STAR-BULLETIN FILE / 2002
Japanese tourists pose for pictures in front of the DFS Galleria shops in Waikiki.
Before new While it faces court action in Hawaii for not paying its airport concession fees, duty-free operator DFS Group has resolved a similar problem in Los Angeles.
LA contract, DFS
Group paid debts
The duty-free retailer got
its rent reduced, but first
had to pay what it owedBy Russ Lynch
rlynch@starbulletin.com
DFS, which had been holding back its payments for the rights to operate 12 duty-free concessions at Los Angeles International Airport, agreed to pay its full minimum guarantee of $37 million for calendar 2002. In return, the airport authority agreed to waive the minimum rent requirement for the next several years and let DFS pay only a percentage of its revenue, which probably will be substantially less than the minimum would have been.
"Simply put, there is no possibility in the near future that the duty free shops at LAX will generate enough sales to sustain DFS's present financial obligation," said a statement from the Los Angeles World Airports board of commissioners. The city board is responsible for the airports.
The report said the airport authority was faced with two possibilities. One was to declare DFS in default and launch a new request for proposals to attract some other operator. That would have "highly uncertain results" because of market conditions due to a decline in international travel, the authority said.
The alternative was to negotiate with DFS, the authority said.
In return for catching up back payments, DFS had its minimum guaranteed concession fee waived through May 2005 and replaced with a percentage of its gross revenues. For 2003, that will be 23 percent. For 2004 it is 27 percent. For the first five months of 2005, until the end of its contract, DFS will pay 28 percent of revenues up to $75 million, 32.5 percent of revenues from $76 million to $100 million, 36.5 percent of receipts between $101 million and $125 million, and 39 percent of anything above $125 million.
The authority also has the right to extend the contract, still on a percentage basis, for an additional two and a half years, taking it through 2007.
Duty-free sales in Los Angeles dropped in 1998 because of the Asian financial crisis but rebounded to $124 million in 2000. Sales dropped again, to $92 million in 2001 and $73 million in 2002. That meant that the minimum guarantee of $37 million last year would have been equal to 50 percent of DFS revenues at Los Angeles, the airport authority said.
Based in San Francisco and owned by conglomerate LVMH Moet Hennessy Louis Vuitton Inc., DFS Group has duty-free operations at a number of airports around the country and overseas. In Hawaii, it has had the exclusive right for more than 40 years to sell duty-free goods at the state's airports.
Since late 2001, when international travel to Hawaii, particularly from Japan, fell after the terrorist attacks, DFS Hawaii has refused to pay its minimum concession fee of $60 million and instead has been paying what it calls a "hardship" rent.
On March 28, state Attorney General Mark Bennett delivered a demand letter to DFS in Honolulu seeking immediate payment of $49 million it says is owed and giving DFS a week to pay or face losing its $45 million performance bond. That deadline was extended to the end of this week at the request of DFS. The company is disputing the amount owed and has been seeking negotiations, saying it cannot stay in business if it is forced to pay.
Gov. Linda Lingle has said the state won't negotiate new terms until DFS pays what it owed at the end of last year.
DFS Group LP
