Adelaide Airport is executing a ‘Commercial Principles Agreement’ that addresses the very real business pain being felt by retail operators while simultaneously accounting for what could be a staggered road to recovery. In this edition of TRBusiness’ ‘Over to you’ column series, John Pearce, Head of Retail and Commercial – Terminal, Adelaide Airport Limited outlines how the airport is fostering open discussions with concessionaires to explore frameworks that share risk at the beginning of the recovery journey.

What an incredible three months. We’ve become accustomed to an expanded vernacular that would’ve been unheard of six months ago. In fact, the following would’ve been more appropriate as names for the starting lineup of horses at our annual Melbourne Cup: ‘unprecedented’, ‘asymptomatic’, ‘cluster’, ‘social distancing’, ‘house party’ and ‘travel ban’, to name but a few.

Sadly though, this ‘event’ (Covid-19) has been anything but a day at the races. Adelaide Airport reported a rapid, complete shutdown of all its retail and businesses within the terminal by the end of March and had to contend with a Covid-19 cluster centred within the Qantas baggage handler group.

RELATIONSHIPS AND ROI

With the exception of essential on-site staff, we found ourselves working from home within days. Being midway through a terminal expansion construction project added another layer of complexity. Our management team have done a terrific job to keep this expansion project going, amid an environment of one or two daily commercial flights and a small contingent of FIFO (fly-in-fly-out) flights supporting the outback mining industries.

To make matters worse, the collapse of Virgin Australia sent shockwaves through our industry. As part of our terminal expansion, Virgin had completed a brand-spanking new lounge days before [the shutdown] . The timing could not have been more disappointing. Despite all of this, we are very positive that an airline in some form will emerge from the Virgin Australia administration.

There is strong local sentiment here that Australia needs two major airlines, a view supported by the CEO of Qantas. Australia needs a competitive landscape and as far as Adelaide Airport is concerned, Virgin has been our second biggest airline partner.

In this tough environment, I have never been more grateful that we invested deeply in our partner relationships. After the immediate carnage of airline, terminal and business shutdowns, I have spent countless hours on the phone each day in contact with partners, many of whom were simply overwhelmed dealing with staff layoffs and the sense of foreboding.

My first objective with our retail partners was just to see if they were okay. Subsequently, as the dust has settled and the damage has been assessed, it has been more possible to undertake meaningful commercial conversations. These have been tough and robust and the challenge has been to deliver to our partners the airport’s perspective: that it too is experiencing significant financial stress. I am thankful I invested in these relationships in the good times.

We are collaborating and delivering on a ‘Commercial Principles Arrangement’ that addresses the reality of  ‘ground zero’ for businesses, which let’s be honest have ground to a halt. This is a very real commercial pain in the ‘here and now’ for all parties.

I have tried to ensure that the delivery of this message is balanced with a narrative that focuses equally upon a ‘Principles of Recovery’ and a willingness to restructure commercial arrangements that acknowledge there is no business right now. The recovery will start small and may or may not be linear; it may well be staggered.

As a landlord, my responsibility first and foremost is to our shareholders. In order to deliver the optimal outcome for these shareholders in the long term, it is fundamental we need a healthy market of travel retailers. They are the ‘lifeblood’ of our non-aero business and the business itself. So we have communicated together the recovery scenarios that may occur and are bringing internal and external stakeholders on the same journey.

In the Australian travel retail market it’s critical airport landlords adopt the view that while navigating their own financial survival, they ensure concessionaires remain financially solvent and not only survive this crisis, but emerge intact, resilient and ready for growth. This is fundamental for maintaining competitive tension in the market for optimal retail tender outcomes.

MANAGING THE PAIN

We are already in commercial discussions with concessionaires as to what ‘success’ looks like when they start trading in the short term, even with minimum passengers. To me this is important to think through detail such as operational changes and commercial variations. This is where we have encouraged creative lateral discussions and a willingness to explore frameworks that share risk at the beginning of this journey.

