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Este informe no está disponiblen espe añol. CARIBBEAN BUSINESS This Airport Means Business New stores, a new hotel, and a five-year, $245 million capital improvement program is the new stage of growth of Puerto Rico’s and the Caribbean’s principal airport hub. By MARIALBA MARTINEZ July 22, 2004 A New Way of Doing Business Renegotiating the lease contracts of dozens of businesses at Luis Muñoz Marin International Airport, Ports Authority Executive Director Miguel Soto extracts close to $20 million in new leasing fees and gross sales’ commissions for a start Fifteen months ago, when Miguel Soto Lacourt was appointed the Puerto Rico Ports Authority’s third executive director in as many years under the Calderon administration, he aggressively undertook the task of renegotiating dozens of the agency’s contracts with stores whose leases had expired or weren’t bringing in market prices. With less than six months remaining until the end of the Calderon administration’s term, the Ports Authority has engaged in what Soto Lacourt calls a commercial reformulation, starting with Carolina’s Luis Muñoz Marin International Airport (LMMIA), the keystone of the agency’s aviation division. One of the Ports Authority’s most valuable real-estate assets, the LMMIA brought in approximately $56 million last year, or 94% of the aviation division’s $59.4 million in revenue. The Ports Authority has initiated a plan to increase revenue from its lessees by changing their contracts. By investing in capital improvements, the agency has found ways to bring in additional revenue from airport concessionaires. Over the next three years, contract negotiations at the LMMIA alone will generate an extra $9 million for the Ports Authority. On an annual basis, the contracts should represent recurring revenue for the agency of approximately $10 million. "It isn’t as if we had many areas to look to for new revenue," said Mickey Espada, director of the Ports Authority’s Office of Property Development & Marketing. "The airlines have five-, 10-, and 20-year leases, and we don’t expect to receive additional income from them except as stipulated in their contracts as annual compensations. So, we had to look to other areas to improve the Ports Authority’s financial situation." To help convince LMMIA store owners that sales will be increased by improvements to the facilities, which in turn will increase passenger traffic at the airport, the Ports Authority has embarked on a $245.1 million program of capital improvements through 2008. Some of these projects were started in 2001 and have a completion date, while others are still in the design and bidding phases. These improvements include the construction of a new air-rescue building, which is almost 75% finished. The general cargo area nearby will be moved from the LMMIA’s main runways closer to Muñiz Base. In 2005, the $38 million reconstruction of the LMMIA’s Runway South will kick off, followed by Runway North’s $11 million expansion. There will also be a $48 million construction of a second taxiway between those two runways so two planes will fit at once. In 2003, the Ports Authority had total assets of $801.1 million; it reported $128.6 million in revenue and $126.2 million in operating expenses, resulting in net income of $2.4 million. Payroll (including benefits) was $67.8 million. Revenue from the Ports Authority’s maritime division was $63.1 million, while the aviation division had revenue of $59.4 million; other Ports Authority revenue amounted to $6.1 million. In 2001, the agency reported a 10-year record-high revenue of $149.2 million, followed by a 16% reduction in 2002 to $124.9 million. Cashing In on the Airports "The Ports Authority is a wide-ranging organization, responsible for air and sea operations, passengers, and cargo in one big system," said Soto Lacourt. The former deputy secretary of the Puerto Rico State Department took over the Ports Authority after the resignation of Jose Baquero, who succeeded Miguel Pereira, who was transferred to head the Police Department and is now secretary of the Corrections & Rehabilitation Department. After evaluating the needs of Puerto Rico’s 11 airports, Soto Lacourt set short-, mid-, and long-term goals, starting with making infrastructure improvements at the LMMIA to help remarket the airport. The Ports Authority began at the LMMIA because, said Soto Lacourt, "[It is] the first impression most visitors get when they arrive in Puerto Rico and the last one they get as they leave." The LMMIA’s short-term plan began with a $4.2 million investment in infrastructure projects. With the help of the Puerto Rico Tourism Co., a more tropical landscaping was designed for the airport. Also, the airport’s exterior was painted and the escalators and elevators under the agency’s supervision (those outside areas operated by the airlines) were repaired. A new set of elevators is being built between the parking lot and American Airlines’ terminal; American handles 65% of the airport’s passengers but doesn’t have elevator access for passengers with baggage. New signage was installed to help traffic flow more smoothly, and a new taxicab station will be built at the airport’s entrance, close to the car-rental agencies. Taxis will be hailed as needed by an operator at the airport terminal. Remarketing the LMMIA’s Commercial Space "In August, we published a request for proposals to lease 40 new