Transportation Network Companies (TNCs): Impacts to Airport Revenues and Operations—Reference Guide (2020)

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25 A second key component of the research effort focused on examining how TNCs are affecting airport revenue and rental car transactions. This Reference Guide presents analyses, tables, and exhibits mainly for large-hub airports. Key findings include the following: • The use of TNCs has reduced the use of taxis and limos in most markets, and the associated revenue from these operators has diminished. Less clear is the impact on revenue from park- ing and rental cars. • Airport and survey data clearly indicate TNCs substitute for private vehicle trips; therefore, they are contributing per trip fees and revenues that didn’t previously exist at most airports. • The impact of TNC activity is not a separate rating category for the bond-rating agencies. Rather, it is a consideration related to the more general analysis of airport revenues. However, the data do not show a significant decline in the broad category of ground transportation revenue, and certainly not in any way that would jeopardize the ability of airports to generate sufficient debt service coverage. • While there are concerns regarding TNC impact on the revenue used to support airport oper- ations and the financing of airport capital programs, most airport operators have developed strategies to manage revenues. Longer-term questions will likely focus on the appropriate types of facilities to build, and less on the ability to generate annual revenues. • Absolute ground transportation revenue (overall and for the primary subcategories of parking and rental cars) has generally continued to increase during the rapid increase of TNC activity at airports. • Ground transportation revenue per passenger (calculated using either total enplaned passen- gers or origin and destination [O&D] enplaned passengers) has been flat. – Ground transportation fees: A key discussion item for airport operators is the “level play- ing field.” Of all the various commercial ground transportation operators at airports, who should pay what fees? Airports have long-standing fiscal policies and business practices underlying the establishment of ground transportation fees. At some airports, social equity considerations and living wage goals now complicate the development of fee structures. – Financing airport facilities: This review has not shown any significant negative impact on near-term ability to finance airport facilities. Airports have generated replacement ground transportation revenue sources, and airport operators have been generally successful in developing the revenue necessary to support capital programs. 4.1 Survey Data The airport survey conducted as part of the research generated information regarding the impact of TNC activity on airport ground transportation revenue sources. The survey solicited responses from 100 of the largest U.S. airports, and received responses from 58: 22 large hubs, S E C T I O N 4 Impacts on Airport Revenues

26 Transportation Network Companies (TNCs): Impacts to Airport Revenues and Operations—Reference Guide 15 medium hubs, and 21 small hubs. The survey data are particularly useful in providing a recent view (as of summer 2018) of the impact of TNCs on ground transportation revenues. 4.1.1 Parking Revenue Table 4-1 presents data on the recent change in parking revenue at the surveyed airports. As shown, almost half of the large-hub airports reported a recent decrease in parking revenue; a smaller share of medium-hub and small-hub airports reported decreases. This is not surprising given that TNCs are more concentrated in the large metropolitan areas served by large-hub airports. 4.1.2 Rental Car Revenue Table 4-2 presents data from the survey on the recent change in rental car revenue at the sur- veyed airports. For all sizes of airports, less than half of the airports reported a decrease in rental car revenue. The results for the reported decrease in revenue are somewhat more uniform across airport size than the reported change in parking revenue (when compared with Table 4-1). 4.1.3 Taxi/Limo/Shared-Ride Van Revenue The survey asked the airport operators to indicate changes in revenue from other commercial ground transportation operators: taxis, limos, and shared-ride vans. These operators are argu- ably the most direct competitors with TNCs for the “single ride” to or from the airport, and they showed some significant shares of decrease in revenue. Table 4-3 presents data from the survey on the recent change in taxi, limo, and shared-ride van revenue. PARKING REVENUE LARGE MEDIUM SMALL Decrease 45% 31% 27% No Change 18% 23% 7% Increase 36% 46% 40% Unknown 0% 0% 27% NOTE: The percentage values represent the share of the surveyed airports that reported responses in each category. SOURCE: ACRP Project 01-35: Airport Survey, July 2018, RSG. Table 4-1. Recent change in parking revenue by hub size. RENTAL CAR REVENUE LARGE MEDIUM SMALL Decrease 36% 38% 27% No Change 9% 23% 20% Increase 23% 38% 33% Unknown 32% 0% 20% NOTE: The percentage values represent the share of the number of surveyed airports that reported responses in each category. SOURCE: ACRP Project 01-35: Airport Survey, July 2018, RSG. Table 4-2. Recent change in rental car revenue by hub size.

