Airport terminals are catering to an important new tenant. Not Continental or American or any of the other major airlines, this first-class passenger is the name-brand retailer.

Nationally and internationally recognized retailers ranging from Liz Claiborne to London Fog are vying for airport locations. "It's a long time coming, but it really makes so much sense," says Faith Hope Consolo, vice chairman of Garrick-Aug Worldwide Ltd., a New York-based leasing firm. Some expansion-minded retailers are turning to airports after exhausting alternatives ranging from Main Street to malls. "Given the economy and the number of travelers, this is a natural expansion," Consolo says.

Demand for airport retail locations is up across the board due in large part to the strong economy and increase in travelers. The heavy airport traffic also has increased the number of delays, which often means travelers are spending more time in airports.

"Before, airports offered a place to get a newspaper and maybe a cup of coffee and a hot dog. That has all changed now," Consolo says. Today's travelers can shop for everything from hiking boots to cosmetics.

The airport climate for retailers is transforming as airports pursue recognized name-brand stores. "Airport retail has changed more in the past five years than it had the previous 20, and it has been good, positive change for everyone," says Gregg Paradies, a senior vice president at The Paradies Shops in Atlanta. Paradies Shops operates retail stores in 57 airports in the United States and Canada. Airports also are adding a variety of new services ranging from computer centers to manicurists. "Airports are focusing more on the customer or traveler's needs than ever before," Paradies says.

"I think the new trend in the United States is that airports are realizing that retail is a good service for passengers and it's a good source of revenues," says Helen Deknatel, commercial director at New York-based JFK IAT LLC, the manager and developer of the new Terminal 4 at JFK International Airport.

Recognizing that travelers have grown tired of paying inflated prices at their facilities, airports are working to get prices down to that of traditional street retail locations. "I believe that travelers, especially here in the United States, do expect better retail in airports, and they expect street pricing," Deknatel says.

Enticing sales Airports' access to a large audience is the big incentive for retailers. The volume of passengers traveling through Pittsburgh International Airport, for example, topped 18.8 million in 1999. This traveling population also represents an attractive demographic group.

Pittsburgh International's demographics reflect a population evenly split between men and women in the 25-to-45 age group with incomes that average $60,000 to $100,000.

"Airports are a terrific avenue for retailers to gain access to a market they don't normally gain access to," says Jay Kruisselbrink, vice president of development at BAA Pittsburgh Inc.,which operates the AIRMALL at Pittsburgh International.

The continuous traffic and access to affluent travelers is a powerful draw for retailers. "It's worth the extra hurdles and headaches to have that captive demographic market," says Randy Goodman, a senior property specialist at Houston Airport System. In 1999, the total traffic volume at George Bush Intercontinental was 33 million, including 16.4 million enplanements.

Airports also provide brand recognition to millions of people, so an airport store can present an excellent advertising opportunity. "Having that type of exposure is not bad," Goodman says.

Airports also have established a reputation for producing sales per square foot that more than triple average sales at traditional shopping centers.

Retail is a growing business at George Bush Intercontinental Airport, with 1999 sales up 20% over sales the previous year. Although the airport has added only about 4,500 sq. ft. of new retail space since 1996, increased airport traffic and improved merchandising have helped boost sales by 60% in the past three years, Goodman notes.

"What we have seen is that maybe a shop or a couple of shops didn't work, so we replaced them with a brand or branded concept, which has really increased the traffic," Goodman says. Although airport retail sales at George Bush Intercontinental run the gamut from $100 to $4,000 per sq. ft., the average is $1,200 per sq. ft. The airport's name-brand retailers include The Body Shop, The Museum Company and Wilson's Leather.

Daunting challenges The downside of higher airport sales is higher operating costs. Build-out costs are greater, as are operating costs due to factors such as higher wages and longer hours of operation. "Only looking at revenues doesn't tell the whole story," says Todd Dorrien, vice president of strategic planning at Host Marriott Services in Bethesda, Md. Host Marriott operates food and beverage and retail stores in nearly 70 airports around the world.

For retailers, airports present unique and challenging situations ranging from lease terms and construction to inventory management and staffing. Leases, for example, resemble government contracts. "We have seen RFPs that come out with over 70 pages of tenant design criteria in some cases," Dorrien says. Because airports are public spaces, there also is considerable attention given to public safety issues.

Another major adjustment for retailers is a rental rate that is higher than traditional retail locations. Average airport rents are typically 15% to 20% of gross sales compared to Class-A street locations where rents are closer to 10% to 15% of gross sales. On average, the rental rate for retailers at George Bush Intercontinental amounts to about 15% of gross sales.

In addition, there are plenty of operational challenges unique to the airport setting. Finding workers is a problem that has been magnified by the tight labor market. "A lot of these retailers are finding out that airports are more difficult than they appear on paper," Paradies says. Most airports are open 365 days a year, as well as maintaining longer hours of operation.

