TRB NEWTEMPLATE - Airports

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aer rianta international middle east
Beirut Duty Free.
ARIME heading for $840m
in a year of mixed fortunes
With an expected managed sales turnover of
$840m this year, Aer Rianta International
Middle East (ARIME) has had a good year
considering the pressures on some parts of the
operation and the fact that it is slightly ahead of
last year, after three record sales years in a row.
ARIME Managing Director John Sutcliffe talks
to Doug Newhouse in the first of a two part
in-depth interview about the highs and lows of
the year, new retail infrastructure coming on
line in Cyprus and the impressive fact that the
retailer has ongoing expansion and
refurbishment projects covering all of its main
operations in Bahrain, Beirut, Cyprus, Egypt,
Qatar, Oman and elsewhere – despite
pressures in some locations.
“There are people here who are losing money in
some locations and I am happy they are losing
money to be quite honest because they have come
in and bid ridiculous prices and it could have easily
upset the whole market here, but it hasn’t so far.”
John Sutcliffe.
o how has ARIME performed over the last year?
Basically 2009 has been a year of mixed fortunes so far,
but in general we are doing well and our performance
both top and bottom line is slightly ahead of last year
overall, which in the circumstances is a pretty good result
considering we have had record years for the last three years.
We expect our overall managed turnover to surpass about $840m,
although the results vary by location and I think it is fair to say that
those locations which we operate in which are exposed to the UK
market –and in particular the British pound specifically –are the ones
which have struggled the most.
They would be Cyprus, Egypt and Bahrain to a lesser extent. All of
the other locations have positive results over last year.
The issue with the British pound is very serious and in Cyprus it is
particularly nasty because we have a huge capital expenditure
programme which is ongoing this year and over the last few months
we have been working very hard to open the new terminal in Larnaka
which will open on the seventh of November [now open-Ed].
This is Aer Rianta International’s biggest single outlet and largest
project. The total commercial area in Cyprus is over 6,000 square
metres, which incorporates food and beverage and retail.
Now Cyprus is also very seasonal, so we are opening quite a big
shop in the winter, but we had to be committed to the new airport.
The good thing about Cyprus is that we have a 25-year contract
there and we are actually investors through Hermes which is the
consortium which has the concession to operate the two airports
until 2031. We have got an 11% share of that as landlords. We also have
a 25-year concession for the duty free and also we are in partnership
with our Cypriot partners and SSP on the food and beverage.
So in essence we are sort of master concessionaires for a very long
time in Cyprus, which is ideal and therefore there is no panic in terms
of the capital expenditure that we are putting in this year.
If we had a choice we probably would have delayed some of that
S
november 2009
of course and that would have been a prudent thing to do, but we
didn’t have a choice really because we are opening up a new terminal
in Larnaka. It is absolutely fantastic and it is also great for Cyprus.
Having said that, we might still struggle a bit next year because I
am not confident that the British market will come back quickly. I
think it could take another two years before we start to see any
significant increase again.
But as I said, we are there long term and we are quite confident that
it is going to be a success in the long term. In fact we know it will
because it is already a success, but it is not as successful as we want it
to be right now and sales are down.
Now we opened Paphos this time last year and that has been very
successful and my point is proven there really in the sense that even
though Paphos is about 85% dependent on UK tourism, the
performance in Paphos has been good and that is simply because we
opened a new facility there last year which helped with a lot of the
problems that we have faced this year.
I think the same will happen in Larnaka next year. It will be a new
shop with a fantastic location and it is an integrated shop design with
the food and beverage and retail mixed and there is also the extended
product range. I think all of that will give us significant incremental
sales and help cushion what would otherwise have been a very severe
period next year. So we are confident about that.
So do you think that it is now a game of increasing penetration and
conversion with the new shops at those two airports?
Yes and I have always said this. I get a bit frustrated when I hear
people talk about cut backs. I mean the first thing that you hear when
there is a recession or an issue like 9/11 or something like that and
people are looking down the barrel of a gun... the first thing they feel
they must do is cut costs. Of course that is the prudent thing to do,
because you cut costs and you protect your profits.