Impacts on Airport Revenues 27 As shown, for all sizes of airports—large hub, medium hub, and small hub—a significant share report a decrease in taxi revenue. This is expected as TNCs represent the most direct substitution for taxi services. For large-hub airports, a significant share reported a decrease in revenue for other related services: limos and shared-ride vans. The trend is not so obvious for medium- and small- hub airports. However, a large percentage in these two size categories reports that changes are unknown or not applicable. In many cases, this could be because some smaller airports do not offer these services, but it could also be that revenues are not recorded or tracked in a manner that makes it possible to answer the survey questions. 4.2 FAA Revenue Data U.S. commercial service airports are required to file annual financial reports with the FAA in accordance with the FAA Authorization Act of 1994. To meet this requirement, the FAA created CATS to gather and disseminate congressionally mandated airport financial information. Airport personnel use the system to file and amend annual financial reports. FAA staff use the system to administer the Airport Financial Reporting Program. The public can view the resulting financial reports of commercial service airports, as was done for this study.39 TAXI/LIMO/SHARED-RIDE VAN REVENUE LARGE MEDIUM SMALL Decrease Taxi 68% 77% 80% Limo 82% 38% 20% Shared-Ride Van 64% 31% 13% No Change Taxi 9% 8% 7% Limo 5% 31% 33% Shared-Ride Van 18% 23% 33% Increase Taxi 9% 8% 7% Limo 5% 15% 7% Shared-Ride Van 5% 8% 0% Unknown/Not Applicable Taxi 14% 8% 7% Limo 9% 16% 40% Shared-Ride Van 14% 39% 53% NOTE: The percentage values represent the share of the surveyed airports that reported responses in each category. SOURCE: ACRP Project 01-35: Airport Survey, July 2018, RSG. Table 4-3. Recent change in taxi/limo/shared-ride van revenue by hub size. 39 FAA CATS data analyzed in this section encompasses 3 years: 2015–2017. The research panel requested that an additional full year of data be included in the Reference Guide; Appendix C presents an additional year of CATS data for 2018. The additional data do not alter the findings or conclusions presented in Section 4.

28 Transportation Network Companies (TNCs): Impacts to Airport Revenues and Operations—Reference Guide 4.2.1 Parking Revenue The FAA CATS database combines parking revenue with revenue from other ground trans- portation services (taxi, limo, shuttle, TNC), making it difficult to isolate the impact of TNC activity on parking revenue using only this database. Therefore, this section presents FAA CATS data for parking in addition to other ground transportation revenue, as well as presents a method to estimate the portion of TNC revenue and to net out TNC revenue from this FAA category. Parking Revenue in FAA Certification Activity Tracking System Database Table 4-4 shows the parking and other ground transportation revenue reported in the FAA CATS database. As shown, total parking plus other ground transportation revenue increased from 2015 to 2017. Revenue per passenger also increased, both per enplaned passenger and per O&D enplaned passenger, although only slightly. Adjusted Parking Revenue: Large-Hub Airports Table 4-5 shows an adjusted estimate of parking and other ground transportation revenue for large-hub airports, which was derived from taking the base FAA CATS data and netting out the estimated TNC revenue. As shown using the survey data on average TNC revenue by airport, total TNC revenue at the 30 large-hub airports increased from approximately $55 million in 2015 to approximately $298 million in 2017. Adjusting the FAA CATS data for this estimated TNC revenue, total net parking and other ground transportation revenue is estimated to have increased slightly from $2.3 billion in 2015 to $2.4 billion in 2017. This result is consistent with the airport survey data. According to the airport survey, 45 percent of large-hub airports reported a decrease in parking revenue, and the remainder reported an increase or no change. Thus, on average, the parking revenue for large-hub airports would be expected to be unchanged. Per enplaned passenger and per O&D enplaned passenger, this adjusted revenue shows a decrease from 2015 to 2017. 2015 2016 2017 PERCENT CHANGE Parking + Other GT Revenue Large Hub $2,386,372,169 $2,562,516,069 $2,705,601,697 13 Medium Hub $780,390,615 $826,650,273 $871,279,530 12 Small Hub $470,834,728 $497,760,958 $523,083,319 11 Total $3,637,597,512 $3,886,927,300 $4,099,964,546 13 Revenue per Enplaned Passenger $4.67 $4.77 $4.88 Revenue per O&D Enplaned Passenger $6.67 $6.69 $6.74 NOTES: Revenue per Enplaned Passenger is calculated by dividing the total revenue in each airport size category by the total passengers in the same airport size category. Revenue does not include rental car revenue, which is reported in a separate category in the FAA CATS database. GT—ground transportation O&D—origin and destination SOURCE: FAA, Certification Activity Tracking System, 2018 (parking, taxi, limo, and TNC revenue). Table 4-4. Parking and other ground transportation revenue (USD).

Impacts on Airport Revenues 29 As shown in Table 4-5, after netting out the estimated TNC revenue, the adjusted FAA CATS data represented about 89 percent of the base (original) data in 2017, compared with 98 percent in 2015. This indicates the estimated TNC revenue at large-hub airports increased from approximately 2 percent to approximately 11 percent in this FAA CATS revenue category from 2015 to 2017. 4.2.2 Rental Car Revenue The FAA CATS database reports rental car revenue at U.S. airports. This includes the concession revenue rental car companies pay to airport operators, but not the customer facility charge (CFC) revenue that supports the operation of rental car facilities and associated capital improvements. CFC revenue is dedicated to supporting the operation and develop- ment costs of rental car facilities, and, in most cases, it is not considered part of the general revenues airports collect. For most airports, rental car agreements provide for the payment of monthly concession revenues. The concession revenues are typically a combination of mini- mum annual guarantees (against a percentage of gross revenues earned from car rentals) plus space rentals (e.g., ready-return areas and counters). Table 4-6 shows the reported total rental car revenue from 2015 to 2017 for large-, medium-, and small-hub airports. As shown, total rental car revenue has increased slightly for the total population of 137 reporting airports. While the total amount of revenue has increased, per passenger revenue is flat or declining. This is consistent with the airport survey data, which indicated about one-third of sur- veyed airports reported a decrease in rental car revenue. Or, on balance, more airports continued to experience an increase in rental car revenue since the introduction of TNC operations. On average, rental car revenue increased approximately 6 percent from 2015 to 2017. Results vary for the different airport sizes—large, medium, and small. The variances are not as much related to any distinction associated with airport size as they are to the differences in results for individual airports. 2015 2016 2017 Average TNC Revenue per Airport (USD) $1,837,214 $7,318,989 $9,940,561 Reporting Airports 30 30 30 Estimated TNC Revenue—Large Hubs (USD) $55,116,420 $219,569,670 $298,216,830 Parking + Other GT Revenue Net of TNC Revenue (USD) $2,331,255,749 $2,342,946,399 $2,407,384,867 % of Base Data 98% 91% 89% Revenue per Enplaned Passenger (USD) $3.97 $3.80 $3.82 Revenue per O&D Enplaned Passenger (USD) $6.24 $5.85 $5.75 NOTES: Revenue per Enplaned Passenger is calculated by dividing the total revenue in each airport size category by the total passengers in the same airport size category. GT—ground transportation O&D—origin and destination TNC—transportation network company SOURCES: FAA, Certification Activity Tracking System, 2018. ACRP Project 01-35: Airport Survey, July 2018, RSG. Ricondo & Associates, Inc., October 2018 (analysis). Table 4-5. Parking and other ground transportation revenue net of estimated transportation network company revenue—large-hub airports.

