Airport Finance: A Brief Overview

Airport Finance: A Brief Overview

Order Code 98-579 E
June 26, 1998
CRS Report for Congress
Received through the CRS Web
Airport Finance: A Brief Overview
Robert S. Kirk
Economics Division
Summary
Airports in the U.S. national system are nearly always public sector enterprises that
operate under a city, county, regional or other charter such as a port authority. Although
these airports are public enterprises, they are typically managed as businesses. Most
airport operating revenues come from airfield revenues (such as landing fees),
concession agreements, or rent from leased areas at the airport. For capital development
needs airports rely on bonds, federal Airport Improvement Program (AIP) grants,
passenger facility charge (PFC) revenues, state and local grants, and surplus airport
revenue. Federal involvement in airport finance is mostly concerned with airport capital
improvements intended to support policies concerning capacity, competition, noise,
safety, and the availability of air service nationwide. This report will not be updated.
Airport Finance
Airports in the U.S. national system are nearly always public sector enterprises that
operate under a city, county, regional or other charter such as a port authority. Although
these airports are public enterprises, they are typically managed as business enterprises.
Airport operating revenues support costs that include day-to-day operations, bond
repayment, and other operating expenses. Capital development funding, for the most part,
comes from a combination of private and public sector sources including, tax-exempt
bonds, the Airport Improvement Program (AIP), passenger facility charges (PFCs), state
and local grants, and unexpended airport revenue.
Operating Revenues
These are airport revenues provided by fees, rents, and other charges that are directly
associated with the running and operation of the airport.1 Operating revenues include:
1 In this report all references to airports or the national airport system refer to those airports listed
in the National Plan of Integrated Airport Systems (NPIAS). See, U.S. Federal Aviation
Administration (FAA). National Plan of Integrated Airport Systems (NPIAS) 1993-1997. April
(continued...)
Congressional Research Service ˜ The Library of Congress

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airfield area revenues, terminal area concessions, airline leased areas, and other leased
areas.2
1)
Airfield area revenues/landing fees. These fees include the use of the landing strips,
clear zones, and safety zones; temporary parking and service areas; and emergency
services. These fees can be assessed by gross landing weight, gross takeoff weight
or by a percentage of an airline’s gross revenue at the airport. Small airports may
charge a fixed flat weight or gross landing weight fee but often simply charge a fuel
“flowage” fee that is levied on each gallon of aviation fuel sold at the airport.
2)
Terminal area concessions. Businesses contract with airports to set up a wide variety
of enterprises that can range from operating parking garages or hotels to running
snack or gift shops. These concessions are often established by competitive bid.
3)
Airline leased areas. Airports also collect rent from airlines for terminal space,
hangars, cargo terminals and land. The terms for these leases are set forth in the
airline agreements.
4)
Other leased areas. Airports may also rent land or facilities to non-airline tenants.
Examples of other leased areas include industrial parks, cargo terminals, and
agricultural land.
Some airports have sources of revenue that would continue even if the airport itself
shut down. These nonoperating revenues include investment income, rent from leasing
non-airport property or equipment, and income from consultancy services.
The Revenue Mix. The mix of operating revenues varies greatly from airport to
airport. It is influenced by the conditions written into an airport’s airline agreements, the
amount of traffic sustained, and the strength of revenue flows from business concessions
and leases. Large and medium hub airports are more likely to have a more complex
system of charges and fees than small airports. Smaller airports generally have less
diversified revenue streams and are less likely to have substantial revenue from concessions
and leases.
Operating revenues are derived from the operation of the airport and are used mainly
to pay day-to-day costs. Most capital improvement funding is supported from sources
other than operating revenues (airport revenue ranks fifth among the five major sources
of capital improvement funding). Operating revenues and airline agreements are important
elements of a discussion of sources of airport capital projects because of the impact they
have on an airport’s ability to attract and pay for private capital.
1 (...continued)
1995. Washington, 1995. [150] p. According to the FAA, currently all but 180 of the 3,580
NPIAS airports are publicly owned.
2 For further reading on airport finance see, Kluckhohn, Harry. Financing U.S. Airports. In
Ashford, Norman and Moore, Clifton A. Airport Finance. New York, Van Nostrand Reinhold,
1992. p. 26-55. Also see, U.S. Congress. Congressional Budget Office. Financing U.S. Airports
in the 1980s. Washington, CBO., 1984. p. 15-39.

