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AIRPORT FINANCE AND HOW GROUND TRANSPORTATION FEES FIT IN. LEIGH FISHER ASSOCIATES A Division of Jacobs Consultancy Inc. Airport Ground Transportation Association Spring Meeting, 2005. Presented by Joan Zatopek Leigh Fisher Associates. April 5, 2005. Presentation Outline.
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AIRPORT FINANCE AND HOW GROUND TRANSPORTATION FEES FIT IN LEIGH FISHER ASSOCIATES A Division of Jacobs Consultancy Inc. Airport Ground Transportation Association Spring Meeting, 2005 Presented by Joan Zatopek Leigh Fisher Associates April 5, 2005
Presentation Outline • Airport financial overview • Historical context • How are airlines charged? • What are the funding sources? • Landside fees and considerations
Airport Financial Overview Airport must: • Be self-sustaining • Meet federal law and FAA mandates • Serve the needs of the community • Attract and promote air service • Maintain competitive rate structure to be able to attract any type of air carrier • Cover increasing operating expenses
Overview of Airport Finance--Governance Structure • Most U.S. airports are operated as either • Independent not-for-profit entities with oversight by a politically appointed authority • Self-sustaining enterprise fund of a city, county, or state government • Very few privately run airports in the U.S. Other 9% Authority 4% State 9% City 40% County 15% Regional 23%
• Congress • • FAA/DOT • TSA • • NTSB • • EPA • • OSHA Federal Regulations and Policies Capital Markets: • Bondholders • Rating agencies • Credit and liquidity providers • State government • County or local government • Governing board or authority Sponsor Assurances Bond Ordinance/ Resolution/ Trust Indenture Authorizing Legislation Airport Operator • Merchants/vendors • Car rental franchises • Taxi/limo operators • Hotel operators • Parking garage operators • Fixed based operators • Signatory air carriers • Nonsignatory air carriers • Air cargo carriers Generally accepted accounting principles Concession/ Operating Agreements and Permits Airline Use and Lease Agreement Factors Governing Airport Financial Operations– U.S. Airports
Historical Context: National Traffic Perspective U.S. enplanements generally recovered by 2004. While the long term trend has been positive, potential war and further terrorist attacks are uncharted territory. • Airport operators need to continue their focus on longer-term needs despite current uncertainties
Basic Rate-Making Methodologies • Compensatory • Recover fully allocated costs of facilities occupied • Only pay for what you use • Airport sponsor assumes financial risk • Airport keeps nonairline revenues • Airport System Residual (single cash register) • Recover net costs after allowing for nonairline revenue credit • Financial risk transferred to airlines • Usually requires airline approval on capital investments decisions • Airport negotiates retainage of fixed discretionary cash amount • Hybrids • Mixture of both methodologies • Carve outs of self-supporting cost centers • Net revenue sharing formulas (usually in return for “safety nets”)
C o m m e r c i a l L a n d i n g f i e l d T e r m i n a l b u i l d i n g P a r k i n g C a r g o / h a n g a r G e n e r a l a v i a t i o n p r o p e r t y r e v e n u e r e v e n u e r e v e n u e r e v e n u e r e v e n u e r e v e n u e Compensatory Rate-Making Methodology Recover fully allocated operating and capital costs from airlines for each facility occupied or used O&M costs, debt service and coverage O&M costs, debt service and coverage O&M costs, debt service and coverage O&M costs, debt service and coverage O&M costs, debt service and coverage O&M costs, debt service and coverage Airport Sponsor’s Net Cash Flow • Airport sponsor assumes risk that nonairline revenues will cover nonairline costs, and retains for its discretionary use any net cash flow • Airport sponsor retains control over capital investment decisions
Residual Rate-Making Methodology Recover net amount from airlines to keep airport at break-even, after identifying all costs and providing credits for all revenues Expenses - Equipment and small capital outlays - Debt service and coverage - Operating - Reserves - Amortization minus Nonairline Revenue - Parking and rental car - Terminal concessions - Ground/building rent - Commercial property - General aviation - Interest income minus Airline Terminal Rents equals Airline Landing Fees Airport discretionary cash flow for capital improvement or reimbursed to signatory air carriers
Hybrid Rate-Making Example Airfield cost center residual Terminal compensatory All other cost centers Expenses Expenses Nonairline Revenues Operating Capital Reserves Operating Capital Reserves less minus minus Expenses Nonairline Revenues Airline share of terminal concession revenue Operating Capital Reserves Other Airfield Revenues equals Terminal Rental Requirement equals Landing Fees Requirement Airport Net Revenues Airport Discretionary cash flow for capital improvement Airline share
Methodology at U.S. Airports—2002 • Trend away from pure residual systems as airports operate more as a business • In 1983, 58% of large- and medium-hub airports used a residual approach; by 2002 only 13% did • Blurring of distinctions between traditional rate-making approaches with significant number of hybrid approaches • Rate covenant provisions make compensatory agreements less risky. Source: AAAE Rates and Charges Survey, 2001-2002. Examples of “Other” include situations in which landing fees are adjusted for inflation, are set based on similar industry or regions, etc.
