Sky Chef

Internal Audit Report 

Sky Chefs, Inc 

Lease and Concession Compliance Audit 

January 1, 2008 through December 31, 2009 




Issue Date: October 05, 2010 
Report No. 2010-15

Internal Audit 
Sky Chefs, Inc; Agreement No. 716 
Audit Period: January 1, 2008  December 31, 2009 

Audit Period: July 1, 2005  June 30, 2008 
Table of Contents 
Internal Auditor's Report ................................................................................................... 3 
Executive Summary ........................................................................................................... 4 
Background ........................................................................................................................ 5 
Audit Objectives ................................................................................................................ 5 
Audit Scope ........................................................................................................................ 5 
Audit Approach .................................................................................................................. 6 
Conclusion ......................................................................................................................... 6 
Schedule of Findings and Recommendations ................................................................ 7 
1.    Disallowed Revenue Deductions 












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Internal Audit 
Sky Chefs, Inc; Agreement No. 716 
Audit Period: January 1, 2008  December 31, 2009 

Audit Period: July 1, 2005  June 30, 2008 
Internal Auditor's Report 
We have completed an audit of the Lease and Concession Agreement, as amended, between the Port of
Seattle and Sky Chefs, Inc. The purpose of the audit was to determine the following: 
1)  Reported concession was complete, properly calculated and remitted timely to the Port. 
2)  Port and the lessee complied with provisions of the Lease and Concession Agreement. 
3)  Lease and Concession Agreement, as amended, complies with applicable state and Port requirements. 
We examined information related to a two-year period from January 1, 2008, through December 31, 2009. 
We conducted our audit using due professional care. We planned and performed the audit to obtain
reasonable assurance as to compliance with significant provisions of the agreement, including complete
and timely reporting of concessionable revenues. 
Sky Chefs materially complied with the terms of the Lease and Concession agreement, with an exception of
disallowed revenue deductions. The agreement itself complies with applicable state and Port requirements. 
We extend our appreciation to the management and staff of the Aviation Business Development, and
Accounting & Financial Reporting for their assistance and cooperation during the audit. 


Joyce Kirangi, CPA 
Director, Internal Audit 







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Internal Audit 
Sky Chefs, Inc; Agreement No. 716 
Audit Period: January 1, 2008  December 31, 2009 

Audit Period: July 1, 2005  June 30, 2008 Executive Summary 
Audit Scope and Objective             The purpose of the audit was to determine the following: 
1)   Reported concession was complete, properly calculated and remitted timely to the Port. 
2)   Port and the lessee complied with provisions of the Lease and Concession Agreement. 
3)   Lease  and  Concession  Agreement,  as  amended,  complies  with  applicable  state  and  Port
requirements. 
We examined the books and records of Sky Chefs, Inc., for a two-year period from January 1, 2008 through
December 31, 2009. Aviation Business Development has the primary responsibility for administering and
monitoring the agreement to ensure compliance with agreed-upon terms. 

Agreement Terms  Sky Chefs, Inc. provides in-flight catering service, including the preparation and
distribution of in-flight foods, beverages, and related services to domestic and overseas airlines at Seattle
Tacoma International Airport.
The terms of the agreement provide for a 7% concession fee on the gross sales for catering services to
airlines, and a 3.5% concession fee on the gross sales to non-airline parties, with only the following
acceptable offsets or deductions: 
1)  Returns and refunds 
2)  Taxes imposed and collected by Lessee as agent for its taxing body 
3)  Meals furnished to employees of Lessee 
A monthly rent is payable in advance, on or before the first day of each month, without notice from the Port.
The concession is due monthly within 15 days following the end of each calendar month. For untimely
payments, the agreement provides interest to be accrued from the due date until paid. 

Audit Result Summary  Sky Chefs materially complied with the terms of the Lease and Concession
agreement, with the exception of disallowed revenue deductions. The lessee offset its gross revenue with
approximately $888,964 of disallowed discounts resulting in underpaid concessions of approximately
$6,890. The agreement itself complies with applicable state and Port requirements. 




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Internal Audit 
Sky Chefs, Inc; Agreement No. 716 
Audit Period: January 1, 2008  December 31, 2009 

Background              Audit Period: July 1, 2005  June 30, 2008 
The agreement was    originally signed with Marriott in November 1980, but later assigned to Caterair
International Corporation in             July 1995. Caterair subsequently subleased the agreement to Sky Chefs in 
September 2001. 
Sky Chefs began its operations in the 1940s as a catering arm of American Airlines. Through acquisitions 
over time, the company became a wholly owned subsidiary of Lufthansa. The company is officially known
as LSG Sky Chefs, and currently operates in 49 countries. 
The concession fee per the agreement is defined as 7% and 3.5% of gross sales from airline and nonairline
customers, respectively. Gross sales subject to the concession include all revenue streams from the
lessee's operation at Seattle-Tacoma InternationalAirport, with the exception of three expressly allowed
sales deductions: 
1)  Returns and refunds 
2)  Taxes imposed and collected by Lessee as agent for its taxing body 
3)  Meals furnished to employees of Lessee 
Financial Highlights 

Reported 
Paid 
Year          Gross 
Concession 
Revenue 
2006             19,771,729    $1,032,199 
2007             16,225,964       908,508 
2008             20,480,996     1,351,834 
2009             24,207,455     1,654,627 
Total            $80,686,144     $4,947,168 
Source: PROPworks and PeopleSoft 
Audit Objectives 
The objective of our audit was to determine the following: 
1)  Reported concession was complete, properly calculated and remitted timely to the Port. 
2)  Port and the lessee complied with provisions of the Lease and Concession Agreement. 
3)  Lease  and  Concession  Agreement,  as  amended,  complies  with  applicable  state  and  Port
requirements. 
Audit Scope 
The scope of the audit covered the period January 1, 2008 through December 31, 2009. 

