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

Chapter: Chapter Three - Revenue Sources Airport Practices and Innovations

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Suggested Citation:"Chapter Three - Revenue Sources Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Three - Revenue Sources Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Three - Revenue Sources Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Three - Revenue Sources Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Three - Revenue Sources Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Three - Revenue Sources Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Three - Revenue Sources Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Three - Revenue Sources Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Three - Revenue Sources Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Three - Revenue Sources Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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Suggested Citation:"Chapter Three - Revenue Sources Airport Practices and Innovations." National Academies of Sciences, Engineering, and Medicine. 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Washington, DC: The National Academies Press. doi: 10.17226/14041.
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24 With costs of construction increasing, airlines filing for bank- ruptcy, and periodic economic downturns affecting the indus- try, airport operators find themselves continually looking for additional revenue sources to fund capital projects and sustain operations. Figure 20 shows the distribution of operating revenues for large-, medium-, and small-hub airports. Because air- line revenues are governed by airport-specific conditions that often include an airport–airline lease and use agree- ment, and airfield-related fees are governed by federal laws and FAA regulations that prohibit revenues from exceeding costs, this report focuses on nonairline revenue services. These revenues may be used to reduce airline payments, fund new capital projects, or develop airport equity and reserves. The ideas presented are not intended to represent revenue streams available to all airports nationwide. Instead, these summaries should illustrate creative options that are available to airport operators. The decision of undertaking a revenue- enhancement initiative at a particular airport should ulti- mately be made after careful consideration and evaluation of local needs and financial viability. For particularly unique nonairline revenue sources case studies are presented documenting the discovery, develop- ment, and annual operations of the specific revenue source. Topics discussed in this chapter include: • Airport parking revenues, • Rental car revenues, • Terminal concessions, • Advertising programs, • Commercial development and land use, and • Other innovative revenue enhancement concepts. AIRPORT PARKING REVENUES As shown in Figure 20, parking revenues are the most signifi- cant source of nonairline revenue at airports. Although park- ing has long been a revenue source for airport operators, recent innovations provide further opportunity to enhance parking revenues. Some innovative ideas for enhancing parking rev- enues that are being used in airports around the country today are outlined here. Premium Parking Services There are a variety of premium parking services (or products) available to enhance parking revenues, improve customer ser- vice, and maintain or enhance an airport’s share of the park- ing market. Although each of these services has been used and proven at several airports, there does not appear to be any air- port that has implemented all of the following premium park- ing services: • Valet parking—Many airports have offered or currently offer valet parking that allows a customer to drop off their car at the terminal curbside (or other convenient location) and, upon the customer’s return, retrieve their car at this same location. Valet services are typically popular among business travelers and can benefit airport operators if vehicles are stored in underutilized portions of a garage or lot. Furthermore, more valet-parked vehi- cles can be “squeezed” into an area than self-parked vehicles. However, many airport operators have found that valet parking operations do not generate significant additional net revenues because of their labor-intensive nature (compared with self-parking operations), increased liability costs, and other costs. Many airports have found that valet parking operations produce less net revenue than do an equivalent number of standard parking spaces offered at standard rates. • Monthly or corporate reserved parking—Several airports sell monthly or corporate access cards and guarantee that card holders can always find an empty space in the con- venient parking area reserved for their use. Card hold- ers are charged a premium rate—often a monthly fee— to gain access to these reserved spaces. Airports have found that this service is popular with patrons and can generate significant additional revenues compared with standard rates, but do not use spaces every day. Airports where monthly or corporate reserved parking is offered include those serving Atlanta, Houston, Sacramento, San Francisco, and Seattle. • Discount parking coupons and loyalty programs— Private airport parking companies have offered discount coupons and loyalty (frequent parking) programs for many years. Discount coupons are typically distributed through travel agents, corporate (in-house) travel desks, newspapers, household mailers, or other sources, and now through the Internet. For competitive reasons, private operators may accept coupons issued by other CHAPTER THREE REVENUE SOURCES—AIRPORT PRACTICES AND INNOVATIONS

25 companies (or the airport). In the past, few airports offered discount coupons; however, recently airports such as San Francisco International are using the Internet to offer such coupons. Coupons allow an airport to develop an electronic database of their frequent cus- tomers (and long-duration, high-ticket-value customers) and to better compete with off-airport lots. Parking-based loyalty programs are similar to frequent flyer programs in that they offer repeat patrons reduced rate parking. Alternatively, the frequent parking points can be applied to goods and services available at the air- port (e.g., discounts on concessions). Several private air- port parking companies allow the frequent parking points to be translated into airline frequent flyer miles. • Remote lot parking service enhancement—To improve customer service and better compete with off-airport parking companies, several airports offer frequent shut- tles that pick up and drop off remote lot customers at or near their car. To complement these shuttle services, some airports clear the snow from parked cars, wash windshields, and offer amenities such as free bottles of water and newspapers. Others have tested pilot programs that allowed a patron’s vehicle to be washed, serviced, or repaired. Some airport operators offer shuttle services FIGURE 20 Distribution of airport operating revenues. Source: FAA, AAS-400, CATS Report 127, 2005.

