PORT OF SEATTLE 
MEMORANDUM 
COMMISSION AGENDA               Item No.       5b 
ACTION ITEM             Date of Meeting    May 28, 2013 

DATE:    May 21, 2013 
TO:      Tay Yoshitani, Chief Executive Officer 
FROM:   James Schone, Director, Aviation Business Development 
James Jennings, Manager, Aviation Properties 
Jess Qunell, Aviation Property Manager 
SUBJECT:  Amendment No. 2 to the Port's Management Agreement with VIP Hospitality for
Club International at Seattle-Tacoma International Airport 
Amount of this Request: $500,000     Source of Funds: Airport Development Fund 
ACTION REQUESTED: 
Request Commission authorization for the Chief Executive Officer to execute the Second
Amendment to the Management Agreement with VIP Hospitality LLC for operation of premium
lounge services at Seattle-Tacoma International Airport, substantially as drafted in the attached
exhibit, effective March 8, 2013, to increase the contract cost for a five-year total not to exceed
$500,000. 
SYNOPSIS: 
VIP manages and staffs the Port's common use premium airline lounge named Club
International, which is located at the South Satellite (See Exhibit 1). The agreement pays VIP a
base management fee to oversee the facility and staff the operation and offers an incentive
management fee based on annual profitability. The term of the current agreement is for three
years with two one-year options. Staff has determined that execution of the first option year
would require Commission approval due the expectation that management fees under the current
agreement would exceed $300,000 after September 2013. The amendment is written to be
retroactive to March 8, 2013, in order to align with the beginning of the first option year of the
original agreement. 
Staff is seeking authorization for the full implementation of both option years, which if approved
by Commission, will enable the current agreement to continue through the fifth year.The
amendment includes the following changes to the underlying agreement: 1) an increase to the
base management fee; 2) modification of the incentive management fee schedule for year four
and five of the agreement; and 3) added administrative duties that VIP will perform on a regular
basis to streamline some processes.

COMMISSION AGENDA 
Tay Yoshitani, Chief Executive Officer 
May 21, 2013 
Page 2 of 4 
BACKGROUND: 
A premium passenger lounge is an essential component of the services offered by airlines that
target high margin first- and business-class-passengers on international flights. A premium
lounge offers a quiet place for passengers to relax prior to boarding their flight and offers
services including complimentary food and beverage, computer access, newspapers, magazines
and televisions. The Port's provision of a common-use lounge, which accommodates multiple
airlines in the international terminal, is key to ensuring that both existing and prospective
international airlines serving the Airport can meet their business plan objectives, specifically,
route profitability. The Port's Club International meets a critical market need for those airlines
that cannot justify building or leasing their own facility and that cannot be accommodated as
sub-tenants in the existing airline branded lounges. Many international carriers would view the
lack of a common-use lounge at the Airport as a barrier to successful entry into the market.
Therefore, it is important that such an option be maintained for current lounge users as well as 
prospective new entrant airlines. Strategically, having a viable common-use premium lounge in
the South Satellite is critical to meeting the Port's Century Agenda objective to double the
number of international flights in the next 25 years. 
The Port markets Club International as a premium passenger lounge directly to carriers operating
at the South Satellite of the Airport. Club International first began on the Mezzanine level of the
South Satellite decades ago as a no-frills common-use lounge where airlines would provide their
own staffing, food, and beverages. In May 2010, the Port changed the operating and business
model in an effort to improve the level of service. Port staff solicited and selected a third-party
company (VIP Hospitality) to provide a full service lounge inclusive of staff, food and beverage
services, as well as management oversight. Additionally, the fee model was changed from a
fixed per-flight charge to an individual per-passenger charge applied to airlines' passengers who
visit the facility. 
The lounge agreement with VIP was executed on March 8, 2010. On June 17, 2011, the first
amendment to the agreement was executed that clarified accounting processes, record keeping
responsibilities and asset ownership. In March 2012, Club International moved into a remodeled
facility on the concourse level that was vacated by Delta Airlines. Since opening the doors at the
new location, our partnership with VIP Hospitality has been quite successful in attracting new 
airline customers and achieving profitability in their management of the facility.
The basic terms of the amended management agreement include the following: 
Hire, staff, manage, maintain and operate the Club International lounge 
Manage direct operating expenses and budgets on behalf of the Port 
Compensation of a monthly Base Management Fee for the full-time manager and
Incentive Management Fee based on percentage of Net Operating Income 
VIP has done an excellent job in managing the staffing and expenses of Club International. The
club now provides service to five international airlines and the operating hours have been 
extended to meet the needs of these airlines. Per their contract, VIP has accommodated this