30 Transportation Network Companies (TNCs): Impacts to Airport Revenues and Operations—Reference Guide 4.2.3 Longer-Term Trends In addition to examining the most recent data for 2015 to 2017, ACRP 01-35 research included an evaluation of longer-term trends in ground transportation revenue, as reported in the FAA CATS database. The project was also informed by the survey on TNC activity and revenue generation. This analysis is intended to determine the longer-term change in trends for ground transpor- tation revenue at airports. Also, by extension, it is intended to determine the impact of TNCs using a longer-term historical perspective. It is useful to compare the most recent data with the longer-term trend in revenue generation from commercial vehicle operations at airports. Exhibit 4-1 shows the longer-term trend in ground transportation revenue per enplaned passenger for U.S. airports, including the estimated share represented by TNC operations. As shown, total ground transportation revenue per enplaned passenger increased steadily from 2009 to 2017. Beginning in 2015, TNC revenue has represented an increasing share of the total ground transportation revenue per enplaned passenger at U.S. airports. This generally confirms two themes related to the impact of TNC activity on airport revenue: (1) revenue per 2015 2016 2017 Large Hub $1,036,838,192 $1,074,242,281 $1,105,744,232 Medium Hub $351,951,509 $356,115,463 $361,959,858 Small Hub $254,840,674 $258,595,960 $274,586,417 All/Average $1,643,630,375 $1,688,953,704 $1,742,290,507 Revenue per Enplaned Passenger $2.11 $2.07 $2.07 Revenue per Originating Passenger $3.01 $2.91 $2.86 NOTES: Revenue per Enplaned Passenger is calculated by dividing the total revenue in each airport size category by the total passengers in the same airport size category. Includes concession fees and other rents; does not include CFC revenue. SOURCE: FAA, Certification Activity Tracking System, 2018. Table 4-6. Rental car revenue (USD). $5.00 $5.50 $6.00 $6.50 $7.00 2009 2010 2011 2012 2013 2014 2015 2016 2017 GT Revenue ex-TNC TNC NOTES: GT—ground transportation TNC—transportation network company SOURCES: FAA, Certification Activity Tracking System, 2018; ACRP Project 01-35: Airport Survey, July 2018, RSG. Exhibit 4-1. Total ground transportation revenue per enplaned passenger (USD).

Impacts on Airport Revenues 31 passenger has decreased for traditional airport commercial ground transportation sources, and (2) new and incremental TNC revenues have provided a replacement source of revenue for airports. The values shown in Exhibit 4-1 are in nominal dollar terms. Given the long-term perspective of this information, it is useful to consider the impact of inflation on the trend and conclusions. The compound annual growth rate for nominal dollar revenue per enplaned passenger from 2009 to 2017, as shown in Exhibit 4-1, is 1.0 percent. Over this period, the average price infla- tion value was approximately 1.5 percent per year, depending on the specific measure or index used for reference. It can therefore be concluded that the average revenue per passenger, while increasing on a nominal basis, did not keep pace with inflation and declined somewhat on a “real dollar” basis. 4.3 Public Airport Data Publicly available data from a selected group of 37 airports were compared with the results from the airport survey and the FAA CATS database. The public airport data have differences from other data sources: • The data are publicly available, with no issues regarding confidentiality or publication. • The data are generally more detailed and quantitative than the airport survey data in annual figures related to ground transportation revenues. • The data frequently offer more line-item detail compared with the FAA CATS data (e.g., sepa- rating more individual categories of ground transportation operator revenue). • There is not a 100 percent sample of airports. Generally, coverage is better for large-hub airports than for medium- and small-hub airports. This is partly because large-hub airports issue revenue bonds more frequently and, therefore, produce disclosure documents more frequently. Thus, trade-offs are inherent in this data source. There can be insights from more detailed information, but the sample is not as complete as a sample of all airports. A total of 37 airports were found to have public data both recent and relevant to this analysis: • Large hubs: 19 airports. • Medium hubs: 8 airports. • Small hubs: 10 airports. The following presents data from the publicly available sources previously described on ground transportation revenues at large-hub U.S. airports. In contrast to the FAA CATS data presented earlier, the data in this section provide more information on the individual sources of ground transportation revenues, specifically TNCs. Table 4-7 summarizes the data from 19 large-hub airports, which represent a sample of about 63 percent of the large-hub airports in the United States. In contrast to the consolidated FAA CATS data, this summary provides further insight into more specific categories of ground transportation revenue: parking, rental cars, other (taxis/limos/vans), and TNCs. Overall, total ground transportation revenue per airport increased from 2015 to 2017. The most significant change was the increase in average TNC revenue. The data on revenue per passenger are consistent with the data reported in the FAA CATS database: a slight increase in revenue per enplaned passenger and a slight decrease in revenue per O&D enplaned passenger. This is explained by O&D enplaned passengers increasing faster than total enplaned passengers at large-hub airports from 2015 to 2017.