that pick up customers at the trunk of their car, but drop them at scheduled stops. Other airports use parking atten- dants to direct entering vehicles to empty parking bays or floors, rather than allowing customers to randomly cir- culate through a lot searching for empty spaces. Airports where such services are offered include those serving Atlanta, Dallas, and Houston. • Internet-based parking reservation—In Europe, airport parking patrons can use the Internet to reserve and pay for parking in advance of their arrival at the airport. In the United States, many private airport parking companies also use the Internet to allow prospective customers to reserve and pre-pay for parking. The benefits of such Internet-based reservations include: (1) advanced receipt of payment for long-duration/high-value transactions, (2) improved marketing and promotional opportunities as Internet sites attract potential customers browsing the web for parking, (3) formation of an electronic customer base for future promotions, and (4) less diversion of potential patrons who, having already paid for parking, are less likely to be attracted to an alternate parking lot or rate that they may see when entering the airport. Parking Operational Enhancements Many airports have implemented operational measures that reduce operating costs while enhancing customer service. These measures include: • Cashier-less parking—Several airports, including Mon- treal, Portland, Raleigh–Durham, Richmond, Seattle, Vancouver, and Washington, D.C., have implemented “pay-on-foot” parking revenue control systems by means of automatic teller machine-like pay stations. These pay- on-foot systems eliminate the need for patrons to interact with exit cashiers (except for lost tickets and other excep- tion items); eliminate vehicle queues at the parking exits, thereby allowing patrons to exit more quickly and reduc- ing vehicle emissions associated with idling vehicles in long queues; and improve cash handling and reduce rev- enue “shrinkage.” Pay-on-foot systems have proven to be most successful at airports that reward patrons using the systems. • Ticketless parking—Several airports have eliminated parking tickets (minimizing the use of parking cashiers) through the use of: – Credit card in/out control systems—Parking patrons who enter a lot with a credit card in/credit card out control system must insert a credit card to raise the barrier gate and enter the lot (rather than retrieving a parking ticket) and then insert the same credit card in a reader when exiting the lot. The parking system automatically calculates the fee owed, charges the fee to the patrons credit card, and, if requested, prints a receipt. The patron need not sign a credit card slip. Airports with credit card in/credit card out systems include those serving Des Moines, Indianapolis, and Minneapolis–St. Paul. – Automatic vehicle identification (AVI) transponders— At several airports AVI tags or toll tags (e.g., Fast- Pass and EZPass) issued by a local toll road, toll bridge authority, or the airport itself are recognized by the parking control system and allow customers to enter and exit parking without using cash or credit cards. The customer’s parking fees are automatically debited from their toll tag account. Airports with AVI tag entries and exits include Columbus, Dallas/ Fort Worth, Richmond, and the three New York area airports. • Parking guidance systems—To reduce the time patrons spend searching for an empty space (and thereby improve customer service and reduce vehicle emissions) airports are installing changeable message signs acti- vated by low-cost overhead vehicle detectors that clearly display space availability (OPEN or FULL) for each space and aisle, rather than just at the entrance to each garage (or garage level). These guidance systems result in better utilization of the available spaces as they direct patrons to empty spaces, rather than requiring patrons to conduct random searches across large floors or garages. Off-Airport Parking Percentage (or Privilege) Fees More than 24 airports require private off-airport parking com- panies to pay “privilege fees” that are calculated as a percent- age of the company’s gross revenues. Additional airports are in the process of establishing such fees. The fees are similar to those charged off-airport rental car agencies in that the fees are charged for the benefits an off-airport company doing business on an airport receives from the presence of the entire airport— not just the roadways used by their courtesy vehicles. Off- airport privilege fees can help an airport operator to: • Maintain and protect existing parking revenues by help- ing to preserve the airport’s share of the total public park- ing market. • Generate additional revenues that exceed $1 million per year at some large airports. The amount of the potential additional revenue varies depending on the extent of the off-airport parking business, the parking rates charged by these businesses, and the amount of the privilege fee established by the airport. Similar to past court decisions concerning rental car fees, fed- eral and state courts have repeatedly upheld the right of an air- port operator to establish off-airport parking privilege fees and require the payment of such fees. RENTAL CAR REVENUES As was shown in Figure 20, rental car concession revenues are the next largest source on nonairline revenue for medium- and 26