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Airline Agreements
Although U.S. airports are typically publically owned, they operate in a business
environment that is shaped in part by their operating relationship with the commercial
airlines. This operating relationship has an impact both on the way airport capital spending
is financed and also on the different views that airports and airlines take on policy issues.
Airports generally negotiate “airport use agreements” with their tenant airlines. Use
agreements are legally binding agreements that define how the risks and responsibilities
of airport operation are shared. There are two types of airline agreements: residual cost
agreements and compensatory cost agreements. Each of these mechanisms has
implications for both rate setting and airport improvement financing.
1) Residual Cost Agreements. This approach sets rates and charges based on the net
revenue an airport needs to cover expenses including debt service. If the airport cannot
meet its costs, the rates airlines pay are raised to meet the shortfall. If the airport runs a
surplus the rates are adjusted down. Under residual cost agreements airports know their
budgets will be balanced and airlines are granted more control relative to the airports over
airport capital improvement spending decisions.
2) Compensatory Cost Agreements. This approach sets rates and charges based on
recovery of costs for the facilities used. The airports could assume more risk in this
arrangement because an airport must make up any shortfall from other sources of airport
revenue. The cost of “public space” is borne by the airport and is usually paid for with
revenue from non-airline sources. Under this approach the airport can run a surplus and
use it for purposes other than reducing the airlines’ rates. In comparison with most
residual cost agreements, airports accept more financial risk but also retain more control
relative to the airlines on airport capital improvement spending decisions.
Other Features of Airline Agreements.
1) Majority-in-Interest Clauses (MII). An MII clause gives the airlines that account for
the majority of the traffic at an airport the right to review and accept or veto any capital
projects that could lead to significant increases in the rates that they pay for the use of
airport facilities. MII clauses are typically only found in residual cost agreements.
Airports that operate under MII agreements may have less freedom to undertake capital
improvement projects.
2) Term-of-Use Agreements. Airports and airlines also negotiate the length of use of the
airport’s facilities. Residual cost agreement airports usually have substantially longer term
of use agreements than those that use compensatory cost agreements. This is because
residual cost agreements are often designed to provide security for long-term airport bond
issues. The length of use usually coincides with the term of the bond issue.
Capital Project Funding for Airports
There are five major sources of funds for airport capital project funding: bonds,
Airport Improvement Program (AIP) grants, passenger facility charge (PFC) revenues,
state and local grants, and surplus airport revenue.

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It is important to keep in mind that the different sources are not always independent
of other financing methods. For instance, PFCs, state and local grants, and surplus airport
revenue can all be used to secure and repay bonds.
Table 1 shows airport capital funding sources using 1996 data.3 In 1996 bonds
provided 58% of total funding or twice as much as the next two sources, AIP grants and
PFCs. Bond proceeds are generally received as one-time lump-sum payments. Airport
revenues and, increasingly, PFCs are used to repay bonds.
Table 1. Funding Sources for Airports’ Capital Spending, 1996
Funding Source
1996 (in billions)
% of Total
Source of Funds
Tax-exempt bonds
$4.104
58
Issued by state and local
governments or airport
authorities
Airport
$1.372
20
Appropriated by Congress
Improvement
from the Airport &
Program (AIP)
Airway Trust Fund
Passenger facility
$1.114
16
Funds come from fees of
charges (PFC)
$1, $2, $3 per trip
segment
State and local
$0.285
4
Can come from state
grants
aviation fuel taxes, airport
property taxes, fees, state
bonds or appropriations.
Airport revenue
$0.153
2
Generated from the
airports’ operations or
derived from concessions
and leases.
Total
$7.028
100