real-estate areas at the LMMIA," said Soto. "More than 150 individuals and companies were interested and 112 bids were received. So far, we have signed or are negotiating 30 new contracts for kiosk and store space, which should add at least $2.5 million to the LMMIA’s budget and create more than 200 direct and 300 indirect jobs, not to mention the commissions on gross sales [ranging from 7% to 12%]." Felipe Perez, owner of the popular criollo (native) sandwich chain El Meson, has high expectations for his forthcoming eatery at the LMMIA, which will be his 27th. There are currently 24 El Meson restaurants around the island, and two will open in Santa Isabel and Manati before year’s end. "I have been trying to open a restaurant at the LMMIA for approximately eight years," said Perez. "This is not only a great spot but also a great opportunity to show off this local chain internationally. A lot of people pass through the airport.... We expect to provide tourists [and locals] with the best service and the best food." El Meson will be in Terminal D’s food court, alongside McDonald’s, Subway, and Taco Maker. Perez made a $500,000 investment to enter the LMMIA and expects to make triple that in sales each year. The mix of stores and their locations at the LMMIA were based on a feasibility study conducted by the Ports Authority in November 2002. Espada and his staff evaluated the physical condition and services of the 66 stores currently leasing space at the airport. A second study conducted in September 2003 by local consulting firm the Marketing Center suggested what the most successful store mix would be and recommended a new formula for determining lease rates. The 66 concessionaires’ contracts have been renegotiated and their store locations reassigned as necessary. These stores will also have to meet new requirements at the LMMIA concerning signage, products or services, and hours of operation. The LMMIA’s kiosks are colorful wagons like those found in the corridors of major shopping centers. Each kiosk sells a unique product or service and is built according to Ports Authority specifications. Owners pay the agency a fixed $1,500 monthly rental fee plus a commission on gross sales. El Tamarindo’s Edwin Rosario and his wife, Aida Roman, feel fortunate that their bid for store space at the LMMIA was accepted in a field with dozens of other bidders. El Tamarindo sells fruit frappes & shakes, crepes, and special coffees; the company also has locations at Plaza del Sol and Santa Rosa Mall, both in Bayamon. "Our two stores are in shopping malls, so we were lucky to have been selected for the LMMIA," said Rosario. "Our 150-square-foot shop will be after Terminal C’s security checkpoint; construction should end in one month. Travelers like fresh fruit products, and I expect to generate at least $200,000 in annual gross income, with a 10% annual growth estimate." The LMMIA’s new stores will vary in size and will be leased to product and service providers. A second phase of the project will bring another 20 to 25 stores to the airport. Storeowners at the LMMIA pay average lease rates of $39 per square foot plus a commission on gross sales. Some of the stores that have signed up for space at the LMMIA are Martin’s BBQ, Nature Nation, Tropical Sweets, Piccolo Gelatos, Skin Oasis & Massage, The Closet, Yocahu Surf Wear, and El Guayacan. Hamburger chain Wendy’s and Starbucks Coffee are two of the franchises that will be operating at the LMMIA. Wendy’s already has 52 fast-food restaurants around Puerto Rico. Starbucks arrived on the island in 2002 and recently opened its sixth store in San Juan’s Condado area. "One of the reasons we decided to open a Wendy’s at the airport is the large number of people who move through it annually," said Wendy’s marketing and advertising director Carmen Perez. "Good food at good prices will be an alternative to the other food establishments already at the airport. We believe it should be one of our top restaurants, with comparable sales of more than $2 million annually." Wendy’s is one of only two retailers that will be on the first floor of the LMMIA’s multilevel parking structure; the other is the Sky Bar & Grill. Starbucks will occupy a 200-square-foot area inside Terminal C. "Obviously, most of our customers will be transients who are looking for a grab-and-go cup of coffee instead of the sit-down clients we have in our larger stores outside the airport," said Starbucks del Caribe CEO Dean McPhail, who expects the LMMIA coffee shop to open before year’s end. "In Puerto Rico, it will be a natural step since we have shops in airports all over the U.S. mainland and in other countries." Soto Lacourt admits the task of upgrading and remarketing the LMMIA hasn’t been easy. Even public corporations such as the Ports Authority get bogged down in the process to obtain building permits. "If I were to do it again, the Ports Authority wouldn’t get involved in the construction phase. Companies such as Wendy’s and Starbucks are more advanced with their construction-permitting process than we are," he said. Making Offers Lessees Can’t Refuse Soto Lacourt was committed to renegotiating contracts that weren’t favorable to the Ports Authority. One of those belonged to Empresas Santana, among the largest concessionaires at the LMMIA. Under the new contract, which was expected to be signed this week, the company must replace some of its 16 eateries with new franchises. "Renegotiating