The United States possesses the largest, most extensive aviation system in the world with more than 18,000 airports, ranging from large commercial transportation centers enplaning more than 30 million passengers annually, to small grass strips serving only a few aircraft each year. Of these, 3,304 are designated as part of the national airport system and are therefore eligible for federal assistance. The federal interest in capital investment for airports is guided by several objectives, most notably ensuring safety and security, preserving and enhancing the system's capacity, helping small commercial and general aviation airports, funding noise mitigation and protecting the environment.
NATIONAL SYSTEM AIRPORTS (3,304 airports)
General Aviation Airports (2,764 airports)
Commercial Service Airports (540 airports)
Although all commercial airports in the United States are publicly owned, the private sector plays a significant role in their operations and financing. Employees of private companies - airlines, concessionaires and contractors - account for 90 percent of all employees at the nation's airports. The largest source of capital for airport development is tax-exempt bonds, secured by future airport revenue and subject to the scrutiny of credit-rating agencies. In other countries, most airports are owned and operated by national governments.
The possible sale or lease of commercial airports in the United States to private companies has generated considerable attention in recent years. Several factors, such as providing additional private capital for development, have motivated greater interest in airport privatization. Concerns over the possible abuse of the monopoly power of an airport, along with long-established legal and regulatory protections for existing airport investments and their revenue streams, however, have held back wholesale airport privatization in the United States.
Even if a sale or lease transfer could overcome legal obstacles, the ability of a private airport to operate profitably is uncertain. A privately owned airport would not be eligible for tax-exempt debt financing, federal airport grants or passenger facility charges (PFCs). Since these sources constitute the majority of capital funding at most airports, financing costs would rise significantly.
As part of the Federal Aviation Reauthorization Act of 1996, Congress established an airport privatization pilot program that exempted up to five airports from legal requirements that limit their sale or lease to private entities. As of December 1999, only one commercial service passenger airport (Stewart/Newburgh, New York) had submitted a final application to participate in the pilot program.
While national governments of many foreign countries have historically owned and operated airports, in recent years some countries have begun to privatize all or parts of their nation's aviation system. The United Kingdom, which sold its major commercial airports in 1987, is one of the few countries where airports have generated profits for their shareholders.
Because airports resemble small cities, they are organized like a small city, with departments for purchasing, engineering, finance, legal, operations, personnel, administration, security, public relations, etc. They also have fire and police departments and must handle such typical municipal duties as trash and snow removal.
Many of an airport's departments deal with one, or both, of the two sides of an airport - groundside and airside. Groundside includes an airport's roads, parking lots, passenger drop-off and pick-up points, check-in areas, baggage-claim areas, restaurants and shops. Airside includes aircraft gates, loading ramps, taxiways and runways. Groundside is geared toward the movement of ground traffic into and out of the airport, and airside to the movement of air traffic into and out of the airport.
Airports, contrary to popular misconception, are not funded by government general fund tax dollars - federal, state or local. Rather, airports are funded either directly or indirectly out of aviation revenue generated by airlines, their passengers, or airport vendors in the form of direct payments or through earmarked taxes collected from aviation system users.
Airports rely on a variety of public and private funding sources to finance their capital development, including airport bonds, federal and state grants, passenger facility charges (PFCs), and airport-generated income.
Airport Improvement Program (AIP)
Airport grant programs are funded from taxes and fees specifically collected for that purpose. As of January 2000, these included a 7.5 percent domestic ticket tax and a $2.50 per-person per-flight-segment fee for all flights, except to certain rural airports. A $12.00 international arrival tax and a $12.00 international departure tax (both adjusted for the annual rate of inflation, beginning January 1, 1999), a 6.25 percent tax on domestic air freight, a 4.3 cents-per-gallon domestic air fuel tax, and taxes on the fuel used in small planes and for non-commercial purposes also fund the grant programs. These revenues are credited to the Aviation Trust Fund, created by Congress in 1970 to fund improvements to airports and the nation's air traffic control system. The FAA dispenses grants to airports out of the trust fund for projects under the Airport Improvement Program, which had total outlays of $1.6 billion in FY99.
Passenger Facility Charge (PFC)
Since 1992, many airports have also been charging airline passengers a $3.00 fee, known as a passenger facility charge, which the airlines collect as an add-on to the airfare. Beginning in 2000, Congress authorized an increase in the maximum PFC rate that airports can charge passengers - $4.50 per segment, with a cap of $18.00 for a roundtrip. These taxes must be pledged to specific capital improvements that will: (1) preserve or enhance safety, capacity or security of the national air transportation system; (2) reduce noise; or (3) enhance competition between or among air carriers. Every PFC is tied to specific capital improvement projects that have been approved by the FAA, and the fee expires when all of the money needed for the approved projects has been raised (unless new projects have been approved under a separate application).
More than 300 airports had received federal government approval to levy this tax. Currently, more than $1.5 billion in PFCs are collected each year, and the FAA has already authorized the collection of more than $25 billion. However, even though one of the main objectives of the PFC program is to increase airport safety and capacity, only 19 percent of collected funds have been used for airfield safety and capacity improvements. In fact, more PFC funds are now being spent on interest for capital projects (29 percent) than are being spent on airfield safety and capacity. Passenger facility charges, when used wisely, have been a useful tool in meeting aviation infrastructure needs.