But you also have to look at other ways you can increase sales,
because you can’t just run the business down and cut costs in every
place and withdraw incentives for the management team and all of
these things –it just doesn’t make sense and it makes matters worse.
So what we are doing at Aer Rianta International Middle East
across the board and not just in Cyprus is that when it was obvious
last year that we were heading into a fairly deep recession we got
Cyprus Duty Free.
53
“What I think saved the
region here – as distinct
from say Europe or the
States – was the massive
amount of infrastructure
development that was
already going on and you
could say the same for
Asia.”
John Sutcliffe.
together our management team in Cairo last November and we
basically laid down a plan.
This was a push-pull type of plan and we didn’t immediately cut
back in terms of costs associated with training and marketing. We
also felt that we needed to push the business forward to make sure
that we had plenty of excitement in our shops and plenty of offers and
that we must be conscious that people are struggling financially.
So we had a lot of this and we had a lot of support from our
suppliers as well which was great. If we take Cyprus again, we have
had these Amazing Days programmes going on for the last 18 months
in the last summer and this summer and that has been highly
successful.
This is where we are giving away fantastic prizes such as all
expenses paid holidays in Las Vegas with a few thousand dollars
worth of pocket money and this is what the customers want to see. I
mean all they hear every day is bad news on the TV or when they read
the papers.
So I think that is why we have had a pretty good year with all things
considered. Its been the same then relative to the British pound. I
mean the British pound is really hurting and in Cyprus it is a
particularly nasty one because it is only in recent years that they have
moved over to the euro so we have got to live with that.
We are obviously hoping that this will come good, but I can’t see it
happening in the short term and I think it is going to be more into the
middle of next year, although I could be wrong because I am not an
economist. I think it will be into the middle of next year and possibly
at the beginning of 2011 before we see a decent comeback on the
British market.
I mean people have money and it is there in the market, but they
are not spending and that is obviously clear across the board. Average
spends are down and particularly on luxury goods which is a clear
indication that people have just stopped spending.
Is that where you seeing a lot of the decline – in luxury goods, or higher
ticket items?
Yes. This always happens. That is a trend that we see every time that
there is any kind of a crisis, be it SARs, bird flu, swine flu, a Gulf War or
anything. It is always the luxury goods that get hit when people are
retrenching and pulling back on their spends.
Then ironically you often see that things like liquor and tobacco and
food and beverage tend to do quite well in those situations. People
get to airports and say that they won’t bother shopping and they will
just get a cup of coffee, or a beer or whatever.
We were finding the same thing was happening in Egypt at the
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Cyprus Duty Free.
“But regardless of what I have
said on the positive side, we
are in a recession and it is
hurting. If we make 3% to 4%
right across the board this year,
then that would have been 18%
to 20% had we not had a
recession, so it could be better
– but it could also be a damn
sight worse.”
John Sutcliffe.
beginning of all this. But the good thing is that the Egyptian market
has come back very strongly in the last three or four months and it is
now doing well. Now I think the reason for that is the pricing is good
and it is good value for money relative to other destinations in
Europe. Obviously we are hoping this will continue.
I mean we opened Terminal 3 in Cairo which was a milestone in
terms of Egyptian Duty Free and it is a fantastic location, although it
will probably take quite a while to mature because of the usual
logistics and red tape issues that our clients Egyptair Duty Free have.
But we are pushing ahead and when that operation matures I think
we will see good business there next year. So we are quietly confident
about Egypt.
As I mentioned earlier on, Bahrain has struggled and this is because
it is unique in the Gulf area in the sense that it has quite a bit of
charter traffic from the UK in the winter months. So from now up
until April of next year we will get the normal charter traffic coming
through with the likes of Monarch Airlines and they are going from
the UK down to places like Goa, Phuket and Thailand and so on and
they carry a lot of UK passengers.
Here we are getting the exact same result with these passengers as
in Cyprus, so that is why Bahrain has struggled a bit in the winter
months –although in the summer months it has done very well.
We were ahead of last year through the summer months, but
subsequent months have pulled back sales by about 8%. But it could
be worse and we are not too unhappy about that. I think Bahrain will
come back and we are also making some new changes in Bahrain.
