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38 How to fund IROPS mitigation initiatives is a key consideration in executing an investment plan for mitigating IROPS events. The funding details will depend on many factors, such as airport size, local, state, and federal regulations, budgeting styles of the airport governing body, other budget priorities of the airport, the airportâs Capital Improvement Plan, the Airport Master Plan, bond covenants, and Airline Use Agreement (AUA) provisions, to mention a few. These considerations will vary from airport to airport and as conditions change over time. Like most businesses, airports are not static. They adapt and must remain flexible as conditions change while operating subject to regulations, agreements, and practices that are imposed exogenously (on both the airports themselves and on their passengers and tenants) or that they impose on themselves. This chapter describes the processes and considerations for strategic planning for and financing of IROPS mitigation initiatives. It also discusses the relationship between the IROPS investment plan and the structure of the AUAs that the airport has negotiated with its tenants. 5.1 Strategic Planning In general, airports must plan strategically and spend a considerable amount of time and effort on developing long-term plans. The main vehicles for strategic planning activities include the airportâs budget, Capital Improvement Plan, Airport Master Plan, and individual project plans. When this planning is undertaken, airport operators must consider not only IROPS needs, but all of the needs of the airport, including ongoing operations, expansion plans, maintenance, replacement, and capital purchases. This planning must also balance the requirement to meet regulatory, statutory, and AUA requirements. 5.2 Funding Eligibility Once the strategic plan has been developed, work on financing can begin. One of the major questions that must be answered is the source of funds. Sources of funds can be internally generated funds, Airport Improvement Program (AIP) funds, passenger facility charges (PFCs), other grants, loans, or bonds. Each of these options is examined within the context of the airportâs priorities and financial capabilities. Of specific interest are the eligibility requirements that exist for federal funding programs, which often limit or preclude the application of federal funds to IROPS-related airport improvements. 5.2.1 Internally Generated Funds Priorities for spending internally generated funds are based on a number of factors. These factors include the structure of the airportâs AUAs, the internal policies of the airport governing body, bond reserve requirements, and the nature and market of the airport. The ability of airports C H A P T E R 5 Strategic Planning, Financing, and Airport Use Agreements
Strategic Planning, Financing, and Airport Use Agreements 39 to accumulate funds in excess of their annual requirements for expenditures can vary widely. Some airports can accumulate significant reserve funds, while others are restricted in their ability to do so as a result of their markets and agreements. Most airports have some discre- tionary funds that are internally generated and internally controlled. Airports may, however, be hesitant to use internally generated funds when other funds, such as AIP and PFC funds, are available. In general terms, it is in the airportâs benefit to have a reasonable level of reserve funds to deal with unanticipated needs, including IROPS. Specific levels of reserve funds will depend on the situation of the airport, including the form of the airportâs AUAs, its market strength, airline stability, and other factors. 5.2.2 Airport Improvement Program/Passenger Facility Charges The presence of a federal grant program for airport development dates back to the Federal- Aid Airport Program (FAAP) of 1946. In subsequent years, the program has seen many changes as a result of legislation including the Airport and Airway Development Act of 1970, the Airport Development Aid Program, and the FAA Modernization and Reform Act of 2012, which is the current governing legislation. The two major sources of federal funding for airports are the AIP and PFC programs. For the purposes of this report, the two programs are considered together, as the eligibility requirements are virtually identical with only minor technical differences. Capital projects intended to mitigate IROPS events are generally considered to be unplanned or of an emergency nature, and are considered contingencies in excess of normal FAA design standards. The design standards that apply for AIP- and PFC-eligible projects are intended to accommodate normal conditions, whereas IROPS are considered exceptional or off-nominal conditions. Therefore, most initiatives spe- cifically designed to mitigate IROPS projects are not eligible for AIP or PFC funding. Exceptions include projects whose main benefits extend beyond mitigating IROPS, such as the increase in capacity that a new gate would provide. Despite the general lack of eligibility for AIP and PFC funding, during the stakeholder outreach phase of ACRP Project 10-14, airports reported examples of having public funds or grants in support of IROPS mitigation. These include grants from agencies not directly associated with the FAA, such as the U.S. Department of Defense or the U.S. Department of Homeland Security (including funding from the Federal Emergency Management Agency). They also include grants from local and state agencies, such as state departments of safety. State and federal surplus property programs also can be used as a resource for equipment intended, at least in part, to mitigate IROPS events. Airports also provided several examples in which AIP- or PFC-funded projects developed to meet FAA standards, also have provided some level of contingency capability for IROPS events. Table 11 lists typical airport projects and indicates their eligibility for federal funds. In general, eligible projects âinclude those improvements related to enhancing airport safety, capacity, security, and environmental concernsâ (FAA 2012a), but the list is not exhaustive, and each grant application must be judged based on an individual analysis of the request. Federal airport funds can be used for mobile command posts, airport rescue and firefighting equipment, and similar equipment and related facilities in accordance with the Airport Emergency Plan. These resources have clear applications for IROPS events, and the source of funding in no way precludes their use. As airport operators look at their IROPS needs, they commonly find that the purchase of a piece of equipment to address IROPS also supports operational requirements that are fully eligible for federal funding. In summary, there is some flexibility in the use of AIP and/or PFC funds for purchases of systems that support the primary goals of enhancing airport safety, capacity, security, and