Bonds. The largest source of funds for airport development are debt issues.
Because airport sponsors in the United States are nearly always local or state governments
or a special public authority, the form of debt is usually a tax-exempt bond. The three
most common types of bonds are:
1) General Obligation Bonds. These bonds are issued with the “full faith and credit” of the
issuing government or special district entity(such as an airport authority). Full faith and
credit means that the airport sponsor provides an unconditional pledge to pay the interest
and principal over the life of the bond. General obligation bonds are typically issued for
development projects at smaller airports.
3 G.AO, Funding Sources for Airport Development, p. 6-9. Table 1 is a slightly modified version
of the table on page 6. For more detail also see GAO’s graphs and charts on pages 32-49.

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2) Airport Revenue Bonds. These bonds are secured by a pledge of an airport’s revenues.
The issuer pledges to make scheduled payments on the interest and principal over the life
of the bond to the extent that the airport has sufficient revenue to make the payments.
These bonds tend to be used by large and medium-sized airports whose revenues are large
enough to provide adequate security.
3) Special Facility Revenue Bonds. These bonds are secured by a pledge of revenue from
a particular airport facility. Special facility bonds are used to finance specific projects,
such as a terminal building, often on behalf of a single airline tenant. The security is the
stream of rental income the airport receives from the tenant.
Airport Improvement Program. AIP provides federal grants to airports for
capital development projects. The grants are distributed according to formula or grant
criteria in a manner to support national policies and priorities, including the safe operation
of airports, minimizing noise impacts, increasing capacity, and improving service to state
and local communities. Most AIP money is spent on “airside” projects such as runways,
taxiways, aprons and noise abatement or safety equipment. The Federal Aviation
Administration (FAA) requires a range of grant assurances from participating airports as
a means of implementing federal airport policy.
Passenger Facility Charge. PFCs are charges an airport imposes on each
passenger boarding at the airport to support capital development. The PFC is not a federal
tax. It is a local tax levied at an airport with federal (FAA) approval. PFC funds are more
likely to be spent on “landside” projects such as terminals or roads than are AIP grants.

State and Local Grants. States and local governments provide grants for airport
improvements. Some state and local grants are used to fund federal matching grant
requirements.4 State grants are more likely to go to smaller airports than are federal
grants.
Surplus Airport Revenue. If an airport’s revenues are large enough to more
than cover its operating expenses and debt reserve requirements, these unexpended funds
can be used for capital development and other uses. Federal law requires that all airport
revenue be used for airport purposes. Large and medium hub airports have generated
modest amounts of surplus revenue that are available for capital development but other
commercial service airports often operate at or below the point required to maintain
operating expenses.5
As can be seen in Table 2, smaller airports are typically more dependent on AIP
funding for their capital needs. In 1996, for the 71 largest commercial airports, AIP
4 U.S. General Accounting Office (GAO). Airport Finance: Funding Sources for Airport
Development. GAP/RCED-98-71, March 12, 1998. Washington, 1998. p. 17, 40-41.
5 GAO, Funding Sources for Airport Development, p. 41-42. In 1996, 5% of capital funds at
large airports and 3% at medium airports came from surplus operating funds. Small hub, non-hub
and other commercial service airports, as a whole, ran operating deficits in 1996.

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represented 10.6% of development funding compared to 50.5% for the remaining 3,233
national system airports.6
Table 2. Distribution of Funding Sources By Airport Size
71 Large and Medium
All Other National
Funding Source
Airports
System Airports
AIP
10.6%
50.5%
PFC
18%
7.2%
State Grants
1.8%
11.9%
Special Facility Bonds
3%
16.2%
Airport Revenue
4.6%
0%
Airport Bonds
62.1%
14.2%
6 GAO, Airport Financing: Funding Sources for Airport Development. GAO/RCED-98-71,
Mar. 12, 1998. Washington, 1998. P. 8.