Posted on: Monday, December 2, 2002

EDITORIAL
Airport retailer deal deserves rethinking

It's not surprising that the Cayetano administration declined to act on a proposal by DFS Hawai'i to help it out with its delinquency in airport rent. With Cayetano leaving office today, there wasn't time to look at a restructuring of its contract to operate duty-free stores in Hawai'i to the extent required.

DFS approaches the problem as a simple matter of reducing its overdue obligation to the state so that it won't be in default. The state has been down that road too many times. We hope the new Lingle administration will take a broader, more imaginative view.

No one argues that DFS isn't suffering from a prolonged slowdown in the sort of visitor traffic — primarily Japanese — that in better times snarfs up swanky luxury items in Costco quantities. But it's not the first slowdown, nor will it be the last.

Credit Lingle with quickly understanding the dynamic of the relationship between the state and DFS. The state needs income from the airport concessions — DFS, by far the largest, is supposed to pay a minimum of $60 million a year under its current contract — and DFS would have no enterprise at all without the airport.

But DFS' balance due now has reached $41.6 million. The state's dilemma is that DFS, in good times, lays golden eggs. What does it avail the state to kill the goose, or as Lingle put it: Does the state "get more by forcing the company into bankruptcy and end up maybe getting 10 cents on the dollar versus some reductions going forward?"

To its credit, the Cayetano administration has developed a long memory with DFS. It came to suspect that DFS was simply relying on the state to bail it out in bad times. Could that explain why it felt able to bid higher than its competition?

So in its last contract, the state prohibited the company from seeking adjustments as a result of unforeseen catastrophes and situations, including war. That was smart, but perhaps simplistic.

It failed to recognize the corporate "firewall" that is said to separate DFS from its majority owner, the luxury giant LVMH Moet Hennessy Louis Vuitton SA. LVMH is ready enough to rake in profits from DFS in good times, but unwilling to stand behind DFS obligations in bad times.

Lingle should recognize that the state needs a reliable business partner running its concessions, one that has the financial depth to deliver on its obligations consistently.

That's not what we're seeing now. DFS is saying that if it's held to its current lease terms, "the alternative is we don't stay in business."

The change of administrations is a good time to have a fresh look at the relationship. Perhaps what's needed is to go over the head of the weak local subsidiary and strike a deal with the parent company.