32 Transportation Network Companies (TNCs): Impacts to Airport Revenues and Operations—Reference Guide This data source includes two revenue categories that provide more detail compared with the FAA CATS data source: • Other ground transportation revenue: This includes taxis, limos, shuttles, and vans. This category does not include TNCs, which have been reported separately. The data show a pronounced reduction in revenue from this category, consistent with the premise that TNCs have taken significant mode share from taxis and limos. • TNCs: This refers to the revenue from TNCs. Many airports now report TNC revenue as a separate line-item category in their financial statements. For some airports, other informa- tion (e.g., TNC market share) was used to estimate this category of revenue. The data show a significant increase in TNC revenue. From a review of the airport financial statements and the bond official statements, it appears that in some cases TNC revenue is not completely reported. If there is some underreporting in public documents, then this would help explain the difference between the airport survey data and the TNC revenue shown in Table 4-7. Table 4-8 compares the annual TNC revenue from the airport survey with the summary of public financial statements for large-hub airports. The results are broadly similar in the trend of increase from 2015 to 2017, but they are not precisely identical in values. Variances can be explained by differences in reporting and sampling practices. 2015 2016 2017 Parking (millions) $73.2 $77.2 $78.9 Rental Cars (millions) $35.9 $36.9 $37.8 Other (millions) $7.2 $7.0 $6.1 TNCs (millions) $1.0 $4.1 $7.8 All/Average (millions) $117.3 $125.2 $130.6 Revenue per Enplaned Passenger $5.58 $5.66 $5.75 Revenue per O&D Enplaned Passenger $9.16 $9.09 $9.05 NOTES: “Other” includes taxis, limos, shuttles, and vans; it does not include TNCs. O&D—origin and destination TNC—transportation network company SOURCE: Ricondo & Associates, Inc. compilation of airport financial statements and bond official statements from various dates. Table 4-7. Ground transportation revenue per airport—large hubs (USD). AVERAGE TNC REVENUE 2015 2016 2017 Airport Survey $1.8 $7.3 $9.9 Public Airport Reports $1.0 $4.1 $7.8 NOTE: The airport survey results are for 22 large-hub airports, and the public financial data are for 19 large-hub airports. SOURCES: ACRP Project 01-35: Airport Survey, July 2018, RSG. Ricondo & Associates, Inc., analysis of public airport records. Table 4-8. Comparison of estimated transportation network company revenue by airport—large hubs (USD, millions).

Impacts on Airport Revenues 33 This source of additional airport data reinforces the general conclusions and results reported from the other sources, particularly regarding the significant increase in TNC revenues at large-hub airports from 2015 to 2017. The data collected from large-hub airports were also used to analyze trends in revenue per passenger. Table 4-9 presents data on ground transportation revenue per enplaned passenger for large-hub airports, using data as reported in the various public documents. Overall, the trends in revenue per enplaned passenger are broadly similar to the trends reported using the FAA CATS data. The most significant data item is the TNC revenue per passenger. TNC revenue per enplaned passenger and TNC revenue per O&D enplaned pas- senger increased significantly from 2015 to 2017. This has offset per passenger revenue declines in other ground transportation categories. The change in rental car revenue at airports is not necessarily directly related to the development of TNCs. Airports have concession agreements with rental car companies that often provide for increases in minimum annual guarantees or other revenue terms. In addition, other companies, such as peer-to-peer carsharing companies, have an impact on the airport car rental business. 4.4 Proprietary Airport Data Several large-hub airports provided detailed monthly transaction and revenue data for five distinct modes of airport access: • On-airport parking. • Rental cars. 2015 2016 2017 Revenue per Enplaned Passenger Parking $3.48 $3.49 $3.48 Rental Cars $1.71 $1.67 $1.66 Other $0.34 $0.32 $0.27 TNC $0.05 $0.19 $0.34 Total/Average $5.58 $5.66 $5.75 Revenue per O&D Enplaned Passenger Parking $5.72 $5.60 $5.47 Rental Cars $2.80 $2.68 $2.62 Other $0.56 $0.51 $0.42 TNC $0.08 $0.30 $0.54 Total/Average $9.16 $9.09 $9.05 NOTES: Other includes taxis, limos, shuttles, and vans; it does not include TNCs. The airport survey results are for 22 large-hub airports, and the public financial data are for 19 large-hub airports. O&D—origin and destination TNC—transportation network company SOURCE: Ricondo & Associates, Inc., analysis of airport financial statements and bond official statements. Table 4-9. Revenue per enplaned passenger—large hubs (USD).

