Ben-Gurion Duty-free Franchise Holder Wins Dubious Break on Fees

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Ben-Gurion Airport's duty free shops
Ben-Gurion Airport's duty free shopsCredit: David Bachar

In a move experts say is legally problematic, the Israel Airport Authority allowed James Richardson – the operator of duty-free shops at Ben-Gurion International Airport – to revise the terms of its contract midway through its seven-year term, documents obtained by TheMarker show.

Selling everything from beauty products, liquor, wine, tobacco to candy, chocolates and Victoria’s Secret lingerie, James Richardson is a familiar presence to travelers passing through the Ben-Gurion terminal.

It is also a big money maker for the IAA. Franchise fees accounted for 45% of the authority’s 3.27 billion shekels ($900 million) in revenues in 2015, far more than it collects from fees charged to airlines and passengers. James Richardson alone pays tens of millions of dollar in franchise fees annually.

The Australian company has had the Ben-Gurion franchise since 1988 and was awarded an additional seven-year contract in 2013. As it turned out, the agreement was reached just as Israel and the European Union put their Open Skies accord into force, enabling more airlines to fly more routes.

That brought down air fares and caused a stunning rise in air traffic. In 2016, a total of 17.34 million passed through the airport, compared to 13.46 million in 2013, for an increase of 29%.

All those extra passengers should have been good news for James Richardson, but it wasn’t. The terms of its contract tied the annual fee it pays to the IAA to sales numbers and traffic at Ben-Gurion. The base fee was $169 million, but sources said that by 2015 it had climbed to $210 million due to the linkage. The problem for James Richardson was that the surge in passengers was heavily weighted toward repeat travelers rather than new ones, and frequent fliers are less likely to shop at duty-free since they are at the airport so often.

By the end of 2015, the Australian company had had enough and demanded that IAA reduce the fees and end the linkage to Ben-Gurion traffic. The authority refused and tensions reached a point where James Richardson threatened to pull out of its seven-year contract and close its stores. The IAA counter-threatened to put the franchise up for competitive bidding again.

Eventually the two sides reached terms that give James Richardson the right to end the contract with just 60 days’ notice and puts a ceiling on the fees it pays. The amount of that ceiling was redacted from the documents that were shown to TheMarker.

“It is hereby clarified that during the restriction period, the operator will not pay combined authorization fees higher than the rate of [deleted] of the total gross sales revenue in the stores, as defined in the agreement for the restriction period,” the documents say.

The IAA declined to offer any account of the revised terms, except to ascribe them to “exogenous changes” that entitled its tenders committee under the law to negotiate all the airport’s franchise holders. James Richardson said it had a policy of not discussing contract terms with members of the media.

But an industry source, who asked not to be identified, said the revised contract was highly problematic.

“The 2013 tender was very tough. Nowhere else in the world do you pay franchise fees of this magnitude. Foreign companies read the terms and decided not to compete,” the source said. “It’s true that this is a franchise that has been paid to the IAA for many years, and you can understand why they want to keep it, but on the other hand – since when does a franchisee get everything he wants?

“The biggest damage we have done as a country is that people around the world see that there’s a contract and that it can be changed. It turned out that James Richardson could renege from its obligations two years after it was signed,” he said.

Legal experts said the revision was problematic.

“Under the Mandatory Tenders Law, any discounts given by the authority to the winner of the tender after he has won violate the terms of the tender and the tender law,” said Yoav Bein, an expert of tenders law at the Haifa law firm Prof. Bein & Company.

Experts said that a government body to revise terms, but only if it can cite force majeure. But another attorney, who asked not to be identified, said in the case of the James Richardson contract that wasn’t an issue because they came as a result of a sharp rise in Ben-Gurion traffic.

“James Richardson had to anticipate that and take it into account when submitting its bid in the tender,” he said. “Therefore, I doubt when the changes in the agreement would ever stand the test of judicial review. “

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