01:705 .00
00c, Los Angeles World Airports
REPORT TO THE
BOARD OF AIRPORT COMMISSIONERS
-Dave jaw
Meeting Date:1/7/2021 Approved by: Dave Jones, Director, Airline Property and Concession
Services CAO Review: ' I Completed Pending N/A El Reviewed by: Jeffrey Utterback, Deputy Executive Director
-h(N
, Commercial Development V.. -1d'S.-Reviewed for i Date Approval Status f3_y
CI VW QM TB KC
44144
City Attorney Finance
CEQA Procurement Guest Experience Strategic Planning 12/22/2020 12/18/2020 12/17/2020 12/23/2020 12/23/2020 ZY El N 0 NA ZY 0 N ZY ON 0 Cond ZY ON DY II N Z NA
Justin Erbacci, Chief Executive Officer
SUBJECT: Second Amendment to Concession Agreement between Los Angeles
World Airports and Smarte Carte, Inc. (Agreement No. LAA-8940)
Approve the Second Amendment to the Concession Agreement with Smarte Carte, Inc.
covering the luggage cart concession at Los Angeles International Airport, to modify the Monthly Concession Fee and Management Fee, and establish rental rate increases for calendar years 2021 and 2022.
RECOMMENDATIONS:
Management RECOMMENDS that the Board of Airport Commissioners: 1. ADOPT the Staff Report.
2. DETERMINE that this action is exempt from the California Environmental Quality Act (CEQA) pursuant to Article III, Class 1 (31) of the Los Angeles City CEQA Guidelines. 3. APPROVE the Second Amendment to the Smarte Carte, Inc. Agreement No. LAA-8940 at
Los Angeles International Airport.
4. AUTHORIZE the Chief Executive Officer to execute the Second Amendment to Smarte Carte, Inc. Agreement LAA-8940 upon approval as to form by the Los Angeles City Attorney and upon approval by the Los Angeles City Council.
Page 1 Smarte Carte 2"d Amendment
DISCUSSION:
1. Purpose
Amend the Concession Agreement with Smarte Carte, Inc. (Smarte Carte) to decrease the Management Fee Los Angeles World Airports (LAWA) pays Smarte Carte, modify the Monthly Concession Fee that Smarte Carte pays LAWA and establish cart rental rate increases.
2. Prior Related Actions
August 4, 2016 - Resolution 26047 (LAA-8940)
The Board of Airport Commissioners (Board) approved a seven-year with three one-year extension options, Non -Exclusive Concession Agreement with Smarte Carte, Inc. to operate luggage cart services at Los Angeles International Airport (LAX) (Agreement).
November 7, 2019 - Resolution 26877 (LAA-8940)
The Board approved an increase to the rental rate from $5.00 to $6.00 per luggage cart upon execution of the Amendment.
3. Current Action
Smarte Carte currently has a non-exclusive right to operate and maintain luggage cart service at LAX. The Agreement commenced on November 1, 2016 and expires December 31, 2023, with three one-year extension options, at LAWA's sole discretion. The Agreement has hybrid service/concession structure, which allows LAWA, consistent with most
international airports in Asia and all major U.S. west coast international airports, to provide luggage carts for free to international arriving passengers in the Federal Inspection Services (FIS) areas at LAX, while allowing Smarte Carte to operate as a concession in international departing and domestic departing and arriving areas where guests pay a concessions fee to
rent luggage carts. Since December 5, 2019, the cart rental rate at LAX has been set at $6.00.
The hybrid structure is as follows:
1. Service: LAWA pays Smarte Carte approximately $4 Million annually (adjusted each
year based on the Consumer Price Index) to provide free carts to international arriving passengers. A portion of this expense is recovered directly from international airlines through the terminal rate base and the FIS fee. Based on current projections, LAWA will pay Smarte Carte a Management Fee of $4.3 Million in FY 2021 as shown in the table below.
2. Concession: Smarte Carte pays LAWA annually a base fee of $200,000 plus 50% of gross sales over $2 Million earned from the rental of carts to all passengers outside of the FIS areas. For the most recent Agreement year, the total rent payment from Smarte Carte to LAWA is estimated to be $434,000 as shown in the table below.
