for about 40 years. Fithian said changing the current system is "a very poor idea."

James Stone, an attorney for DFS Group, said DFS has paid the state $2 billion through the years it has had the sole duty-free concession and a lot of study is needed before the Legislature changes something that works that well for the state.

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