Bahrain Duty Free Leading Duty Free in the Middle East operated by Aer Rianta International

You mentioned that Aer Rianta International Middle East is on target with 830 million in sales in 2008. How realistic were your predictions and how has the global economic downturn hit your sales operations?

Bahrain duty free, John Sutcliffe: We were very fortunate, we were just short of our prediction of 830 million; we came in at around at 820 million actually but given the circumstances it was a fantastic year for us. We had a very strong December, which helped a lot because of all the holidays – it happened that the Western and the Arabic holidays came together and was a strong finish to the year. The beginning of 2009 has been mixed; some of our locations in this region have been growing actually, like Beirut and Oman, for various reasons, while others have struggled a bit, and I would specifically mention Egypt and Cyprus. The reason being both of these locations having a high level of influence from the United Kingdom, and the situation with the British pound was particularly painful for us there. It meant people weren’t traveling from the UK, and when they did travel they weren’t spending as much because of the pound, and this had a significant influence on our sales for the first quarter of this year. We’re just going to have to ride out the storm, we’re doing a lot of positive things to help in terms of having special offers and making our offer more attractive, but it is an issue for us. Other locations like Bahrain and Qatar, big operations, they’ve managed to hold at a satisfactory level, either on or just below last year’s results.

What are your expectations for 2009 and how lucrative is the Middle Eastern market? What are the prospects for retail growth, and in which segments of the region?

Bahrain duty free, John Sutcliffe: I think the prospects for the Middle East are excellent, because if you look at what’s happening here, despite the very serious impact of the economic downturn, there is enormous infrastructural growth going on, especially in the areas which affect our business, the travel and retail business. You have significant airport structural development continuing in Dubai, Abu Dhabi, Bahrain, Qatar, and also further north, in Beirut and Egypt where they’re opening a new terminal in Cairo; in Cyprus Larnaca which opens a new terminal in November. In parallel to that, the airlines are continuing to grow. The new airlines you see, Etihad, Qatar, Emirates, they have their difficulties but that whole structure is growing. You have new airlines coming on like Fly Dubai, more of the low cost airlines coming on, that creates a very solid foundation for our business, because that brings more people into better retail markets, and that gives us an opportunity to increase our sales and retail offers. I’m very optimistic for the future. However, there will be some short term pain, and again that differs by location. Beirut, for example, is doing very well, because it generally benefits when people cut back their budgets and decide not to travel to Europe or the United States and say “right, we’ll go to Beirut,” especially from the Gulf. Also, thank God it is going through a period of stability at the moment, which also helps. Oman in the same way is doing well, there is slow growth and development of Oman Air which has been steady, and we’re seeing the benefit of that there. They’ve hardly felt the impact of the economic downturn in the airport there, so it’s been brilliant. It is the bigger hubs in the Gulf that will have the short term pain, the likes of Bahrain, Doha and so on. In Doha the new airport will come on stream in 2012, and Qatar Airway is growing at a fantastic pace so it’s all very positive but there will be some short term pain.

Qatar Duty Free has achieved a growth rate in excess of 50% in each of the last four years and is now the second largest duty free operation in the Gulf in terms of sales volumes. What are your expectations for Qatar Duty Free?

Bahrain duty free, John Sutcliffe: My expectations are high. The Qatari economy is booming as we all know, and the growth will come with that. Qatar Airways has a very dynamic leader, and he’s taken the airline forward at a very significant rate, at a very high level and standard as well, which I think is important because there is a lot of competition, especially with Etihad emerging now throughout Abu Dhabi. I think with a new airport coming into stream and knowing the plans about that in quite some detail, Qatar will have a fantastic offer. I think when you look at that in parallel to what’s happening in the economy in Qatar and their petro-chemical and gas developments as well, I think we’re in for some serious growth. I mean, remember where it’s come from; it wasn’t long ago, about six years ago, when it was one of the smallest duty free operations in the GCC, to now being the second largest and the fastest growing. I’d say it is the fastest growing in the world, I don’t think that any duty free facility is growing at that rate in the last five years.

In terms of the growth of duty frees in the region, does it benchmark against the other locations?