34 Transportation Network Companies (TNCs): Impacts to Airport Revenues and Operations—Reference Guide • Taxis. • Limos. • TNCs. For these five modes, Ricondo compiled detailed revenue and transaction data that were then used to analyze airport access mode share, as well as ground transportation activity and revenues on a per passenger basis. Exhibit 4-2 shows the change in ground transportation revenue per O&D enplaned passenger from 2015 to 2017, with a breakdown of the drivers of change for each ground transportation mode included in the analysis. TNCs drove an increase in revenue per O&D enplaned passenger, which was offset by decreases for each other modes Overall, revenue per O&D enplaned pas- senger was virtually unchanged during this 2-year period. Proprietary data provided by several large-hub airports were consolidated and used to develop the information shown in Exhibit 4-2. The revenues in different categories of commercial ground transportation operations were summarized for each airport providing data. Separately, information was accessed regarding the annual number of O&D enplaned passengers at each airport. The revenue values were divided by the O&D enplaned passenger values to develop the analysis of changes in revenue per O&D enplaned passenger from 2015 to 2017. 4.5 Funding Airport Operations and Capital Programs Airports continue to have significant capital funding needs, and many large-hub airports have multibillion-dollar capital programs. With the debt required to fund the construction and oper- ating expenses that support expanded facilities, there is a need to generate adequate and reliable NOTES: O&D—origin and destination TNC—transportation network company SOURCE: Ricondo & Associates, Inc., analysis of select airports, analysis of proprietary data provided by select large-hub airports, February 2019. Exhibit 4-2. Change in revenue per origin and destination enplaned passenger, 2015–2017 (USD).

Impacts on Airport Revenues 35 revenue. The general trend in average airline cost per enplaned passenger is a gradual increase, as airports incur these costs to invest in their facilities. Airport operators have an interest in increas- ing nonaeronautical revenues, including ground transportation revenues, to mitigate required increases to airline rates and charges. Revenues from airport operations are used to fund both ongoing airport operating costs and investment in capital improvements. The development of TNC operations, the resulting changes in commercial ground transportation mode share, and the potential impacts on key sources of airport revenue, such as parking and rental cars, have raised issues regarding the generation of airport revenue to support both ongoing airport operations and long-term capital program financing. If nonaeronautical revenue decreases at an airport, then there would be a correspond- ing requirement to increase revenue from another source. Bond-rating agencies have recognized the uncertainties regarding changes in ground trans- portation mode share and the impacts on revenue, but at the same time airport operators have developed strategies to either enhance existing nonairline revenue or develop replacement revenue. Thus, the increasing use of TNCs has not yet emerged as a major credit risk according to the various bond-rating reports. However, while airports continue to generate sufficient revenues, in the longer term there may be more significant questions regarding the advisability of financing purpose-specific ground transportation facilities, such as parking garages and rental car facilities. 4.5.1 Airport Revenue Generation Airport operators have different governance structures and business models; however, gen- erally, (1) they are required to generate sufficient revenue to pay annual operating and capital expenses, and (2) they must use all airport revenue for lawful airport purposes. Note that while there are exceptions, for this evaluation, it is reasonable to consider the most typical airport experience. Categories of Airport Revenue Airport revenues are typically divided into two main categories: 1. Aeronautical revenues. 2. Nonaeronautical revenues.40 On average, for 2015, 2016, and 2017, the roughly $20 billion in annual airport revenues was split approximately 50 percent between aeronautical and nonaeronautical revenues. Parking and rental car revenue account for most of the nonaeronautical revenue category. The revenue impact of TNCs requires an understanding of airport business arrangements. Airport Business Arrangements with Nonairline Businesses Airport operators use a variety of methods to contract with nonairline businesses. In some cases, there are service agreements with permit fees, per use fees, or both. In other cases, arrangements are more complicated, with minimum revenue guarantees and fees based on percentage of earned gross revenue. 40 Nonaeronautical revenues, such as the revenues generated from parking and rental cars, are key to the development of airport financial plans. U.S. airports, as a rule, must generate their own revenue; they are not allowed to send revenue off the airport. Therefore, the amount of revenue generated from nonairline sources, such as parking and rental cars (and other ground transportation sources), has a direct impact on the amount of revenue individual airports must charge airlines.