27 small-hub airports after parking revenues, and rank third after parking and terminal concessions at large-hubs airports. Rev- enues from rental cars companies can include one or more of the following. Percentage (or Privilege) Fees Rental car companies located on-airport typically pay privi- lege fees of up to 10% of gross revenue from airport-related car rentals, or a minimum annual guarantee, whichever is greater. The minimum annual guarantee may be bid for the first year of the agreement and then adjusted by an agreed- upon formula or it may be specified in the bid for every year of the agreement. Off-airport rental car companies typically pay from 0% to 8% of gross revenue from airport-related car rentals. Terminal Rentals Rental car companies typically lease ticket counters and some- times office space in terminals, and pay rent to the airport operator. Land Leases Rental car companies also lease land on-airport for fuel, clean- ing, vehicle storage, and/or maintenance facilities. This rent may be determined based on the appraised value of the land or by some other method. Customer Facility Charge or Transportation Fee At some airports, each rental car concessionaire collects a CFC or transportation fee from its customers at the airport. Trans- portation fees, such as those charged at San Francisco Interna- tional Airport, are charged on a per-transaction basis and are intended to recover the operating and capital costs of trans- portation between a consolidated rental car facility and the air- port’s terminals (see Figure 21). CFCs are typically used to pay all or a portion of the oper- ating and capital costs of a consolidated rental car area or structured facility, and may include the cost of transportation to the terminals. CFCs may be assessed on a per-transaction basis (i.e., as a one-time fee for each rental car contract) or on a per-transaction-day basis (i.e., as a fee charged for each day the rental car contract is in effect). CFC revenues may be used on a stand-alone basis to leverage bonds or may be used together with other airport revenues to support double-barrel bonds. As with PFC revenues, revenues from CFCs and rental car transportation fees are local money. Unlike PFC rev- enues, there is no requirement for any federal oversight or approval of the CFC or transportation fees. CFCs are usu- ally established pursuant to an ordinance that documents the CFC amount, among other things, and the CFC may thereafter be part of the airport’s annual rate resolution. Because rental car companies cannot decide among them- selves to charge a CFC or transportation fee, the airport operator has a great degree of discretion in setting and charging the fees. Contingent Rent In the event that there is an unanticipated shortfall between the airport’s cost of providing and operating a consolidated rental car facility and the revenues derived from CFCs and rental payments, a contingent rent may be charged to the rental car companies, subject to the terms of any agreement. TERMINAL CONCESSIONS Although airlines are currently struggling with yields, labor issues, and rising fuel costs, passengers are returning in record numbers. Today, airport shoppers are recognized as a lucra- tive market and airport retailing is evolving to meet that mar- ket. Concession sales have increased dramatically as airlines discontinue meal services and changes in airport security require that passengers arrive early, consequently finding themselves with extra time in the airport and being a captive audience to the products and services offered by an airport’s concessionaires. Airport operators have worked diligently over the past sev- eral years to satisfy the traveler’s desire for a pleasant airport experience. With considerable effort directed toward devel- oping some of the best food, beverage, and retail offers any- where, concession partnerships are turning airport terminals into places that effectively serve the dining and shopping needs of millions of customers. With travelers spending 90 minutes, on average, at the air- port, airport operators have directed efforts to maximize con- venience and “down time” for the traveler, which if success- ful, can translate into significant sales from the restaurants and shops located in the terminal (see Figure 22). FIGURE 21 Albuquerque International Sunport—Customer facility charge-supported bonds.

