The second session of last week’s Taipei Trinity Forum was interesting, data driven and carried some important lessons for airports, writes Doug Newhouse.

 

The last major presentations on the first morning of the Trinity Forum began with a session entitled ‘Why is airport retail attracting such intense interest from the investment community? How do investors view the channel, now and into the future?

 

This featured Cay-Marco Fritsch, Executive Director, Investment Banking Consumer Retail, Nomura International plc (pictured above) who said travel retail is one of his focus areas.

 

For the purpose of the Trinity event, his presentation focused mainly on non-food and beverage perspectives, as he described investor interest in travel retail companies.

 

Some see travel retailers as attractive due to the strong cyclical trends that underpin the airports business, he said, adding that there are also structural advantages versus other channels because of the potentially attractive financial returns.

 

Fritsch said those companies engaged in sector consolidation are being viewed increasingly positively by the investment community which sees the investment opportunity.

 

Bernard Creed, Vice President Finance, Dubai Duty Free.

 

AIRPORT SALES OF $50BN BY 2016?

Investors are attracted by access to higher income and less price sensitive entities, said Fritsch, as travel retail continues to show that it is a growing distribution channel, supported by healthy forecasts. These obviously include the prediction that global airport retail sales are set to increase from an estimated $36bn today to $50bn by 2016.

 

While this presumes that spending will continue to increase, there are a number of other structural advantages that investors have identified. Not the least is that the concession system by its very nature limits competition and retailers are often protected by barriers, while the customer profile remains very attractive.

 

Fritsch said that other attractions of the sector include the fact that retailers are obviously the key drivers of financial returns and it is generally understood that their earnings can be materially higher than they are today.

 

He said the investment sector is also increasingly aware of the factors that can disrupt the business and these include contract renewal risks, escalating concession rates and upfront minimum annual guarantee (MAG) fees.

 

Investors are also very aware of the bargaining power of landlords said Fritsch, while recognising that retailers are the most important contributors. Landlords can also increase fees and he says the jury is still out on this.

 

Interestingly he added that there is body of opinion within the financial and analysts’ sectors that there will be less game changing transactions within the industry between now and 2020.  He argued that the big deals may become smaller in the near term, unless the acquirer has already invested in the sector.

 

 

Just to further strengthen its loan credentials, Dubai Duty Free was awarded a 25-year extension of its operating licence at Dubai International Airport by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai.

 

HOW DDF SECURED ITS FUTURE

The next speaker was Bernard Creed, Vice President Finance, Dubai Duty Free and he took the audience through Dubai Duty Free’s relatively recent financing exercises.

 

As reported by TRBusiness.com, Dubai Duty Free is currently discussing a new $20m loan re-pricing exercise with its lenders. This follows DDF’s finance facility for $750m last year, on top of the earlier re-pricing of its $1.75bn debut loan facility – originally initiated the year before.

 

DDF originally mandated Abu Dhabi Commercial Bank, Emirates NBD Capital Limited and Standard Chartered Bank – and each of their respective affiliates – to arrange the senior unsecured conventional and Islamic financing facilities.

 

This included a conventional term loan and Islamic facilities, with the main purpose to finance the further development of Dubai International Airport (DIA). The original loan was to finance the development of Dubai International Airport until 2020.

 

Creed took the audience through the processes of obtaining these loans and made the point that this was all new to DDF at the time, as it had never had any debt in the past. Creed said the $1.75bn loan was originally taken out in 2012 where it took some six months for it to be approved.

 

In the end he said there were 26 banks and just a year later DDF took out another $750m with three banks. He said that they explained to the banks that DDF is the ninth largest in duty free with 28,000sq m of space and a 7% share of global airport retail sales and it is forecasting $1.9bn this year.

 

 

More of the Dubai Duty Free numbers given to the banks for its two huge financing loans.

 

HIGH-VALUE CREDENTIALS

Creed said DDF pointed to its 16.7% growth rate from three terminals and the opening of Al Maktoum International at Dubai World Central.