Bahrain duty free, John Sutcliffe: Any of the major publications will show that the Middle East has now overtaken South East Asia as the biggest growth area. And if you look at some of the statistics vis-à-vis aircraft orders, tourism projections from the World Tourism Organization, the Middle East is predicted to be the leader going forward.

Dubai Duty Free has communicated very largely and become a benchmark in the region and a worldwide reference. You have been a part of Dubai Duty Free and helped develop it. How do you compete at the regional level with the Dubai Duty Free, and how would you like to replicate what you achieved over there with Aer Rianta?

Bahrain duty free, John Sutcliffe: Well, we don’t want to replicate it. We want to do things differently. Dubai Duty Free is a marvelous success story, but remember, it is a government-owned and runned organization, and that is quite rare. The same happens in Qatar, and maybe in Abu Dhabi, but for the rest of the region, it is more like the models you get in the rest of the world where you have a landlord in terms of the airport owner, and you have to pay the concession for operating a duty free shop. So it is more of a realistic situation here in Bahrain, and Beirut and Oman where our company has bid against other competition to develop their facilities. We don’t have the ability to spend huge quantities of money on advertising and marketing. We are conscious of the importance of exposure, and with the limited funds we have we do that. What makes us different is that we internationally think of the whole operators has actually got a firm policy of being flexible, and not trying to develop a one size fits all package, and we have an absolute firm policy of going to any country and building a retail offer around the culture of the location. We believe that’s very important, and that happens across many different issues ranging from our staffing – you will find in most of our shops a lot of local staff, in Bahrain almost 70% of our staff are local- ; you will find a significant local influence on the design of the facilities. If you go to YouTube and click on Bahrain Duty Free, you will see families and individuals taking photographs of the magnificent dhow that is in our shop with water flowing under it. Throughout the year we celebrate the Arabic Eid holidays, the Formula 1 Grand Prix which happens here early in the year, Christmas, all those things. We sell a lot of local products; we help the local community as much as we can. We even get involved with the community in terms of local handicrafts and helping the handicapped here. Many of the products we sell in the shops in Bahrain are produced by handicapped people in Bahrain. And I think that is a fantastic thing to be able to do so. We have a firm policy of that; we allocate space, even though there is an opportunity cost in doing that.

Bahrain Duty Free announced their full 2008 results with positive sales of 17% of last year. What are the key factors behind this performance, and what are your expectations and plans for this Bahrain Duty Free?

Bahrain duty free, John Sutcliffe: Bahrain Duty Free is now a mature operation, and I think we will continue to see steady but not huge growth in Bahrain. It will develop alongside the development of Gulf Air and Bahrain Air; the two local airlines, and also with the development of the economy. It is a nice steady curve, which I think in these trying times is the proper way to go. You don’t suffer the huge peaks and troughs of what other companies and countries we see in the region have. Bahrain has been quite steady. I think the growth in Bahrain Duty Free will parallel that. The airport has a major plan for expansion, and I think when that happens, when we have more space and are able to improve the offer, we will see a significant lift. But generally speaking over the long term we have steady growth and Bahrain Duty Free will remain a player. The quality is very important, and Bahrain Duty Free is an entirely different kind of offer. It may not be the biggest, it’s not small either at 100 million dollars. What you will find there is a very interesting retail offer, that has in fact won the Airport Retail of the Year Award for its design and approach to customer service.

Aer Rianta Middle East is the biggest international duty free operator in the region with business interests in Bahrain, Qatar, Kuwait, Beirut, Muscat, Egypt, and Cyprus. How would you characterize your strategy and expansion plans for Aer Rianta in the region?

