Xanterra Sues NPS Over Mismanagement of Grand Canyon Contracts

 

 DENVER, COLORADO, October 8, 2014 – Xanterra Parks & Resorts, the country’s largest and oldest national park concessioner, has been forced to take legal action against the National Park Service (NPS) in protest against arbitrary and capricious actions by the agency in connection with the concession contracts to operate lodging, restaurants and other services at Grand Canyon National Park.

The Issue:  Grand Canyon South Rim Concession Contract

Xanterra, the primary national park concessioner at the Grand Canyon South Rim, was founded as the Fred Harvey Company in 1876 and first brought visitors to the Grand Canyon by railroad starting in 1905 (the Grand Canyon was designated as a national park twelve years later in 1917).  Beginning with its first contracts with the NPS over 90 years ago, Xanterra has invested more than $200 million in capital improvements in the Park, including lodging, employee housing, roads, trails, utilities, environmental upgrades and other infrastructure.  A large portion of these investments qualify as “Leasehold Surrender Interest” (LSI) and must be repaid to Xanterra in accordance with federal law if Xanterra were to cease operating at the Grand Canyon.

The current primary concession contract for the Park, awarded to Xanterra in 2002 and renewed three times on a year-to-year basis since then, expires on December 31, 2014.  The contract is to operate and maintain more than 300 Park buildings, including El Tovar Hotel, Phantom Ranch, Bright Angel Lodge, Hopi House and numerous other historic facilities constructed in the Park during Xanterra’s lengthy tenure as the primary South Rim concessioner.

Modification of Existing Concession Contracts

In a surprise announcement in August 2013, the NPS decided to modify Xanterra’s primary concession contract by transferring responsibility for considerable operations that had been under the primary contract to a smaller existing contract and paying down a large portion of Xanterra’s related LSI.  Operations carved out of the primary contract and added to the smaller contract included certain lodging, retail and food services at Yavapai Lodge, Desert View, Camper Services and Trailer Village RV campground.  NPS immediately put this new expanded smaller contract out to bid, awarding it to Delaware North, a competing concessioner, effective January 1, 2015 (conditional upon a required period of review by Congress).  This decision to modify the primary Grand Canyon contract and pay down a portion of the LSI by the NPS was made unilaterally by the NPS and Xanterra was not consulted on the decision.

According to the NPS, reducing the operations under the primary contract was intended to “motivate other companies other than Xanterra to compete for the larger contract.”  However, after being put out to bid twice before, the larger contract received no responsive bids from prospective concessioners.

In large part, this stems from the fact that the primary contract economics are untenable to prospective bidders.  In the most recent version of the prospectus, a new concessioner will be required to pay a franchise fee of 14% of gross receipts under the contract, more than triple the current 3.8% franchise fee.  Xanterra believes this will 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.

It appears the reason for such a drastic hike in the contract’s franchise fee is the NPS decision to use $25 million in Park funds and another $75 million borrowed from other national parks to “buy down” Xanterra’s LSI.  This decision will in turn, by NPS’ own admission, result in cutting budgets of its staff, implementing hiring freezes and furloughing of NPS employees at a number of national parks.  Additionally, the NPS recently announced its intention to raise visitor entrance fees at many parks across the country.

Additionally, many key projects at both the Grand Canyon and other parks will necessarily be deferred, adding to the agency’s existing multi-billion dollar accumulated maintenance backlog.

The net result of these decisions is the mismanagement of agency funds, the further degradation of integral Park facilities and a diminished experience for Park visitors.

Adverse Impacts on Xanterra Employees

Not only will the NPS decision to modify the Grand Canyon concession contracts have negative economic impacts on NPS properties and employees and lead to reduced visitor services at national parks around the country, it also will have a direct negative impact on Xanterra’s dedicated Park employees.

NPS requires that concessioners provide adequate employee housing as part of any concession contract.  As repeatedly pointed out to the NPS by Xanterra, the assignment of housing between the two contracts by NPS resulted in the allocation of an excess supply of housing to the smaller contract.