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Internal Audit 
Sky Chefs, Inc; Agreement No. 716 
Audit Period: January 1, 2008  December 31, 2009 

Audit Approach            Audit Period: July 1, 2005  June 30, 2008 
To achieve our audit objective, we performed the following procedures: 
Read and analyzed the lease agreement, as amended. 
Reviewed applicable state and local rules and regulations. 
Identified significant provisions in the agreement. 
Obtained necessary financial and non-financial data from the lessee. 
Assessed relevant risks associate with the agreement. 
Designed and executed audit procedures based on risk. 
Analyzed data (internal & external) to determine completeness & compliance, including: 
o   Reconciliation of the reported gross receipts to the lessee's accounting records to ensure
completeness and consistency. 
o Reconciliation of the certified Audited Schedule of Gross Receipts to lessee's accounting
records to ensure completeness. 
o   Verification that concession fee were paid timely and intact. 
o   Recalculation of concessions and related fees to ensure accuracy. 
Conclusion 
Sky Chefs materially complied with the terms of the Lease and Concession agreement, with the exception
of disallowed revenue deductions. The lessee offset its gross revenue with approximately $888,964 of
disallowed discounts resulting in underpaid concessions of approximately $6,890. The agreement itself
complies with applicable state and Port requirements. 








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Internal Audit 
Sky Chefs, Inc; Agreement No. 716 
Audit Period: January 1, 2008  December 31, 2009 

Schedule of Findings and Recommendations Audit Period: July 1, 2005  June 30, 2008 

1.  Disallowed Revenue Deductions 
This is a repeat finding. In 2007, we audited Sky Chefs records and suggested a recovery of
approximately $30,000 because Sky Chefs was netting its gross revenue with disallowed discounts.
Management disagreed with the finding and did not pursue collection. 
Gross revenue is defined under Section 3.d iii as: 
"thetotal selling price, fee or charge, whether for cash, credit or otherwise, of all
prepared meals, food or other products, and of all related food catering services or other 
services, and all other receipts whatsoever, resulting from or attributable to Lessee's 
operations on the Premises, regardless of delivery point or place of payment, without 
offset or deduction of any kind except (i) returns and refunds; (ii) the amount of any sales
tax or other excise tax imposed on the purchaser and collected by Lessee as agent for
their taxing body item; and (iii) meals furnished to employees of Lessee..." 
Except for the following three specific allowances to offset gross revenue, there are no other reductions
allowed in the agreement: 
Returns and refunds 
The amount of tax collected on behalf of taxing body 
Meals furnished to employees of Lessee. 
During this audit, we reviewed the lessee's general ledger in detail. We noted that the lessee continues
to reduce its gross revenue with discounts such as Quick-Pay and Group Volume Discount. These 
discounts amounted to $518,094 and $370,870 in 2008 and in 2009, respectively. These discounts were
inconsistently applied to gross revenue. Sometimes the discounts were offset against gross revenue,
and in other months they were not. 
Based on the audit finding from 2007, which resulted in a disagreement concerning the definition of
gross revenue, we expected to see clarifying language in 2010, but we found none. 
The effect of offsetting gross revenue with the disallowed discounts is documented below. The auditor's
calculation shows Sky Chefs owes the Port an additional $6,890 in concession fees for this audit period.
The relatively small additional concession amount is a result of Sky Chefs inconsistent treatment of the
discounts. 



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Internal Audit 
Sky Chefs, Inc; Agreement No. 716 
Audit Period: January 1, 2008  December 31, 2009 
Type of                 Actual Gross
Total
Total        Additional
Reported                         Concession
Year    Gross               Audit Period: July 1, 2005                           Revenue Per   Rate          June 30, 2008          Concession     Concession
Gross                             Due Per
Revenue                      Audit                              Paid          Due 
Audit 
Airline        19,984,923    19,948,315   7.0%       1,396,382 
2008 
Non-                                                         1,416,307         2,436 
Airline           496,074       638,877   3.5%          22,361 
Airline       23,464,866    23,502,920  7.0%       1,645,204 
2009 
Non-                                                         1,668,531         4,454 
Airline           742,589       793,748   3.5%          27,781 
6,890 
Recommendation 
We recommend management collect approximately $6,890 in additional concession fees. Further for the
upcoming lease agreement RFP, we recommend management clarify the definition of gross revenue. 

Management Response 
Aviation Business Development (AVBD) staff disagrees with this Internal Audit finding.  In response to
the 2007 audit of Sky Chefs where this same issue was identified, AVBD staff consulted Port Legal staff
on the audit finding.  Legal staff concluded that Internal Audit's interpretation of the lease was incorrect
and that Sky Chef did not owe the Port this money. Since there have been no new developments to
change this conclusion, AVBD staff see no reason to bill the tenant for this money.
Internal Audit did, however, note some irregularities in the reporting of the revenue deductions.
Therefore AVBD staff will request corrected reports from Sky Chefs. In addition, since the current lease
language relating to gross revenues is perceived by Internal Audit to be unclear, staff will work to clarify
this language in terms of what is included and excluded from gross revenue in the up-coming lease
negotiations.  AVBD staff will also add a provision in the lease requiring an Annual Report and more
specific language about late fees and interest charges. 





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