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Although nearly all U.S. airports are owned by state or local governments, airports are required by the federal government to be as self-sustaining as possible, and receive little or no taxpayer support. This means that airports must operate like businesses – funding their operations from their revenue, and thoughtfully and diligently planning funding for major improvement projects – which can often be very expensive. For example, building new runways at Chicago O’Hare will cost $6.6 billion. The airport, capital markets, the airlines and their passengers provide funds to help pay for these long-term projects.
Day-to-Day Operating Revenue
Airline rents, usage fees and charges are the primary source of the aeronautical, or airside revenue. The relationship between the airport and an airline is similar to a landlord-tenant relationship – essentially, each airline pays the airport for the use and maintenance of its facilities.
Most airports create a contract with airlines wishing to use its facilities, typically known as a Use and Lease agreement. This contract frames the relationship between the airport and the airline. One of the most important elements of any Use and Lease Agreement is the definition of the compensation the airline pays to the airport for use and maintenance of its facilities, including:
- Terminal rents – Based on the amount of space an airline uses inside the terminal.
- Landing fees – A per plane charge, usually based on the weight of the aircraft.
- Other charges – Specific fees for extra airport services (e.g. use of a jet bridge).
An airline does not have to have a signed contract to use an airport. However, an airline with a contract, typically called a signatory airline, enjoys special benefits, such as lower rates. At some airports, these contracts give an airline a voice in the management and long-term planning of the airport.
Non-aeronautical, or terminal and landside, revenue are all the funds generated from all non-airline sources. These other sources include:
- Concessions – Rents paid by gift shops, restaurants, and newsstands, and, if agreed to in the concession contract, a percentage of the profits.
- Parking and Airport Access – Fees for all airport-owned parking lots and in some cases, off-airport concessions bringing travelers to and from the airport.
- Rental Car Operations – Revenue from rental car operations within or outside a terminal.
- Land rent – Excess airport land may be rented for golf courses, office buildings, hotels, farming or other uses.
Advertising – Ads placed on airport walls, billboards and buses is a source of airport income.
Options to Fund Airport Construction Projects
Airport Improvement Program (AIP) grants, often referred to as federal grants, are primarily funded by the taxes and fees paid by passengers, general aviation and cargo shippers. The AIP program is not funded by general taxpayer revenues. The AIP regulations require that the FAA’s Office of Airports distribute entitlement and discretionary grants to airports, following the submission of documentation on the proposed use of the grant.
- The grants are distributed to airports to increase capacity, safety, security, or reduce noise.
- The program currently distributes about $3.35 billion per year.
- Most of the money is distributed by a formula, based on an airport’s passenger and cargo traffic.
- Some discretionary funds are handed out based on national priorities.
Passenger Facility Charges
Passenger Facility Charges, or PFCs, are a local fee-per-ticket collected by the airline on behalf of the airport to fund capacity, safety, security or environmental projects. The fee is listed on the passenger’s ticket. PFCs have become a cornerstone of airport capital programs, having funded over $35 billion in airport development benefiting passengers since their inception in 1990.
Because PFCs are user fees, the Federal Aviation Administration set up a series of rules governing these funds.
- Currently, the maximum fee is $4.50 per passenger, with a maximum charge of $18 per passenger, per ticket.
- The FAA must approve the project after gathering airport user comments and public review.
- The FAA approves individual airport PFC applications for specific dollar amounts and time periods. Airports must re-apply to extend the period of PFC collection.
- A large or medium-size airport that collects a PFC is required to return up to 75% of their AIP entitlement funds for use at smaller airports.
Airports frequently turn to the capital markets to finance long-term construction projects. Because many airports are part of a state, county or local government, they have access to tax-exempt municipal bonds for capital projects.
There are four basic types of bonds that airports use:
- General obligation (GO) bonds
- General airport revenue bonds (GARBs)
- PFC-backed bonds
- Special facility bonds
Depending on the nature of the project being financed by the airport, most bonds are considered private activity bonds (PABs). Oftentimes, PABs are subject to the Alternative Minimum Tax, thereby raising the return demanded by the investor and the financing cost for the airport.
General Obligation Bonds:
- Sold by the state or local government to benefit an airport.
- Considered some of the safest bonds sold because they are backed by a sustainable revenue stream.
- These bonds often carry the lowest interest rate.
- Smaller airports use these bonds if they do not have sufficient resources to access capital markets on their own.
General Airport Revenue Bonds:
- Most common form of airport debt.
- Will be repaid by the revenues generated by the airport – landing fees, terminal rents, concession revenue, parking charges or other sources.
- Higher interest rate since there is some risk – however, an airport has never defaulted on a bond.
- Stand-alone PFC bonds are secured only by PFC revenue. Since PFC revenue is tied directly to passenger traffic, there have been very few of these bonds sold since Sept. 11, 2001, due to the higher risk.
- Double-barrel PFC bonds are more common since 2001. One combines PFC revenues with general airport revenues to repay the bonds while another pledges general airport revenues as a backup if PFC revenues decrease.
Special Facility Bonds
- Used to fund construction of a terminal or other facility for a specific airline.
- Bonds are backed solely by the airline’s lease payments to use the facility.
- Lease payments are structured to cover the debt service on the bonds.
- Fewer special facility bonds issued since bankrupt airlines have contested their lease payments.
State and Local Grants
- Some states provide funding for local airports through grants or other assistance as the airport serves as a critical engine for economic development and job creation.
- These funds can come from specific aviation taxes and fees such as fuel taxes or aircraft registration fees, or from general state revenues.
- State or local funds can be provided as a grant to fund a capital project.
- State and local governments may also provide local dollars to assist if a “local match” is required for AIP grants.
Contact Liying Gu (email@example.com), Senior Director, Economic Affairs and Research, for questions.