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Revolving Funds for Sustainability Projects at Airports (2019)

Chapter: Chapter 3 - Phase 1: Planning Initiating an Airport GRF

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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
×
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
×
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
×
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
×
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
×
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
×
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
×
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Suggested Citation:"Chapter 3 - Phase 1: Planning Initiating an Airport GRF." National Academies of Sciences, Engineering, and Medicine. 2019. Revolving Funds for Sustainability Projects at Airports. Washington, DC: The National Academies Press. doi: 10.17226/25567.
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9 GRFs offer significant benefits and can provide a new framework for managing sustainability actions at airports. Using a GRF structure to support sustainability offers an airport a clear process to prioritize and develop projects based on their cost-effectiveness. Airports may also decide to assign value to actions that achieve social and environmental outcomes. Measures that advance all three components of the triple bottom line (people, planet, profits) could be priori- tized over those that may yield fewer benefits. Basing decision-making on prudent economics will help convince a wide range of airport stakeholders that a GRF is worthy of consideration. Airports should review the entire 10-step implementation process and gain familiarity with the requirements of each component before deciding to pursue a GRF. The first four steps for GRF implementation cover the planning phase. They describe the preliminary actions related to selecting the appropriate structure and generating support from stakeholders (see Figure 3). 3.1 Step 1: Perform Research—Understand Your Airport 3.2 Step 2: Select a GRF Model 3.3 Step 3: Assess Investment Potential 3.4 Step 4: Engage Stakeholders and Build Buy-In When contemplating whether a GRF makes sense for an airport, start by gathering informa- tion about potential energy- and resource-efficiency projects that could be funded through a GRF. The airport terminal facilities or operations group may already have a running list of pre- viously identified opportunities or can find potential projects using recent energy audit results. If an airport does not have an existing project list, it may make sense to contact the local utility and schedule a no-cost preliminary audit or site walk-through to identify opportunities. FAA funds can be leveraged to pay for independent energy audits. Airports can also consult relevant ACRP literature and the energy conservation measures listed in Appendix B. From there, review the airport’s governance structure and how sources of funding must be managed. Identifying the advantages and limitations associated with various sources of financing, airport ownership, level of service, and any planning, design, or environmental reviews that may pertain to GRF projects will provide significant insight on the barriers that need to be addressed during the GRF assessment. After the airport decides that a GRF is worth exploring, contact all affected parties to discuss coordination. Reach out to airlines, concessionaires, and any other parties that have opera- tions in spaces subject to the GRF. Airline buy-in may be essential before an airport dedicates resources and makes commitments. See Section 3.4.2 for suggestions on working with airlines. The research team also suggests including FAA Airports District Office planners and engineers in the dialogue and keeping them updated with developments. Involving all relevant stakeholders C H A P T E R 3 Phase 1: Planning—Initiating an Airport GRF

10 Revolving Funds for Sustainability Projects at Airports early in the exploration process can increase the likelihood that obstacles will be uncovered, and more support will be provided when the assessment turns into a GRF proposal. Once stakeholders have been updated, it is important to understand the standard accounting practices used at the airport for resource efficiency projects. Capital will exit the GRF account to pay for the materials and labor associated with a project and potential soft costs that could include contractor designs and environmental review. Future secured project savings must be returned—from the budget in which they accrue—to the GRF account to finance future proj- ects. These transactions must be tracked according to standard airport accounting practices, which will ensure that the circular flow of capital that defines the GRF is maintained. Airports should consider which internal stakeholders would handle the accounting and financial flows for the GRF including tracking the utilities’ budget where project savings accrue. If this involves stakeholders in different airport lines of business, do existing channels of communication and collaboration already exist, or must these be developed? 3.1 Step 1: Perform Research—Understand Your Airport 3.1.1 Do the Homework The first step in developing a successful GRF is to gain an understanding of the range of GRF models and to begin thinking about how the fund can be tailored for an individual airport. Figure 3. Phase 1: Planning—initiating an airport GRF.

Phase 1: Planning—Initiating an Airport GRF 11 Much work has already been done in this area and using existing materials can cut months from the fund development process. There are two key areas in which research is crucial. First, learn about existing and relevant GRFs such as those provided in Chapter 2. These could be from other airports, or they could be based at universities and city governments within each airport region. Gain a basic understanding of the structure of these funds, the types of projects they typically finance, and popular variations on the GRF model. Second, examine the elements of airport operations that are relevant to a GRF. These include the following: • Long-term planning, environment, and climate goals; related airport plans; regional GHG goals (e.g., climate action plans); and Airport Carbon Accreditation participation. • How are utility services distributed and paid? Is the entire airport run as one large unit, or is the enterprise split into smaller, autonomous departments or units? • How is money transferred internally? Airports often have accounts associated with each department and unit, and it may be necessary to secure an account for the GRF. • Which stakeholders contribute to decisions about facility operations and project finance? Who will need to be consulted to establish buy-in for the fund? • What is the current state of energy efficiency and auditing at the airport? Have any studies identified potential energy efficiency or sustainability projects? 3.1.2 Airport Budget Structures The creation and deployment of a GRF has implications for both capital and operating budgets. First, because a GRF revolves over time and reinvests its funding into additional projects, the creation of a GRF can take pressure off future capital budgets by funding projects that would otherwise have been paid from the capital budget. Additionally, the monetary savings associ- ated with commonly funded GRF projects, like energy efficiency and renewable energy (EE/RE), typically accrue to the operating budget. However, GRF investments must be repaid from opera- tional savings for the fund to continue to function. The most common approach with existing GRFs is to use the savings that would have accrued to the operational budget to repay the GRF. This typically requires that a new line item be created for the amount of the GRF repayment, and this needs to be added to the airport’s operating budget. Using the operating budget for repayment keeps the benefits (savings) and costs of the project within the same overall budget. Repayments could also be made from capital budgets or from some other separate budget category depending on airport structure and preference. The airport also needs to be able to access project savings if another cost center, line of busi- ness, city department, or other entity has oversight of utility payments. Establish management protocols to obtain utility data and operational savings transfer, if oversight of energy con- sumption and energy payments are separate for the airport. 3.1.3 Airport Level of Service and Governance Structure There are over 3,300 existing and proposed airports, identified under the 2019–2023 National Plan of Integrated Airport Systems (NPIAS), contributing essential services to national air transportation (National Plan of Integrated Airport Systems n.d.). Of these airports, more

