In sickness and in health

Ian Cesa

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In 2003 the travel-retail industry in Asia was hit by the SARS outbreak, resulting in a severe downturn in travel and plummeting sales. Now the business faces what could be a bigger threat—that of bird flu. Emily Pacey talks to retailers to assess what steps are being taken to deal with the danger

"God forgive us," recalls King Power Group (Hong Kong) managing director Antares Cheng. "The year 2003 was terrible. We don't want a repeat of it ever again—at least not during our lifetime." He describes the experience: "When the SARS outbreak began at the end of March, international passenger traffic evaporated overnight and sales turnover experienced total paralysis. We were registering next to nothing at the cash tills." The recovery was slow, only beginning four months after the initial scare had kept millions of potential travellers away from the airports. But unfortunately for Cheng and the entire travel-retail industry, his worse nightmare could yet recur, and this time with even more devastating consequences.

The H5NI avian influenza virus, commonly known as bird flu, first appeared in southern China in 1997. Since 2003 it has killed 109 people and there have been 194 recorded human cases in 10 countries, including China, Thailand, Cambodia, Vietnam, Indonesia and Nepal. According to the March 2005 National Academy of Science's Institute of Medicine flu report, the "current epidemic of H5N1 avian influenza in Asia is unprecedented in its scale and in its spread".

"A large shadow"

If this evolving virus becomes capable of human-to-human transmission and as contagious as more common strains of influenza, humanity could face a pandemic unlike any experienced before. Or it is possible that nothing at all will happen. Scientists cannot predict with certainty what the H5N1 strain will do, but financial and scientific authorities are taking the risk seriously. The World Health Organization (WHO) has put us on the third rung of the six-step ladder that measures the danger of a pandemic. The World Bank has described bird flu as a "large shadow" that could harm economic growth in parts of the world, particularly Asia, and the Asian Development Bank has estimated the potential cost to the region at between $99.2bn and $282.7bn in lost consumption, trade and investment if a pandemic occurs. Travel retailers would feel the effects of restricted travel instantly, and more disastrously than many retail markets.

As with SARS, any immediate danger of catching bird flu is more in the mind than a reality. Conventional flu kills between 250,000 and 500,000 worldwide every year, or up to 13,761% more than bird flu. SARS killed 774 of 8,096 people infected worldwide, but in the process it generated about 1.2bn column inches of press hysteria, which many maintain was the real culprit in keeping people at home. Malaysian retailer Dimensi Eksklusif managing director Zainul Azman believes that the media has not made the same mistake this time. "The media is helping by not publishing negative daily news on bird flu, but instead focusing on the efforts to combat the outbreak."

The key moment will come if and when the virus mutates so that it can infect humans. "When we have confirmation that the virus has mutated to a strain that can be transmitted easily among humans, it is likely some governments will react by closing borders," said World Tourism Organization (WTO) secretary general Francesco Frangialli when he addressed delegates at the Global Travel and Tourism Summit in Washington last month. "Bird flu today is not a problem for travellers. The day a pandemic starts, the picture will change totally, and travel and tourism will be the carrier and the victim."  ‰

According to WTO, the 2003 Asian outbreak of SARS led to a 19% fall in international visitors to Singapore and a 10% drop in China. Across the region, airport passenger traffic declined by up to 70%. At Kuala Lumpur International airport (KLIA) all concessionaires experienced sales decreases of more than 50% in the first three months of the outbreak. At Singapore Changi International airport passenger numbers declined by 58%, which was reflected in sales, while at Hong Kong International airport (HKIA) passenger numbers and sales plummeted by 70% or more. "It was a nightmare," says Azman. "The region's airports were deserted. Most airlines cancelled or reduced their flights because very few people were travelling. Companies did not allow their personnel to travel abroad and in some cases they were asked to work from home."

Retailers' struggle for survival during the SARS crisis would have been even tougher without the support of airport authorities, most of which took measures to help their tenants. At HKIA retailers were finally forced to request rent reductions one month after the epidemic began. One positive legacy of SARS at HKIA was the introduction of the per-passenger retail contract model, under which tenant's fees rise or fall with passenger traffic.

At Singapore Changi, landlord Civil Aviation Authority of Singapore (CAAS) was quick to help its tenants, granting a basic rent reduction of 10% to all retailers from May until the end of the year. It also waived rent completely for landside retailers for the same period owing to the "disastrous drop in the number of meeters and greeters at the airport". Retailers at Changi were already on contracts that allowed minimum annual guarantees to rise and fall with traffic, but CAAS also passed on to their retailers the 5.8% property tax rebate paid to landlords by the government.