We are upgrading the perfume and cosmetics area there which will
be very nice and we have changed things around quite a lot there
over the last couple of years and the shop looks fantastic. In fact it is
still my favourite perfume and cosmetics shop.
So I am not really worried about Bahrain. It is a $100m business for
us and it has just gone through that little difficulty and exposure to
the UK market on the charters. But there are new airlines that have
started up here with Bahrain Air and Gulf Air is also reorganising, so I
think we will see a nice steady growth.
There is a lot happening in the local Bahraini market as well and the
local economy here didn’t struggle as much as Dubai and some other
locations because of its size. It wasn’t so far ahead and it didn’t have
so far to fall, so it is still fairly buoyant. Just during the last week one of
the big shopping malls here City Centre opened a half indoor outdoor
massive water park, so these kinds of things are happening and that
will bring business.
Then moving onto Doha we have a consultancy management
contract there with Qatar Airways. Now you have to give credit to
Qatar Airways and their Ceo Akbar Al Baker because they never sit
back. There are continuous improvements taking place in Doha. As
we speak there is a new massive airport being built which will be
fantastic which is scheduled to open in 2012 and even then they are
still continuing to develop the existing facility, even though most
airports would probably not do that and would let it run down.
But that is not the way that Qatar Airways think and they have
done a great job and sales have been 7% to 8% ahead of last year.
Between Doha and Beirut these two locations are running second
in the Gulf in terms of sales to Dubai. So it has been good in Qatar
and we have been making continuous changes down there and we
have got a good team there with Bill Maxwell and Keith Hunter from
Qatar Airways. They will certainly have a good year next year as the
airline and the airport continue to expand.
Last year you did mention that Qatar Airways might want to run this
operation themselves in the future. Can you say what the current
position is with this?
The only thing that I can say is that we haven’t yet discussed the issue
fully. Our contracts are due to finish there next May. We are now into
our second term there with Qatar Airways and we have had a
fantastic time together and we have seen the business grow from a
small $2m business turnover to what is now the second largest
business in the Gulf after Dubai.
That is mainly down to the fantastic job which the government has
done there and Akbar Al Baker in particular with Qatar Airways in
developing the facilities.
I mean if you know Qatar for what it was and what it is now then
you can see that Doha International Airport is just unrecognizable
and there is also a brand new airport in a different location on the
november 2009
55
Bahrain Duty Free.
way. He is a very dynamic individual. There are also continual new
routes that come with the expansion of the airline and there are new
aircraft coming in, so this is all building up the traffic. What happened
in Dubai all those years ago is what is happening in Doha now.
We will sit down over the next couple of months and discuss what
will happen after our current contract expires to see if we are involved
and we hope that we will be in some form or another. But we will
have to wait and see what Qatar Airways want to do – they haven’t
decided yet.
What about that other lovely place The Lebanon. That has been
powering along nicely as well hasn’t it?
Beirut has been the star performer this year and as I have always said
to you when you call me up to ask what my wish is for the New Year
–while others wish for more money and more profits, I just wish for
continued peace.
I have lived in the Middle East for most of my working life. I came
to Dubai in 1983 with Colm McLoughlin and the boys there and with
the exception of two years in Russia I have been in the Gulf region
since then and I’ve seen wars and all sorts of crises.
The thing about Aer Rianta is that we have such an extensive
footprint here. We’ve got interests in North Africa in the Levant, in
the Mediterranean and right down to the Gulf and we’ve been in
Damascus, Kuwait, Bahrain and Muscat, so we have fairly extensive
experience and we’ve made mistakes and we’ve learned from them.
My dad used to say that the biggest mistake that you can make is
to repeat one, so we have tried to learn how to gel in, but as I said
peace is a big factor here in this region and we have it now. Since 2006
there has basically been good civility in Beirut and it continues to exist
Qatar Duty Free.
“Sooner or later all of the big operations here are
going to go to some sort of contractual
arrangement other than run it by themselves. They
are either going to go to concession, tender, or they
are going to bring in a selected partner to help
them run the business. It is a matter of when and
not if and I am certain of that.”
John Sutcliffe.
in what is an absolutely fabulous destination.