12 Revolving Funds for Sustainability Projects at Airports than 500 are commercial service airports, over 250 are reliever airports, and nearly 2,600 are categorized as general aviation (GA) airports. Regardless of how these airports are identified in the NPIAS, their owner/operator structures, at a high level, can be broken down into either general-purpose governments—municipal, county, or state—or single-purpose entities, such as airport authorities and commissions and private management companies (Reimer and Putnam 2009). The following provides an overview of these airport categories and governance structures, and how they can affect the implementation of a GRF. Commercial Service Airports—GRF Applicability Of the more than 500 commercial service airports in the NPIAS—382 primary and 127 non- primary airports—133 account for 96% of all U.S. enplanements (National Plan of Integrated Airport Systems n.d.). Regardless of an airport’s level of service, a significant factor to consider when evaluating GRF feasibility at any commercial service airport is the extent to which airport/ airline use and lease agreements, as well as other leasehold agreements, will affect the imple- mentation of GRF projects. Airline contracts often include requirements for the airport to share operational cost savings (Vanden Oever et al. 2011). Sharing savings derived from GRF projects may require considerable stakeholder engagement and negotiation. See Airport/Airline Use and Lease Agreements in Section 3.1.5 for additional information. Commercial service airports represent the most complex locations at which GRF may be implemented because of the variety of airport lease agreement structures. Less Than One Million Annual Passengers Commercial service airports with less than 1 million annual passenger enplanements gener- ally have limited revenue streams, which may not be available for the capitalization or growth acceleration of a GRF. If annual project savings are equal to or less than the cost of the staff time required to implement and maintain a stand-alone GRF, pursuing a fund does not make sense. GRFs at the state level make more sense for smaller commercial and GA airports as presented in the Virginia Department of Aviation case example in Appendix C. Greater Than One Million Annual Passengers Commercial service airports with greater than 1 million annual passenger enplanements typi- cally have a larger diversity of revenue streams that can be allocated to the establishment or accel- eration of a GRF. Annual operational savings can also exceed the labor costs associated with developing and implementing a GRF. Some small and most medium and large hub airports will likely have an enhanced ability to generate and retain savings from GRF projects. Reliever and GA Airports—GRF Applicability Although a variety of leasehold agreements apply at reliever and GA airports, these airports are not subject to airport/airline use and lease agreements. Airports in these categories may encounter fewer barriers when establishing a GRF; however, given the scale of operations, and the size of the potential utility savings, it is likely more cost-effective for smaller airports to participate in a GRF at the state system level. For information on how the Virginia Depart- ment of Aviation set up its revolving fund to support small airports, see the case example in Appendix C.

Phase 1: Planning—Initiating an Airport GRF 13 The lack of revenue sharing agreements at reliever and GA airports may enable GRFs to grow at relatively fast rates compared with GRFs at commercial service airports; however, the scale of operations may limit the size of annual savings at GA airports and thus reduce their revenue benefits. A GRF is not the right solution, if the total dollars saved are lower than the airport cost to establish and maintain a revolving fund. If there is an economic case to proceed, GA airports need to pay attention to tenant contracts. 3.1.4 Airport Owner/Operator Structures Owner/operator structures can be broken down into either general-purpose governments or single-purpose entities. General-purpose governments may choose to retain direct control over airport decision-making or may retain indirect power through the ability to appoint and remove airport authority commissioners. A noted benefit of general-purpose government’s direct control of airport decision-making is the ability of the electorate to vote on the governing body’s airport- related decisions (Reimer and Putnam 2009). Conversely, the autonomy of single-purpose entities has also been cited as leading to improved airport performance and efficiency (Reimer and Putnam 2009). Municipal, County, and State—GRF Applicability City-owned airports are the most widely adopted ownership model in the United States at 33% of the total. Fifteen percent of airports are operated by counties and 7% are state operated (American Association of Airport Executives 2014). Airports operated completely by either a city or a county will typically fall under the oversight of a division or department of the city or county, and the airport director may report directly to elected officials. According to the American Association of Airport Executives (AAAE) “the advantage of an airport that is municipally owned is that airport administration has access to the resources of the other city or county departments” (American Association of Airport Executives 2014). As described in Section 3.1.3, smaller airports can benefit from a pooled fund at the state level. Municipalities also have the power to tax and issue bonds on behalf of the operation of the airport. Airports operated by general-purpose local governments, however, can be at a dis advantage given the span of control of elected officials. To ensure that elected officials prioritize airport needs, advisory boards are often created to communicate action recom- mendations. Advisory boards can also establish airport authorities or commissions (American Association of Airport Executives 2014). The implementation of a GRF at airports that are directly owned and operated by general- purpose governments has the benefit of access to other department resources. Other depart- ments across the municipality, county, or state may have experience with similar revolving funds and could assist the airport with the implementation and management of a GRF. Additionally, the ability of general-purpose governments to issue bonds on behalf of the airport could pro- vide an additional funding source for GRF projects (see Section 4.1.2 for further GRF funding information). However, in cases where airport decision-making is directly overseen by elected officials, who have numerous priorities, the GRF implementation process may encounter delays. General-purpose governments that establish airport advisory boards to improve the efficiency of airport decision-making may accelerate the adoption and growth of a GRF.

