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Deadline Looming For Concessions At Grand Canyon National Park's South Rim

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Barring a temporary agreement, mass layoffs stand to cripple concessions operations at Grand Canyon National Park on December 31, shuttering hotels and dining rooms, ending mule rides and bus tours, and canceling some memorable New Year's Eve celebrations on the South Rim.

National Park Service officials, who have been trying to find an equitable solution for a new 15-year concessions contract, could avert such a shutdown by extending a one-year contract to buy time to successfully negotiate the long-term agreement. While Grand Canyon Superintendent Dave Uberuaga has said such a near-term solution is possible, he was out of his office Wednesday and unavailable to say whether he would do so.

That uncertainty was leading some employees for Xanterra Parks & Resorts, which holds the existing contract, to resign and go in search of more stable employment rather than risk opening the new year without a job, said company officials, who last month notified their South Rim workforce that they could be out of work come Jan. 1, 2015.

"We've already seen employees start to leave the South Rim because they have to preserve their employment and take care of their families, so we've seen people leaving already," said Jon Streit, general manager of Xanterra's South Rim operations. "We're at a low point in our employment that we've never seen before, we're assuming because of this uncertainty."

Xanterra normally would have between 1,000 and 1,100 employees on the South Rim at this time of year, said Mr. Streit, who added that so far the remaining workforce of 900-950 has been able to keep the operations running smoothly.

"We continue to serve the visitor, and hopefully it is seamless to the visitor, that's our goal," he said during a phone call from the company's Denver offices. "But obviously we pay more in overtime and we have to work people additional hours and days and it's just additional stress with that uncertainty of not knowing what's going to happen after the end of the year.

"... We could definitely be out of the park as of January 1. Our hope is that the Park Service will issue us a temporary contract for up to one year to continue operating the South Rim facilities," said Mr. Streit.

There are a bit more than 900 lodging units on the South Rim, from 78 rooms at the El Tovar Hotel and 278 at Maswick to 358 at Yavapai Lodge.

Creating the contractual uncertainty has been a deep-rooted concessions operation at the Grand Canyon that has allowed Xanterra to amass nearly $200 million in "leaseholder surrender interest" through investments and improvements in South Rim facilities. The problem of leaseholder surrender interest dates to the early 20th century, when the Park Service encouraged businesses to develop visitor facilities.

"Laws have always recognized that concessioners would be compensated by the NPS for investments in facilities. Over the last 100 years at Grand Canyon, Fred Harvey and the Santa Fe Railway and successors (Xanterra, then known as Amfac Parks & Resorts, took over operations in 1968)  constructed about 250 buildings for operations on the South Rim, ranging from sheds to the El Tovar Hotel," according to Grand Canyon spokeswoman Kirby-Lynn Shedlowski.

Sixteen years ago Congress, through its Concessions Management Improvement Act, basically handed the Park Service the tab for repaying concessionaires for the improvements they had made by requiring the agency to advertise concession contracts for open competition for the first time. At the Grand Canyon, the South Rim concessions business was not opened to competition from other companies until 2002. To create that opportunity, the Park Service had to place a value on the South Rim concessions facilities. The figure, arrived at through arbitration, was $165 million in 2002. Since then its has grown to $198 million, according to park officials.

Earlier this year, Grand Canyon officials decided that, to make concessions contracts on the South Rim - lodging at El Tovar, Bright Angel, Phantom Ranch on the canyon floor, and the mule rides into the canyon, as well as the Thunderbird and Kachina Lodges, Maswik Lodge, retail and food service at Hermits Rest, retail service at Hopi House and Lookout Studio, and transportation services such as bus tours and taxi service -- attractive to a number of prospective companies, they would buy down Xanterra's LSI by $100 million, a dollar amount the Park Service came up with in part by borrowing $75 million from throughout the rest of the National Park System. Even still, that move leaves another $57 million that would be owed Xanterra if another company wins the contract.

To further make the bidding for concessions contracts more competitive, the Park Service split the South Rim concessions business in two, and earlier this year the Park Service awarded roughly half of the business to Delaware North. Even still, Delaware North (which has been interviewing Xanterra employees for jobs on the South Rim) will have to pay Xanterra $41 million in LSI fees that reflect Xanterra's past investments in those operations.

While it's potentially feasible for Delaware North, which takes over the Yavapai Lodge on January 1, to offer guest lodging this winter, that lodge typically closes the first Sunday in November, reopens for Thanksgiving and Christmas, and then closes again until President's Day before reopening in March for the park's busy high season.

Xanterra no doubt complicated the concessions matters more so last month by suing the Park Service over the South Rim business, accusing the agency of acting arbitrarily and capriciously when it decided to split into two the South Rim concessions contracts.

