DFS payments
$18 million short

The duty-free retailer
is asking for lower rent
due to Sept. 11 fallout

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By Russ Lynch
rlynch@starbulletin.com

The biggest provider of funds for Hawaii's airport system, DFS Hawaii, is $18 million behind in payments due from sales of duty-free goods to international travelers statewide and is lagging in rent payments for its retail operations at Honolulu Airport, according to airport officials.

But DFS says the rent deficit number has to be negotiable because of fallout from the events of Sept. 11.

Brian Minaai, state transportation director and the individual responsible for airport income, agrees adjustments may be needed.

"We have been carefully monitoring (DFS's) sales and tracking employment numbers and the economy," he said. "The tourist industry obviously has not recovered, especially the Japanese. Duty-free sales have not rebounded as we had hoped."

The big dip in arrivals from Japan since Sept. 11 has hit the biggest concession holder in the airport system especially hard. DFS has provided about $2.5 billion in financial support to that system over four decades.

In its current contract, DFS is obliged to pay the state at least $60 million a year, more if its sales are high enough. The company, which once agreed to pay the state more than a billion dollars for a five-year duty free contract, also has a contract for a minimum of about $8 million a year from its retail businesses at Honolulu Airport.

Reacting to the fall-off in international travel after Sept. 11, the state Legislature passed a temporary law waiving those base minimums.

The state administration decided the concession holders would be allowed to pay a percentage of their revenues; in the DFS case, 22.5 percent of sales of duty-free goods at the airports statewide and 30 percent of duty-free sales at its Waikiki Galleria.

Concessions have not been able to come up with even that smaller number, airport officials say. Meanwhile, the law expired in April and the regular contract terms are back in effect.

"Our business is proposing a 'severe hardship' formula that is lower than the stipulated percentage of the lease, because these are unprecedented business conditions for us," said Sharon Weiner, group vice president of administration at DFS Hawaii.

"We've never had business down this far for so long with so little hope for recovery," she said. "Business for duty-free sales is at levels we haven't seen for 25 years. It's comparable to 1977 and 1978."

"We can't survive and pay the percentage rents," said Weiner.

She said her company's duty-free sales so far this year are down 31 percent from the same time last year, which already was down from 2000. Retail sales are down 21 percent, she said.

"We are still deeply concerned about continuing low levels of arrivals from Japan as compared to pre-9/11 levels," Wiener said. "We do not expect to see a return to pre-9/11 levels until 2005 or 2006."

Meanwhile, DFS has deeply slashed its operating costs in the islands, Weiner said. "We've reduced our (full-time worker equivalent hours) by almost 50 percent, cutting some workers to as little as 20 percent of the hours they worked and we've cut management by 31 percent," she said.

Concessions such as shops and restaurants normally provide nearly two-thirds of the operating income for the statewide airports system.

While post-9/11 rules that let only ticket-holders into the areas where the concessions are located have hurt DFS, one beneficiary of the new security rules may be HMSHost, which holds the master concession for all food and beverage operations at Honolulu Airport.

Alan Yamamoto, general manager, said his company's numbers are still down "but we did see improvements.

"While we are not getting the same numbers (of people) at the airport, the people who are there, those that have tickets, have a longer dwell time at the airport," which means more opportunity to eat and drink, Yamamoto said.

Since the whole cost of running and financing Hawaii's airports must, by law, come from the commercial users of the airports, the airlines serving Hawaii will have to pick up where concessions leave off. That means more costs to the airlines and possibly higher fares.