Airport prepared to fly solo after departure of BAA

July 23, 2007

The Indianapolis Airport Authority, which has assumed management of the city's airports from BAA, said it paid the British firm $21 million over nearly a dozen years to bring brand-name stores and restaurants to a terminal where concessionaires long had gouged passengers.

The BAA contract unceremoniously expired July 15, and authority officials taking the helm for the first time since 1995 say they're confident the millions of dollars in tuition schooled them to continue to innovate as they prepare to open a new terminal.

But those now running what was the first airport in the nation to be privately managed will have to be diligent to boost revenue, to resist the kind of government patronage alleged by BAA's former Indianapolis director--and to stay current with peers, observers say.

"To be able to learn from [BAA] is extremely valuable," said Pauline Armbrust, president and CEO of Palm Beach Gardens, Fla.-based Airport Revenue News, a trade publication read by airport managers and retailers. "But it does require people to stay on top of trends."

John J. Kish, the new executive director of Indianapolis International, said the airport retains its BAA brain trust in Indianapolis. As of last week, all the airport's 460 employees under BAA remained, except for Patrick Dooley. He resigned as airport director to become CEO of Indianapolis mechanical contracting firm Frank Irish Co. Taking over for Dooley is Robert Duncan, airport vice president and counsel who started at the airport in 1973.

"We as a board took a position that no one would lose their job," said Lacy Johnson, president of the airport authority board and an attorney at Indianapolis law firm Ice Miller.

Pay and benefits for the most part remain comparable, airport leaders said.

"The same people who were performing those tasks are still here," said Kish, who for the last several years has served as project director of the midfield terminal, to open next year.

Johnson credited BAA for systems and processes it brought to Indianapolis, but he noted the vast majority of the employees were from here, not from the United Kingdom. "The gray matter was here before."

A trailblazer in innovative airport operation, BAA shook up American airports, starting in Pittsburgh in the early 1990s. BAA turned Pittsburgh's airport into a virtual shopping mall. Today, however, "the airport industry has caught up with BAA," Kish said.

Armbrust said airport retailing is anything but mature, however. Rather, she calls it a quickly evolving "science" ranging from how best to negotiate deals with tenants to concepts such as "adjacency," which involves coming up with the ideal pairing of stores in a given location to maximize sales.

Fewer complications?

Kish noted that most airports in the country are still municipally operated and that his team will continue to stay abreast of the latest strategy in retailing through trade groups, seminars and other continuing education.

A typically unflappable tactician, Kish said the transition to municipal management this month "was like Y2K. It came and it went and nothing happened."

If anything, Kish sees advantages to returning to municipal management. Besides saving an average of $1.75 million a year by not having to pay BAA management fees, municipal management removes the need for BAA oversight by the airport authority.

"We don't compete for board attention. We don't compete for board resources."

Perhaps most important, Kish said, is that putting the authority back in control of airport operations should improve communication with the authority's construction team on midfield. Integrating operations and midfield teams is crucial as the airport prepares to transition to the new terminal, he said.

"It's kind of the best of all worlds for us," said Mike Wells, a longtime airport authority board member who quarterbacked former Mayor Steve Goldsmith's privatization of airport management in 1995.

"Once [BAA] did it and we understood it and followed it, we got all the benefit. To carry it on is not a difficult task," Wells said of the BAA strategy. "I think we get the best bang for the buck now ... we won't pay the fee for the [BAA] intellectual capital."

BAA legacy

Trying to measure financially the value of BAA's dozen years in charge of Indianapolis International--compared to what the authority might have achieved if it had been in charge--is difficult.

Based on data that is readily available, it's clear that fees collected from concessionaires in the terminal rose to $5 million in 2005 from $3.41 million in 1998.

Overall terminal revenue grew to $28 million from $19 million in 1998 and $17 million in 1995.

Parking revenue alone rose 33 percent since 1998. Growing such non-airline revenue is important because it's that much less the airport has to charge airlines in fees and charges to operate here. Theoretically, passengers benefit.

But just how much of the improvement can be attributed to BAA's management versus the inherent rise in traffic at the airport that also bolstered revenue isn't apparent.

"Clearly, non-airline revenue has increased over the years, [but] we've never really done the math," Kish said.

It would just be an academic exercise, at this point. BAA ended its contract a year early, in part because of an ownership change and a decision to refocus on its U.K. airports.

The plan to leave Indianapolis actually goes back to around 2005, Johnson said, when the company decided it wanted to discontinue consulting. As in the U.K., BAA wanted to own airports.

Johnson said the authority had actually asked BAA a few years ago to assist in midfield consulting--something not permitted in its contract with the airport. The authority gave up after BAA presented unacceptable financial terms, he said.

What is most evident following the BAA era is its dramatic improvements to retail and restaurant offerings at a terminal that once had all the appeal of an East German bus station.

Out went a number of no-name stores and restaurants. In came national brands such as Starbucks, TGI Friday's, Waterstone's Booksellers and WH Smith.

Indianapolis becomes a leader

By 2002, Airport Revenue News, the bible of the burgeoning airport retailing industry, ranked Indianapolis--the nation's 50th-largest airport--as No. 10 in airport spending per boarding passenger. Indianapolis passengers spent an average of $7.11 per person on food, beverages and retail--besting no less than Atlanta, Boston and Detroit airports.

"BAA was always big on branding ... instead of having mom and pops," Wells said.

They treated the airport as a business, not as a utility as some municipal operators are inclined to do, said Dennis Rosebrough, a longtime former airport employee.

Rosebrough said BAA looked at concessions in a more strategic way, staging joint promotions during holidays, for example.

BAA also addressed an impediment that long plagued airport shoppers around the country--high prices. BAA required tenants to offer goods at prices no higher than those of nearby stores outside the airport. Airport staff "mystery shopped" to test compliance.

"Some of those [approaches] at the time were certainly a departure from how the airport previously looked at that side of the business," Rosebrough said.

BAA also changed parking at the airport. The company carved up the airport's lots into specialty parking, crowned by premium airport business parking that included perks such as rain parkas and newspapers. It also installed kiosks just outside the terminal that allowed garage parkers to pre-pay and bypass pay booths. BAA also was able to cut the number of workers it needed in its parking department.

Wells said BAA also improved fire department training and equipment and security--serendipitously, just before 9/11. BAA was able to tap its expertise back in the U.K., where its airports had long faced terrorist attacks.

"We could literally pick up the phone and call colleagues at the U.K. airports where the IRA had bombed runways" with mortars, Rosebrough added.

Such was BAA's broad expertise and the reason some aren't happy to see this chapter in privatized airport management end.

"I was very disappointed to see this decision being made," said Robert Poole, director of transportation studies at Los Angeles-based Reason Foundation.

Poole, who was a backer of former Mayor Goldsmith's plan, agreed that Indianapolis officials likely will benefit from BAA improvements for a while.

"For a good while, at least, I'd guess the airport would be pretty well-managed," he said. "The long term is really the acid test."

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