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INNOVATIVE FINANCE AND ALTERNATIVE SOURCES
OF REVENUE FOR AIRPORTS
SUMMARY Airport capital needs are estimated to exceed $70 billion for federal fiscal year (FFY) 2005
through FFY 2009, or approximately $14.3 billion per year, according to the Capital Needs
Survey conducted by Airports Council InternationalNorth America. Although the Airport
Improvement Program (AIP) administered by FAA is at historically high levels, it totaled
just over $3.5 billion in FFY 2006, leaving a gap of $10.8 billion to be funded with local
sources. With costs of construction increasing, airlines filing for bankruptcy, and periodic
economic downturns affecting the industry, airport operators find themselves continually
looking for additional revenue sources to fund capital projects and sustain operations.
This report presents the results of ACRP Project 11-03, S01-01, and is intended to inform
airport operators, stakeholders, and policymakers about alternative financing options and rev-
enue sources that are currently available to airport operators in the United States, or that could
be available in the future if certain developments occur to facilitate them. Information used
for this study has been gathered through a literature review and selected interviews of airport
operators and industry experts.
This report provides: (1) a brief overview of common capital funding sources used by
airport operators, (2) a high-level review of capital financing mechanisms used by airports,
(3) a description of the various revenue sources developed by airport operators, and (4) a review
of privatization options available to airport operators in the United States. Because what is
innovative to one airport operator may be common practice to another, a continuum of
financing mechanisms and sources of revenue is presented, starting with the most common
practices at U.S. airports, and progressing to increasingly innovative practices.
The principal sources of funds for airport capital projects include the following, from
largest to smallest:
ˇ Proceeds of bonds and other forms of debt--Bond proceeds are the largest source of
funds for airport capital needs. Debt service associated with bonds issued for airport
capital needs can be supported by the overall tax base of the issuing entity, general
airport revenues, passenger facility charge (PFC) revenues, revenues generated by
the facility constructed with the bond proceeds, other revenues, or any combination
thereof.
ˇ PFC revenues--A majority of large-, medium-, small-, and non-hub airports impose a
PFC of between $1.00 and $4.50 per enplaned passenger to finance eligible airport-
related projects. Airport operators must obtain an approval from FAA before they begin
the collection and use of such revenues.
ˇ AIP grants from the Airport and Airways Trust Fund and administered by FAA--AIP
grants administered by FAA are funded by aviation user taxes and are available to airport
operators, subject to certain eligibility limitations and assurances.
ˇ Internally generated capital resulting from retained airport revenues--Certain airport
operators are able to retain net operating income from each year to invest in capital
improvements.
ˇ Security grants from the general fund and administered by TSA--TSA grants are available
on a limited basis to airport operators to make terminal modifications to accommodate
explosive detection systems.
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ˇ State grants and local financial support--Certain states provide funding for airport and
aviation-related projects in the form of outright grants or matching share for federal
AIP grants.
Airport operators are major and regular participants in the municipal bond markets. Despite
the financial challenges airports have faced since September 11, 2001, airports have maintained
investment-grade ratings from credit rating agencies. To finance capital projects, airport
operators have:
ˇ Utilized numerous types of bonds--Airport operators have used, among others, general
obligation bonds, general airport revenue bonds, bonds backed by PFCs, bonds backed
by customer facility charges (CFCs; fees paid by rental car customers), bonds to be paid
with future AIP or state grants, and special facility bonds to finance capital projects.
Each type of bond has advantages and disadvantages that are dependent on the structure
and financial capacity of the airport operator. For example, the Port of Seattle, operator
of the SeattleTacoma International Airport, issued subordinate and intermediate lien
general airport revenue bonds to finance a $3.4 billion capital improvement program
and reduced projected airline payments.
ˇ Accessed other financial instruments--In addition to bonds, airport operators have used,
among others, commercial paper, bond anticipation notes, grant anticipation notes,
pooled credit programs, and capital leases. For example, the city and county of Denver,
operator of Denver International Airport, entered into capital equipment leases to pro-
vide short-term financing at low interest rates for runway, security, and other equipment.