14 Revolving Funds for Sustainability Projects at Airports Airport and Port Authority Advisory Boards and Commissions— GRF Applicability Airport and port authority advisory boards typically consist of representatives with consid- erable knowledge or expertise relating to the aviation industry. Airport authorities represent 30% of all U.S. airports. The degree of airport authority power is dependent on enabling legis- lation, which typically includes the power to make daily operational policies and may include the ability to levy taxes as well as use the power of eminent domain. As a more focused entity, airport authorities can allocate resources toward airport-specific business matters rather than general community issues. Airports with greater independence can make more streamlined decisions (American Association of Airport Executives 2014). Port authorities represent 9% of all airports in the United States. The AAAE defines a port authority as a “legally chartered institution that generally has the same status as a public corpora- tion” (American Association of Airport Executives 2014). In addition to airports, port authorities operate a variety of other public facilities, including harbors, railways, and toll roads. One of the more significant advantages of port authorities is their ability to use revenue from other modes of transportation for airport purposes (American Association of Airport Executives 2014). Similar to airport authorities, “commissions can have the same responsibilities and stature . . . and are generally established to allow for focused attention and expertise to be applied in oper- ating the airport.” Appointed individuals represent the city or county, which can be an asset or drawback because they must be responsive to the political landscape to remain in office (American Association of Airport Executives 2014). The relative autonomy of airport and port authorities is a significant advantage when consid- ering GRF implementation. The ability of these entities to directly make decisions rather than being required to seek approval from governing bodies will likely help airports under authority control to streamline the GRF adoption. Additionally, although airports must comply with FAA Order 5190.6B (FAA Airport Compliance Manual 2009) and cannot divert airport generated revenue, authorities with operational oversight of multiple airports may be able to use a single GRF across locations as long as each is operated by the same controlling entity. Furthermore, port authorities can share revenue sourced from the various transportation systems under their control with the airport(s) they operate. This could potentially serve as a significant source of funding for GRF projects at airports managed under this structure. Private Management—GRF Applicability According to the AAAE, “privatization refers to the shifting of government functions and responsibilities, in whole or in part, to the private sector.” Although most commercial and GA airports in the United States are owned/operated by government entities, or by entities enabled or appointed by governments, active private entities play a part in airport operations, develop- ment, and management. Approximately 6% of U.S. airports are operated through intercity con- tracts or by special tax districts (American Association of Airport Executives 2014). Existing research has noted that private participation in airport management is recognized as an oppor- tunity to improve cost certainty and efficiency (Reimer and Putnam 2009). However, privatiza- tion of management does not mean that general-purpose governments forfeit all control over the airport.

Phase 1: Planning—Initiating an Airport GRF 15 Detailed agreements, leases, or other contracts determine the extent to which private entities are delegated airport control. Generally, a “private operator’s authority over key decisions is often constrained by the long-term lease agreement with the airport owner and the continued application of commitments to the federal government” (Reimer and Putnam 2009). Key barriers that disincentivize airport privatization include the time-consuming transfer process from public to private ownership, restrictive or vague regulatory requirements, and limited access to or use of federal funds (Tang 2017). Although their autonomy from government control is subject to negotiated lease terms, con- tracts, and agreements, private management firms operating airports may be able to expedite GRF implementation. As for-profit entities, privatized airport operators may find GRFs attrac- tive with their potential to create an internal funding mechanism that can operate independently from the capital budget process. Private airports may also prefer the simplicity of existing finance options. 3.1.5 Airline and Other Tenant Participation Considerations Airports derive a significant source of revenue from both airline and nonairline sources, many of which are subject to agreements and leases. Spaces such as airline ticket counters, gates, offices, baggage claim areas, aircraft hangars, and maintenance areas are all examples of airline usage. Nonairline lease spaces can include concessions, vehicle parking areas, advertis- ing spaces, and rental car facilities (American Association of Airport Executives 2014). Air- ports have a variety of options when it comes to how these leases are structured. The following provides an overview of the primary air carrier (airline) and concessions (nonairline) leasing options available at airports, and how each can affect GRF implementation. Airport/Airline Use and Lease Agreements Airport/airline use and lease agreements are legal contracts between the airport operator and the air carriers serving the airport. Use agreements define the rights, privileges, and obli- gations of airlines and the airport. Use agreements serve multiple purposes (Airports Coun- cil International—North America n.d.). First, they establish the business arrangement and rate-setting methodology with the airlines. Second, they identify the areas and facilities (both airfield and terminal) leased by the airlines and the degree of control by the lessee. Third, they define the level of air carrier control over airport expenses. Lastly, they identify general party responsibilities and obligations for indemnification, insurance, environmental issues, and other governmental inclusion (Young and Wells 2004; Faulhaber et al. 2010). Airline cooperation is essential for commercial airports to implement a GRF. See Section 3.4.2 for suggestions on how to generate buy-in and ideas on how sharing the operational savings could work. Residual Agreements. Residual agreements permit aeronautical users to receive a “cross- credit” of nonaeronautical revenues. Under this structure, the airport applies excess non- aeronautical revenue to airfield-related costs to reduce air carrier fees. In exchange, the air carriers agree to cover any airport budget shortfalls, if nonaeronautical revenue is insufficient to cover airport costs. In a residual agreement, aeronautical users may assume partial or total liability for nonaeronautical costs (FAA Airport Compliance Manual 2009).