 

It also highlighted DDF’s other assets, which include the Dubai Duty Free Aviation Club, its 202-room Creekside Hotel and others, as well as the longevity of employment of key staff amongst the workforce – many of whom have been with the company since it began.

 

All these assets helped to reassure its new bank investors, along with other factors, such as the strong contribution from DDF’s wholly-owned in-house brand Akaru and its growing online business.

 

Creed said that three sets of auditors poured over all of this and other data as part of the loan process, at the same time that the retailer was able to demonstrate its stable longevity at the airport.

 

This was also helped by a 25-year extension of DDF’s operating licence at Dubai International Airport by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai.

 

In its information relayed to the banks for the original loan, DDF quoted sales growth of 2.5% in 2009, 14.4% in 2010 and 15.6% in 2011. EBITDA growth in 2009 was 18.7% followed by 25.9% in 2010 and 23.4% in 2011. Net profit growth came in at 14.5% in 2009, 13% in 2010 and 37% in 2011.

 

 

Dr. Rafael Echevarne, Director, Economics and Programme Development at ACI World.

 

DDF PREDICTS $2.85BN BY 2020

Dubai Duty Free also forecast retail sales of $2.85bn by 2020 and passenger growth to 94.6m by the same year. Spend per passenger is also predicted to grow, with spends by terminal reported at $33 in T1 in 2011; $17 in T2; and $27 in T3.

 

In its data presentation to its lenders, DDF also said: “Forty years ago, 76% of world’s traffic was between North America, Western Europe and Japan. DDF’s revenues have risen at a compound annual growth rate of 17.2% for the period 1984 to 2011. The traffic between the above mentioned, however, is estimated to decline to 30% of world traffic in 2030.

 

“Dubai is positioned uniquely between established and emerging markets. The average revenue per kilometre growth of Middle Eastern airlines is forecast to grow at a CAGR of 7.4% over the next 18 years; this is the highest growth rate of all regions.”

 

The next presentation was entitled ’ASQ findings on the role and performance of retail’, by Dr. Rafael Echevarne, Director, Economics and Programme Development at ACI World.

 

Dr. Rafael Echevarne gave a detailed and stimulating presentation on The Americas and the Caribbean back in June at the ASUTIL conference in Mexico City and this one was equally thorough and interesting.

 

PRODUCTS ‘TOO EXPENSIVE’

He began by showing last year’s passenger traffic growth rates for 2013, with the Asia Pacific region out in front with plus 8.7%; the Middle East with 7%; Latin America and the Caribbean 5.5%; Europe 3.2%; North America 1.1%; and Africa 0.5%.

 

Echevarne said that small airports increasingly want to know how to improve their non-aeronautical revenue as a priority and he said it is important to have the commitment from retailers to make this happen.

 

He added that there is also a need for data and the good news is that ACI has it, as he pointed to the 400,000-plus passenger interviews conducted by ACI every year. ACI’s researchers ask a wide range of questions on many aspects of airports, from retail to Wifi to trolleys at the 281 member airports in 60 countries.

 

He said that he hears ‘all around the place’ in ACI’s surveys that products sold in airports are too expensive and he added that he is not surprised. He also made pointed reference to this at the ASUTIL Mexico City conference. This would appear to be an increasingly serious problem considering the very low penetration rate of around 30% in all airport retail shops.

 

In the latest survey covering the first two quarters of 2014, Echevarne said that ACI’s researchers spoke to some 120,000 passengers from 246 airports.

 

Interestingly he noted that customers tended to be more satisfied within the larger airports when it comes to retail.

 

Customers polled in those airports with nice shops and nice restaurants are also happier than their value for money competitors, with cleanliness in both the shops and the overall terminal areas a very important factor for many.

 

Echevarne said that this research also showed consistently that women tend to be much more critical of the retail and F&B offers than men and he made the point that the happier passengers are, then the more they are likely spend.

 

Very interestingly he added that more regulators are now paying a lot of attention to ASQ (Airport Quality Service ratings) and some are going to be using this measure when rating airports in future.

 

[TOP IMAGE: Cay-Marco Fritsch, Executive Director, Investment Banking Consumer Retail, Nomura International plc]