Reinventing Terminal Concessions Programs Developing a concessions program that goes beyond indus- try standards requires thoughtful planning, a strong cus- tomer orientation, and hard work. Each airport has a unique, distinctive set of passenger markets, all of which use the air- port differently, and have varying spending motivations and characteristics. Today, airport operators are recognizing the need to embrace the latest trends and idea management in the indus- try. These include understanding the customer, anticipating what they want to buy, creating a shopping environment, moti- vating shopping behavior, and finally making it easy to buy. New trends and innovations such as upscale dining, high- technology newsstands, and creative specialty retail offerings are common amenities of the modern airport. Independent passenger surveys have shown that airport retail programs are one of the key determinants of passenger satisfaction with an airport. At the same time, passengers are becoming more dis- criminating in their choices of food, beverages, and retail offerings at airports. • Recognizing the consumer—Airport operators are mak- ing serious efforts to understand the key passenger mar- ket segments in their respective airports. These efforts are informed by statistics such as the ratio of men to women and domestic to international passengers, the per- centage of business versus leisure travelers, and even connecting versus origin and destination (O&D) passen- gers, because departing passengers often have different habits from those returning home. • Inviting shopping experience—Airport operators are designing new airport facilities around the goal of incor- porating substantial amounts of retail space to provide greater exposure to retail opportunities. Innovative design can help motivate potential customers. Success- ful design and retail plans are creative and innovative to attract upscale, branded merchandise as well as food and beverage outlets in terms of revenues and service. Apart from achieving the objective of maximizing nonaero- nautical revenues, airport operators want airports to be user-friendly, provide the highest possible level of passenger convenience and comfort, and promote the culture of the region where the airport is located by: – Creating a density of shops and restaurants that visually affects the customers—Clustering or double- loading amenities will often attract potential cus- tomers who could otherwise walk straight to the gate. Food courts strategically placed in the center of the airport’s retail area stimulates foot traffic into stores (e.g., at Orlando International Airport). – Providing accessibility to merchandise—Because of the smaller size of most airport concessions, access is key. The entrance should be open, well-merchandised, uncluttered, and provide enough room for shoppers to enter and begin browsing immediately. – Making use of idle space by using kiosks—Using kiosks in key locations offers customer convenience and maximizes concession revenues. The kiosk should look attractive—inviting and friendly—to the indi- viduals who are going to use it, and it should embody a positive expression of the image that the company or institution wishes to project, including its brand identity and service levels. – Playing on local concepts and “Sense of Place”— Many airports are looking for concepts that are a point of differentiation, such as regional or local branding that reflects the cultural heritage of the region. • Providing an accommodating dining opportunity— Certain airport operators provide creative food venues that offer quality carry-out food. Long-haul flights on airlines that provide minimal food service often moti- vate passengers to purchase food before their flight. Also, one-of-a-kind restaurant concepts that celebrate icons, landmarks, and the cuisine from the surrounding region are a growing trend designed to enhance the travel experience. Minneapolis–St. Paul and Portland International airports are good examples of this. • Product preferences—Airports also consider conces- sionaires that best meet the taste of the profile of the airport’s passengers and that generate higher sales and commissions. Airports and their retailers have a much better chance of generating a sale if they are selling something that the customer really wants to buy. Travelers from different countries have different pur- chasing profiles, dependent on both the availability of specific brands and styles in their respective homelands, and any price differentials that might exist. • Branding—Many travelers express a preference for brand name products and services. National companies with branded products can partner with local retailers to provide a complement of brand name and local owner- ship (see Figure 23). 28 FIGURE 22 Boise Airport—Concession program implementation. The City developed a comprehensive concession plan with detailed space allocations; integration of the existing McDonald’s operation into a new food court; development of sales and revenue forecasts; recommendation of business arrangements and lease provisions; review and drafting of concession agreements and competitive proposal documents; review and analyses of food and beverage, retail merchandise, and specialty coffee proposals; and Board presentations.

29 Terminal Concessionaire Contracts In addition to shorter airline agreements, airport operators are taking a more competitive look at retail space as contracts begin to expire and retailers aggressively bid for space. • Revisit percentage fees—Traditionally, airports have charged percentage rents that were payable on a monthly or quarterly basis, with an annual reconciliation when total gross sales for the year are known. As the impor- tance of percentage rent continues to decline, airports (as landlords) are now using other methods to increase value from tenants when renewing or releasing space. Those methods include tying rental increases to the Consumer Price Index, implementing fixed-percentage increases, or aggressively renegotiating leases to raise minimum rents by 10% or more. • Control minimum annual guarantees—Airports that identified a fixed-income guarantee in concessionaire contracts were able to minimize their losses following the effects of the terrorist attacks of 9-11. Because airport concessions contracts are bid competitively, operators often bid more than what they can afford to get the con- tract. Therefore, airport operators may want to consider setting a reasonable minimum annual guarantee, using a percentage for the first year and then reevaluating annu- ally based on enplanements. • Establish point of sale procedures—The drive toward increased cost-effectiveness means maximizing opera- tions integration and information technology consolida- tion to minimize retail payment challenges. • Monitor pricing and inventory—Incorporating regular audits into concession contracts allows airports the