40 Being Prepared for IROPS: A Business-Planning and Decision-Making Approach environmental concerns. Cross-utilization of equipment owned/operated by the airport and funded with AIP/PFC funds is not prohibited if it is used for a legitimate airport purpose. Specific guidance for airport operators is usually arrived at through consulting with the local FAA Airport District Office or the Airports Division of the applicable FAA Regional Office. 5.3 Airport Use Agreements ACRP Report 36: Airport/Airline AgreementsâPractices and Characteristics (Faulhaber et al. 2010) focuses on the subject of AUAs. The report explores the complex issues that can arise during the negotiations of AUAs and the definitions and concepts contained in it are also used here. Notice that airports can, and some do, operate their facilities without the benefits of an AUA. For ease of discussion, the term ordinance will be used to describe situations where airports and airlines do not operate under an AUA. An AUA is defined as âthe contract between the airport operator and its tenant airlines that establishes the rights, privileges, and obligations for each party and defines how the airport is to be used by airlinesâ (Faulhaber et al. 2010, 7). AUAs serve the following functions (Faulhaber et al. 2010, 7): ⢠Establish the business arrangement and rate-setting methodology with the airlines (e.g., compensatory, hybrid, residual). ⢠Identify the premises and facilities leased by the airlines and define the degree of control by the lessee (e.g., exclusively leased, preferentially leased, leased in common, etc.). Eligible Projects Ineligible Projects Runway construction/rehabilitation Maintenance equipment and vehicles Taxiway construction/rehabilitation Office and office equipment Apron construction/rehabilitation Landscaping Airfield lighting Artworks Airfield signage Industrial park development Airfield drainage Marketing plans Environmental studies Maintenance or repairs of buildings Safety area improvements Training Access roads only located on airport property Fuel farms (may be eligible under specific circumstances) Removing, lowering, moving, marking, and lighting hazards Improvements for commercial enterprises Snow removal equipment and storage facilities Aircraft hangars (may be eligible under specific circumstances) Glycol recovery trucks (eligibility subject to specific requirements) Aircraft rescue and firefighting equipment (eligibility subject to specific requirements) Airport layout plans Weather observation stations Navigation and visual aids Planning studies Land acquisition Table 11. AIP eligibility for a sample of airport projects.
Strategic Planning, Financing, and Airport Use Agreements 41 ⢠Define the level of control over the expenses at the airport, if any (typically capital expenses are those over which the airlines may have some control through a majority-in-interest or similar type provision). ⢠Identify general party responsibilities and obligations for indemnification, insurance, environmental issues, and other governmental inclusion. According to Faulhaber et al. (2010, 8), AUAs in effect at airports today generally follow one of three different rate-setting methodologies: A pure residual methodology is where the airlines bear the overall financial risk for the airportâs operation and, in turn, receive the benefit of all non-aeronautical revenue credited toward the calculation of their rates and charges. On the opposite side of the spectrum, a pure compensatory rate-making approach is where the airport operator assumes the overall financial risk for the airport operation. There is also a third approach, generally called a hybrid methodology, that is a mixture or combination of the prior two approaches and may include a ârevenue sharingâ component of excess non-airline revenues generated at the airport. Airports operating by ordinance will have many similar provisions in their ordinance to those that are found in AUAs, the primary difference being that the establishment of the ordinance provisions is by the airportâs governing body and not negotiated with the airlines. These airports will select a rate-setting methodology and use it to develop a schedule of rates and charges. As airport operators develop their AUAs, the provisions within those agreements or ordinances will influence how they approach the financial consequences of IROPS mitigation initiatives. Given that AUAs and ordinances vary substantially by airport, however, it is not possible to determine a specific financial outcome for any specific IROPS mitigation strategy without running an airportâs model for setting rates and charges. 5.4 Leased Facilities An airportâs AUA contains provisions that govern use of the airportâs facilities. These provi- sions will, in part, affect the planning for and funding of IROPS mitigation strategies. Histori- cally, airports and airlines entered into long-term AUAs. Often the AUA term was tied to, or paralleled, the issuance of long-term debt instruments referred to as general airport revenue bonds, commonly issued for periods up to 30 years. Over time, for various reasons, these practices have changed in favor of shorter-term AUAs. Today, AUAs commonly have 5-year terms (with extensions) and less commonly have terms as short as 30 days on a rolling basis. In the context of this report, the most common concern relates to the leasing of gate space, including the associated apron area, boarding bridge, and passenger holding areas. Other airport facilities, such as cargo buildings, cargo aprons, areas for Federal Inspection Services, and hardstands are also of concern, but the issue of control is the same. Within AUAs, the terms of use are commonly described and resolved in one of three general fashions: (1) the space is leased to the tenant for its exclusive use, (2) the space is leased to the tenant on a preferential use basis, or (3) the space is leased on a common use basis. The following paragraph summarizes current trends (Faulhaber et al. 2010, 48): The shift away from exclusive use gates, along with the adoption of compensatory pricing practices for terminal space, which tend to be higher than residual rates, serves to emphasize the effective use of these facilities. Also, the financial pressures placed on the airlines reduced their ability to absorb costs for under- utilized assets. Thus, with the exception of a few airports that have significant grants of exclusive gates remaining, gate assignment provisions have generally shifted in a manner that provides greater control to the airport operators. As described in more detail below, each of the three methods has advantages and disadvantages. The focus of the discussion is on how the lease structure can affect the implementation of IROPS mitigation initiatives.