16 Revolving Funds for Sustainability Projects at Airports Stakeholder Impacts. Under a residual agreement, the air carriers that enter into a con- tract assume significant financial risk by agreeing to keep the airport financially self-sustaining by covering airport losses after factoring in all nonaeronautical revenues (Young and Wells 2004). By assuming such risk, air carriers receive nonaeronautical revenue sharing with the airport to help reduce aeronautical costs (e.g., landing fees, rental rates). Furthermore, Majority-in-Interest (MII) clauses included in residual agreements provide signatory air carriers with greater control over airport capital development because of the risk they assume (Faulhaber et al. 2010). GRF Applicability. Under a residual agreement structure, air carriers will likely have strong support for a GRF. This is because a decrease in airport operating costs or increase in savings derived from airport implemented efficiency measures would result in a greater chance of the airport recognizing a surplus, which—under a residual agreement—must be shared with the air- lines. Therefore, the establishment of a GRF works in favor of both the airport (improved opera- tional efficiency) and the air carriers (increased potential for a rate base reduction). Establishing a GRF under a residual agreement, however, may have a drawback. Air carriers generally have greater influence over capital improvements under residual agreements, which could potentially delay the rate at which GRF projects could otherwise be implemented. Under a business as usual budget, operational costs are higher, and savings are unrealized (see Figure 4). Airport operators will likely need to engage air carriers to a greater extent under residual use agreements when selecting GRF implementation projects. Effective cooperation between an airport and its airlines is essential to the long-term health of the aviation industry. GRFs offer an opportunity for the parties to align on both sustainability and financial outcomes. Compensatory Agreements. Compensatory agreements place all liability for airport costs on the airport operator and allow for the retention of all airport generated revenue. Airport Source: U.S. Department of Energy 2018. Figure 4. Unlocking operational savings to accelerate resource efficiency.

Phase 1: Planning—Initiating an Airport GRF 17 operators may choose to share nonaeronautical revenues, but it is not required. Additionally, air carrier leasehold space charges are set based on the operational cost of the aeronautical facilities used (FAA Airport Compliance Manual 2009). According to ACRP Report 36: Airport/Airline Agreements—Practices and Characteristics, “air carrier rates are calculated in the respective rate- making cost center. The total cost requirement of the cost center is divided by the appropriate measure for that cost center (such as total rentable space for the terminal cost center) to arrive at the specific rate” (Faulhaber et al. 2010). Stakeholder Impacts. Unlike residual agreements where air carriers assume the risk and are responsible for guaranteeing that the airport operator has a balanced budget, compensatory agreements place financial risk on the airport operator. Therefore, airport operators must ensure that nonaeronautical revenues meet the operating needs of the airport. Because air carriers do not take on additional financial risk under this type of lease structure, their control over an air- port operator’s capital development is limited (Faulhaber et al. 2010). GRF Applicability. Air carriers may support GRF establishment under a compensatory lease structure. Because the airport operator is solely responsible for its budget, the airport operator will likely be able to implement identified GRF projects with greater independence. This can help grow the fund at a faster rate than could be achieved within a residual contractual framework. The central premise of a GRF is that operational savings are retained to pay off project “loans.” Airlines must agree to forgo reductions in utility, or other potential costs, so that a GRF can be recapitalized. If dedicating 100% of savings is not tenable, a compromise agreement could establish the portion of savings to be shared with airlines. In a split retained/shared savings scenario, the GRF could help reduce air carrier lease rates over time because air carrier rates are set based on the operational costs of space/services used. As efficiency measures capitalized by a GRF are implemented, airline rates may be reduced in proportion to the efficiency improve- ments made. Although airport operators have considerable control over capital decision-making under compensatory agreements, modification of existing agreements may be necessary to stipulate a new process for reinvesting savings in a GRF. Securing airline buy-in is essential in all cases, and airports can refer to Section 3.4.2 for tips on how to convince carriers that a GRF is a worthwhile joint venture. Hybrid Agreements. Hybrid agreements can consist of a variety of residual and com- pensatory rate-setting elements. For example, a hybrid agreement may incorporate a residual airfield area and a compensatory terminal into its overall structure. Alternatively, a hybrid agreement could consist of an overall compensatory agreement between the airport operator and the air carriers, but the agreement may also include revenue sharing to help keep air carrier rates and charges at a fair and reasonable level (Faulhaber et al. 2010; FAA Airport Compliance Manual 2009). Stakeholder Impacts. Integrating both residual and compensatory agreements, hybrid agreements attempt to balance the risk/reward relationship negotiated between the airport and air carriers. Because revenue sharing plays a significant role in hybrid agreements, air carriers can exert greater influence over airport capital improvement options than they would under a pure compensatory agreement.