We are very fortunate in Beirut because the passenger mix there is
perfect. There are basically two sectors in the mix with the Lebanese
themselves who are very brand conscious and very good spenders
and that helps and then you have the other segment there which is
the Arabs from the Arabian Gulf who go to the Lebanon on holidays.
It is the perfect destination for them because it is like the Riviera.
It has fantastic five-star hotels, beautiful weather, lovely food and it
is an Arabic-speaking country. They are very high spenders as well.
Beirut has performed extremely well and it is substantially ahead of
last year, so we are delighted, and again, we have an ongoing
refurbishment programme to freshen up the shops.
Again, most people have postponed these type of works but we
haven’t. We have works going on in all of our locations from building
a new terminal in Larnaka right down to refurbishing the shops in
Bahrain and Beirut. We also have a whole programme across all of
the Egyptian airports. So there is a lot of investment going on and
nobody is sitting back.
The other location of course is Muscat, which is our smallest
operation but it has a turnover of $50m which isn’t small and that is
fantastic. It is currently running about 8% ahead of last year which is
wonderful and it is one of my favourite locations, because it is a
beautiful part of the world with wonderful natural resources.
They have opened a new pier at Muscat Airport and we’ve opened
shops there this year and while it is more expenditure, that is what
you need to do. They also have a new airport coming in about four
years and you’ve got Oman Air there which has been building
steadily as well. It is not just going out and buying 20 or 30 new
aircraft, but it is building steadily by adding new routes all of the time.
They just announced in the papers today that they have started
services from Oman to the Maldives some four times a week and that
sort of steady building is all very good for our operations there.
So the picture in the region is pretty good compared to what it might
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with non-oil related industries, so this is happening at the same time.
That’s why I think the Middle East has weathered the storm a bit
better than most because all of those things are happening and they
couldn’t be stopped really. But regardless of what I have said on the
positive side, we are in a recession and it is hurting. If we make 3% to
4% right across the board this year, then that would have been 18% to
20% had we not had a recession, so it could be better – but it could
also be a damn sight worse.
Cigars and tobacco at Beirut Duty Free.
“The good thing about Cyprus is that we have a 25year contract there and we are actually investors
through Hermes which is the consortium which has
the concession to operate the two airports until
2031. We have got an 11% share of that as
landlords. We also have a 25-year concession for
the duty free and also we are in partnership with
our Cypriot partners and SSP on the food and
beverage.”
John Sutcliffe.
have been if you had just sat back and done nothing?
Yes. What I think saved the region here –as distinct from say Europe
or the States – was the massive amount of infrastructure
development that was already going on and you could say the same
for Asia.
I was in China on holiday during the summer and you could see
that everywhere. Now the same has been going on in the Middle
East. You’ve got new airports being built and new terminals like
Cairo. The same is happening in Jordan with a new terminal coming
up at Amman Airport. There have also been announcements that
Bahrain will start constructing its new terminal shortly. There is also a
new airport being built in Doha alongside the ongoing developments
in Dubai and Abu Dhabi all the time which we know of.
So you have all of this infrastructure being expanded in airports
and in parallel to that you have this huge expansion of the big carriers
such as Emirates Airlines, Qatar Airways, Etihad, Bahrain Air, Middle
East Airlines and this is happening across the board.
Now a lot of that is transfer traffic coming through here, but it is all
good news because it is more people coming through the airports.
Then in parallel to that as well you have the continuous development
of the local economies and the massive infrastructure developments
After 26 years in the Middle East do you think you ought to be getting a
better deal from some of the supplier sectors than you are, because
there still seem to be some problems in some areas?
There are, but I obviously can’t talk for Dubai or Abu Dhabi. But I
have worked in Dubai many years ago so I know it pretty well. In fact
I wouldn’t say that Dubai or Abu Dhabi were very good examples
because they are two government-run operations, whereas all of my
operations with the exception of Qatar are concession type
arrangements.
When you are paying concession fees it is a different business and
you can’t compare the two because you are living by different
parameters and objectives.
I would say yes, the suppliers could do more, but to be fair I would
also say that many of the suppliers have now altered course and over
the last couple of years we have found that many have come to us
and been understanding of our situation and they have been helpful.
