Attachment Sky Chefs for Audit Meeting on Jun 25, 2018 1:00pm at Pier 69

Sky Chefs

INTERNAL AUDIT REPORT
LIMITED CONTRACT COMPLIANCE
SKY CHEFS, INC.

MARCH 2015 – FEBRUARY 2017

ISSUE DATE: MAY 30, 2018
REPORT NO. 2018-06

INTERNAL AUDIT

Sky Chefs, Inc.
March 2015 – February 2017

TABLE OF CONTENTS

EXECUTIVE SUMMARY ................................................................................................................................................. 3
BACKGROUND .............................................................................................................................................................. 4
AUDIT SCOPE AND METHODOLOGY ........................................................................................................................... 5
APPENDIX A: RISK RATINGS ........................................................................................................................................ 6

Sky Chefs, Inc.
March 2015 – February 2017
EXECUTIVE SUMMARY
Internal Audit completed an audit of the Lease and Concession Agreement (Agreement) between the Port
of Seattle (Port) and Sky Chefs, Inc. (Sky Chefs or Lessee) for the period March 1, 2015 through February
28, 2017. The audit was performed to verify compliance with key lease provisions in the Agreement,
including the completeness and accuracy of concession fees paid to the Port.
On September 26, 2014, the Port entered into the Agreement with Sky Chefs. Sky Chefs is the brand
name of LSG Lufthansa Service Holding AG, which is the world’s largest provider of airline catering and
in-flight services, operating in 56 countries. It is a subsidiary of Deutsche Lufthansa AG. Sky Chefs
prepares and delivers meals, beverages, and snacks for domestic and international flights.
The initial term of the Agreement was three years, commencing on March 1, 2014. Sky Chefs exercised
the option to extend the lease term to February 28, 2019, two consecutive periods past the original lease
expiration.
We concluded that the Lessee materially complied with the significant terms in the Agreement.
No issues were identified requiring management response.
We extend our appreciation to Port management, the staff of Aviation Business Development, and to Sky
Chefs, Inc. for their assistance and cooperation during the audit.

Glenn Fernandes, CPA
Director, Internal Audit

RESPONSIBLE MANAGEMENT TEAM
Lance Lyttle, Managing Director Aviation
Jim Schone, Director, Aviation Business Development
James Jennings, Sr. Manager, AV Properties Group

Sky Chefs, Inc.
March 2015 – February 2017
BACKGROUND
LSG Lufthansa Service Holding AG is headquartered in Germany, while its North American headquarters
are located in Irving, Texas.
The current Agreement (number AIR001849) between Sky Chefs and the Port became effective on
March 1, 2014 for an initial term of three years. Sky Chefs provides in-flight catering service, including the
preparation and distribution of in-flight foods, beverages, and related services to domestic and
international flights out of Seattle Tacoma International Airport.
For the concession rights and privileges, the Lessee pays a monthly concession fee equal to 7% of gross
revenue from Airport Operations and 3.5% of gross revenue from Off-Airport Operations. Off-Airport
Operations include revenues arising from occasional charter activity at Joint Base Lewis-McChord,
Boeing Field, Snohomish County Airport, and Bellingham International Airport.
The agreement also requires Sky Chefs to pay land and building rent. Rent is based on square footage
and is due monthly. Land rent is $14,966 per month and building rent is $25,307 per month.
The table below reflects total concession revenue and land & building rent earned by the Port:
SKY CHEFS, INC.
Fiscal Year Gross Revenues Concession Revenue Land & Building Rent
2015 $49,032,636 $3,428,844 $483,268
2016 51,612,608 3,611,374 483,268
TOTAL $100,645,244 $7,040,218 $966,536
* Data Source: PeopleSoft Financials

Sky Chefs, Inc.
March 2015 – February 2017
AUDIT SCOPE AND METHODOLOGY
We conducted this audit in accordance with Generally Accepted Government Auditing Standards
and the International Standards for the Professional Practice of Internal Auditing. Those standards
require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and conclusions based on our
audit objectives.
The period audited was March 2015 through February 2017. After identifying significant provisions
in the Agreement, we performed the following audit procedures:
Revenue Completeness and Accuracy:
• Agreed the data spreadsheets provided by Lessee to the monthly profit and loss sales report and
to the General Ledger.
• Agreed the recalculated concession fees to amounts reported to the Port.
• Verified the accuracy of the concession fees by agreeing the percentage rate applied to the
revenue category and fees invoiced.
• Obtained and reviewed documentation supporting the Lessee’s Annual Certification of Gross
Sales.
• Analyzed deductions in the data sheets to determine whether they were properly classified and
correctly deducted from the gross revenues.
• Tested a judgmental selection of 30 invoices from high revenue volume months (15 selections
from July 2015 and 15 from December 2016). Determined if the amounts on the revenue detail
reports agreed to the amounts invoiced and reflected on bank statements.
• Obtained third party confirmations and from Alaska Airlines for invoices totaling $5,114,486.
Surety Deposit:
• Recalculated annual deposits and validated that they were received timely.
Land & Building Rents:
• Reviewed the PeopleSoft Query results showing the monthly Land & Building Rent, invoiced
to and paid by Sky Chefs, to the Port.
• Traced ACH payments to bank statements, to validate timeliness of payments.

Sky Chefs, Inc.
March 2015 – February 2017
APPENDIX A: RISK RATINGS
Findings identified during the course of the audit are assigned a risk rating, as outlined in the table below. The
risk rating is based on the financial, operational, compliance or reputational impact the issue identified has on
the Port. Items deemed “Low Risk” will be considered “Exit Items” and will not be brought to the final report.
Port Commission/
Rating Financial Internal Controls Compliance Public
Management
Large financial
impact Noncompliance
High probability
with applicable Important
Missing, or inadequate for external audit
Remiss in Federal, State,
HIGH key internal controls issues and/or
responsibilities and Local Laws, Requires immediate
negative public
of being a or Port Policies attention
perception
custodian of
public trust
Partial controls Inconsistent Potential for Relatively important
compliance with external audit
Moderate
MEDIUM Not adequate to identify Federal, State, issues and/or May or may not
financial impact
noncompliance or and Local Laws, negative public require immediate
misappropriation timely or Port Policies perception attention
Generally
Internal controls in place Low probability
complies with
but not consistently for external audit
Federal, State and Lower significance
Low financial efficient or effective issues and/or
LOW/ Local Laws or Port
impact negative public
Exit Items Policies, but some May not require
Implementing/enhancing perception
minor immediate attention
controls could prevent
discrepancies
future problems
exist
Efficiency An efficiency opportunity is where controls are functioning as intended; however, a modification would make
Opportunity the process more efficient

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