flex- ibility to monitor pricing and inventory and ensures compliance of tenant and concessionaire leases and contracts. ADVERTISING PROGRAMS Airport advertising can reach an exclusive and upscale audi- ence, and can be an important complement to the standard media mix. With longer dwell times, airport customers can now take the time to read advertisements. Modern airport advertising programs specialize in the sales and maintenance of advertising sites at airports. Table 1 shows the revenues generated by advertising for a cross section of U.S. airports. The range of media described here are just some innovative and creative approaches to advertising seen at airports today. Optimize Technologies Technological innovations also offer opportunities for airport revenue enhancements. • Touch-screen directories—Touch-screen airport directo- ries provide passengers with a complete directory and way-finding system. Most systems include a directory of area hotels, car rentals, restaurants, and shopping, as well as area maps. Some listings are even linked to a floor plan showing the current location as well as a guide to their desired destination. Also available are real-time flight information dis- plays, including arrival and departure status and gate information. Information can be viewed interactively with a touch-screen interface. The touch-screens kiosks require less space and provide tremendous customer ser- vices as well as another revenue opportunity. • WiFi applications—Airports that are providing wireless Internet service for travelers find that short-term con- tracts allow them to assess their needs as technology and the needs of users evolve. Under some agreements, the airport receives a percentage of the user fees (e.g., Des Moines International Airport). Opportunities also exist to provide wi-fi for free, but also to sell advertising on FIGURE 23 Memphis International Airport—Concession program redevelopment. TABLE 1 ADVERTISING REVENUE AT SELECTED AIRPORTS Airport 2005 Advertising Revenue (in $ millions) Advertising Revenue per Enplaned Passenger ($) Atlanta—ATL 7.8 0.18 Chicago—ORD 11.1 0.29 Cincinnati—CVG 1.8 0.16 Denver—DEN 4.7 0.22 Detroit—DTW 1.8 0.10 Fort Lauderdale—FLL 1.2 0.11 Houston—IAH 3.0 0.24 Las Vegas—LAS 16.3 0.74 Miami—MIA 4.4 0.29 Minneapolis—MSP 33.3 0.18 New York—LGA 9.6 0.74 Philadelphia—PHL 3.4 0.22 art, tourism, history and industry.

the launch page through the use of a simple “ad bar” at the bottom or top of the screen. However, this needs to be nonintrusive and must avoid pop-ups. • iFIDS—Internet-based Flight Information Display Sys- tems provide real-time airline information through the use of the Internet, eliminating the need for information technology investment and infrastructure. The cost- effective kiosks can be configured to display multi- media images and text messages offering a tremendous revenue potential. Sponsorship Opportunities In the last decade, sponsorship programs have moved to the forefront of advertising programs and emerged as a specific business discipline, capturing the attention of the media and the corporate world as it provides organizations with the ability to cut through the clutter of traditional advertising and exhibition. Effective sponsorship that balances the ties between brand and product marketing and is done well fits ideally with overall marketing objectives. The benefit of sponsorship programs is that they help defray the cost of the terminal while providing a valuable customer amenity. For example, in a sponsorship effort with the airport, a vendor provided flat screen televisions at no cost in the newly con- structed Dallas/Fort Worth International Terminal D/Hyatt Hotel. Sponsorships do not replace the airport’s identity and may be of short duration or event driven. It is feasible to have multiple sponsors for a single location or have a sponsored meeting point. Maximize Exposure Opportunities also exist for nontraditional locations for air- port advertising. Advertising with banners, moving walkways and escalators, and even websites are cost-effective ways to generate additional revenue. Banners draped across the sky bridge or on the exterior of the terminal building are raising the bar on nonaeronautical revenues and are quickly becom- ing the newest form of airport advertising that gives “owner- ship” to a specific brand name, for example at Miami–Dade International Airport. Furthermore, advertisements can be used to improve the airport’s image and propose modern and creative ideas to travelers. In Johannesburg, South Africa, advertising has been placed on unpaved airfield land to maximize advertising revenues (Figure 24). COMMERCIAL DEVELOPMENT AND LAND USE Given the need to finance future capital expenditure and max- imize shareholder value, airport operators are under increas- ing pressure to optimize revenues they generate from com- mercial sources. This can be achieved through adopting policies and practices that can unlock the considerable potential that exists within many airports to fully develop and exploit commercial activities to increase revenue. The fol- lowing sections will explore some conventional and innova- tive sources to enhance nonairline revenues and help lower airline costs while improving the quality of service and pro- viding a new level of convenience for the passenger. It also includes some key constraints to revenue development as well as opportunities. Depending on the nature of the airport complex, there can be a variety of other revenue-producing leases from nonairline operations, including manufacturing, warehousing, freight for- warding, and even farming. Revenues from these areas have been categorized in the following way: • Fixed-base operator leases, • Ground rentals, • Cargo-area rentals (freight forwarders, etc.), • Industrial areas, • Other buildings, • Fuel and aircraft servicing, and • Agriculture. Although commercial development of the airport’s land is another way to help support core aviation businesses by pro- ducing nonairline revenues, it also redefines the airport as a center of commerce. To determine its goals and objectives for commercial land development, it is essential for the airport operator to identify the relative importance of the financial, political, and aesthetics/identity considerations. Commercial Property Development In most instances, simply providing basic services to airlines and passengers is no longer sufficient to ensure the viability of running an airport. Quality, innovation, and new services and products are the key to ensuring survival in the competitive marketplace. Today, airport operators are compelled to review their roles as mere landlords with a new energy to complement ancillary services. Although most revenue sources are tied to passengers, airports are now finding the need to identify a long-term source of nonairline revenues. 30 FIGURE 24 Advertising on unpaved airport land in Johannesburg, South Africa.