Contract
Year
Calendar
Year Rent to LAWA
Management Fee 1 2016 $2,602,218 $ 4,000,000 2 2017 $1,906,001 $ 4,080,000 3 2018 $1,815,271 $ 4,161,600 4 2019 $1,566,133 $ 4,244,832 5 2020 * $434,000 $ 4,329,729
* Due to significant decrease in passenger travel, caused by COVID-19, sales from cart rentals are expected to be slightly over $2 Million and therefore rent to LAWA will consist of the MAG of $200,000 plus 50% of anything over $ 2 Million which is estimated to be $234,000.
Due to COVID-19 impacts arriving international passenger traffic at LAX has decreased by nearly 90%. However, the Agreement does not have a mechanism to reduce the
management fee proportionate with the reduction in international arrivals. Therefore, LAWA and Smarte Carte agreed to restructure the Agreement to reduce the management fee payment. Further, in recognition of the reduction to the management fee and because Smarte Carte has not received any concession rent relief at LAX, LAWA proposes to also reduce the rent Smarte Carte pays to LAWA and allow increases to the luggage cart rental rates as described below.
Proposed Terms: Management Fee
The proposed amendment will adjust the management fee to a payment of a flat rate of $2 million annually to cover fixed costs including depreciation and basic staffing levels, plus a variable per passenger fee of $0.20 per arriving international passenger. LAWA estimates this will reduce LAWA's payment by approximately $2 million per year at current passenger
levels, and directly link future fee amounts to actual international passenger numbers. Proposed Terms: Concession Rent
The proposed amendment will also change the percentage rent that Smarte Carte pays from 50% of Total Gross Revenues over $2 million to 38% of Total Gross Revenues over $2 million. The chart below provides a comparison on revenue to LAWA, based on estimated sales.
Comparison of Current Rent vs. Proposed Rent to LAWA Calendar
Year
Estimated Total Sales
Estimated Rent at Current 500/o Contingent Fee
(Plus $200K MAG)
Estimated Rent at Proposed 38/0 Contingent Fee
(Plus $200K MAG)
2020 $2,468,000 ** $434,000 ** $434,000
2021 * $3,282,794 ** $841,397 ** $648,978 2022 * $5,064,881 ** $1,732,441 ** $1,272,708
* Sales based on proposed automatic increase in per cart rate in 2021 to $7/cart and in 2022 to $8/cart.
** Estimated Revenue includes $200,000 MAG.
Proposed Terms - Cart Rental Fee
Based on declining cart usage and the cost to operate the luggage cart program, Smarte Carte requested an increase to the per cart rental fee. LAWA staff and Smarte Carte negotiated to allow an increase the rental rate charged at LAX from $6.00 to $7.00 starting January 1, 2021 and from $7.00 to $8.00 starting January 1, 2022. Many airports including ATL, MSP and SFO already have increased the luggage cart rental fee to $8.00 per cart. In
addition, SEA is proposing to increase its rate to $8.00 in Q1 2021, DEN and ORD plan to
Page 3 Smarte Carte 2nd Amendment
increase their rate to $7.00 on January 1, 2021 and $8.00 in 2022, MIA will increase its rate to $7.00 in Q1 2021 and DTW will increase its rate to $8.00 in Q1 2021.
Below is a summary of the proposed changes to the Agreement. All other terms in the Agreement remain the same.