18 Revolving Funds for Sustainability Projects at Airports GRF Applicability. GRF savings would likely need to be shared to some degree with air carriers under a hybrid agreement lease structure because of the inclusion of residual agreement elements. Additionally, because air carriers may consider the allocation of savings generated in one cost center to another as an issue relating to “fairness of costs,” an airport implementing a GRF could establish multiple GRF accounts for each cost center to avoid any conflicts under a hybrid agreement structure (Faulhaber et al. 2010). Non-Agreement Approach. Although airport/airline use and lease agreements are the pri- mary means by which airports set air carrier rates and charges, they are not the only means of doing so. A business arrangement between the airport operator and air carriers without a use agreement is generally referred to as an “ordinance” approach. In this case the local governing body for the airport can enact an ordinance establishing the terms and conditions under which the airport and air carriers will operate (Young and Wells 2004; Faulhaber et al. 2010). Stakeholder Impacts. Air carrier influence over airport decision-making under a non- agreement approach is limited. Although an airport may have greater authority to operate its facilities as required by local ordinance, the lack of air carrier participation may weaken the relationship between the airport and airlines. Airports should also always keep in mind that they must comply with all federal and state laws when setting rates and charges under local ordinance. GRF Applicability. Under a non-agreement approach, an airport may have limited barriers to GRF implementation; however, they may also have limited buy-in from air carriers serving the airport because of a potential lack of engagement. As major stakeholders of the airport, air carriers can help ease and expedite GRF implementation efforts. Airports benefit from air carrier engagement regardless of the airline’s ability to influence an airport’s capital and operational decisions. Airport Concessions Agreements Unlike airport/airline use and lease agreements (which are based on “cost-recovery”), con- cessions agreements allow airport operators to earn revenues based on the “market value” of space leased. Concessions, or nonaeronautical uses, are generally split into two areas: terminal concessions and landside concessions. Terminal concessions include food and beverage, news and gifts, and passenger services of various kinds. Landside concessions include parking facili- ties, rental car facilities, ground transportation services, advertising space, and in-flight catering (Vanden Oever et al. 2011). Regarding leases between fixed-base operators (FBOs) and other tenants, these agreements generally should not limit the airport operator’s ability to implement a GRF; however, airport operators must consider the various elements associated with FBOs and other airport tenant agreements. These include clearly defined leasehold areas, FBO and corporate tenant construc- tion on leased areas, construction compliance with airport requirements, and maintenance responsibilities, among others (FAA Airport Compliance Manual 2009). In particular, airports must be very clear regarding whether their tenants have an ownership interest in real property or simply the right to conduct a particular activity (Vanden Oever et al. 2011). The degree of leasehold ownership may influence the level of control the airport operator has over tenant operations and will affect GRF implementation.

Phase 1: Planning—Initiating an Airport GRF 19 Standard Approach. Under the standard approach, the airport operator directly leases and manages concessions space. The airport assumes all financial risks and benefits from a larger portion of nonaeronautical revenue (American Association of Airport Executives 2014). Stakeholder Impacts. Under the standard approach, concessionaires are bound to the terms set by the airport operator. To the airport operator, these terms should help maximize revenue generation and achieve self-sufficiency; however, concessionaires may view airport operator revenue maximization as a burden on their ability to provide the highest level of service as a result of decreased profit margins (American Association of Airport Executives 2014). GRF Applicability. An airport operator with the greatest level of control over concessions operations will likely have the best ability to implement GRF projects as they apply to non- aeronautical leaseholds. With direct oversight, airport operators can more easily engage with concessionaires and determine the best opportunities to improve leasehold efficiency. Development Company and Institutional Operator Approach. Airport operators with less concessions expertise can also contract management services out to a development company or retail experts. In this scenario, airport operators can reduce their risk by allocating the responsi- bility of managing some or all the concessions to a third-party operator. Stakeholder Impacts. The advantage of outsourcing concessions management from the standpoint of concessionaires is the benefit that experienced management brings to nonairline operations. Experienced concessions managers can centralize resources across multiple operations (American Association of Airport Executives 2014). From the standpoint of airport operators, however, this option reduces control over concessions leasehold space. GRF Applicability. Reduced airport operator oversight of concessions operations may limit the ability to implement GRF projects in nonairline leasehold areas. In scenarios where third-party operators are used to manage concessions operations, it may take longer to imple- ment GRF projects because of the indirect administrative structure of the concessions agree- ment. Third parties could be incentivized to prioritize GRF implementation to achieve alignment with airport goals. 3.2 Step 2: Select a GRF Model Early in the fund development process, outline a tentative basic structure and mission for the fund. GRFs have a variety of elements that can be adapted to the unique challenges, oppor- tunities, and priorities of each individual airport. There are no established rules for how a GRF must be structured, and new innovations are possible. Chapter 1 provides specific guidance and decision points for each component of a GRF. Fund design should be an iterative and interactive process. It is often helpful to begin with a concept proposal, which can serve as a point of discussion with stakeholders as the airport seeks their feedback. This may take the form of a document, presentation, or a few talking points. Engage key stakeholders with this proposal early and often, being sure to include facility and energy managers, sustainability directors, and staff in charge of operations and