At KLIA duty-free contracts were extended for two years as part of the government's package of relief measures, but a later development at the airport is a more mixed blessing. Dimensi Eksklusif is one of a number of retailers at KLIA that signed a renewed five-year lease, a gesture made to retailers of core categories who were worst affected during the SARS outbreak. The catch is that these retailers must now pay higher fixed rental rates, in some cases twice the previous amount. "It's a fair deal," insists Azman. "The selected retailers should not complain about the new high rentals, but accept the terms and work on their sales. They cannot have their cake and eat it."

The retailers contacted by DFNI were unanimously supportive of their airport authorities, with some arguing that operators should remain self-reliant and not depend on authorities to help them in times of need. "We as retailers have to discipline ourselves to pay for a prolonged stand-off," argues Azman. "A lesson we learned from SARS is that companies should have more financial reserves to pay the rent during an extended period of low sales, because the airport authority might not be so generous in future."

But Azman praises Malaysia Airports for learning a lesson during SARS that has changed how they select retailers. During the epidemic, companies that had won their contracts by promising the highest rents posed a problem for KLIA when the airport discovered that the minimum guarantees made by retailers were often unrealistic. "When the travel-retail business was crippled during SARS, it made the airport authority realise that it should not always select the highest bidder, but should evaluate business proposals on other aspects and elements," says Azman. "I am glad that Malaysia Airports looked at this and now selects retailers based on their business strengths."

Continue to invest

King Power's Cheng says SARS taught the company that a lean operation was more flexible in times of crisis, leading it to "slim and trim" its operations and to "be prepared financially to take advantage of a dismal situation by making selective acquisitions as they came up".

The general manager responsible for Valiram Group's Flying Emporium at KLIA's domestic terminal Kim Manaf also subscribes to this business philosophy. "During SARS we learned to cut staffing expenses but also decided that we would be even more aggressive than usual in scouting for opportunities during such a period. Finally, we learned to hold on and prepare for better times ahead."

Nuance Watson (Singapore) executive general manager Ken Tse agrees that it is crucial to maintain a programme of expansion throughout any crisis. "We learned to take a long-term view of our business. All business will recover eventually, so investment planning has to continue."

Staff cuts are often deployed during a downturn, but some retailers remain reluctant to lose their greatest asset. Cheng says SARS made King Power more aware of the importance of "instilling greater loyalty in our long-term staff by investing in a meaningful strategy of staff motivation and retention. This helped us to take full advantage of the later upswing in business after SARS."

Although travel-retail in Asia was deeply damaged by the SARS crisis, businesses learned valuable lessons that will be applicable in the event of a bird flu pandemic. But considering the possible catastrophic downturn in traffic that could accompany a bird flu pandemic, some airport authorities do not seem to be sufficiently prepared for the potential crisis, according to some retailers.

King Power's Cheng reports that bird flu has already had a palpable effect on the retailer. "Bird flu has already had an adverse effect on our business, particularly in China, since some Japanese tour groups are now more cautious about travelling." Nevertheless, Cheng has not had any discussions with the airport authority with regard to contingency plans concerning any potential downturn in traffic. "Nor has the airport authority shown any indication of starting such a discussion," he adds. "When planning we do not take into consideration any possible help from the airport authority. There is no legal obligation for them to offer any sort of help to operators because of a bird flu pandemic or any event beyond their control."

Other retailers from the region confirm that they have yet to enter discussions regarding plans in the event of a bird flu outbreak. Malaysia Airports has not given Dimensi Eksklusif any reassurance that it will offer relief in the event of a slump in traffic. "There is no guarantee from Malaysia Airports that it will offer rent reductions based on any downturn due to any epidemic," says Azman. "It is a matter of judging on a case-by-case basis and the overall impact on the country."

Nuance-Watson (HK) managing director Alessandra Piovesana reports: "I am sure that no one will promise or engage in any commitment until the extent of the disaster can be assessed."

None of the airport authorities contacted by DFNI would confirm whether they had any plans to adjust retail contracts to help concessionaires to weather the effects of a potential bird flu crisis. With a possible pandemic looming, does this represent a lack of forward planning—especially given the lessons learned from SARS? 

