DFS Hawaii has retained its duty free concession in Hawaii as the sole bidder, offering the Department of Transportation (DOT) a minimum guaranteed sum of $190m over the five-year contract period.

The contract – which is also attached to a possible five-year extension – covers duty free shops at Honolulu International Airport, the DFS Galleria in Waikiki and stores on the Big Island and besides offering a $38m minimum annual guarantee for each of the five years, DFS has also agreed to spend $1.75m on improvements to its stores at Honolulu International Airport.
At the same time, DFS Group Vice President of Business Development Sharon Weiner is quoted in the local press as saying that the retailer will now spend around $40m on renovating its Waikiki Galleria to bring in new luxury brands and higher spending tourists. She told the Honolulu Advertiser that the company has only just finished renovating the Galleria's duty free floor.
DFS Group has been the incumbent and unchallenged operator of this business for the last 20 years and this latest contract award which begins next June follows the extension to May 2007 which was granted as part of the settlement between DFS Hawaii and the State of Hawaii following a major row over $49m-worth of rent said to be owed by DFS in 2003.
This was settled after a financial compromise was reached between the State and DFS with the latter eventually agreeing to effectively pay a $40m annual minimum guarantee for the last two year's of the existing contract period to May of next year. (DFS was required to bid on that contract).
While this latest MAG of $38m from June 1 2007 is slightly less than the $40m MAG that DFS is currently paying, DFS will still want to see a big improvement in the number of Japanese arrivals to Hawaii – and their spending levels.
Japanese arrivals so far this year are down 8.9% due to what local commentators say is a combination of higher airline fuel surcharges, more expensive and fewer available hotel rooms and stronger competition from other destinations like China and Korea. This won't be helped by the 7% increase in some air fares to Hawaii and other North American destinations planned by Japan Airlines and All Nippon Airways from April 1 2007.
DFS paid the State of Hawaii $39.1m in concession fees in the year ended June 30 2006 and was the single biggest contributor to the Airports Division of the Department for Transportation (landing fees came in as the next highest at $36m over the same period). DFS paid $42.9m in concession fees in 2005.
Concession fee revenues from DFS accounted for approximately 41% and 44% of total Airports Division concession fee revenues for the fiscal years 2006 and 2005 respectively.

BACKGROUND: DFS was originally awarded a five year lease agreement for the in-bond concession in February 2001. But by 2003 it was in significant arrears in rents due to the Airports Division as a result of financial difficulties arising from the downturn in Hawaii's economy due to the decrease in international visitor travel.
As a result, in August 2003, the Airports Division and DFS entered into a Withdrawal and Settlement Agreement, which provided DFS with certain relief for past due rents and which allowed the Airports Division to withdraw and recapture all of the leased premises and to terminate the in-bond lease early.
The in-bond concession was re-bid in September 2003 and DFS was awarded the lease for the period from October 1 2003 to May 31 2006. The lease contract provided for a minimum annual guarantee rent, as well as a percentage rent on annual gross receipts exceeding certain levels.
For the period from June 1, 2005 to May 31, 2006, the minimum annual guarantee rent was $37,311,121, and the percentage rent was as follows: (1) for total concession receipts greater than $165m, but less than $200m: 22.5% for on-airport sales and 18.5% for off-airport sales; (2) for total concession receipts greater than $200m: 30% for on-airport sales and 22.5% for off-airport sales.
Effective June 1, 2006, the lease was extended for a period of one year pursuant to a holdover clause in the lease agreement. During the holdover period which still operates until May 31, 2007, DFS has been working on a month-to-month tenancy, with rents and terms the same as those in effect immediately prior to the holdover period kicking in on June 1 2006.