36 Transportation Network Companies (TNCs): Impacts to Airport Revenues and Operations—Reference Guide Most airports generate a significant amount of nonairline revenue from in-terminal conces- sionaires, such as retail and food and beverage companies. These companies will continue to provide a significant source of revenue to airports. With the rapid growth in TNCs, airport operators have been revisiting business arrange- ments and strategies for ground transportation services. This will continue to be an important factor in evaluating the TNC impact on airport revenue. Airport operators will likely adjust fees, operating policies, and strategic programs to reflect changes in mode share and airport access by different companies. As an example, many airport operators have been evaluating strategies to either preserve or enhance parking revenue, including reservations, variable pricing, and technology to improve the parking product. In addition, airport operators have been evaluating policies and strategies that “level the play- ing field” for ground transportation operators in terms of the fees commercial providers pay as a condition of airport access. The ability of airports to generate nonairline revenue will have an impact on the revenue airline rates and charges are required to generate, and it has implications for funding airport operations and capital programs. Airport Business Arrangements with Airlines Airport operators utilize a variety of business agreements with airlines. The typical industry terms are • Residual: The airlines agree to pay for all airport expenses and obligations, net of the contribution from nonairline revenue sources. • Compensatory: The airlines agree to pay only for the cost of the space they occupy and the services they incur, and the airport operator is responsible for all else. • Hybrid: This is a mix of the residual and compensatory approaches, including revenue- sharing agreements. The advantage of a residual arrangement is that the airport operator can rely on airlines to provide for airport expenses and obligations, reducing the risk of underperformance by nonairline revenue sources. The advantage of a compensatory arrangement is that the airport can generate surplus revenues from nonairline revenue sources. Many airport oper- ators have adopted a hybrid approach to balance and share the risk of annual financial results. As Kroll Bond Rating Agency noted in a May 2018 report on airport bond-rating methodology: “KBRA do not favor one approach over another. We see certain strengths and vulnerabilities under each approach and view each approach in the context of the airport’s operations.”41 The different business arrangements have different implications for the evaluation of TNC impacts. If TNC activity reduces nonairline revenue (e.g., parking and rental car rev- enue), then the airport operator needs to make appropriate adjustments. In the case of a residual airline agreement, this would increase the required airline payments. In the case of a compensatory airline agreement, this would reduce revenue flowing to the airport. In either case this is a concern to be addressed, and it should result in the airport operator identifying strategies to manage ground transportation revenues and replace one source with another. 41 U.S. General Airport Revenue Bond Rating Methodology, New York: Kroll Bond Rating Agency, Inc., May 29, 2018.

Impacts on Airport Revenues 37 Whatever the specific business arrangement, the airport is obligated to generate sufficient revenue to provide for annual operating expenses and debt service on outstanding bonds. Also, any decrease in revenue from a source must somehow be compensated. Funding Airport Operations Airport revenues are required to fund annual airport operations. Any decrease in parking and rental car revenues would affect the ability to fund annual airport operations and would require a review of expense obligations and other revenue sources. Annual Operating Budgets Airport operators develop annual operating budgets based on estimates of expenses and revenues. The estimates of revenues are important in determining commitments to expenditures on staffing and other operating expenses. The budgeting process is for- ward looking, requiring estimates of future activity and associated expenses and revenues. Airport operators must understand the impact of TNCs on the revenues estimated for their budget. Strategic Plans Many airport operators develop multiyear strategic plans. Strategic plans typically identify several factors relevant to investing in the future of the airport. Both airport operators and airlines closely monitor cost per enplaned passenger; this measure has implications for route development and competitiveness. With the development of TNCs, many assumptions in a typical airport strategic plan need to be revisited.42 The main categories related to strategic planning are • Annual Revenues: Maximize annual revenues and develop plans to generate revenues from various nonaeronautical sources. • Operations Plans: Maximize airport utilization and address any operational issues. • Capital Funding: Develop a plan to fund the facilities determined as required. The development of TNC activity has an impact on airport strategic plans, for both facility development and revenue strategies. Airport operators need to plan for passenger access. The development of TNC activity has changed the view of airport ground transportation mode choice; therefore, it has changed the need for various facilities to accommodate passengers. There has been a greater demand on curbside facilities and a focus on the need for staging lots. Also, there is a need to review the basis for charging commercial ground transportation operators. 4.5.2 Funding Airport Capital Programs Airport revenues, net of annual operating requirements, are used to fund capital investment, through either cash investment or payment of principal and interest on airport debt. Nonairline 42 Airline cost per enplaned passenger is an industry metric closely watched in terms of the affordability or otherwise acceptability of the costs for airlines to operate and add service at an airport. There are different airline agreements at U.S. airports, with different arrangements regarding assignment of costs and sharing of revenues. Whatever the specific details of business arrangements, the ability to generate nonairline revenue (such as revenue from parking and rental car operations) assists the airport operator in paying for expenses and reducing the requirement for airlines to pay fees. Nonairline revenue, therefore, can incentivize the increase in airline service and activity. Thus, airport operators are interested in generating nonairline revenues, such as revenue from parking and rental cars, as a strategy to reduce costs they would otherwise be required to charge airlines. Therefore, non- airline revenues are crucial to the financial plans of airports, as well as to the preparation of capital funding programs.

38 Transportation Network Companies (TNCs): Impacts to Airport Revenues and Operations—Reference Guide revenues, including revenues generated from commercial ground transportation activities, support the financing of airport capital programs. 4.5.3 Airport Funding Needs ACI-NA surveys airports to summarize airport infrastructure needs. The most recent survey reported that U.S. airports will have nearly $128 billion in infrastructure needs from 2019 to 2023 to accommodate growth in passenger and cargo activity, to rehabilitate existing facilities, and to support aircraft innovation. Table 4-10 presents ACI-NA’s most recent summary of reported infrastructure needs for large-, medium-, and small-hub airports; non-hub and noncommercial airports are not included in the table. Most of the capital project funding need is for large-hub airports, which is consistent with the share of large-hub airport passengers. 4.5.4 Sources of Funding for Airport Capital Programs U.S. airports utilize a variety of sources of funding for capital programs: • Grants: from state and federal programs. • Equity: cash flow from annual operating revenues, including specialized revenue streams such as passenger facility charges and CFCs. • Debt: issuance of bonds supported by general airport revenues, specialized revenue streams, or both. • Private Funding: third-party or public-private partnership financing arrangements. The emergence of TNC activity at airports, and the changes in mode share and revenue generation, will have different impacts on these various sources of funding for airport capital programs. More broadly, the ability of airports to generate annual revenues affects both the availability of internally generated cash for short-term capital needs, as well as the net revenue to pay debt service on borrowing to finance longer-term major infrastructure investments. Ground transportation activities, such as parking and rental cars, have traditionally contrib- uted a significant source of revenue to airports. Thus, they have helped to support the ability to fund capital improvements. The more that airports can generate from nonairline revenue sources, the less is required from airline revenue sources. While airports have a variety of business arrangements, as discussed in the following section, any reduction in nonaeronautical revenue is likely to put pressure on the required revenue charged to airlines. This raises concerns regarding the affordability of capital improvements. AIRPORT SIZE CAPITAL NEEDS SHARE OF U.S. PASSENGERS Large Hubs $81 billion 72% Medium Hubs $18 billion 16% Small Hubs $9 billion 8% SOURCE: ACI-NA, Terminally Challenged: Addressing the Infrastructure Funding Shortfall of America’s Airports, 2019. Table 4-10. Airport funding needs.