31 Development and property management planning provides a long-term plan for nonairline revenue generation by helping the airport communicate to all interested parties the long-term goals of the airport and the benefits of cost. In recent years, legislation relating to environmental and security issues has required airport operators to take a more proactive role as “landlord.” Therefore, airport operators are discovering the importance of putting in place land leasing policies for commercial property. Those land leasing policies are being evaluated in a number of respects: • Existing leases—Airports need to evaluate existing lease agreements and perform physical facility reviews as agreements are expiring and facilities are reverting back to the airport. • Redevelopment plans—Airports should anticipate the expiration dates of the existing leases and facilitate “highest and best use” standards for aging facilities. • New development and vacant land—Airports are being more active in identifying near- and long-term uses for currently unused land. Land Use Plans Land use planning not only provides a long-term plan for tra- ditional and nontraditional revenue generation but a number of other useful purposes as well: • Minimize costs—By guiding incompatible land users away from the airport vicinity and encouraging compat- ible land users to locate around airport facilities, costs for noise studies, capital investment in noise mitigation, and legal fees can be minimized. Aircraft noise has been the primary driver of airport land use compatibility con- flicts and proper planning can alleviate noise issues with advance “buy-in” from the surrounding community. This is a valuable tool for the overall strategic business plan- ning for small and large airports alike. • Define alternatives—To the incumbent first-come-first- served policy, which can result in contracts having nego- tiated lease terms that are reasonable on a stand-alone basis, but that otherwise may be inconsistent with the long-term use needs of the airport system. • Determine the highest and best use—Forecast the mar- ket demand for property having commercial uses. The demand (land absorption and price) for office, retail, and industrial (which includes warehouse and distribution) property is projected to determine revenue. • Identify future capital improvements—Determine the major roadway(s) and utilities required to access and ser- vice the property for its highest and best use. The planned improvements are developed by phase based on an analysis of areas that can be absorbed by the market over a reasonable amount of time and serviced with improve- ments that can be developed in reasonable cost increments. The land use plan results in a cost-benefit analysis of prop- erty development. The benefit of revenue generated from office, retail, and industrial land use is calculated by deduct- ing the estimated cost to access and service the property. Airport planning processes are performed at multiple levels: • Service plan—establishes the specific strategy for pro- viding the access and utility improvements required for the implementation of the land use plan. Roadways, storm drainage, water, sanitary sewer, and franchise util- ities are required for commercial uses of land. Police, fire protection, and maintenance services are required for development. The service plan identifies, evaluates, and recom- mends the most cost-efficient combination of methods to provide access and utility services. Efficiency is derived from the determination of political, initial investment, operating, and administration costs. • Financing plan—establishes the strategy for funding the infrastructure improvements required for commercial development. The plan identifies public, private, and air- port funding methodologies available considering: – Ownership of property, – Bond ordinances, and – FAA grant assurances. The financing plan quantifies and evaluates the costs of funds, including initial (start-up) costs, interest, guar- antees, and flexibility to change funding methods. The recommended funding method of the financing plan will be compared with the financing strategies and fees charged by neighboring municipalities. • Marketing plan—establishes the price of property to be set to achieve the airport’s goals of quality of devel- opment, market share, and absorption rate. The target market of users, disadvantaged business enterprises, and developers should be identified in the plan. A promo- tion plan is developed using a mix of printed material, the Internet, presentations, mailings, and advertising to reach the target market. • Development guidelines—direct development to create a coordinated and cohesive appearance linking aviation and nonaviation land uses and an awareness that one is on-airport. They are used to give land for different com- mercial uses a unified and consistent appearance. The result is a campus-style look that accentuates each indi- vidual development: – Landscaping; – Roadways, gateways, driveways, traffic signals, and lighting; – Architectural style, including materials, textures, shapes, and colors; – Lotting, including setbacks and parking; and – Parks of specific land uses, including office, retail, and commercial/flex. Large Land Mass Airports are unique facilities in that they tend to occupy large parcels of land, have unique siting requirements, produce