20 Revolving Funds for Sustainability Projects at Airports finance. The goal of this initial round of discussions is to identify logistical, political, and finan- cial barriers to a GRF; develop a strategy for overcoming these barriers; lay the groundwork for building future support; and refine the proposed fund’s structure to capture opportunities at each individual airport. The following are two major decision points at this stage: 1. How will the fund be capitalized? 2. How will the fund be operated? The following subsections present a series of models for fund capitalization and subsequent operation. Models for fund capitalization and operations can be mixed and matched to meet an airport’s individual circumstances. 3.2.1 Initial GRF Capitalization Models There are two approaches for capitalizing a GRF, and the approach chosen will determine the types of funding sources that can be used. The endowment model approach to capitalization requires a pool of available upfront capital to start but can make efficiency investments imme- diately. The savings reclamation model involves waiting for funding from operational savings before sufficient resources can be made available for new projects. Endowment Model The first approach is a traditional endowment model, where an amount of funding is dedi- cated for the express purpose of capitalizing a GRF. The benefit of this approach is that the fund is immediately able to finance new projects. The drawback is that a suitable source of funding must be identified, typically one that does not need to be repaid and is compatible with a GRF (see Figure 5). Savings Reclamation Model The second approach, known as a savings reclamation model, starts with a project (already identified and either being implemented or soon to be implemented) that will result in opera- tional cost savings. The project owner then captures the resulting cost savings and uses those savings to capitalize the GRF. To the extent that such cost savings are related to expenses allo- cated to airline rates and charges as described in Section 3.1.5, the airport would capture only its share of cost savings for the GRF. Or, if the airport/airline use and lease agreement grants flexibility to maximize retained savings, an airport should seek airline consent to capture and retain 100% of the cost savings generated by a GRF. Depending on the airport/airline use and lease agreement and rate methodology, the airport should seek airline consent to capture 100% of cost savings for the GRF. The benefit of this model is that the funding used to implement the target project does not need to be earmarked for the GRF itself, because the resulting savings capitalize the GRF. For this approach to work, however, the GRF processes to capture and retain the savings must be in place, and all stakeholders must agree to use the operational savings in this manner. Fund capitalization is slower with this approach. The savings reclamation model can also be used with projects that generate new revenue (e.g., solar panel array), not just cost savings (see Figure 6).

Phase 1: Planning—Initiating an Airport GRF 21 A savings reclamation model is often easier to implement because it can indirectly leverage federal, state, and internal capital budget funds that might not be eligible for use as an endowment. 3.2.2 GRF Operation Models Once capitalized, there are various approaches for operating a GRF, ranging from relatively simple to complex. The best operational model is the one that aligns well with an airport’s resources and structure, meets the intended goal of the GRF, and achieves broad stakeholder buy-in. Four operational models can be used as starting points and are outlined as follows: Internal GRF Operation The internal GRF operational model is the simplest GRF structure. It works only in situations where both the funded projects and the resulting operational savings are all internal to the same organization that runs and manages the GRF. For example, an airport forms a GRF that invests Figure 5. GRF capitalization: endowment model.

22 Revolving Funds for Sustainability Projects at Airports only in airport (non-shared) facilities where the airport itself (not a lessee) is responsible for 100% of the operations and utility costs. In such a situation, the GRF “loan,” the operational savings, and the repayments are moved from one internal account to another. This eliminates the need for more complex and time-consuming legal and administrative functions (like the creation and execution of lending agreements) found in other models. The internal operational model consists of a GRF management team or committee that is typically made up of employees of the airport who either volunteer or are staffed part time on GRF operations. The GRF management team is responsible for identifying potential project ideas with input from airport departments, evaluating them, and approving them for fund- ing. After projects are approved, funding is released from an internal GRF budget account— likely structured similarly to a capital budget account—to fund the project. When the project is complete, operational savings (e.g., from a reduction in an airport’s utility budget expen- ditures) are used to repay the GRF, either through regular transfers of a predetermined AIP: Airport Improvement Program. PFC: Passenger facility charge. Figure 6. GRF capitalization: savings reclamation model.

Phase 1: Planning—Initiating an Airport GRF 23 amount or based on actual accrued savings. Once the GRF has been repaid, the transfers are discontinued and the process repeats. Please note that use of savings from operating budgets may require the annual or bi-annual approval of either legislators, airport commissions, or other governing bodies. The internal model is the simplest to implement, because it requires only internal stakeholder approval and minimal legal and administrative overhead (see Figure 7). The drawback of the internal model is that GRF investments are restricted to those that do not involve an external third party. External GRF Operation The external GRF operational model is designed to invest in projects outside the airport organization itself. For example, an external GRF might target sustainability projects in air- line owned and operated assets. In an external GRF model, project ideas must be sourced from outside of the GRF itself, often through an application process. Funds are also lent to an external airport third party and repayment is more formal and structured than in an internal model. This requires additional investment in processes, forms, agreements, and performance tracking, but it allows the GRF to invest in a broader variety of projects than those available internally (see Figure 8). The external operational model consists of a GRF management team or committee that is typically made up of employees of the airport who either volunteer or are staffed part time on GRF operations. The GRF management team is responsible for promoting and raising Figure 7. Airport GRF internal operation.

24 Revolving Funds for Sustainability Projects at Airports awareness of the GRF among external airport parties and sourcing potential project ideas from external parties, often through an application submission and review process. The management team then evaluates and approves project applications. After approval, the GRF and the external party typically enter into some form of lending agreement that defines the project, the imple- mentation schedule, and the terms of the loan including repayment and default procedures. Once the agreement is in place, funding is released from an internal GRF account to the external party pursuant to the terms of the agreement. After the project is complete, the GRF sends bills to and processes payments from the external party until the loan is repaid. Hybrid Internal External GRF Operation The hybrid GRF operational model combines the internal and external models, sourcing project ideas from both groups and implementing processes to approve, lend, and receive repayments from both (see Figure 9). It is not uncommon for a GRF to start as an internally focused fund and add external invest- ment capability as the fund matures and grows in size and sophistication. That evolution may be well suited to airports that begin with a focus exclusively on airport operated spaces and then expand the GRF to cover tenant areas after gaining experience with the approach. Figure 8. Airport GRF external operation.

