Non-aeronautical revenues are the new game in

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Narita Airport Authority rises to the challenge of travel retail Japan s duty free market has been the subject of an intense and unrelenting transformation during the past decade.

1 Narita Airport Authority rises to the challenge of travel retail Japan s duty free market has been the subject of an intense and unrelenting transformation during the past decade. Long gone are the days of a protected domestic market characterised by extreme pricing on liquor and luxury goods the very conditions that drove the Japanese duty free business worldwide from the 1960s through to the early 1990s. Today s travel retail environment is an altogether more competitive affair and every Japanese airport retailer is continuing to adapt their mix and their strategy to different needs and different demands in different times. The Moodie Report Deputy Editor Hui Min Neo visited Japan recently to size up a market in change. She brought back this fascinating report, beginning with a profile of newly-privatised Narita Airport Authority, which has big plans for boosting travel retail revenues. Non-aeronautical revenues are the new game in town for Narita Airport Authority (NAA) as it seeks ways to make up for its shortfall in aeronautical revenues. In particular the airport is paying keen attention to travel retail. It is undertaking a review of shop zoning, and reassessing its tenant mix; and further shops are also planned airside. In particular, the company plans to develop profitable, feasible new business ventures, as well as sales of duty free, travel and souvenir products. As part of the authority s drive to boost commercial revenues, NAA Retailing Corporation (NAAR) was established in May 2004 and on 1 July began operating 10 stores under the brand name, Fa-So-La (as in the musical notes that follow Do-Re-Me). This was followed by the opening of Narita s first full-scale airside bookstore, Fa-So-La Books. Non-aeronautical revenues now comprise just 30% of all revenues, but are expected to grow to 50% by The completion of the south wing of terminal one in 2006 is key to reaching this target. There are plans for two more joint ventures. One will be formed with ANA Duty Free (ADF) by July 2005 and the third will be formed with JAL/DFS. NAA Business Development Supervisor Go Kajita tells The Moodie Report that the joint venture with ADF will take over the general duty free stores in T2 now run by ADF, as well as four brand boutiques. Meanwhile, ADF will retain control of a duty free shop in T2, and will begin operating another in T1 s south wing. After the establishment of the new company, we will spend about a year on refurbishment of the shops, he says. The third joint venture with JAL/DFS will not inherit any shops; instead the company will open new ones in the completed T1 south wing. This joint venture will run a general duty free shop and some brand boutiques. The south wing project is part of the T1 reconstruction project which began in When all work on T1 is completed, it will have a floor space of 440,000sq m, more than double its previous size and larger than T2, which has about 300,000sq m of space. With the reopening of the south wing in 2006, NAAR will see its retail area tripled. (See NAAR feature on page 40.) NAAR is a joint venture between the Narita Airport Authority (NAA), which holds 67% of the shares, and Japan Airport Terminal Co (JATCO), which holds 33%. Retail opportunity: The Uniqlo fashion store at Tokyo Narita Airport 34 The Moodie Report

3 Finding new revenue streams If there is one airport that has received more criticism from the international aviation community than others in recent years, it is Tokyo Narita. Notorious for its charges, the airport s airline customers pay some of the highest landing fees in the world. In 2002, when the Japanese Government was drawing up plans to privatise the country s three largest airports, IATA s Director General and CEO Giovanni Bisignani pointed out that the airport must lower its charges. Narita s charges were set in 1984 at 2,400 per tonne and have not changed since then. Airlines have reduced their costs and passed this on to consumers with yields that are on average -40% lower than they were in It is now time for Narita and the Japanese Government to wake up to the competitive realities of business, said Bisignani at the time. He also pointed out that over a decade Narita had fallen from its position as top airport in Asia to fourth place, after Hong Kong, Singapore and Bangkok. Amidst this heated debate, Narita was privatised on 1 April Judging by the developments so far, the airport is heeding the call of the aviation community, and indeed the challenges from other airports nearby. In its annual report, Narita International Airport Corp Chairman Isao Matsuhashi and President/CEO Masahiko Kurono spelled out their plans in a joint statement: Although the government assistance provided as an airport authority is no longer present, NAA now has a higher level of freedom as a private sector airport operator and is able to venture into business areas that were previously unavailable to it. These new business ventures will increase our nonaeronautical revenue, which is based on commercial activities, and simultaneously provide the improved efficiency needed to reduce landing charges - one of the main goals of privatisation. The company stressed that it would strive to reduce landing charges as soon as possible, as well as expand its profitability by responding to customer needs. Just three months after privatisation (July 2004), it announced that airlines commencing new and additional domestic services from airports other than New Chitose, Itami, Kansai or Fukuoka would be offered a -50% discount, instead of the existing -33.3% markdown, for a period of one year starting from the month following the commissioning date. This means that instead of paying the full charge of 33,200, airlines would be paying 16,600. More airlines arriving at the airport but paying less for the privilege. It s a sound enough proposition but only if commercial revenues can be driven upwards to compensate and therein lies the airport s greatest challenge. The fourth major travel retailer is Empire Duty Free, which will not form a joint venture with the airport authority. They will find a new way for their operations, Kajita says. I think and I hope that it will work well for them. Eventually, the three new companies are expected to work together as a group. The sales target for the trio is set at 15 billion (US$146 million) in fiscal 2006, with 11 billion (US$107 million) from new business ventures. Kajita admits that the formation of the joint ventures is to help the airport authority gain the know-how of running a travel retail business. We formed three joint ventures, because they have different ways of doing their business. ADF and JAL/ DFS have very unique ways of doing business. Unfortunately, we have not done retail business before, so we needed to learn from the travel retailers, he says. Narita Airport: international passenger traffic 2004 vs 2003 Month International Change 2004 passengers on 2003 January 2,380, % February 2,205, % March 2,431, % April 2,284, % May 2,371, % June 2,489, % July 2,709, % August 2,852, % September 2,712, % October 2,659, % Source: Narita Airport Authority 36 The Moodie Report

