Primer:  Airport Financing


Airports are multi-million dollar operations. Most U.S. airports are owned by state or local governments, but they still must operate like a business. Airports are required by the federal government to be as self-sustaining as possible. Within this context, airports must often fund very expensive expansion projects. For example, building new runways at Chicago O’Hare will cost $6.6 billion. The airlines, capital markets and the government provide funds to help pay for these long-term projects.

2 types of airport revenue used to fund day-to-day operations:

  • Aeronautical, or airside
  • Non-Aeronautical, or landside

4 sources of airport construction funding:

  • Bonds
  • Federal grants
  • Passenger facility charges
  • State and local grants

Day-to-Day Operating Revenue

Aeronautical revenue

The airlines are the source of the aeronautical, or airside revenue. The relationship between the airport and an airline is similar to a landlord-tenant relationship. The bottom line is that an airline pays the airport for the use of its facilities.

Most airlines have a contract, or a Use and Lease agreement. This contract outlines the revenue from an airline, which includes:

  • 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 (i.e. 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, than those airlines that don’t sign a contract.

At some airports, these contracts give an airline a voice in the management and long-term planning of the airport.


Non-Aeronautical revenue

Non-aeronautical, or landside, revenue are all the funds generated from all non-airlines sources. These other sources include:

  • Concessions – Rents paid by gift shops, restaurants, newsstands. Most concession contracts also require a concession to pay a percentage of its profits to the airport.
  • Parking – Fees for all airport-owned parking lots.
  • Advertising – Ads placed on airport walls, billboards and buses is a source of airport income.
  • Land rent – Excess airport land may be rented for golf courses, office buildings, hotels or farming.

Concessions are an important source of revenue for airports and many airports are exploring innovative concession ideas such as valet parking and pet kennels.

Options to Fund Airport Construction Projects

Federal Grants

The federal government recognizes that airports play a vital role in the national transportation network. An airport also is a critical cog in its local, national and global economy. Because of this role, the federal government pays out grants from the Airport Improvement Program (AIP).

  • The grants are distributed to airports to increase capacity, safety, security, or reduce noise.
  • The program distributes about $3.5 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 fee collected by the airline on behalf of the airport and the fee is listed on the passenger’s ticket. PFCs have become a cornerstone of airport capital programs, having funded over $50 billion in airport development since their inception in 1990.

Because PFCs are user fees, the Federal Aviation Administration set up series of rules governing these funds.

  • Currently, the maximum fee is $4.50.
  • Qualifying projects are capacity, safety, security or environmental projects.
  • The FAA must approve the project – after extensive public review.
  • A large or medium airport that collects a PFC is required to return up to 75% of their AIP funds for use at smaller airports.

Bonds

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.

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

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 general tax revenues – sales, property or income taxes.

    • 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.

PFC backed bonds – Stand-alone PFC bonds

    • 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.

PFC backed bonds – Double-barrel PFC bonds

    • Since 2001, a more common approach to issuing PFC bonds.
    • One option combines PFC revenues with general airport revenues to repay the bonds.
    • Second option pledges general airport revenues as a backup if PFC funds fall.
    • The direct debt service offset option secures bond by general airport revenues, but PFCs are used to pay the debt service.

Special facility bonds

    • Used to fund construction of a terminal or other facility for a specific airline.
    • Bonds are backed soley 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

  • Many states provide funding for local airports through grants or other assistance.
  • These funds can come from specific taxes and fees such as fuel taxes or aircraft registration fees, or from general state revenues.
  • State or local funds can be a grant for a project.
  • State and local governments may also provide local dollars to match federal grants.

 

 Compiled by A.J. Muldoon (amuldoon@aci-na.org),

Manager, Center for Policy and Regulatory Affairs

 

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