Phase 1: Planning—Initiating an Airport GRF 25 Rate-Base Recovery GRF Operation A rate-base recovery GRF model is a specialized form of an external GRF operations model that uses the existing airport lease rate-setting process as the mechanism for repayment. A rate- base recovery model functions in a similar manner to the external model in all respects except, instead of using a separate lending agreement and processing external repayments, the lease outlines the provisions for accessing GRF funding and for the subsequent rate adjustments to cover recapitalization of the fund. Under this option, leases are adjusted based on the utility cost savings, and airports incentivize tenants’ efficiency actions (see Figure 10). The rate-base recovery model could be combined with an internal model to produce a hybrid internal/external fund. 3.2.3 Regulatory and Other Factors to Consider If an airport is federally obligated, federal law requires that airport revenue be used for airport-related purposes. Revenue use restriction regarding FAA funding will apply to any of Figure 9. Airport GRF hybrid operation.

26 Revolving Funds for Sustainability Projects at Airports the operational models outlined. (See the FAQ in Appendix A for additional information on revenue use limitations within the GRF context). 3.3 Step 3: Assess Investment Potential To implement a successful GRF, it is important to first assess the investment potential at each airport. This can be done by in-house facilities staff who may already have a list of potential projects, or by hiring a contractor to perform an energy audit. Planning and assessing potential projects will help create a pipeline of projects the GRF can finance during the first few investment cycles, including estimates of the costs and savings associated with each, and a forecast of how the portfolio of projects will perform. Forecasting the fund’s expected performance over the first few years—including metrics like total savings, annual ROI, average payback period, and net present value (NPV)—is also helpful for building buy-in and tailoring the airport funding model to maximize performance. Figure 10. Airport GRF rate-base recovery operation.

Phase 1: Planning—Initiating an Airport GRF 27 Forecasting can be done using custom-made spreadsheets or specialized GRF tracking tools, which can also be used for tracking once the fund is launched (see Appendix D for more infor- mation). Investment cycles can be designated for any span of time; however, it is common to use 1 year. 3.4 Step 4: Engage Stakeholders and Build Buy-In Identifying Stakeholders A key component of developing a successful GRF is thorough stakeholder engagement. First, determine the essential stakeholders and decision-makers whose support will be required to establish and sustain a GRF. Second, consider those stakeholders’ responsibilities at the airport, the performance metrics on which they are evaluated, and how a GRF can be leveraged to help them meet their goals. Mobilizing Stakeholders Engage identified stakeholders to refine the GRF proposal so that it is in line with the needs and goals of all parties. A written proposal— building from the concept proposal in Step 2—can be a helpful tool during this process. This document can facilitate discussion and debate as the GRF concept moves forward, and in many cases, it can evolve into the fund charter once the proposal is approved. Building buy-in and a sense of collective ownership should be a continuous process that occurs along with all the other steps; however, it is particularly impor- tant in the early stages to streamline the fund’s development and ensure that stakeholder inconvenience is minimized and that all parties are invited to the table. 3.4.1 Airline Partnership Considerations Prior to launching a GRF, develop the financial framework for the treatment of investments to be funded by the GRF and the treatment of expense savings associated with those projects. The traditional airport-airline relationship defined in airport/airline use and lease agreements focuses on the recovery of allocated costs (operating and capital) and may create barriers to the implementation of a GRF. For example, with utility conservation projects, split incentives can result when the airlines, as the party that pays the resource bills—and thus realizes the benefits of efficiency upgrades—are not the owners of the building. Airports can maximize the probability of GRF success by following the suggestions in this section. Understanding Split Incentives With split incentives, the tenant that pays the bills often will not want to invest in permanent improvements to a property it does not own, and the owner does not want to invest in improve- ments that only or primarily benefit the tenant. This same dynamic often pertains to airport Should the Word “Green” Be Used to Describe Revolving Funds? In some locations, the term “green” carries negative connotations. Imple­ menters should consider whether the full name “green revolving fund” will present a barrier at their airport. While GRFs are more widely recognized by including green in their titles, an accept­ able solution to addressing strong opposition to environmentally influenced decisions is to focus on the revolving and infrastructure qualities. An airport could adopt the alternative terms infra­ structure revolving fund (IRF) or reclaimed savings for infrastructure (RSI) if the alternative name enables the new effort to be viable.

28 Revolving Funds for Sustainability Projects at Airports facilities. In some cases, an airport’s ability to recover the capital investment costs funded by the GRF may be limited or may not match the time horizon needed to replenish the GRF. Further, even if an airport can amortize the capital costs in terminal rentals to generate a recovery, the utility savings will likely be passed on to the terminal tenants rather than shared with the airport. Split incentives create structural challenges to achieving the highest levels of energy efficiency. In other cases, a partial split incentives situation exists in which an airline and airport share operational costs. This situation can complicate GRF investment if there is no agreement amongst parties regarding how savings will be used to repay the fund. Agreements need to be in place before GRF projects are pursued. Overcoming Split Incentives Through Mutual Investment Overcoming split incentives requires a mutually agreed upon approach to handling GRF investment and revolving savings to the fund. This requires negotiation between the airport and the airlines and possible amendments to lease agreements to reflect the allocation and distribu- tion of energy savings. For example, consumption performance targets can be pre-established based on historical metering or modeling data. Achieving efficiency gains above the identified level specified in the rate base can generate additional revenue split between the GRF and direct reimbursement to airlines. The following are a few revolving fund savings structures that airport and airlines could consider: • 100% of operational savings reinvested. This structure is the most favorable for maximizing GRF growth and scale of investments; however, it may be the least appealing to carriers. • 100% of savings reinvested until project reaches an agreed upon payback status. If all the revenue can be redirected to the GRF for the payback, the fund will maintain healthy recapi- talization. After full payback is reached the airport and airlines can shift to a previously pre- negotiated acceptable ratio split for projects that continue to generate savings. • Portion of savings covers the airport’s administrative investment first. The administrative investment refers to the total value of employee labor hours that an airport dedicates to GRF planning, implementation, and continuous management. Airlines could equip airports to provide ongoing support to maintain the GRF with an acceptable portion of savings revenue (e.g., 10% of the total). After the administrative fees have been covered, the airport could split revenue at a mutually pre-established ratio with the airlines. • Rate-base recovery model. Under this structure, airports can adjust lease agreements with airlines and other major tenants to reflect the operational savings achieved through efficiency. Consumption performance targets can be pre-established based on historical metering or modeling data. Achieving efficiency gains above the identified level specified in the rate base can generate additional revenue split between the GRF and direct reimbursement to airlines. 3.4.2 Obtaining Airline Consent Airlines may have limited familiarity with GRFs. Airports should anticipate that their airline partners will benefit from learning how the revolving fund functions and how to realize mutual benefits.