Under the proposed NPS structure, the smaller contract has a surplus of 87 beds in summer and 244 beds in winter, resulting in the larger contract having a deficit of 84 beds in summer and 224 beds in winter.  The NPS solution to this irrational housing split is to evict all affected Xanterra families from their existing homes and move many of them into dormitory-style rooms and un-insulated, non-winterized cabins, units that are normally closed during the winter months due to extreme weather conditions.  The smaller contract housing assignment also includes a disproportionately large number of single-family homes and more desirable units as compared to the larger contract.  Under the NPS proposal, these changes will become effective January 1, 2015.

In making the decisions it has in regard to the Grand Canyon contracts, the NPS has blatantly ignored the well-being of Xanterra’s employees at the South Rim, many of whom have dedicated decades of their lives to the Canyon and raised their families there.  The misallocation of housing by the NPS between the two contracts will in fact force many current Xanterra employees out of their homes over the holidays.

Additionally, this housing misallocation will provide Delaware North an unfair advantage in bidding for the larger contract should it choose to do so, as it now enjoys a housing surplus.

NPS Bid Requirements are Contrary to Law

Bids are due on the larger contract prospectus today.  The NPS has stated as part of the bid solicitation that the new larger contract will begin on February 1, 2015.  At this time, Xanterra does not know if or when the NPS will award this contract.

The larger contract prospectus as currently drafted does not afford the winning bidder a “reasonable opportunity for net profit in relation to capital invested and the obligations of the contract,” as explicitly required by Federal law. The primary factors in this regard are the unfair distribution of housing between the two contracts and the exorbitant 14% franchise fee proposed in the larger contract.

Even if there were time to make alternative out-of-Park living arrangements by the planned February 1, 2015 start of the new larger concession contract, the impracticality and high cost of relocating these displaced employees 70-miles away in Flagstaff, Arizona or spending upwards of $20 million to purchase land and build new facilities immediately outside the Park converts the proposed concession contract into an untenable, money-losing proposition.

To date, Xanterra has pursued every avenue to rectify this situation with the NPS without success.

 

Legal Action Only Alternative Available

“We have no option left but to take legal action and request an injunction to stop the implementation of these contracts in the hope that we can prevent the eviction of 224 of our employees, many of whom are long-time residents and families with deep roots in, knowledge of and passion for the Grand Canyon,” said Andrew N. Todd, President & CEO of Xanterra.  “Xanterra has exhausted every avenue in an effort to correct this situation in an amicable and commercially reasonable manner before it became a crisis for so many families and the community, but the NPS has chosen instead to ignore the obvious problems created by its arbitrary decisions.”

The complaint filed yesterday against the NPS seeks a declaratory judgment that the requirements contained in both the smaller and larger contract prospectuses are arbitrary, capricious, and in violation of law, and an injunction prohibiting further action in the solicitation process pending amendments to both contract prospectuses to bring them into compliance with the law.

To view the filing, click here.

Contact:

Cole Finegan, Esq.

Hogan Lovells

Tel: (303) 517-2617

cole.finegan@hoganlovells.com

Known for its “Legendary Hospitality with a Softer Footprint,” Xanterra Parks & Resorts® entities include lodges, restaurants, tours and activities in national and state parks, as well as resorts, a cruise line, railway and tour companies. Xanterra Parks & Resorts has operations in Grand Canyon, Yellowstone, Zion, Crater Lake, Rocky Mountain and Petrified Forest National Parks; Mount Rushmore National Memorial; Furnace Creek Resort in Death Valley National Park; and five Ohio State Park Lodges as well as the Geneva Marina at Ohio’s Geneva State Park. Xanterra Parks & Resorts also owns and operates Kingsmill Resort in Williamsburg, Va., the Grand Canyon Railway and Hotel in Williams, Az., the Grand Hotel in Tusayan, Az., Windstar Cruises, VBT Bicycling and Walking Vacations, Country Walkers and Austin Adventures.