Perhaps the biggest challenge for retailers is landing airport space. Space is in short supply, and most airports are very particular in how that space is allocated.

"It's tough to get into airports these days," Consolo says. "You need the right product that they want, and you need a strong broker representing you to push the deal along," Consolo says.

In addition, store locations are never consistent in any two airports, so there is no standard footprint or prototype to work with. Oftentimes, retailers take space anywhere they can find it.

Retail operators pursuing airport locations also have to adapt their concepts to smaller stores. Airport retail and concession space is at a premium. Typically, airport stores average 800 to 1,000 sq. ft. Pittsburgh International Airport's 100,000 sq. ft. AIRMALL, for example, is home to 105 tenants. Meanwhile, George Bush Intercontinental offers a total of 60,770 sq. ft. spread throughout four terminals.

Those tenants lucky enough to secure space will find that the development side can be very difficult. Everything relating to architecture and engineering must go through a rigorous approval process. Because of the airport environment, there are more stringent requirements relating to factors such as fire safety and security. In addition, every subcontractor working on the buildout has to be badged as an approved airport employee.

The name game The focus on name-brand shops ranging from Samsonite luggage to Burberry raincoats is a trend that has been sweeping European airports for years. Now that same trend is hitting U.S. airports. Travelers want brand identification whether they are shopping for new shoes or CDs. Another recent shift in airport retail is a rise in service-related businesses such as massage therapy and health clubs. The bottom line is that travelers are looking for something to do between flights.

"Airport shopping is like entertainment. It keeps travelers busy and fills a need," Consolo says.

Pittsburgh's AIRMALL is a model for airport retailing. "It was really the first of its kind to put so many stores in an airport," Consolo says. Now airports across the country are revamping retail programs to offer more choices of name-brand tenants.

The Pittsburgh AIRMALL opened in 1992, and the complex offers more than 100 restaurants, shops and service businesses such as Godiva Chocolatier, PGA Tour Shop and The Discovery Channel Store.

"We try to include a mix of international, national and local uses," Kruisselbrink says. "We really think we get our best development by using all three of those sources." A key part of the airport's retail success is that AIRMALL guarantees that customers won't be charged higher prices at off-airport locations, and they back up that guarantee within individual lease agreements.

That formula appears to work. The volume of sales per passenger has nearly quadrupled since the AIRMALL opened, jumping from $2.40 in 1992 to $9.15 in 1999. The airport generates some of the highest per passenger sales revenues in the country. Sales average $1,000 per sq. ft. for retailers that range from King's Jewelers and Mont Blanc to Nine West and the Watch Station.

Pittsburgh has been very successful from a concessions standpoint, says Paradies, who operates AIRMALL stores such as its Paradies Gifts & News. "The airport was built around the concessions program, and the flow works great," Paradies says. Typically, retail fits into whatever airport space is available. However, many airports are working to improve those retail strategies.

Airport expansion "As airports redevelop, they're trying to find a lot more space," Dorrien says. Airports are striving to boost retail square footage wherever possible for three reasons. First, retail has become a significant income generator. The more money an airport makes from its retail program, the less it has to charge the airlines.

Second, airports recognize retail as a service they can provide to the traveling customer. If there is a long delay, the customer can go to a restaurant or visit the shops vs. just sitting at the gate. Third, retailers are pushing for airport locations.

"Customers have attractive demographics with high income and high education levels," Dorrien says. This segment of the population is increasingly pressed for time. "One way to get at these customers is to go to them," he says.

As a result, airports are gradually incorporating additional retail space. A 100,000 sq. ft. retail center, including 60,000 sq. ft. of store space, is part of the master plan for the new Terminal 4 being constructed at JFK International Airport in New York. The $1.2 billion redevelopment project is scheduled to open in May 2001. New tenants to occupy the terminal include DKNY and Sephora. "We feel you need national and international recognizable brands," Deknatel says.

Currently, George Bush Intercontinental's four terminals feature 35,770 sq. ft. of space for food and beverage concessions, 18,000 sq. ft. for duty-paid retail, and approximately 7,000 sq. ft. for duty-free retail. New construction will add about 5,900 sq. ft. of duty-paid space in Terminal A, and 2,000 sq. ft. of duty-paid retail space in Terminal B. "This also is allowing us to put retail outlets closer to the gates," Goodman says. "The closer we can get to the gates, the better potential we have to make the traveler our customer."

Airports such as George Bush Intercontinental are taking advantage of the passenger information available to select retail concepts and decide where to locate stores within the airport. The retail program in each terminal is tailored to the traveler demographics in each.

"In a way, we have the benefit here in Houston of having separate terminals. We know how much traffic is connecting or (originating), and we know where they're going," Goodman says. For example, people flying to nearby Dallas or Austin are not likely to be interested in shopping for Texas souvenirs, he notes.

Airport retail continues to grow. Says Dorrien, "As new terminals get built and as concourses get redeveloped, I would expect more space and better space to be given to retail and commercial programs."