It would be wrong for me to just tar everybody with the same
brush. I actually think that the majority of our principal partners have
been very understanding and know what is happening in this region.
Now maybe they took their eyes off the ball for a while in the past
and I know that Dan Cappell calls it the golden cash cow, but I think
the principal suppliers now understand operators like Aer Rianta
International Middle East who have partners and different complex
arrangements in different locations.
We have had to struggle to make a business because we are not
government owned, we do have to pay concession fees and bottom
line performance is the main target for us and not necessarily
focusing on our top line performance.
Well it is good to hear you say this because it was only two or three
years ago that there were major concerns?
Yes there were and I said it then because it was a fact then. But I have
worked in Dubai and I am not suggesting for a moment that profit is
not important to them. The Dubai economy has gone through a
pretty difficult time recently and they are in the bottomless pit in
terms of funding available.
You have seen that the government of Dubai and the Civil Aviation
Department of Dubai have put huge resources into developing their
airports. They have a magnificent airport and a magnificent operation
and I congratulate them and Colm on becoming the world’s largest
duty free airport and I actually feel that they will pull away from the
others as well now.
But ours is a different business and you are not comparing like with
like. So I’d have to be positive here and say that after a couple of years
of talking and arguments and a lot of slagging in your magazine and
others the suppliers have sat up and are mostly being reasonable with
us today. It is happening and that is all we ever wanted.
There are still a few that have yet to come to the table, but to be fair
november 2009
57
Beirut Duty Free.
we would have to say that the suppliers have been good.
The market has changed here. If you go back just ten years ago
there was hardly any competition in this market because most of the
big operators just weren’t interested. Now I am getting towards the
end of my time in terms of my retirement, but when we first came
down here Aer Rianta was the first international operator to establish
a regional office here and that is the reason why we have been so
successful.
We have been here a long time and through the difficult times and
we’ve invested in the region and we’ve formed partnerships with
“We have works going on in all of our locations
from building a new terminal in Larnaka right down
to refurbishing the shops in Bahrain and Beirut. We
also have a whole programme across all of the
Egyptian airports. So there is a lot of investment
going on and nobody is sitting back.”
John Sutcliffe.
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good people and also when you live here you understand the market
better because it is different from other locations.
So as I was saying, the market has changed and it is becoming more
like what we are all used to in developed markets like Europe in
particular and it can be a bit of a man bites dog business at times and
we’ve had examples of stupid bidding and I won’t use any other word
for it, because some of it has been stupid.
There are people here who are losing money in some locations and
I am happy they are losing money to be quite honest because they
have come in and bid ridiculous prices and it could have easily upset
the whole market here, but it hasn’t so far.
The trouble with this is you get airport authorities thinking all of a
sudden that legitimate businesses like ourselves are not paying them
enough and then the whole pressure thing starts to build up again.
Now I won’t name names because everybody knows who I am
talking about and we don’t mind competition because it keeps us on
our toes.
But it is disappointing to see this because many of us have put our
whole working lives into this business and we’ve built businesses up
from nothing and now we’ve got a situation where we have got to
fight to keep that business. You’ve actually got two things. You’ve got
to fight to keep the business you have and it is more difficult to get
new business because it is more competitive.
Now we have even had some of our competitors meet with some
of our partners and that is how unscrupulous some people can be. I
know who they are and I am in the ears of these people. We are not
naive and we are aware that we have to be vigilant and work hard.
But the best way to hold on to your business is to make it
successful and to build good relationships and not by shouting,
roaring, or complaining. When partners are successful and you have a
good relationship then they are less likely to want to change.
Cyprus Duty Free.
“We are now into our second term there with Qatar
Airways and we have had a fantastic time together
and we have seen the business grow from a small
$2m business turnover to what is now the second
largest business in the Gulf after Dubai. That is
mainly down to the fantastic job which the
government has done there and Akbar Al Baker in
particular with Qatar Airways in developing the
facilities.”
John Sutcliffe.
Do you think that if some governments start to look at divesting their
investments in airports to special groups that the size of the cheque on
the table is going to become even more important in future bid situations
in the Middle East?
