ASSOCIATED PRESS / FEBRUARY 2003
Sales from this DFS Galleria store in Waikiki are one source of duty-free revenues for DFS Hawaii. A rent-dispute settlement yesterday between DFS and the state will, among other things, put the duty-free contract covering Hawaii's airports out to bid three years earlier than expected. DFS now holds the contract, which should be paying the state $60 million per year but is not.
DFS and state
settle disputeThe state accepts a schedule
for the duty-free company
to pay past due rentsOther firms will get to bid on a contract
worth at least $40 million annually
The duty-free contract covering Hawaii's airports is going out to bid three years early as part of a settlement reached yesterday in the rent dispute between DFS Hawaii and the state.
The new minimum-rent terms will be about 33 percent lower than those of the existing contract, according to terms of the settlement. The state is supposed to receive $60 million a year under the current contract, but DFS has been unable to pay, especially given the economic downturn after the Sept. 11, 2001, terrorist attacks.
Bids for a new contract to run from Oct. 1 this year through May 31, 2006, will be sought soon. That gives other operators a chance to bid for a contract that has been held almost unbroken by DFS Hawaii since the early 1960s. The last two times the contract was up for grabs, though, DFS was the only bidder.
DFS has agreed that it will bid for the new term, which coincides with what is left of its current contract, which started June 1, 2001. DFS said it is prepared to bid $40 million a year for two years and nine months, or a total of at least $110 million.
From its side, the state has agreed to drop legal action against DFS and to accept a modified repayment schedule for past due rents.
Sharon Weiner, DFS Hawaii group vice president, said her company agreed to pay $18 million for rent owed this calendar year, $12 million of it in cash and $6 million by promissory note. Earlier this year, DFS paid $25 million of what the state said was owed, responding to a demand from Gov. Linda Lingle that the company pay its back debt before negotiations on new terms could start.
State Attorney General Mark Bennett, who is traveling on the mainland, said via telephone that the settlement "is basically the best the state can hope for in these negotiations" and that payments are "the best DFS could afford to pay and still remain in business."
In the formal announcement of the settlement, parent DFS Group said from San Francisco that it also agreed to bring rent current on non-duty-free retail concessions it has at Honolulu and Kona airports.
The minimum guarantee for the duty-free side of the business, which is $60 million a year under the current contract, will drop by $20 million and could go as low as $34 million a year by mid-2004 if sales do not improve, according to the terms of the agreement, which were made available by the state.
There also is a provision in the current contract whereby 22.5 percent of gross sales at the airports must be paid if sales rise to the point where the percentage would be higher than the guaranteed minimum.
DFS also is contracted to pay 30 percent of its gross sales at the DFS Galleria in Waikiki, which produces 90 percent of its duty-free revenues, if total duty-free sales are high enough to require more than the minimum rent.
Under the new deal, DFS is able to keep its off-airport operation in Waikiki.
DFS Group said the percentages demanded in the new bid documents will be partially reduced from the current level.
DFS had said its Hawaii operation might go bankrupt if terms of the current agreement were not modified to reflect the realities of the tourism downturn, particularly from Japan, since Sept. 11, 2001.
Weiner said there is no longer a bankruptcy worry.
Bennett said in a statement that the state's lawsuits could be reopened if DFS does not adhere to the terms of the settlement.
In the DFS Group statement, Edward Brennan, the company's chairman and chief executive officer, said the settlement followed a long and determined negotiation and is "a fair reflection of the current status of the duty-free business, which has been deeply affected by the decline in Asian travel to Hawaii."
Concession rents typically cover 60 percent or more of the cost of running the state's airports, and as the biggest concession holder, DFS has come up with 40 percent or more of the airports' budget.
Other concessions also have been deeply affected by the tourism downturn and by new security measures limiting airport access, and they have been seeking rent relief.
Peter Fithian, founder of Greeters of Hawaii and a spokesman for the non-duty-free concession holders, said the others may get a chance for help now that the DFS matter has been settled.
"We're happy that it's been settled. Discussions are ongoing (for the other concessions), and now that they've settled (with DFS), perhaps they can put their full attention into the other contracts," Fithian said.