noise, and generate complex safety concerns, all of which affect neighboring communities. By promoting nonaviation commercial development, an airport can generate additional revenue without increasing the number of aircraft or the level of operations at the airport. The additional revenue could provide an increased level of reserves and funding for both past and future airport needs. Airport operators should be mindful of long-term compatibility with aviation operations when developing commercial develop- ment plans. A number of airports have developed portions of their air- port properties to accommodate nonaviation commercial enterprises. The types of businesses found on airport property include: • Industrial uses – Importing and exporting – Manufacturing – Warehousing – Research and development – Cargo facilities – Bulk storage – Outside storage – Petroleum exploration and mineral rights (see Fig- ure 25). • Commercial uses – Restaurants – Commercial office space/complexes – Hotels and motels – Recreational centers – Training facilities – Small business centers – Retail sales – Industrial businesses – Car rental agencies – Automobile dealers – Golf courses – Movie theaters – Retail businesses – Agricultural uses (see Figure 26) – Recreational and training facilities. The presence of these types of businesses at the airports sur- veyed contributes significantly to their revenues and their abil- ity to build up their reserves and invest in improvements to their facilities. FAA Restrictions on Land Development There are numerous restrictions on the development of airport- owned land and the use of the revenue from that land that are driven by the grant assurances airports accept as a condi- tion of receiving grants or acquiring federal surplus property. Further restrictions are placed on land development through the airport master plan process and airport revenue diversion regulations. These restrictions do not prohibit airport land development; however, they do put limitations to some aspects of this development. • Grant assurances for land acquired with federal assis- tance. Grant Assurances 31a (land acquired for noise compatibility purposes) and 31b (land acquired for development purposes) each state that when the land is no longer needed for the purpose acquired, the sponsor shall dispose of it at fair market value, and the proceeds from this sale that are proportional to the original federal share of projects cost either be returned to the trust fund or reinvested in another approved (AIP or noise pro- gram) eligible project. It is important to note that this particular assurance only applies to land specifically acquired with federal assistance and not all airport land. However, Grant Assurance 31c states: “Land shall be considered to be needed for airport purposes under this assurance if (1) it may be needed for aeronautical pur- poses (including runway protection zones) or serve as noise buffer land, and (2) the revenue from interim uses of such land contributes to the financial self-sufficiency of the airport.” Grant Assurance 31d states: “Disposition of such land under (a) (b) or (c) will be subject to the retention or reservation of any interest or right therein necessary 32 FIGURE 25 Dallas/Fort Worth International Airport—Natural gas and oil exploration. FIGURE 26 Denver International Airport—Farming on currently unused airport land. Under the lease program, the monies received from the sale of the farm crop have been divided on a ratio of one-third to the airport and two-thirds to the farmers. The farmland lease contracts bring in about $300,000 per year to DIA.

33 to ensure that such land will only be used for purposes which are compatible with noise levels associated with operation of the airport.” There is some recent emphasis concerning this issue, because the Office of Inspector General (OIG) audited 11 airports and found that they were not complying with the intent of the land acquisition assurance in that they should have disposed of the land as soon as possible once the proper deed restrictions were placed on that land (that is, the airport should not hold or lease the land). Prior to the OIG audit, airports had assumed that the land could be developed for compatible uses and the revenue contributed to the self-sufficiency of the airport. The results of this audit have only recently been released and follow-up is still pending. • Airport layout plan and airport property map issues. The primary issue around the Airport Layout Plan (ALP) as it relates to land development is the requirement that land uses on these documents are approved, and that changing these uses requires approval. The Grant Assurances require the airport to maintain an ALP that shows the boundaries of all off-site areas owned or controlled by the airport for airport purposes (Grant Assurance 29a), and requires showing the loca- tion of all existing and proposed nonaviation facilities and of all existing improvements thereon. There is some flexibility, however, in how the ALP is developed as part of the master planning process, as spelled out in Advisory Circular 150-5070-6B Airport Master Plan. The ALP consists of a number of drawings as listed in that circular; however, not every drawing is required (specific requirements are worked out between FAA and the airport as the master plan is developed). Any drawing that is approved as a part of the master plan’s ALP however does drive the need to have sub- sequent changes to that drawing approved. If the airport acquired land with federal assistance, a great deal more care must be taken to ensure that the airport prop- erty map and the ALP documents are approved to show any changes in development. Revenue Diversion Issues The FAA policy on Revenue Diversion (“Policy and Proce- dure Concerning the Use of Airport Revenue” 1999) specif- ically states that airport revenue shall only be used for the cap- ital or operating costs of the airport, the local airport system, or other local faculties owned or operated by the airport owner or