ITEM CURRENT TERMS PROPOSED TERMS Luggage Cart Rental Rate $6 per cart Effective January 1, 2021
increase to $7 per cart
Effective January 1, 2022 increase to $8 per cart Monthly Concessions Fee Minimum Annual Guarantee of
$200,000; and,
Annual Contingent Percentage Fee of 50% of the Total Gross Revenues over $2M for the applicable Agreement Year
Minimum Annual Guarantee of $200,000; and,
Annual Contingent Percentage Fee of 38% of the Total Gross Revenues over $2M for the applicable Agreement Year Management Fee Annual fee of $4M subject to
an annual CPI adjustment with a maximum rate of 2%
Annual fee of $2M subject to an annual CPI adjustment with a maximum rate of 2%; and,
A rate of $0.20 per arriving international passenger, subject to an annual CPI adjustment
Using 2020 estimated passenger numbers and luggage cart sales, LAWA staff estimates that the cumulative impact of revising the Management Fee and Cart Rental Fees would result in slightly less revenue ($331,763 instead of $332,063), but a significantly reduced Management Fee ($2.6M instead of $4.0M), as shown in the table below:
Management Fee Revenue
Intl Pax Fixed Fee Variable
($0.20/Pax) Total $6/Cart at 50% $7/Cart at 38%
2020* 3,128,750 $ 2,000,000 $ 625,750 $ 2,625,750 $ 332,063 $ 331,763
* 2020 Passenger Estimates
How this action advances a specific strategic plan goal and objective
This action advances this strategic goal and objective: Sustain a Strong Business: Operate sustainability - balancing economic, social and environmental responsibilities. Amending the Agreement will align the management fee that LAWA pays to Smarte Carte to reflect the decline in international traffic and the reduced number of free carts being provided to
international arriving passengers, as well as adjust the revenues that Smarte Carte receives.
Action Requested
Staff requests the Board approve the proposed Amendment to reduce the Management Fee LAWA pays Smarte Carte for the free international arrival passenger carts, to modify the
Concession Fee Smarte Carte pays LAWA, and to increase the rental rate from $6.00 to $7.00 on January 1, 2021, from $7.00 to $8.00 on January 1, 2022.
Fiscal Impact
This item is expected to decrease the annual cost to LAWA by approximately $2,000,000.
4. Alternatives Considered
Take No Action
LAWA will continue to pay $4M for reduced service caused by the Covid-19 Pandemic with no revenue expected to be paid to LAWA for the sales generated by the international departing and domestic departing and arriving passengers' rentals.
APPROPRIATIONS:
Funds for this item are available in the Fiscal Year 2020-2021 LAWA Operating Budget in Cost Center 2001097, Commitment Item 520160 - Operations Contracts. Funding for subsequent fiscal years will be requested as part of the annual budget process.
STANDARD PROVISIONS:
1. Establishment or modification of any rate, fee or charge is exempt from California
Environmental Quality Act (CEQA) requirements pursuant to Article III, Class 1 (31) of the Los Angeles City CEQA Guidelines.
2. This proposed document(s) is/are subject to approval as to form by the City Attorney.
3. Actions taken on this item by the Board of Airport Commissioners will become final pursuant to the provisions of Los Angeles City Charter Section 606.
4. Smarte Carte, Inc. is required by contract to comply with the provisions of the Living Wage/Worker Retention Ordinances.
5. Procurement Services has reviewed this action (File No. 7612 and established a 5% Airport
Concessions Disadvantaged Business Enterprise (ACDBE) goal was set for this project. Smarte Carte committed to 5% ACDBE.
6. Smarte Carte, Inc. is required by contract to comply with the provisions of the Affirmative Action Program.
7. Smarte Carte, Inc. has been assigned Business Tax Registration Certificate number 0000866231.
8. Smarte Carte, Inc. is required by contract to comply with the provisions of the Child Support Obligations Ordinance.
9. Smarte Carte, Inc. has approved insurance documents, in the terms and amounts required, on file with the Los Angeles World Airports.
Page 5 Smarte Carte 2nd Amendment
10. Pursuant to Charter Section 104 (g) staff determined that airport concession agreements are exempt from the provisions of Charter Section 1022 (Use of Independent Contractor).
11. Smarte Carte, Inc. has submitted the Contractor Responsibility Program Questionnaire and Pledge of Compliance and will comply with the provisions of the Contractor Responsibility Program.
12. Smarte Carte, Inc. must be determined by Public Works, Office of Contract Compliance to be in full compliance with the provisions of the Equal Benefits Ordinance prior to execution of Contract Amendment.
13. This action is not subject to the provisions of the First Source Hiring Program.
14. Smarte Carte, Inc. has submitted the Bidder Contributions CEC Form 55 and will comply with its provisions
