Publisher’s introduction: The Thai Retailers Association has been one of the most persistent critics of the various proposed tender models covering the duty free concession at Suvarnabhumi Airport in Bangkok.
As reported, the tender for the contract, held by King Power International since the airport’s inception, is mired in controversy. Uncertainty continues to surround the fate of the tender for Suvarnabhumi and a separate bid covering duty free retailing at Chiang Mai, Hat Yai and Phuket airports amid an increasing war of words in the Thai media and the introduction of a revamped Public-Private Partnership (PPP) Act.
As reported, Airports of Thailand came under concerted criticism for its initial decision to offer a single contract across all four airports. Following intense external and political pressure, it subsequently announced on 29 March that it would tender the Suvarnabhumi concession separately from another collective contract for the other three airports.
However, those plans are subject to the findings of a government-appointed panel set up to consider whether the duty free bids fall under the new Public-Private Partnership (PPP) Act. The panel’s findings are soon. Local reports suggest that if the duty free concessions fall under the PPP Act, the bidding procedure will have to “start from scratch again”. Airports of Thailand decided to issue the bid before a ruling from the PPP committee, saying its tender does not fall under the act.
[UPDATE: We will bring you the latest on the PPF findings soon].
The Thai Retailers Association, backed by several of the country’s most powerful domestic market retailers, believes the master concession model is inappropriate for the nation’s main gateway. The Moodie Davitt Report spoke to association President Worawoot Ounjai about the controversy. Worawoot also serves as Chief Executive Officer of Officemate Group, part of The Central Group, itself a possible contender in any tender.
[Note: The views in this article regarding the merits of various concession models are those of the association and other parties may differ both on perspectives and fact. We have offered King Power International the right of reply.]
The Moodie Davitt Report: How would you like the Suvarnabhumi and other airport duty free tenders to be structured?
There are three types of airport concession model around the world: master concession; concession by location and concession by category.
The master concession model is more suitable for smaller airports with limited traffic. This was a popular method in the past that most large airports have now moved away from. Apart from the ease of management, the master concession model usually results in limited assortment, less attractive stores, and less competitive price points due to lack of competition and specialisation. [Note: This is the association’s claim; many in the industry would disagree -Ed].
Concession by location is another option when there are more locations (terminals) in an individual airport. It nurtures ‘natural competition’ among the duty free operators and in turn pushes each operator to provide the best selection of products for the tourist. However, there are pros and cons for this model. It may lead to varied pricing for the same product and hence create customer confusion. Also, [it can produce] a limited assortment of offering in the case of a mirror concession.
The concession by category model will optimise the range and quality of offering due to the specialisation of players. It will provide a superior customer experience and journey through the airport as well as maximising the airport’s income from duty free. However, this will increase the complexity from the airport operator’s point of view, as it will have to manage multiple concessions.
Referring to the table below, Thailand is the only host of a leading airport in the Asia Pacific region that operates its major airport under the master concession model. Also, it shows that its rating by Skytrax is far behind those held by major airports in other Asia Pacific countries.
What other criticisms do you have of the tender model – and what are your alternatives?
In our view, it is necessary to alter the future granting of concessions at Suvarnabhumi and the other Thailand airports in four main ways:
- The transparency and fairness in the concession-granting process: At present, the process does not show transparency. Thus, we propose a committee from other disinterested sectors to be advisors or observers of the process determining the Terms of Reference (TOR) and selecting the concessionaires with reference to global best practice. The committee would be made up of representatives from agencies such as the Anti-Corruption Organization of Thailand, the Office of the Auditor General of Thailand (OAG), the TDRI and other representatives from the private sector.
- The format of the concessions: At present, Airports of Thailand Public Company Limited (AoT) uses the format of a master concession, which is monopolistic and does not give rise to fair competition. It gives rise to limitations in the range of products and quality of service. It is therefore proposed to consider changing from a master concession to a system of concession by category.
- The lifetime of the concession: Currently, the lifetime of the concession is as long as ten years and can be further extended without bidding. It is therefore proposed to specify the lifetime of the concession to be in line with the global best practice of leading nations, which is a lifetime of 5-7 years with no extension. Reducing the lifetime of the concession helps prevent a long-term monopoly by a single operator as well as stimulating innovation and new ways to deliver product and a better customer experience.
- Concession fees: Increasing concession fees from 17% at Suvarnabhumi Airport and 19% at other AoT airports is consistent with a global average of 25-47%, which will result in substantially increased revenues for AoT.
The four reasons outlined above clearly explain why Thailand needs to reform its duty free sector.