ˇ Minimized interest expenses--Airport operators have reduced interest rates on out-
standing bonds and manage interest rate risk by entering into interest rate swaps with
investment banks. For example, the city of Chicago has examined the agreements with
airlines serving Chicago O'Hare International Airport to reduce the bonds subject to the
alternative minimum tax (AMT). Bonds subject to AMT pay a higher interest rate than
bonds not subject to AMT.
Although a majority of these financing mechanisms have been used by large- or medium-hub
airports, greater capital market acceptance can create opportunities for other airports.
Nonairline revenues may be used to reduce airline payments, fund new capital projects,
or develop airport equity and reserves. Airports nationwide have developed creative programs
to maximize revenue sources such as:
ˇ Airport parking revenues--Parking has long been a revenue source for airport opera-
tors and further opportunities exist to enhance parking revenues by offering premium
parking services, implementing parking operational enhancements, and collecting off-
airport privilege fees.
ˇ Rental car revenues--In addition to privilege fees and rentals, a CFC is collected at
some airports by each rental car concessionaire from its customers and used to pay all
or a portion of the operating and capital costs of a consolidated rental car area or struc-
tured facility, and may include the cost of transportation to the terminals. For example,
Albuquerque International Sunport imposed a CFC to finance the cost of a new consoli-
dated rental car facility at the airport.
ˇ Terminal concessions--Airport shoppers are recognized as a lucrative market, and
airport retailing is evolving to meet that market. Concession sales have increased dra-
matically as airlines discontinue meal service and passengers arrive earlier. Airport
operators have been able to maximize revenues through reinventing their terminal con-
cessions programs by recognizing the customer, creating an inviting shopping experience,
providing an accommodating dining opportunity, and branding. For example, Memphis
International Airport's new concession program balances local favorites with major
brands and provides guests with a sense of the city.
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ˇ Advertising programs--With longer dwell times, airport customers now take the time
to read advertisements. Modern airport advertising programs specialize in the sales and
maintenance of advertising sites at airports by using technology, sponsorship opportu-
nities, and nontraditional advertising locations.
ˇ Commercial development and land use--Airport operators have generated revenue
from a variety of revenue-producing leases from nonairline operations including man-
ufacturing, warehousing, freight forwarding, and even farming on available airport land.
Commercial development and land use has been done through coordinated planning
efforts and mindful of FAA restrictions on land development. For example, Dallas/Fort
Worth International Airport is in the process of developing natural gas and oil resources
on airport land.
Most U.S. airports are operated as independent not-for-profit entities with oversight by a
politically appointed authority or as a self-sustaining enterprise of a governmental entity such
as a county, city, or state government. As it applies in the United States, privatization can
refer to a broad range of activities that entail varying levels of private involvement in the
operation of an airport including:
ˇ Partial privatization--Airport operators have explored many ways of doing business
that involve varying degrees of private-sector involvement in the management, capital
investment decision making, financing, and pricing of airport facilities and services. Pri-
vate involvement at airports nationwide includes airline involvement in capital decision
making, contracting of services to private companies, master concessionaire agreements,
and private terminal development. For example, AMR (American Airlines' parent com-
pany) developed, renovated, and financed Terminal 4 at Los Angeles International Air-
port with special facility bonds issued by AMR and backed by their lease payments.
ˇ Full privatization--Some airports in the United States have been developed, financed,
and operated privately throughout their entire existence, including various general avia-
tion airports around the country. Congress established an airport privatization pilot pro-
gram to explore privatization as a means of generating access to sources of private capital
for airport improvement and development. Stewart International Airport is the only air-
port to be privatized to date. Under the 99-year lease agreement, the New York State
Department of Transportation received an initial payment of $35 million from National
Express Group. The city of Chicago submitted a privatization proposal to FAA for
Midway Airport in September 2006 that was still pending as of January 31, 2007.