Bahrain duty free, John Sutcliffe: I think the reason we have been successful here is because we are here. We were the first international operator to establish a regional office. Setting up in Bahrain was so easy, I am not exaggerating, we got so much help from our local partners here and from the authorities. There is an obvious lack of red tape here which is fantastic, it doesn’t mean it’s not regulated or governed, it very much is. Bahrain is considered one of the leading financial centers in the Middle East. We found it very easy to establish ourselves here. We’ve got a good footprint, quite spread out, ranging from Egypt to Oman in the Strait of Hormuz, which means we are not subject to any individual happening. If there is a problem in Lebanon, our other operations can take us through those times. But I think the main reason we have been so successful in addition to having an office here, a fully-supported office as well, is our flexibility. We are not a one size fits all operation. We will go and visit a potential client and find out what they’re looking for, and we can develop a service or a relationship which suits that. It could be full ownership, it could be a giant venture, it could be a consultancy or a management contract, whatever. And that’s the reason we’ve been successful. Some people want to invest with us and some people just want advice, so in the various countries we’re in we have different contractual relationships and this has worked very well. I think also our ability to understand the local culture is all important, because people here are very proud of their culture. They want to be modern and have a very modern and high standard of service, but they also want to retain their culture, and we respect that and I think that’s been very important.

What other locations are you targeting, and would you like to grow organically or by acquisition?

Bahrain duty free, John Sutcliffe: Our growth will be two fold. We will grow our existing operations and we would presume that there would be bolt on opportunities from our existing contracts. For example, we recently signed a contract to operate in a joint venture with SSP, the food and beverage in Cyprus, which is a bolt on opportunity to retail facilities. In Cyprus we have a major investment there, we also have shareholders in the Herramay’s Consortium which is a 25 year concession with the government to own and operate the two airports in Cyprus. But in terms of looking for future growth, we will definitely be looking at North Africa, we will definitely look to continue to build in Egypt which I think is a huge market, and there are difficulties with that but there is huge potential. There will be opportunities within the GCC as well, as some of the government operations start to look to do things differently due to financial pressures, which may create an opportunity for Aer Rianta. You can’t ignore the fact that right next to us there are the Indian subcontinent, Iran, and Iraq and Afghanistan. These are all countries with significantly huge populations and they will in time create big opportunities for a lot of companies and I believe they will for us too.

In 2008, you mentioned that they key issues and challenges facing your business included inflation, wage pressures and currency changes. Are these challenges still prevalent?

Bahrain duty free, John Sutcliffe: The inflation issue has obviously died away, thank God, but we’re still suffering from the cost increases we incurred in the last two or three years. I think the major issue affecting us now is currency issues. There has been such a swing of currency that it has an effect, especially for a non-dollar environment. It made our prices look quite expensive, there has been a big swing, so when that levels out, I think things will start to come back to normal, especially with regards to the English pound, and the English influence in terms of tourism is quite big. But that’s short term. I think the salary issue you look at two ways. We all have an obligation to look at salaries in this region and to make sure the people are getting a fair wage, and we are working here in Bahrain and in other locations with the government. In Bahrain Duty Free for example we have adopted a minimum wage policy, because we believe it’s right. And that’s one of the advantages of having local involvement in what we’re doing, and we have a moral responsibility here. Obviously any cost increase is a concern but the big threat going forward now is the recession, and we hope the world gets over this recession quickly and that the whole currency issue will at least stabilize and we won’t have these huge swings of currency. Some of them have been quite significant, the British pound for example saw a 40% swing in eighteen months, which is unheard of.

How are you helping to relieve this pain?

Bahrain duty free, John Sutcliffe: With regards to the currency issue, we are specifically targeting passengers whom we know this affects. We are trying to create a retail offer that helps alleviate some of the pain, specifically some of those passengers coming through the UK. For example in Bahrain Duty Free we have a significant amount of charter traffic coming through from the UK to Thailand to Goa and so on during the winter months mainly carrying British or European passengers. And we’ve really struggled with those this winter because of the British pound. So what we’ve done is looked at places where we have a superlative price advantage, where our prices are so low that even with the currency, we are still a better value. So we’ve pushed these and made the customers aware of these offers, and we’re mainly talking about the old reliable sale like liquors and tobacco and so on. But on the luxury end which is the one usually most affected when there is a recession, what we’ve tried to do there is work with our suppliers to get our prices down, try to bring in some attractive offer, whether it be a two for one offer or a gift with purchase, or maybe some cross subsidy, where we say to people if you buy 20$ worth of confectioneries, we’ll give you five dollars off your perfume purchase, or something like that. Anything that will help alleviate the situation for the customer and make it more attractive.