the Empresas Santana contract was part of a major strategy that has been extremely successful," said Espada. "We haven’t favored any company in the reformulation of the airport’s commercial offering, but negotiations have been difficult at times." Some of the franchises that Empresas Santana has committed to bringing to the LMMIA are Domino’s Pizza, Cinnabon (cinnamon rolls), Chester’s (fried chicken), La Taqueria (tacos), and Sbarro (pizza and pasta). Empresas Santana’s Sports Bar restaurants will continue operating without changes. Even though he is one of the airport’s most successful tenants, Luis Bared has committed to redesigning the space occupied by his Alliance Duty Free store. Bared’s contract renegotiation netted $1 million for the Ports Authority and is expected to increase the agency’s commissions. Also renegotiated was Trans Ad P.R. Inc.’s contract for indoor and outdoor advertising space. With 10 million visitors passing through the LMMIA each year, the $90,000 annual contract didn’t reflect the actual value of the space. Trans Ad’s new $200,000 contract (not including commission) is limited to indoor advertising. The contract for outdoor advertising space hasn’t been awarded yet, though six companies (including Trans Ad) participated in the bid. This contract is expected to generate about $700,000 annually for the Ports Authority, plus commissions. Other airport facilities have been affected by the new marketing plan. The old airport hotel was remodeled and reopened June 29 as a Best Western targeted at business travelers. The Ports Authority has renegotiated a $75,000 annual contract with Banco Popular, which will add more automated teller machines at the LMMIA and at Aguadilla’s Rafael Hernandez Airport, Fajardo’s Diego Jimenez Torres Airport, Isla Grande’s Fernando L. Ribas Dominicci Airport, and the Old San Juan and Fajardo piers. The Puerto Rico Tourism Co.’s office will be transferred to a new and bigger area now that the agency has renegotiated its lease. Plans also call for turning a 20,000-square-foot area near the Best Western entrance and the Banco Popular branch into an outlet for designer clothes. Leaving the LMMIA should be easier now thanks to the implementation of a system whereby the parking fee is paid before leaving the terminal. The Ports Authority has settled a longstanding $3.8 million dispute with parking-lot operator and administrator American Parking Inc.; under the new agreement, the agency will receive $2 million to $3 million in annual revenue while American Parking retains the right to operate the LMMIA parking lot for five years. Contract negotiations with car-rental agencies involved not only new fees but also the agencies’ move to a new site near Terminal A. Cendant Corp., owner of Budget and Avis, paid the Ports Authority $2 million for a particular space there. Hertz, National, and newcomer Alamo will also build and move into new facilities near Terminal A. Each car-rental agency will be allowed 50 spaces in the airport’s parking lot near the passenger terminals, which will generate $240,000 in annual revenue for the Ports Authority. Annually recurring revenue from this sector will total approximately $700,000. Airport’s Future is in Fiber Optics "Nobody knew there was a fiber-optic line installed throughout most of the airport," said Soto Lacourt as he explained how the LMMIA’s communications systems would be brought into the 21st century. "The fiber-optic line has been in place since 1992. After trying it out, an engineering firm told us it only needs to be relooped in those areas where new construction has taken place." Added Espada, "The first stage, to reactivate the fiber-optic line and put it in working condition, will require between $6 million and $7 million. The Ports Authority has committed $2 million to the line’s reactivation, and a request for proposals has been published to select an operator. The agency is estimating an end-of-year start-up for some parts of the system." The Ports Authority is also considering installing FIDS and BIDS, automated systems that display flight and baggage information, respectively, on monitors installed around an airport. The information is automatically updated throughout the day, and the systems provide for visible and audible paging-information systems. "FIDS and BIDS are potentially vast revenue-makers for the Ports Authority," said Soto Lacourt. "Through the same fiber-optic line, we will be able to lease telephone, Internet, and television services [to airlines and concessionaires] while retaining ownership of the line. All point-of-sale transactions...will be important to determining the Ports Authority’s fees." These and other projects make up only the first phase of the Ports Authority’s commercial reformulation. While $20 million in additional revenue for one year might not be enough to solve all of the LMMIA’s infrastructure and operational problems, it will surely give a significant boost to the airport’s image and could lead to a more efficient way to manage the profitability of the agency’s top piece of real estate. The question is, how will the reformulation be implemented at other Ports Authority properties? The Future of Puerto Rico’s 10 Regional Airports The Puerto Rico Ports Authority manages 11 airports in Puerto Rico: Carolina’s Luis Muñoz Marin International Airport (LMMIA) and 10 regional airports, in Aguadilla, Arecibo, Culebra, Fajardo, Humacao, Isla