Impacts on Airport Revenues 39 For most U.S. airports, the total revenues generated from airport operations are used to pro- vide for both annual operating expenses and payment of debt service for capital investments. Airport revenues are approximately evenly split between revenues received from airlines and revenues received from nonairline sources, such as terminal concessions, parking, rental cars, and other sources. 4.5.5 Rating Agency Criteria and Opinions Credit rating agencies are key participants in the bond financing process and, therefore, in the process of financing airport capital improvements. The key credit rating agencies involved with airport bond issuance are Standard & Poor’s Global Ratings, Moody’s Investors Service, Fitch Ratings, and Kroll Bond Rating Agency. Credit rating agency opinions are important in connection with a given individual bond issuance, but more so in setting criteria and establishing benchmarks and metrics for airports. Credit rating agencies issue periodic reports with opinions related to the outlook for airport credits. These reports provide airport operators and other participants with guidance in the debt issuance process. The reports include key metrics, such as airline cost per enplaned passenger, and other metrics related to concession revenues. Bond-rating agencies periodically review and update their criteria for assigning ratings to airport credits. Generally, airport credit ratings are based on the quality of the market and the ability to generate revenue. Rating agencies use different terminology in explaining their rating agency criteria. For this section, Ricondo compiled a summary that appropriately groups the rating criteria into similar categories. Table 4-11 summarizes the criteria used by the various rating agencies in evaluating the issuance of airport bonds. The bond-rating agencies have included commentary in their individual rating reports regarding the impact of TNCs on airport revenues. However, from this review, the bond-rating agencies have not officially changed the criteria they use in evaluating airport debt specifically regarding the development of TNCs. GENERIC CATEGORY FITCH KROLL MOODY’S STANDARD & POOR’S Management Development Planning Management Management Management and Governance Service Area Revenue Risk Economics/Demographics Market Position Economic Fundamentals Airline Traffic Revenue Risk Airport Utilization Market Position and Service Offering Market Position and Industry Risk Capital Program Infrastructure Development Capital Needs and Debt Leverage and Capital Needs Debt and Liabilities Legal/Financial Structure Debt Limits Legal Mechanics Framework Liquidity and Financial Flexibility Financial Results Financial Profile Airport Finances Financial Metrics Financial Performance SOURCE: Ricondo & Associates, Inc., compilation of rating agency reports, January 2019. Table 4-11. Bond-rating agency criteria.

40 Transportation Network Companies (TNCs): Impacts to Airport Revenues and Operations—Reference Guide The rating agencies track the annual trends in airline and nonairline revenue, and attention to the impact of TNCs and the changes in mode share and revenue generation has noticeably increased. A key question to consider is, how does the rapid growth of TNC activity at airports change or affect the criteria used to evaluate airport debt? The answer would seem to be related to the impact on airport revenues, as well as to the resulting impact on an airport’s ability to generate sufficient debt service coverage. The impact of TNC activity is not a separate rating category for the rating agencies. Rather, it is a consideration related to the more general analysis of airport revenues. As previously discussed, TNC impacts on airport revenues have been a concern. However, the data do not show a significant decline in the broad category of ground transportation revenue, and certainly not in any way that would jeopardize the ability of airports to generate sufficient debt service coverage. As a result, it is expected that bond-rating agencies will continue to highlight these new trends but will also continue to offer favorable ratings to airports that show positive trends in market growth, revenue generation, and ability to service debt. Standard & Poor’s Global Ratings Standard & Poor’s provided the following opinion in January 2018: “We anticipate nonaeronautical revenues to grow with or slightly faster than passenger traffic due to airport operator initiatives to improve concession schemes and yields. Parking and rental car rev- enues might see slower growth due to increased competition from TNCs.” It was also stated that “competition from technology used by TNCs such as Uber and Lyft are beginning to negatively affect the business model of some transit providers and soften parking revenues of some airport operators.” Moody’s Investors Service Moody’s issued the following opinion in April 2018: “Increased use of Uber and Lyft, often referred to as transportation network companies (TNCs), has resulted in lower per-enplanement parking and rental car revenues at U.S. airports, though strong growth in enplanements, or the number of people using an airport to depart on a flight, has kept total parking and rental car revenues increasing.” Moody’s noted that airport operators can charge TNCs for airport access and can therefore offset declining revenue from other sources. One of the key conclusions was that “most airports can recover lost revenue not recovered by TNC fees through other revenue streams, most notably from airline rates and charges.”43 Moody’s issued an updated opinion in December 2018 regarding the outlook for financing airport capital improvements. Specific comments related to TNCs and airport revenues were as follows: “Increased use of ridesharing services like Uber and Lyft has had a negative impact on parking and ground transportation revenue at airports across the U.S., but airports have adapted by collecting pick-up and drop-off fees to keep overall collections stable. Looking ahead, Moody’s believes that emerging technologies will allow for more effective fee collection and provide increased revenue generation.”44 Summary The rating agency opinions have evolved since the introduction of TNCs at airports. In prior years, there was a greater concern that the continued increase in TNC activity would reduce 43 Airports—U.S.: Parking and CFC Bonds Face Credit Pressure from Uber, Lyft, but Airports Are Protected, New York: Moody’s Investor Service, April 16, 2018. 44 Moody’s Investors Service, Inc., Research Announcement: Moody’s: 2019 Outlook for U.S. Airport Sector Remains Positive, December 2018.

