Innovative Finance and Alternative Sources of Revenue for Airports (2007)

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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 International–North 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: • 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. • 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. • 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. • 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. • 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. SUMMARY INNOVATIVE FINANCE AND ALTERNATIVE SOURCES OF REVENUE FOR AIRPORTS

2• 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: • 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 Seattle–Tacoma 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. • 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. • 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: • 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. • 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. • 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.

• 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. • 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: • 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. • 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. 3