Example—Airline cost per enplaned passenger can range from $2.00-$12.00
FFY 1999 – 2001 Average Annual Funding ($11.8 billion) State grants 4% Airport revenue 4% Special facility bonds 12% PFCs 13% Tax-exempt bonds 46% AIP grants 21% Source: GAO, “Airport Finance: Past Funding Levels May Not Be Sufficient to Cover Airports’ Planned Capital Development,” February 25, 2003.
AIP Funding Levels Funding (billions) Federal Fiscal Year AIR-21 Vision 100 * Appropriation includes additional $175 million authorized by ATSA and appropriated by DOD Security Appropriation for security purposes only.
Airport Funding Sources—Federal Airport Improvement Program (AIP) Grants • Federal Airport Improvement Program (AIP) Grants • Entitlement funds • Discretionary funds • FAA Letters of Intent • Eligible projects • On-airport property or within right-of-way acquired by airport operator • Must exclusively serve airport traffic • Generally limited to one access road to nearest public highway • Includes related facilities (acceleration lanes, etc.) • Eligible transit facilities must primarily serve passengers or employees
Airport Funding Sources--Passenger Facility Charges (PFCs) • Airports can charge $1, $2, $3, $4 or $4.50 PFC, subject to FAA approval • Can be used pay-as-you-go • Can be leveraged by issuing bonds • Eligible Projects • Airport operator must show can’t be funded through AIP • Must demonstrate “significant contribution” to safety/security, competition among airlines, reduced congestion, or reduced noise • Operator loses 75% of AIP entitlements (lose 50% of AIP entitlements if charge a lower PFC) • Surface transportation or terminal projects only eligible if airport operator has adequately provided for airside needs
Airport Funding Sources– Bond Proceeds • General airport revenue bonds (GARBs) • Secured by revenues of the airport(s) • Other revenues may be pledged under the bond indenture • PFC-backed bonds • “Stand-alone” PFC-backed bonds • “Double barrel” bonds backed by PFCs and revenues • Special facility bonds • Backed solely by a tenant’s credit, or • Revenues of facility built with the bonds • General obligation bonds • Backed by tax base of airport sponsor • Usually repaid by airport operator
Airport Funding Sources--Customer Facility Charges (CFCs) • CFCs charged in conjunction with consolidated rental car facilities • Capital cost of facilities • Operating costs • Bus or transit system from consolidated rental car facility to Airport terminals • Can make a bus or transit system economically and financially viable • Can be leveraged to issue bonds
Airport Funding Sources--Internally Generated Capital/Retained Revenues • Rentals, fees and charges • Passenger and cargo airlines • Terminal concessionaires • Rental car companies • Other aviation tenants • Other services (ground transportation, public telephones, carts, lockers, etc.) • Other revenue • Interest income • Nonaviation tenants and industrial areas
Typical Distribution Of Operating Revenues Large Hubs Small Hubs Parking 17% Other Ground Transportation 1% Parking 20% Rental Cars 8% Rental Cars 13% In-Terminal Concessions 11% Landing Fees 18% Landing Fees 24% In-Terminal Concessions 7% Other 4% Airline Rentals 33% Airline Rentals 28% Other Aviation 2% Other 10% Other Aviation 4% Airline Revenues 46% Airline Revenues 57%
Ground Transportation, Rental Car and Parking are 70%-85% of all Non-Airline Revenue
Operating Revenues to Meet Operating Expenses Typical Capital and Operation and Maintenance Expenses • Debt service for Capital projects • Security • Dispatching/curbside management • Personnel • Contractual services • Utilities • Maintenance and repairs • Insurance • Administration • Public works • Janitorial
Typical Ground Transportation Fees • Permit fees • Monthly or annual fees • Per company or per vehicle • Cost recovery fees • Per trip • Vary by vehicle size • Privilege fees • Percent of gross revenues • Other measures • Excessive dwell times • Excessive circuit
Considerations when Charging Ground Transportation Fees • Assess role of ground transportation provider • For-hire versus “courtesy” • Enhancing flow of passengers • Amount of benefit derived by operator • Availability of facilities and services used directly by providers • Air quality needs/incentives • Access to market • Exclusive • Open
Conclusions • Airports are required to be self-sustaining • Non-airline revenues represent >43% of total revenues • Ground transportation/parking revenues represent >70% of non-airline revenue • Important to preserve existing revenues (parking and rental car) while enhancing others as appropriate