Phase 1: Planning—Initiating an Airport GRF 29 Airlines May Be Reluctant Initially Because the majority of airline agreements require operational cost savings to be shared, securing airline buy-in is crucial for GRFs to work at airports. Clear communications with the airline contract and legal departments can help them recognize the strategic benefits that can be accomplished through a GRF. However, obtaining airline consent for this type of project can be challenging. Given the tight margins and high level of competition between carriers, airlines may be hesitant to implement anything that may impact financial performance. Airlines, and their trade associations, may also be hesitant to establish precedent where conventional shared savings approaches are disrupted. Potential Collaboration Solutions The following are six suggestions for an airport to generate consent from its airlines. 1. Go to the largest airline first. If the airport can get the leading carrier to agree to a GRF, its acceptance can influence the other airlines to follow suit. Airlines with the largest vulner- ability to energy prices and power supply disruption will be quicker to appreciate infrastruc- ture investments that can improve airport resilience and decrease the impact of escalating electricity prices. After securing initial interest from the largest carrier, an airport could host a GRF informational meeting with all the airlines and co-present the concept. 2. Combine GRFs with broader sustainability goals. Presenting the GRF as a solution to a mutual challenge will likely be better received than proposing it as an independent initiative. 3. Introduce the concept as a revolving fund partnership. Frame the conversation as an opportunity to collaborate to accelerate project implementation and advance sustainability. Early discussion can focus on the overall GRF system as a novel revenue source for projects that might not be implemented otherwise. 4. Recruit airline representatives who have environmental responsibilities. Because airline representatives from real property and legal offices may have a narrow focus on bottom line performance, it is suggested that communication start with the environmental affairs rep- resentatives. The environmental team can present the GRF plan to senior leadership, which could include strategy and public relations executives. Airline senior leaders may see benefits that the more financially focused lines of business overlook. 5. Calculate and share the GHG benefits. Airlines are acutely aware that there is a growing interest in reducing carbon emissions from every source. Recent Intergovernmental Panel on Climate Change (IPCC) scientific summary findings strongly urge all sectors to reduce GHG emissions rapidly to reduce long-term warming levels below 1.5 C. Many U.S. states and cities have independently acted to remain in the Paris Agreement via either the America’s Pledge program or We’re Still In Coalition. Aviation is one of the only industries that does not have targets to reduce total emissions before 2030. Airlines may be hesitant to adopt more ambitious GHG reduction goals, because their operations are already efficient relative to other sectors, and razor thin profit margins generate minimal funding for additional CO2 abatement. Their reductions have been estimated to cost as much as $200/metric ton of CO2 (Energy Transitions Commission 2018). Many GRF actions are already cost-effective with- out the value of carbon. Airports can offer the GRF as a way for airlines to reduce in-sector emissions at a fraction of the cost they would be via other methods. Airports can recognize

30 Revolving Funds for Sustainability Projects at Airports airlines for their carbon reduction partnerships if the carriers choose to support emissions reductions achieved through GRFs. 6. Pursue additional sustainability co-benefits. If climate benefits are not compelling enough by themselves, airports can present additional benefits from GRF projects to airlines. One chief benefit of GRF-related projects is increasing airport resilience. When airports reduce their electricity or liquid fuel demand, fewer alternative energy sources—such as renewables and battery storage—are needed to cover an airport’s remaining energy needs. GRFs could directly fund the systems that are less susceptible to outages, such as fuel cells and improved power grid supply. GRFs may also be able to directly fund microgrid projects that can yield revenue sources, such as transactive capabilities to participate in demand response and time- of-use programs. Other GRF projects may directly or indirectly reduce air quality emissions, water consumption, and waste material.

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Airports continually balance demands to improve infrastructure within the realities of available budgets. Green revolving funds (GRFs) offer an alternative approach for investing in projects that generate operational savings. These funds work by tracking verified cost reductions from implemented actions, and then transferring those savings to a reserve that provides capital for future qualified projects such as energy system upgrades.

A number of universities have managed GRFs for over a decade. Municipalities are starting to adopt them as well. ACRP Research Report 203: Revolving Funds for Sustainability Projects at Airports includes several non-airport-related case examples that have managed GRFs and two airport-related case examples. Airports require a modified GRF approach because of financial structures, Federal Aviation Administration (FAA) regulatory requirements, airline agreements, and the wide range of tenant roles.

This ACRP report provides guidance to determine whether this innovative funding approach is suitable for a particular airport and instructions on how to deploy it. Airports that have the ability and determination to launch a GRF will gain a robust method for advancing their sustainability goals.

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