With that lawsuit pending, Grand Canyon officials have continued their efforts to settle on a concessionaire for the next 15 years for the bulk of the South Rim visitor operations. Part of the problem in attracting bids might be the $57 million owed to Xanterra if it fails to retain the contract, and part might be the franchise fee the Park Service is demanding as part of the contract.

While the agency had been seeking a 14 percent fee, last week that was reduced to 10 percent for the first third of the contract, with a 12.5 percent franchise fee to be assessed for each of the remaining 10 years. Mr. Streit, noting the legal filing, would not comment on whether that change was sufficient, or if they would desire a lower franchise fee.

With the bidding deadline arriving on Nov. 19, it's believed that only Xanterra has responded so far. Even still, it's not expected that the park could analyze bids and award a contract by year's end. Hence the need for a temporary, year-long agreement to keep the South Rim lodges and other concession services operating through year's end and throughout 2015.

Calculating franchise fees is a complicated matter for the Park Service, as the condition of facilities can vary greatly from park to park, as can visitor traffic. Too, sometimes the fee is balanced against a percentage of annual gross receipts required to be deposited in a repair and maintenance fund. The fees also can be affected by whether new construction projects are part of the contract.

For instance, at Yellowstone National Park, where Xanterra in February was awarded a 20-year contract, the contract carries an annual franchise fee of 4.5 percent. It also requires Xanterra to place 6 percent of its gross receipts into a repair and maintenance fund and to invest $135 million in new facilities, primarily in the Canyon area where a considerable amount of the existing lodging is being replaced.

At the Grand Canyon, the outstanding concessions contract for the South Rim, in addition to the franchise fee, calls for 1.3 percent of gross receipts to be placed in a repair and maintenance fund, and for more than $13 million in new construction, including the demolition and replacement of the Maswick South lodge complex, a project estimated to cost $11.5 million.

Xanterra said in its lawsuit that the initial 14 percent franchise fee sought in the South Rim contract would "result in a cumulative negative cash flow for any concessioner over the entire term of the larger contract and represents a wholly unfeasible economic proposition." But Park Service concessions officials typically arrive at a feasible franchise fee through a rigorous financial analysis, which could involve outside consultants, that takes into consideration a concessonaire's past income and expenses as well as projected income and expenses. 

Mr. Streit said he expects the Park Service is anxious to find an amicable solution.

"I would assume they don't want to see visitor services stop at the South Rim (on December 31)," he said. "It's not in the best interests of the American public."

Comments

The figure, arrived at through arbitration, was $165 million in 2002. Since then its has grown to $198 million, according to park officials.

Obviously that figure is too high.  If the facilities were really worth that, the other concessionaires would have no problem paying that.


The problem with the January 1 shutdown appears to be that the new bids have been delayed and the effective date has not been moved back.  Most likely because Xanterra is refusing to do a temporary extension to put further pressure on the Park Service as witnessed by articles like this that echo their statements.

 

The leaseholder interest surrender  problem is somewhat overstate.  Glacier NP just changed concessionaire after many many years and the new vendor accepted the amount without a buy down.   Since whomever takes it over  is going to recoup the payoff amount plus interest whenever they surrender the contract, the successful bidder simply has to be able to carry the amount through the life of the contract.  Obviously a cost Xanterra doesn't have to consider in their bid, but not insurmountable.


but not insurmountable.

Unless it was set too high to begin with. 


Interesting that the new concessionaire at Glacier NP is Xanterra.   Also, I believe a new contract for Yellowstone is also with Xanterra.


Am not sure if it was set to high with all the facilities and arguably the most historical and landscape appropriate buildings that enrich the Park like the Watchtower, Hopi House, Lookout Studio, Hermit's Rest and all of Phantom Ranch that were designed by Mary Jane Elizabeth Colter under the employe of Xanterra's previous incarnation as the FredHarvey Company.  A hundred plus years of occupancy does accrue a good bit of equity.  It's my guess that Xanterra has morphed into something different than what proceeded the name change, as everything has.  Without going into detail I also believe at Grand Canyon there have been parts of their operating model (HR for one) that have been undesireable to NPS, employees and visitors alike.  Without an easy remedy, it's come to what we have going on as we speak.  My view for what it's worth.


Am not sure if it was set to high

If it wasn't set too high, it wouldn't be hard to get another concessionaire to step up and pay. 


Just lower the arbitrated appraisal?  How would that work?


Rearbitrate.  Heck, if you can rearbitrate a divorce settlement, you should be able to rearbitrate an LSI.


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