COMMISSION AGENDA 
Tay Yoshitani, Chief Executive Officer 
May 21, 2013 
Page 3 of 4 
growth without any escalation to the original base management fee or incentive management fee 
as compensation. It is important to note that the original agreement did not come before
Commission because the term, including the option to extend, did not exceed five years and the
estimated costs to the Port were not anticipated to exceed the CEO's spending authorization.
Previously, it was the objective of staff to conduct a new request for proposals (RFP) process
prior to the end of the three-year term. However, this objective was not met. Accordingly, Port
staff determined that execution of the first option year allowed in the agreement would be
necessary. This will lead to expenses associated with this contract exceeding the CEO's 
spending authorization limit of $300,000 by September 2013.
In order to streamline administrative responsibilities for management of the club, Port staff
requested and VIP has agreed to take on additional duties that have been performed by Port staff
for the past three years. These duties include invoicing airline customers and collecting
payments. In recognition of these additional duties as well as the significant increases in lounge
traffic and the lack of a built-in fee escalation clause in the original agreement, Port staff has 
negotiated an increase to the base management fee. Also, changes to the incentive management 
fee have been included in this amendment to ensure VIP is working to improve profitability
during the remaining term of this management contract. Based on these factors , VIP's strong
performance, and the importance to the Port to have uninterrupted service for our current Club
International airline customers, the Port has agreed in principle to the following terms: 
A $14,450 increase to the annual base management fee, from $73,150 to $87,600. 
An increase in the incentive management fee schedule, resulting in a 1% to 4% increase
in the share of net operating income that VIP would receive if certain gross operating
profit margin thresholds are met. 
Port staff is working on an RFP process that would change the lounge operating model from a
management agreement to a more traditional concession-based agreement model. In the
meantime, staff hopes to maintain the flexibility for the Port to exercise the second option year 
(through March 7, 2015) if the market doesn't adequately respond to the RFP.
FINANCIAL IMPLICATIONS: 
The costs incurred by the Port under this agreement are included in the Airport's annual
operating budget, and thus funded by the Airport Development Fund. These costs are more than
offset by revenues generated by this agreement to produce a positive net operating income
(NOI). The lounge generated $98,000 NOI in 2012, and the budgeted NOI for 2013 was 
$215,000. It is anticipated that, in light of the proposed changes to the base management fee and
incentive management fee, the revised 2013 NOI would be $199,000. This assumes no change
in revenues for the year. Through April of 2013, revenues are running 56% above budget, so
projected NOI for 2013 will likely exceed budget.

COMMISSION AGENDA 
Tay Yoshitani, Chief Executive Officer 
May 21, 2013 
Page 4 of 4 
STRATEGIC OBJECTIVES: 
This request supports the Port's Century Agenda objective to advance the region as a leading
tourism destination and business gateway. Specifically, this amendment ensures that the Port has
high quality and uninterrupted premium lounge services that will provide a key amenity in
support of making Sea-Tac Airport the West Coast "Gateway of Choice" for international travel 
and support the goal to double the number of international flights and destinations. 
BUSINESS PLAN OBJECTIVES: 
This amendment supports the Aviation Division's strategic goal of operating a world-class
international airport. It allows the Port to continue to provide a high level of customer service to
airlines and their passengers and to keep airlines' cost per enplanement low by ensuring that they
have existing lounge service opportunities available to them without the need to construct and
operate exclusive lounges. 
ALTERNATIVES CONSIDERED AND THEIR IMPLICATIONS: 
Alternative 1 - Do nothing. Continue into year four of the agreement with no changes. This
would require the Port to terminate the agreement later this year prior to exceeding the $300,000
spending authorization limit for the Port's CEO. This would not be in the best interest of the
Airport or participating airlines as it would cause an operational disruption in lounge service
while the Port attempts to procure a new service provider and negotiate a new agreement. This is
not the recommended alternative. 
Alternative 2  Approve the current agreement to exceed $300,000, without making any other
changes to the agreement as have been negotiated between Port staff and VIP. Rejection of the
negotiated terms may place the lounge operation in jeopardy as VIP could elect not to continue
as the lounge operator upon providing 90 days' notice to the Port. This is not the recommended
alternative. 
Alternative 3  Approve retroactive changes to the agreement through the execution of
Amendment No. 2, with changes to the base management fee and incentive management fee with
the intent of ensuring continued and profitable service for Club International. This is the
recommended alternative. 
OTHER DOCUMENTS ASSOCIATED WITH THIS REQUEST: 
Exhibit 1  Club International Map 
Amendment No. 2 to Management/Concession Agreement with VIP Hospitality L.L.C.
for Operation of Lounge Services at Seattle-Tacoma International Airport 
Original management agreement available electronically 
PREVIOUS COMMISSION ACTIONS OR BRIEFINGS: 
None