You mentioned your social role and how you work with the government on the wages aspect. In terms of the environment and sustainable development, what is your policy and strategy as a company?

Bahrain duty free, John Sutcliffe: Well, we have a very firm philosophy. I won’t say this had any significant amount of planning. Our parent company is a government company, and being a government company these issues will always be on the table for discussion and implementation. But there are also economic pressures that put us in this direction, and I would be lying to say we put up the green flag. It didn’t start out that way, we looked at ways of reducing our costs and we’ve actually discovered that being a green company we could save on a lot of operational costs, ranging from the type of light fixtures we use in our shops to the types of materials we would use in terms of construction of our retail facilities. We discovered that by using a more green-friendly product we could actually save money. And that is a big issue, and I think a lot of companies are not aware of that, but are becoming aware of it. Then having thought about it, we felt like we had some social responsibility and we have a number of projects in hand at the moment. For example we have a project to stop using plastic bags. It’s not so easy to do here, it’s been done effectively in some countries including my home country, Ireland, where they introduced the plastic bag tax. We can’t introduce a tax but we have a committee together at the moment to find an alternative to using plastic. We have introduced it in some cases like Muscat for special product categories and we’ve even been able to get sponsorship, but the significance of that is underestimated. We have millions and millions of passengers passing through and millions and millions of plastic bags going into circulation. I think this will happen over the next eighteen months to a year. It’s not easy to do. It is very difficult for us as an airport operator to go totally green, but definitely it’s there and we feel that moral responsibility and it’s happening.

In May, members of parliament in Bahrain voted in favor of a blanket ban on public sales of alcohol at Bahrain’s restaurants, hotels, and clubs. Is this a real threat to the Bahraini economy, and how would a ban on alcohol affect your operations?

Bahrain duty free, John Sutcliffe: Yes, it is a real threat to the Bahraini economy and we are all hopeful that this will not push through. We do understand the sensitivities here, we understand that we’re in a Muslim country and that they’re obviously very sensitive to alcohol and other issues which go against the grain of their beliefs. Bahrain is a relatively small economy compared to the rest of its neighbors, but it is a very dynamic and forward thinking economy, and as we speak there are some very serious projects either just finishing or in progress or planned, and many of these depend on a vibrant tourism coming into the country and I think that whatever decision is made on the alcohol issue needs to take this into consideration. People need to be sensible. What I hope you will find is that there will be a nice balance achieved. In the duty free for example, we continue to sell alcohol but we are very conscious of the way we present it, and we are not putting it at the front of the shop. We are very conscious that some of our very valuable customers have an objection to the sale of alcohol, so we’re not going to put it in their face, and I think that’s the responsible way to do it, and that’s what we’re doing.

Millions of people leaving through the airport and millions more who are simply in transit, Bahrain Duty Free is the first thing they see. What is your main responsibility towards Bahrain?

Bahrain duty free, John Sutcliffe: Our first responsibility along with all the other entities and stakeholders in the airport is to make sure that visitors to the airport, whether departing or in transit, have an easy, no hassle-flow through the airport. Especially in today’s environment where you usually have traffic jams on the way to airports, you’ve got queues checking in, you’ve got security hassle, people get more stressed out than they used to be. Our main role collectively in airports is to relax these people as much as possible and make their passage through the airports hassle free and enjoyable. Regarding the retail offer, our main role there is to make them feel first and foremost that they’re in Bahrain, not just in some production line as you get in many airports. I travel extensively myself and it bugs me that every time you pass through an airport if you just blink you ask yourself where am I. And I think especially for transit passengers passing through Bahrain, they should feel and know that they are in Bahrain, and they should have an opportunity to experience that. You will feel immediately as you are passing through Bahrain that you’re in an Arab country, number one, and then you’ll see that you’re in Bahrain and able to buy Bahraini handicrafts in addition to all the big brands. And you’ll also hopefully have a nice friendly Bahrain face greeting you and giving you the best level of customer service. That is our main responsibility. Finally, it is our main responsibility to have these people leaving the airport saying “wow, I’d like to come back here sometime.” That’s the main thing.;