operator, and directly and substantially related to the air transportation of passengers or property. The allowable use of revenue to develop airport land is clear for land that serves a direct aviation purpose (use revenue is allowed for the development of this land and revenue gen- erated from this land must be used for airport purposes). The restrictions on the use of airport revenue to develop land not used for direct aviation purposes (developing land set aside for noise buffers) are less clear. OTHER INNOVATIVE REVENUE ENHANCEMENT CONCEPTS On-Line Auctions of Airport Equipment Airports with excess equipment or equipment being replaced or phased out may consider online auctions as a possible way to enhance airport revenue. Auctions allow the seller to gen- erate additional revenues and the buyer to obtain much needed equipment at or below market rate. Conducting those auctions online makes them more readily accessible to a broader range of potential buyers than other forms of auctions (see Figure 27). Conservation Easements A conservation easement is a legally binding agreement between a property owner and a land trust or government agency that limits the use of an area of land. Some of the rights of the owner are transferred to the latter to support conser- vation efforts. Although conservation easements are usually donated, they are sometimes sold. Furthermore, if an easement benefits the public by protecting important resources and meets other tax requirements, it can qualify as a tax-deductible charitable donation. Most easements run into perpetuity—only perpetual ease- ments can qualify for tax breaks. Airports, being publicly owned, would not benefit from tax breaks, but might be able to sell conservation easements for airport land that will not be developed in the future. The viability of these instruments as revenue generators for airports, however, is unknown. Air- ports may not want to permanently restrict their ability to develop their unused lands. Given concerns about accommo- dating future growth, those areas that are already off limits to construction would probably not be purchased by a conserva- tion easement fund to begin with. FIGURE 27 Dallas/Fort Worth International Airport—Online auction of surplus equipment.

Carbon Sequestration The Carbon Sequestration—Chicago Climate Exchange (CCX) is a self-regulatory exchange that administers a volun- tary, legally binding program for reducing greenhouse gases in North America. Corporations, public entities, and organiza- tions that generate greenhouse gas emissions directly or indi- rectly can join CCX by pledging to curb their contribution of these gases to a baseline volume that decreases annually according to a predetermined formula. CCX members trade their carbon credits to comply with their emissions quota at minimum cost. CCX offset providers are organizations or individuals that manage or represent carbon offset projects, such as no-till farming, methane sequestration, and reforestation and conservation. Offset providers can earn Carbon Financial Instruments (CFIs) in the exchange through a third-party certification of their prac- tices. Airports could adopt carbon sequestration projects in their excess lands and apply for CCX Offset Certification. With possible future increases in the value of CFIs from their January 2007 levels of between $3 and $4, innovative sequestration approaches may become viable supplements to conventional forestation projects. Energy and Utility Services Airports may have opportunities to generate and sell energy and utility services to tenants, nearby businesses or communi- ties, or regional utilities at a net profit. For example: • An airport could purchase utilities wholesale from the local utility company and sell the utilities to tenants at the retail utility rates they would have paid the utility company. • An airport steam plant could be sized to produce a cost- effective steam district to nearby hotels or other large institutions. • Electricity from solar or wind sources could be gen- erated on airport property to offset airport electricity or costs, or be sold to the local electric utility and/ or tenants. As restrictions on emissions increase, local utilities may be willing to subsidize airport investment in alternative energy equipment on airport property. Shared Services Airports may also have opportunities to provide services that are of mutual benefit to the airport, airlines, and/or other tenants. For example, ground handling of aircraft is provided by airport operators at a number of European air- ports. In the United States, ground handling is generally provided by the airlines or ground handling companies. If an airport can provide the services more cost-effectively than its tenants or a third-party contractor, then providing the service represents a potential new revenue source. For example, ground handling is provided by the airports oper- ators of Orlando Sanford International Airport and Bangor (Maine) International Airport. 34

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TRB’s Airport Cooperative Research Program (ACRP) Synthesis 1: Innovative Finance and Alternative Sources of Revenue for Airports explores alternative financing options and revenue sources currently available or that could be available in the future to airport operators, stakeholders, and policymakers in the United States. The report examines common capital funding sources used by airport operators, a reviews capital financing mechanisms used by airports, describes various revenue sources developed by airport operators, and a reviews privatization options available to U.S. airport operators.

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