For example, understanding the minimum sales revenue required to trade; how the government’s wages subsidies can assist; and moreover what sales thresholds need to be in place to trigger certain uplifts in minimum guaranteed rental down the track. It is important to create a commercially optimistic mood and narrative.

While we are deliberately focused on getting through, we are spending time discussing what mechanisms and structures might be in place to share outperformance and upside in the future. The only prohibition to passenger numbers exceeding 2019, as far as I am concerned, is time. Conversations around the detail and timing of minimum annual guarantees and variable rental thresholds need to be undertaken in a way that recognises the different possible patterns of recovery. This requires mutual trust and an understanding of all parties’ needs.

We have considered in our ‘Principles of Recovery’ equation the importance of appropriate distribution of sales growth among retail categories, especially in the context of our terminal expansion. Most importantly, we want to ensure that customers’ needs are sufficiently met, whether we have one million pax or when we reach nine million. The practical social distancing and sanitising disciplines are key.

But we also want the lights on again and to be able to serve great coffee and experience the delicious aroma of muffins just out of the oven. In Adelaide we have started. We want to restore as quickly as possible the sensory retail journey that lifts the spirit. We know retail experiences vindicate and rewards a passenger’s decision to travel. People attract people and retail attracts more retail. This is a very powerful and profound way our industry can work together to contribute to the recovery. Even now, we have contractors, builders, security staff and operations staff that will enjoy the retail re-openings as we see the green shoots of this recovery.

‘STRONG AND VIGOROUS DOMESTIC REBOUND’

By nature, human beings are intrinsically optimistic and we all possess that unique capacity to erase the memory of painful experiences. For this reason, I see a strong and vigorous domestic [travel] rebound, particularly here in Australia. It appears likely our local state border restrictions will be lifted soon and in the second half of this year, domestic travel will be the order of the day. Australia and New Zealand will likely be our first international travel hubs.

We will continue to leverage the hope and optimism that characterises not just our wonderful industry, but the human spirit itself. Australians possess an adventurous spirit and have never travelled as much as in the past two decades. On the back of our success in containing the outbreak domestically, we are anticipating that the domestic travel recovery could be up and running within weeks. This is exciting.

We are expecting a strong demand to re-emerge, by millennials in particular. There has been an overwhelming sense of sadness by the young throughout this tragic event. Their vigour, energy, wanderlust has all been restrained. Their aspirational hedonism has been stifled. They will come back with a vengeance. Here in Adelaide, we want to be ready.

There has been many a prognostication about the dampening effects the post-Covid world will have on the future habits of travellers. Perhaps we’ll no longer see queues of baby boomers rushing to board a cruise. But they will fly to a resort in Cairns, or board a plane for a safari in the Northern Territory. ‘Boomers’ are addicted to travel. Domestically, there will be new opportunities.

Some have postulated about the negative behavioural inertia of online meetings and teleconferencing impacting business travel. However, this is possible to everyone subscribing to that theory, I would ask them how much they are missing that business dinner after concluding a deal, or how much they are missing the high fives with colleagues over a beer. We are social creatures and moreover, travel is addictive. Travel represents freedom. That holiday away is not called the ‘getaway’ or ‘escape’ for no reason.

Finally, speaking of a weekend escape, back to the Melbourne Cup. There could be one more horse I perhaps should have named, our vaccine…

The views and opinions expressed here belong to the columnist and do not necessarily reflect those of TRBusiness.

To read other columns in the series, click the relevant links below. Interested in getting involved? Please contact one of the editorial team at the following: [email protected]; [email protected]; [email protected].

Andrew Brodie, CEO, Sunshine Coast Airport

James Prescott, Managing Director, Harding Retail

Kevin Brocklebank, Founder and MD, One Red Kite

Alain Maingreaud, President, TFWA

Tullia Ialongo, Business Development Partner, Wand Technology