More than 95 percent of all airport debt, or about $53.6 billion, issued since 1982 has been in the form of general airport revenue bonds (GARBs), which are secured by an airport's future revenue. Roughly $17.3 billion, or one-third of this total, was to refinance existing debt, while the other $36.3 billion, or two-thirds, was new financing for airport capital development. Because airport revenue has kept pace with increased debt-service costs, the capacity to issue new debt has not been harmed.
The top 71 airports, which account for almost 90 percent of all passenger traffic, obtain 79 percent of all capital funding, while the 3,233 other national system airports account for the remaining 21 percent of the funding. These airports also rely most heavily on private airport bonds, which constitute roughly 65 percent of their total funding, while the other airports rely more heavily on federal and state grants for their funding.
Capital improvements such as the construction of a new terminal or parking garage are sometimes funded privately (for example, by an airline if the new facility is for its own exclusive use), but more often through the sale of revenue bonds by the airport operator. Revenue bonds are repaid, with interest, from the future revenue the new facility generates. For example, revenue bonds sold for a new terminal would be repaid with the rent the airport collects from the airlines using the terminal.
Usually, the airport owns all the facilities built on its property, regardless of how their construction was financed. Facilities built for exclusive use of a tenant, however, are sometimes leased to that tenant for a long period of time.
Years ago, general obligation bonds, which are backed by the taxing power of a governmental unit, were far more common because of their stronger credit standing and, therefore, lower financing costs. The decline in general obligation bonds reflects the improved acceptance of GARBs by investors. Today, general aviation airports have been the most common issuers of general obligation bonds for airport development.
With the exception of a few small airports that receive subsidies from their municipality, U.S. airports are self-sustaining. The revenue collected from businesses, passengers and shippers using the airport covers most of the operating expenses associated with operating the airport.
Typically, companies doing business at an airport (airlines, car rental companies, restaurants, stores, etc.) pay rents for the space they occupy. Many businesses also pay a gross-receipts fee based on the total value of their business at the airport. Airlines do not pay gross-receipts fees, but pay flight fees, based on the weight of each aircraft that lands or departs. In some instances, they also pay aircraft parking and fueling fees, or make direct payments on long-term airport debt.
There are two common methods for computing air-carrier fees: residual and compensatory. In a residual agreement, the signatory airlines accept the financial risk and guarantee the airport sufficient revenues to meet its operating costs and debt-service costs. Under the residual method, after an airport deducts all non-airline revenue from its total annual expenses, the airlines are responsible for the remaining (residual) amount, and rates are set accordingly.
Compensatory agreements are generally found at mature airports that have realized successful revenue generation. The airport undertakes the risk of meeting costs, but also receives all the upside advantage. Under the compensatory method, an airport is divided into various cost centers (airfield, terminals, parking areas, etc.), and airlines pay a share of those costs, based on the amount of space they occupy, planes they land/depart and other measures of airline use.
While the fees airlines pay to airports represent a small portion of overall airline operating costs (approximately 5 percent), they have been one of the industry's fastest-rising costs. Between 1992 and 1999, airport costs exclusive of PFCs, rose 35 percent. Including PFCs, they rose 70 percent. In contrast, the producer price index over that same period of time increased less than eight percent and airline prices rose less than four percent.
Of increasing concern to airlines (and many airport operators) has been local political interest in siphoning money away from airports for other non-aviation purposes. This activity, known as revenue diversion, is prohibited by federal law, but is allowed, in a few instances, under special arrangements that were "grandfathered" in the federal statutes addressing this issue.
Regulation of Airports
As mentioned in Chapter 6, airports that receive scheduled air service by carriers must be certified by the FAA as operating within strict federal safety guidelines for design and operation. This certificate is known as a Part 139 certificate after the section of the federal air regulations (FARs) dealing with airport safety. Part 139 certificates are the equivalent of the Part 121 certificates for airline operations. Airports also may have to comply with state and local regulations, although these usually deal with environmental or administrative matters rather than strictly with safety.
Airports have two capacities - one for groundside and one for airside. Groundside capacity is the number of passengers per year the airport's roads, parking lots and terminals can handle. Airside capacity, on the other hand, is the number of aircraft operations the airport's runways, taxiways and gates can accommodate safely.
The FAA calculates an airport's airside capacity using an engineering formula that takes into account the various ways an airport's runways are used, or not used, in different wind and weather conditions. Known as an Engineered Performance Standard (EPS), it is expressed in aircraft operations per hour.
Decisions that FAA's air traffic control division makes about the flight paths carriers will follow in and out of an airport also affect airside capacity. Airport capacity, or lack of it, is one of the most significant issues facing civil aviation. A great deal of attention has been focused in recent years on getting more capacity out of airports that already exist. This can be done by adding runways, taxiways, and landing aids, or perhaps, by changing departure and approach patterns.
These and other capacity enhancements, however, often face stiff opposition from residents of surrounding communities, who often want to see airport operations scaled back to reduce noise and pollution. Building entirely new airports in less densely populated areas, on the other hand, is a more expensive option to expanding existing facilities, and often less convenient for most travelers.