Airports of Thailand amends duty-free concession agreement with King Power Duty Free

Airports of Thailand (AOT) has announced its decision to resolve problems surrounding a duty-free concession agreement with King Power Duty Free.

In a statement signed by Krit Pakagij of the Corporate Secretary and Corporate Governance Department, AOT stated it would approve solutions to issues in duty-free business operations at airports under AOT’s supervision.

The airports include Suvarnabhumi Airport (BKK), Don Mueang International Airport (DMK), Phuket International Airport (HKT), Chiang Mai International Airport (CNX), and Hat Yai International Airport (HDY).

AOT considered two primary options – either contract amendment or contract termination for a new bidding process – and concluded that the most suitable option is to “amend the contract by adjusting the concession conditions in alignment with the actual circumstances arising during contract management”. The following factors were also considered:

• Ensuring business continuity: AOT will be able to provide continuous passenger services with a good Level of Service, as duty-free retail service is considered an essential component. In other words, AOT will not need to seek a new concessionaire, considered as a time and cost-consuming process. Also, there is uncertainty associated with sourcing a replacement concessionaire – a process that may take no less than 14 months.

• More stable revenue: AOT will continue to receive concession fees (at an appropriate level) without experiencing any revenue gap during the bidding process for a new concessionaire, and any revenue loss due to the absence of a service provider.

• Reasonable return: The study found that the contract amendment provides a financial return higher than the minimum return expected from seeking a new concessionaire under the current circumstances, and not lower than the proposal submitted by the second-ranked bidder in the previous tender.

• Minimizing economic damage: Other than causing AOT to lose revenue and lowering the Level of Service, contract termination will also affect overall employment among related operators, thereby impacting the overall economy. This approach allows the project to continue operating and helps reduce potential adverse impacts, caused by related operators, on the overall economy and employment rate.

The statement noted that the contract amendment approach will be more beneficial to AOT than terminating the contract and initiating a new bidding process.

In the event of contract termination, AOT will lose revenue from concession fees until a new concessionaire is appointed, which is expected to take no less than 14 months.

The details of the proposed solution for each airport are as follows:

Suvarnabhumi Airport: The minimum guarantee on a per-passenger basis continues, THB232.90 (US$7), charged annually with a continuous annual growth rate of 5%. AOT has negotiated an additional revenue-sharing component of 35% on the excess spending per head, indicating AOT’s opportunity to obtain additional revenue in the event of recovery in the aviation industry. Extending the contract term for additional two years is consistent with the BKK Development Plan, under which the construction of the South Terminal is expected to be completed around 2032. During this period, it is anticipated that no new concessionaires will be interested in participating in the bidding process.

Don Mueang International Airport: The collection of the minimum guarantee fee per square meter (THB39,187.76 , US$1,230) will continue, along with 20% revenue sharing, with the minimum guarantee returning to the previous rate if passenger traffic exceeds 100%.

The extension of the contract term is proposed because, under the airport development plan, the current concessionaire is required to relocate its services to Passenger Terminal 3 and dismantle its existing investments in the previous terminal building. The study found that if a new investment is made in the new area designated for the duty-free business, an appropriate operating period resulting from such new investment will be approximately five years.

If the construction of Passenger Terminal 3 is delayed to the extent that the remaining term of the current concession is less than one year on the official opening date of Passenger Terminal 3, AOT reserves the right to terminate the existing KPD’s concession contract and initiate a new bidding process.

Regional Airports in Phuket, Chiang Mai and Hat Yai: The minimum guarantee continues on the same passenger-based principle, charged annually and equivalent to THB129.67 (US$4) per passenger, with a continuous annual growth rate of 5% starting from 2030.

In addition, AOT has negotiated an additional revenue-sharing component of 35% on the excess spending per head, subject to the same conditions as those applied at BKK.

However, after the contract amendment, if business returns to the state outlined in King Power Duty Free’s business proposal, AOT reserves the right to collect concession fees as proposed in KPD’s proposal.