I don’t think it is a matter of if... it is a matter of when, because it is
going to happen and mark my words it is going to happen in every
place. Sooner or later all of the big operations here are going to go to
some sort of contractual arrangement other than run it by
themselves.
They are either going to go to concession, tender, or they are going
to bring in a selected partner to help them run the business.
It is a matter of when and not if and I am certain of that. It has
already happened to a certain extent in Abu Dhabi where DFS
basically walked into that contract and there was no tender and no
nothing. So I think you can expect more of that, but it is not the
november 2009
“Beirut has performed extremely well and it is
substantially ahead of last year, so we are
delighted, and again, we have an ongoing
refurbishment programme to freshen up the shops.”
59
Beirut Duty Free.
John Sutcliffe.
golden cash cow that some people think it is. Everybody thinks, oh it
is the Middle East with money to burn, Sheikhs and oil wells, but it is
not like that and it has never been like that for me.
All of our businesses, no matter where we started involved many
of them being put out to tender and we won them and they all
required a lot of planning and a lot of due diligence went into them
before we went in. We have walked into very few cushy situations
and we had to work very hard to help develop those businesses.
It is also not a matter of if these airports are privatised. The airports
may or may not be privatised, but the duty free and commercial
activities in those airports certainly will be pushed in that direction
and there is no doubt about that.
So therefore for you to try and be a world apart from other airports in
terms of excellence must be a priority?
Yes, it’s the best way. People complain and go on about recessions,
but the best way to protect your business is to be efficient and
professional and be successful with the bottom line. In all of the duty
free magazines on the internet you read all about sales doing this and
sales doing that, but it is actually about profit and it is about quality
and the two things go hand in hand in my opinion.
If you are a quality operation and you do the right thing and take a
long term approach, you get the profits in the end and everybody will
get their fair share. You’ve heard me speak about the Trinity issue and
all of that and we are not interested in two or three year contracts and
sometimes even five-year contracts make my stomach turn.
You’ve got to give someone a decent term to build a business and
invest so that they also have a chance to get their money back.
If you offering a short-term contract like they do in Europe and in
the Far East then you just can’t deliver in the short term. You simply
can’t be bold enough to invest in world-class shops and in training
and all of the things that customers expect of you.
Of course, the other big thing that is happening in every place in
the Middle East is the development of the domestic High Street
market.
You mean as a straight competitor with the duty free market?
Absolutely. I mean put yourself in my place at my desk right now. I
mean you cannot leave any of the countries here easily by road and
everybody has to fly every place.
For example, I’ll be doing an average of two flights a week and
people in the Gulf are very frequent flyers and it is a way of life down
here. Now I suppose you could say the same thing is happening now
in Europe and Asia to an extent with the growth of the low-cost
carriers and fares coming down.
Flying is not a big deal any more and it is affordable for most people
because the topography of the place is like that. The Middle East also
sees itself as a major shopping destination and I suppose this whole
thing was started by Dubai back in the eighties. People now recognise
the Middle East as a significant shopping opportunity.
I mean here in Bahrain they just opened a massive shopping mall
right beside another one which has been there for about ten years
and this is supposed to be in the middle of a recession –and this is a
fantastic mall.
So what I am saying is that people have a choice and the Middle
East is a low tax area, although we have a significant price advantage
on liquor and tobacco. But on everything else in Bahrain and most of
the GCC there is a zero to five per cent tax, so we don’t have a
serious comparative advantage in terms of our pricing. We have to
work on lower margins in order to be competitive and fortunately
for these other shops our customers expect the duty free shops to be
cheaper. ❑
[Part two of this in-depth interview with John Sutcliffe will be published on
www.trend.com on Sunday November 22 just ahead of the MEDFA Conference,
where the ARIME head warns of the dangers of a swing back in the value of the
US dollar and how damaging that could be to the region’s operators and why
retailers will still need a lot of help from suppliers. He also talks about the products
duty free shops must have, such as mobile phones, even if the margins are virtually
non-existent and how this situation can be managed profitably. Equally
significantly he talks candidly about the retailer’s entry into the Indian market at
Delhi Airport’s new Terminal 3 next year, now that ARIME has been officially
charged with managing this business as part of its portfolio-Ed].