Retailers may not be talking to their airport authorities about what financial support landlords could offer them, but many voice opinions about what sort of contract models and tender selection processes would be appropriate given the constant threats to traffic growth. Cheng describes the typical retail contract in which the concessionaire pays the airport authority either a minimum guarantee or a percentage of sales turnover, depending on which yields more income for the landlord. "This is acceptable under a normal operating situation," he says. "However, in a sudden downturn brought on by adverse events such as SARS or bird flu, a flexible mechanism incorporating adjustments to royalties and concession fee payments in line with the dramatic drop in traffic could be equitable and helpful."

Nuance-Watson (Singapore)'s Tse agrees. "When a sudden downturn occurs, resulting in an abnormally high reduction in passenger numbers, concession fees need to be adjusted to support the operators." But even a per-passenger contract model does not offer complete security, since it does not account for different nationalities' spending habits. Asian travellers tend to spend more at airport shops than travellers from other regions. At locations that experience slight traffic reductions, the loss of Asian customers is likely to have so disproportionate an effect on sales figures that the per-passenger model offers little relief.

Piovesana doubts that any contract model can cope with the strains of a global flu pandemic. "Incidents such as bird flu fall into the cases of force majeure—in that their consequences are beyond the norm—and to my knowledge none of the current formulas adopted by airports can suit such possible downturns."

In the event of a full-scale pandemic, the power of airports to support their concessionaires is limited. Airports will depend on the WHO and government health departments, and their health and safety contingency plans will take priority over all commercial activities. During the SARS outbreak, the Malaysian government suspended visas for passengers from China and Hong Kong; Thailand insisted travellers from Hong Kong wear masks for two weeks or face prison; and Singapore Changi enforced health checks on passengers from SARS-infected countries. Later it was announced that travel insurance for those travelling to SARS-infected areas would not be honoured, and Vietnam closed its 800-mile land border with China.

Be prepared

Earlier this year Airports Council International released its bird flu update to all member airports, stating: "In the early stages of a pandemic, there would be great pressure on the air transport industry to attempt to delay the international spread of the pandemic through flight and travel restrictions. The implications for international air transport are enormous. It is important that airport operators be aware of the threat and are prepared to react in accordance with guidelines defined by the WHO and national health authorities."

To overcome the slump in international traffic at HKIA during SARS, Nuance–Watson (HK) opened a shop downtown. "We opened a store downtown to safeguard our business, riding on the sales made from residents and mainland Chinese land travellers," says Piovesana. Other less ambitious measures that may help retailers to weather the effects of a bird flu pandemic include strengthening relationships with airport authorities and suppliers. Azman details the benefits of selecting suppliers carefully. "We work with suppliers who understood the SARS disaster and took steps to cushion the drastic drop in business by extending credit terms and supplying cheaper product ranges." Piovesana highlights the wisdom of maintaining these bonds even when things are going well. "True partnerships with the airport authority, staff and suppliers need to be nurtured in bad times but especially in good times, so that we can maximise the good times and react faster and in harmony in bad times."

Asian retailers are fortunate to operate in the world's fastest-growing travel-retail region. Had SARS affected a less buoyant market, it would have taken considerably longer to recover. The region is now benefiting from the rise of low-cost air travel, which is driving sales for travel retailers throughout the region.

But in what has been called the "new normal"—an allusion to a world in which terrorism and global pandemics are ever-present threats to the industry—operators are ill-advised to rely on a stable market for growth. Nevertheless, retailers remain optimistic that they will continue their steady growth. At Singapore, Nuance-Watson is confident of achieving a 5–6% rise in sales over the next three years, slightly below the expected growth in passenger traffic. At HKIA Piovesana insists that the retailer is "working to outperform passenger growth". Any drive to improve sales growth beyond passenger levels would stand operators in good stead should a downturn occur. Dimensi Eksklusif forecasts growth of 10–12% over the next two years, while Cheng tells DFNI:  "If a bird flu pandemic does not occur over the next two or three years, we anticipate double-digit and increasingly robust sales growth for King Power."

If you had told Asian retailers in 2003 that the SARS crisis was merely a dress rehearsal for a far more destructive pandemic, they would probably have packed up and gone home. But their resilience through SARS and the lessons they learned during this experience are helping them to face any new disaster with courage and prudence. It is now up to the region's airport authorities to negotiate contingency plans with their retailers, and to do so sooner rather than later.