Grande, Mayaguez, Patillas, Ponce, and Vieques. All of the regional airports are small and get little traffic. The LMMIA alone generated $56 million, or 94% of the aviation division’s $59.4 million budget. The 10 regional airports, on the other hand, with $6.1 million in revenue and $21.5 million in expenses, lost a combined $15.4 million in 2003. Despite their losses, the regional airports are tied into the $87.3 million in bonds issued by the Ports Authority for capital improvements in 2001, which means the agency must continue to operate them. Ports Authority Executive Director Miguel Soto Lacourt plans to add new activities at the regional airports in an effort to generate more revenue. Humacao’s airport, for example, has become the site for parachuting, ultralight flights, and flying lessons. The Puerto Rico Electric Power Authority is considering transferring its air operations to Humacao. During the Rossello administration, the municipalities of Arecibo and Patillas requested that their airports be moved so they could undertake other economic development activities at the sites. After confronting regulatory, administrative, and maintenance issues, however, Arecibo Mayor Frankie Hernandez Colon returned the airport’s operation and administration to the Ports Authority. "I turned over the airport to the Ports Authority because its upkeep was causing us problems," said Hernandez Colon. "Racecar events were deteriorating the runway; we didn’t have security barriers; and the maintenance for the airport’s 112 cuerdas [about 109 acres] cost too much." According to Hernandez Colon, when the idea to close Isla Grande Airport came up, one option was to move the operations to Arecibo. They even tried to make the Arecibo airport a landing site for corporate jets, but the Ports Authority would have had to invest $1 million to extend the runway by 1,000 feet, a cost the agency can hardly afford. Other possible uses for the airport include a skydiving site, a heliport, and to provide transportation to the members of the lucrative pharmaceutical industry in the region. "All of Puerto Rico’s airports are managed by the Ports Authority, except for Patillas Airport, which is run by a group of private airplane operators because it is such a small operation," said Soto Lacourt. "When municipalities have tried to operate their regional airports, they have failed because they [the airports] aren’t viable economic ventures. The fact remains that no matter who operates the regional airports, the result is the loss of millions of dollars." Hernandez Colon and Soto Lacourt agree Arecibo’s airport shouldn’t be closed, even though it doesn’t generate revenue for the municipality. "Transportation venues should be well-analyzed before they are closed since they can be of greater utility," said Hernandez Colon. "This airport was built by the U.S. Department of Defense during World War II, and the pharmaceutical manufacturing companies [in the area] could make it more active with the opening of Ponce’s transshipment port. But we can’t run it." Promotional efforts are also under way for Aguadilla’s Rafael Hernandez Airport. It doesn’t really qualify as a regional airport because of its 13,000-foot-long runway and more than eight acres of available space for value-added activities, but its location and minor activity make it so. While it, too, waits for the Port of the Americas in Ponce to begin operations, the Ports Authority is trying to attract private and public-sector groups with air-cargo transportation needs to Aguadilla. The agency has assigned $33 million for capital-improvement projects at the airport between 2000 and 2006. These include relocating Taxiway A and making repairs to the runway, installing a new beacon, demolishing Hangar 578, installing an air-conditioning system and an emergency-power plant, expanding the passenger terminal, and improving the air-rescue unit’s training facility. The U.S. Postal Service, FedEx, the U.S. Coast Guard, and FURA (United Rapid Response Forces) already have operations at the Aguadilla airport. Last month, DHL, JetBlue Airways, and Pan American Airways began offering flights from there to the U.S. mainland. Recently, Ivyport inaugurated its new ground-handling facility there, joining DynCorp Puerto Rico Corp.’s facility for airplane maintenance and repair, established in 2003. "The regional airports are but one of the many dilemmas of the Ports Authority," said Soto Lacourt. "There must be many opportunities to take advantage of, but finding those opportunities and fulfilling them doesn’t happen overnight." Industry experts, including Soto Lacourt and former Ports Authority Executive Directors Miguel Pereira and Jose Baquero, have said Puerto Rico needs only six airports: the LMMIA and those in Aguadilla, Ponce, Fajardo, Vieques, and Culebra. "If the airport at [former U.S. Naval Station] Roosevelt Roads in Ceiba is transferred to the local government, I would shut down Fajardo’s Diego Jimenez Torres Airport," said Soto Lacourt. "In addition, given the redevelopment efforts planned for Aguadilla’s airport, it isn’t economically feasible for the government to keep running Mayaguez’s Eugenio Maria de Hostos Airport. Other underused airports are in Arecibo, Patillas, Humacao, and even in Isla Grande, the latter of which sits on prime land in San Juan." This Caribbean Business article appears courtesy of Casiano Communications. or
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