What do you expect to come out of the PPP review?
The PPP law of 2019 was announced in the Royal Gazette on 10 March, 2019, becoming effective from 11 March, 2019. AoT immediately issued two announcements on its website. The first of these was an invitation for professional operators to bid for the duty free concession at four airports – Suvarnabhumi, Phuket, Chiang Mai and Had Yai, while the second invited operators to bid for concessions for commercial space at Suvarnabhumi Airport.
Why would AoT hastily announce invitations for operators to bid for duty free concessions on the following day from the PPP Act 2019 being announced in the Royal Gazette?
Quoting from Section 7 of the Public-Private Partnership Act 2019 announced in the Royal Gazette on 10 March, 2019:
“An agency making a joint investment program in businesses concerned with infrastructure and public services must comply with this Act:
(3) Airports and Air Transport
…A business in paragraph one, includes relevant businesses considered essential to achieve the objectives of operations. This must be as announced by the Committee with the approval of Cabinet.”
Therefore, the issue to be considered is whether duty free and commercial zones are businesses which are relevant and essential.
A legal perspective
Citing the Royal Decree defining the powers, entitlements and benefits of Airports of Thailand PCL, 2002, Section 3:
‘Airport’ means an approved airfield or place for temporary take-off or landing of aircraft which is in the company’s operating powers
‘Airport Business’ means a business of establishing an airfield or place for temporary take-off or landing of aircraft, the establishment of conveniences for air travel, providing a service of parking space for aircraft, providing a service of aeronautical engineers and providing various services concerned with aircraft, permanently stationed personnel, cargo, mail, passengers and employees of airline business operators, and including services of conveniences relevant to or flowing from this business.
Thus, duty free and commercial zones are clearly the business of an airport according to this Decree.
Also, there is the verdict of the Supreme Administrative Court of 30 December, 2005 involving Airports of Thailand PCL and an action concerned with leasing a car park. The Supreme Administrative Court had the opinion that proving the service of leasing a car park was counted as a business that AoT was required to provide as a public service, and was of direct benefit to the general public using that service.
Thus, AoT PCL is not just an ‘Airport’ in isolation, but an ‘Airport Business’ according to the verdict of the Supreme Administrative Court.
Therefore, having retail stores, duty free stores or providing various services located in the airport to provide convenience to passengers are inevitably relevant businesses which are essential for achieving the objectives of operating the airport, according to Section 7 of the PPP law of 2019.
An operating business perspective
AoT said that the infrastructure of an airport means just the airfield, runways and aircraft parking space comes under the scope of the PPP law, while duty free and commercial space, and perhaps passenger car parks are not relevant and essential businesses, as without them an aircraft can still take off and land. This is perhaps a nationally “catastrophic logic” (meaning attempts to give reasons which are plausible but are in fact irrational, and may lead to damage).
- Is it possible to have just a runway for taking off and landing, an aircraft apron enabling take-offs and landings and a passenger terminal for tourists and related employees totalling 60-70 million per year to walk back and forth without commercial and duty free zones for tourists to eat and shop? If that airport did not have that space, could it be said that AoT has achieved its operational objectives as an international airport?
- AoT’s annual report states that revenue from aeronautical business was 33.986 billion baht, a proportion of 56% of total revenues. Non-aeronautical revenue, which is revenue from providing services and shared interests, was 26.551 billion baht, a 44% share of total revenues.
Can AOT claim that this massive share of non-aeronautical revenue from duty free operations and commercial zones is not relevant and essential?
- ICAO (International Civil Aviation Organization) has stated clearly that non-aeronautical revenue is a core factor of an airport’s financial management, enabling an airport to be financially viable, particularly in periods of economic downturn and reduced passenger numbers. This proportion of revenue is usually reinvested in expansion of the airport and related infrastructure.
- Proportion of leased space in the passenger terminal: Suvarnabhumi Airport currently has just one terminal with nine floors and usable space of over 563,000sq m, and leased space of over 55,045sq m, a proportion of approximately 1:5 of total space in the terminal. It can be seen that the proportion of leased space is large compared to the terminal. Leasing space in the airport is thus inevitably relevant and essential.
When considering the importance of duty free and commercial zones, considering revenues and the importance of the space, it can be seen that it is a high proportion of great importance.
Therefore, AoT should find it hard to deny that duty free and commercial space are relevant and essential businesses to achieve the objective of the airport’s operations according to Section 7 of the PPP Act, 2019.
We expect the PPP [verdict] to come out in line with the reasons we state above.
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