42 Being Prepared for IROPS: A Business-Planning and Decision-Making Approach 5.4.1 Exclusive Use Exclusive use agreements place control of the leased facility on the entity that is granted the exclusive use of the facility. Although this is a strong position for the leaseholder, there may be opportunities for the airport operator to negotiate use of gate space during periods of non-use. Generally, airports and airlines are reluctant to open an AUA negotiation on issues during the term of an AUA, but negotiating side agreements to address specific issues outside the AUA is common. For example, the airport operator and the airline leaseholder may be able to negotiate the use of an exclusive space under specific and mutually agreeable terms, such as during IROPS events. 5.4.2 Preferential Use Each signatory to the AUA may be granted preferential use of specific space. The basic operat- ing practice is that the signatory airline has priority (preferential) access to the space, but not exclusive use. In application, use of the defined space is flexible when it does not materially affect the operations of the tenant holding the preferential use right to the space. Commonly, the airport and lease holder will develop understandings about preferential use in writing. The details generally are described in documents outside the AUA, although doing so is not required. Preferential use agreements generally give added flexibility to airport operators to respond to IROPS events, as they can maximize the use of unused space. 5.4.3 Common Use The term common use denotes space that is used by airlines on a non-exclusive or non-preferential basis (e.g., gates, apron areas, hold rooms, and passenger processing equipment). A common example of this type of arrangement is the use of baggage delivery areas and associated baggage belts and/or carousels. The use of facilities in common with other users generally provides the most efficient use of space and related facilities. The effective and flexible use of space does, however, come with higher system management commitments. For example, the airport operator typically is responsible for scheduling the use of the common use facilities. This responsibility can be challenging during IROPS events, given their disruptive and unpredictable nature. 5.4.4 Limitations and Opportunities As related to terminal and apron space, preferential use and common use agreements provide greater opportunities for use of space during IROPS events than do exclusive use agreements, even when side agreements are in place. Still, each airport is different and needs to undertake a critical review of its operations to determine the order of magnitude and the consequences of each type of IROPS event that is likely to occur. Best management of leased facilities must balance cost, real availability of the space, and effectiveness. The IRIS decision support tool developed for ACRP Project 10-14 should help airport operators conduct these reviews, keep- ing in mind that no single, best answer exists given the many factors that must be considered. 5.5 Rates and Charges A complete discussion of rates and charges is outside the scope of this document and is well covered in ACRP Report 36, at least in the context of AUAs. Within the context of business planning for IROPS mitigation initiatives, however, the effect on rates and charges will be important for airport operators to understand. Given that rate-setting varies substantially from airport to airport, it is not productive to attempt to define standard practices, conventions, or general
Strategic Planning, Financing, and Airport Use Agreements 43 effects that IROPS-related expenses will have on rates and charges. The ease of calculating the effect of any related capital or O&M expenses on rates and charges is proportional to the complexity of the rate-making process used by the airport. The level of complexity, in turn, is affected by the provisions in the AUA, bond covenants (if applicable), airport stakeholder preferences, and legal and regulatory provisions, including FAA policies. Where expenses are included in the calculation of the rate base, they are likely to be considered when evaluating each potential initiative. Depending on the provisions contained in the AUA, airports also may be required to consider majority-in-interest (MII) provisions (see Section 5.6). 5.6 Majority-In-Interest As MII provisions affect an airportâs ability to fund projects, they must be considered when present in an airportâs AUA. The AUAâs role in defining control of capital projects can be sum- marized as follows (Faulhaber et al. 2010, 58): Capital project control and consultation is typically an issue that will surface in most Agreement negotiations between airlines and airport operators. Some Agreements address this issue through an MII provision. This provision will generally indicate how much control (if any) the signatory airlines have over an airport operatorâs capital development program, and will detail the formal procedures for how such controls are executed. Capital project control and consultation provisions vary considerably, ranging from no control to very strict and structured airline control. There are also numerous variations in between. Since the airlines bear the financial risk, more airline capital development control generally occurs as Agreements become more residual in nature. There is no right or wrong answer and no good or bad MII provision. Each AUA/MII must fit the issues relevant to the airport/airline(s). Airport operators also understand that AUAs (and subsequently MII provisions) come into consideration only when they impact a signatory to the agreement. Should an airport decide to expend funds on a project and not seek reimburse- ment via rates and charges collected from the signatory airline(s), it is generally within the airportâs discretion to take that action unless prohibited by some other provision in the AUA, bond covenants, or restrictions.