4 He adds that the learning process has been the obvious advantage of the joint ventures. And maybe the advantage to them was to get our point of view NAA s landlord point of view on certain issues. Improved mutual communication and understanding is already paying off. One positive change can be seen in the plans for larger stores in the south wing. There will be four general duty free stores: one operated by ADF, which will have 300sq m of retail space; another operated by the NAA JAL/DFS joint venture with 375sq m; and two other stores with a combined space of 400sq m operated by NAAR. Compared to the four duty free shops currently in T2, each occupying only 150sq m, the new retail area is massive. This will be the biggest shopping area ever. At the moment, we have total retail space of 3,100sq m. But after the completion of works, T1 south wing alone will have 2,200sq m of duty free shops. Passengers will have more choice and will be able to enjoy themselves, says Kajita. He notes that both customers and retailers have long complained about the shortage of space. The airport authority has taken the feedback into account in the design of the south wing. The airport authority also made it clear that it will acquire all stakes of the joint ventures in about five years. What will this mean to the partners? We can t say when the shares will be held by NAA, but even after the acquisition, NAA will still have a strong relation with JATCO, ANA Trading and JAL/DFS. This is because they will still be our customers and our retailers. We will continue to be strong business partners even though the joint ventures formed will one day be competing with their businesses, says Kajita. In terms of results, the first joint venture, NAAR, is delivering. Kajita notes that overall sales for July to September grew by +2% year-on-year. (See NAAR feature on page 40 for further sales growth breakdown.) This increase is a little more than we expected, and there are prospects for steady growth, he says. The potential is especially encouraging in terms of the Chinese market. Kajita says that All Nippon Airways has introduced flights from Narita to places such as Tianjin and Hangzhou, while China Southern flies to Changchun, Northwest introduced a route to Guangzhou and Air China is serving Shenzhen. Breaking all records The number of passengers using New Tokyo International Airport at Narita in 2004 hit 30 million on Saturday 18 December, the first time the airport has reached that milestone since it started operating in The annual number of passengers departing from or arriving at Japan's main gateway exceeded 10 million in 1984 and 20 million in By 2002 it was close to 30 million at 29.1 million after the opening of a second runway. But 2003 s SARS crisis, plus the impact of the Iraq war, saw travel numbers slump to 26.7 million. This year's performance has come as a huge boost to the Japanese travel market and to Narita Airport Authority and its retailers. Things should get even better in According to just-released JTB Corp figures, the total number of overseas Japanese travellers is forecast to hit 17.4 million in 2005 the second highest total ever, and up +3.6% over the 2004 estimate. And number of overseas visitors to Japan is expected to soar +16.4% to 7.1 million. Chinese tourism is booming, he says. There are more and more airlines flying between Shanghai and Narita. In the duty free shops, Chinese are buying tobacco in large quantities, especially over the Chinese New Year period. Japanese rice cakes are also popular, he notes. The airport will be putting up signs in Chinese as well as introducing staff who speak Mandarin. Assessing the retail environment for 2005, Kajita points to the new Chubu airport as a key factor. We will have a little bit less traffic from the Nagoya area. We have five daily flights between Narita and Nagoya, mainly serving transit passengers on international routes, he says. These daily flights may become redundant as those heading for Nagoya can fly direct into Chubu from certain international destinations. But the advent of Chubu will also have positive repercussions for Narita. Kajita says: The Expo fair will be hosted this year in Aichi. The new Chubu airport is expected to welcome more passengers to the Expo. But there are limited flights; the flights serving Chubu are mainly from Asia. So passengers visiting from US and Europe may fly into Narita for a transit to Chubu. 38 The Moodie Report

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NAA Retailing captures Japan s mood of change. You could describe the Japanese as extremely fast. JAPAN REPORT NAA Retailing Corp January 2005

JAPAN REPORT NAA Retailing Corp January 2005 NAA Retailing captures Japan s mood of change Hui Min Neo reports on NAA Retailing Corp, the intriguing new airport/retailer partnership between Narita Airport