Impacts on Airport Revenues 41 airport nonairline revenue and, as a result, would require increased airline revenue to fund capital improvement programs. More recently, airport operators have responded, developed strategies, and realized replacement revenue in connection with commercial ground trans- portation services. 4.5.6 Funding Parking and Rental Car Facilities Some airport operators have financed parking and rental car facilities with revenue streams specifically dedicated to these facilities. The vulnerability of these narrowly defined revenue sources raises concern, particularly regarding TNC activity and changes in ground transporta- tion mode share and revenue generation. There are trade-offs in applying funding sources to support bond issuance for airport facilities: • Separating a revenue stream and debt repayment obligation can be viewed as an advantage in preserving the airport operator’s capacity to issue debt supported by the general revenues of the airport. • Airport operators that use more general and diversified funding for capital improvements and debt issuance can have more flexibility in decisions regarding the generation and appli- cation of revenues to repay debt for capital improvements, including the management of year-by-year airline rates and charges strategies. Airport operators have continued to invest in parking and rental car facilities, and they have been able to issue bonds for such facilities. However, caution is also increasing regarding narrow revenue streams for purpose-specific facilities; in some cases, airport operators have scaled back or put on hold certain parking and rental car projects. 4.5.7 Airport Funding Conclusions There are many ways to think about the impact of TNCs on funding airport facilities. Exhibit 4-3 summarizes these funding issues in terms of recent historical experience, near-term future, and long-term future. The conclusions are different depending on the time horizon considered. Recent Historical Experience There have been concerns regarding the impact of TNCs on specific airport ground trans- portation revenues, such as parking and rental cars. Any negative impact on individual airport revenue sources also raises concerns regarding airport financial performance. The information developed for this research has demonstrated that airports have continued to realize sufficient revenues to support ongoing operations and to provide sufficient debt service coverage on outstanding airport bonds. This is a generalized statement, recognizing that not all airports are equivalent. Two key actions should be highlighted regarding airport actions to ensure adequate revenues: • Creative Ground Transportation Programs: Many airport operators have recognized the need to develop more creative ground transportation programs to attract demand and revenue. Examples include online reservation systems, more user-friendly signage, space availability technology, variable pricing, and products at a range of price points. Ultimately, the product and pricing most preferred by the customer is likely to prevail, and airport operators will need to address this concept not as a protected monopoly, but as a competitor.

42 Transportation Network Companies (TNCs): Impacts to Airport Revenues and Operations—Reference Guide • Fees for TNCs: Airport operators have gradually increased per trip fees for TNCs. This pro- vides a replacement for revenue that might be lost from other ground transportation modes, as well as revenue needed to fund the operation and capital costs required to accommodate the rapid increase in TNC operations. Near-Term Future In the near term, key questions relate to the evolving airport actions to accommodate TNCs, the business arrangements in relation to other ground transportation operators, and the impact on airport financial operations. • TNC Growth: One of the key questions for airport operators is regarding the development of TNC operations, at both airports and in cities in general. What are the growth curve and the ultimate change in mode share? From this analysis, the impact of TNC activity at airports is expected to level off. • Ground Transportation Fees: Another key discussion item for airport operators is the “level playing field.” Of all the various operators at airports, who should pay what fees? Airport operators have developed policies and practices regarding the establishment of ground transportation fees. • Financing Airport Facilities: From this analysis of financing airport facilities, there has not been any significant negative impact on the near-term ability to finance airport facili- ties. Airports have generated replacement ground transportation revenue sources, and airport operators have generally been successful in developing revenue to support capital programs. SOURCE: ACI-NA, U.S. Airport Infrastructure Needs, March 2017. Exhibit 4-3. Airport funding—key findings.

Impacts on Airport Revenues 43 Long-Term Future In the long term, considerations are likely to be related to the need for flexibility in facility development and to the anticipated development of autonomous vehicles. • Flexibility for Facilities: Whatever happens with new-technology companies, it will be in the best interest of airport operators to develop facilities that are flexible to accommo- date various types of activities. Rather than considering purpose-specific facilities, airport operators should think about facilities that can accommodate new modes of transport. • Ground Transportation Business Models: The recent developments in airport ground trans- portation fees inform the longer-term strategies. Airport operators need to develop adequate revenues to support annual operations and debt service. • Development of Autonomous Vehicles: This is perhaps the most significant and uncertain devel- opment related to airport ground transportation business operations and facility development.