Airport
Finance
Airport Finance
A Historical Review
In the early years
The Air Commerce Act of 1926
set the stage for NO Federal Ownership of the
US airport system
(it was delegated to the states and to local
governments).
It also banned federal investment in airports
Airport Finance
A Historical Review
However, two major global events forced federal
investment in airports due to other national priorities:
•The Great Depression
•World War II
Airport Finance
A Historical Review
The Federal Airport Act of 1946 was the first formal
federal program for airport investment.
Key problems:
•The money was from general revenue sources
•Airports were never a very high priority
Airport Finance
A Historical Review
It wasn’t until the passage of the
Airport and Airways Development Act of 1970
and accompanying legislation which created the Airport
and Airway Trust Fund
that an almost continuous stream of federal financing
for airport development became reality.
Airport Finance
A Historical Review
The Airport Improvement Program (AIP)
(the result of combining the Airport Development Aid Program and
the Planning Grant Program through the
Airport and Airway Improvement Act of 1982)
has seen a in decline funding since the early 1990s and
is the subject of annual Congressional funding battles
Airport Finance
A Historical Review
Aviation Safety and Capacity Expansion Act of 1990
created
Passenger Facility Charges
which were declared legal in 1992 by the Supreme Court
now account for a significant portion of federal financing
of airports via charges on passenger tickets
Airport Finance
Objectives of U.S. Federal Investment
Policy

Pursuing system goals such as safety and
security

Stimulating capacity projects of national
significance


Help finance small/general aviation airports
dependent on aid
Paying a major part of noise and environmental
Airport Finance
Traditional Sources of Airport Capital Funding
Revenue & General
Obligation Bonds
Airport Cash Flow
State and
Local Grants
Passenger Facility
Charges (PFC’s)
Airport
Improvement
Program (AIP)
Airport Finance
Airport Cash-Flow
Includes receipts from:
Airside Activities
Landing Fees
Fuel Flowage Fees
Overnight Hangering and
Tiedowns
Airport Finance
Airport Cash-Flow
Includes receipts from:
Terminal Concessions
Shops and Restaurants
Advertising
Services and Facilities
Airport Finance
Airport Cash-Flow
Includes receipts from:
Leased Areas
Airlines
GSE Rental
Fixed Base Operators
Cargo Handling Operators
Office Space
Ticket counters
Operations Areas
Governmental Units
Other Non-Airline Operations
Airport Finance
Airport Cash-Flow
Two ways of determining Rates and Charges
Residual-Cost Method


Tenants agree to maintain
financial solvency and are
charged a reduced rate
Have a voice in airport
capital budgeting
decisions
Compensatory Method
 Airport
maintains financial
solvency alone
 Tenants are charged actual
cost of airport operations
and have no voice in
capital decisions
Airport Finance
Airport Cash Flow
Pays for:

Operations and Maintenance Expenses

Finance Pay “As you Go” Capital
Projects

Amortization of indebtedness
Airport Finance
Traditional Sources of Airport Capital Funding
Revenue & General
Obligation Bonds
Airport Cash Flow
State and
Local Grants
Passenger Facility
Charges (PFC’s)
Airport
Improvement
Program (AIP)
Airport Finance
State & Local Grants


Aviation Aid from State & Local
Governments is estimated at $1 billion
US$ per year.
The major contributor to most state
aviation programs comes from taxes
levied against aviation fuel.
Airport Finance
State & Local Grants



The federal share of grant projects at
primary airports is approximately 75%
At the remaining commercial service
airports, the federal share was about
90%
Some State Aviation Agencies cost-share
in federal projects by providing 2.5% to
7.5% of funding to reduce local cost
Airport Finance
Traditional Sources of Airport Capital Funding
Revenue & General
Obligation Bonds
Airport Cash Flow
State and
Local Grants
Passenger Facility
Charges (PFC’s)
Airport
Improvement
Program (AIP)
Airport Finance
Airport Improvement Program

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
Federal Government has provided
monetary grants for airport capital
development since 1946
In 1970, Congress established the
Airport and Airway Trust Fund
In 1982,Congress renamed the federal
grant program the Airport
Improvement Program
Airport Finance
Airport Finance
Funds from the
Airport and Airway Trust Fund
are used for four general purposes
•
•
•
•
Airport Planning
Airport Development
Airport Capacity Enhancement
Noise Compatibility Programs
Airport Finance
The
Airport and Airway Trust Fund
is currently funded through the following taxes
Aviation users
7.5% passenger ticket tax
$3.30 passenger flight segment fee
[7.5% ticket price - Rural Airport Charge]
6.25% of amount paid for the
transportation of property by air;
$14.50 international departure and arrival
taxes (half on flights to AK and HI)
7.5% frequent flyer award tax
Aviation fuel
4.3 cents per gallon on commercial
aviation;
19.3 cents per gallon on general aviation
gasoline;
21.8 cents per gallon on general aviation
jet fuel
Airport Finance
Airport Improvement Program
AIP grants are
characterized by the FAA
as either:
Entitlement Funds
Set Aside Funds
Discretionary Funds
Airport Finance
Airport Improvement Program
AIP Entitlement Funding
Formula for Primary Airports:
$7.80 for first 50,000
$5.20 for each of the next
50,000
$2.60 for each of the next
400,000
$0.65 for each of the next
500,000
Airport Finance
Airport Improvement Program
Atlanta Hartsfield;
42,402,653 passengers in 2005
Breaks down to about:
$22,716,326.50
in Entitlement Funding
Airport Finance
Traditional Sources of Airport Capital Funding
Revenue & General
Obligation Bonds
Airport Cash Flow
State and
Local Grants
Passenger Facility
Charges (PFC’s)
Airport
Improvement
Program (AIP)
Airport Finance
Passenger Facility Charges (PFC’s)
Originally intended to finance airport capital
improvements with emphasis on:



Capacity
Security
Noise abatement



Environmental
Mitigation Projects
Airside Development
Terminal
Development
Airport Finance
Passenger Facility Charges (PFC’s)
Presently PFC’s generate in excess of US
$2.5 billion annually for airport
development
Provides a powerful tool for financing
critically needed airport development
programs
Are great source of collateral when
Airport Finance
Passenger Facility Charges (PFC’s)
Drawback:


Large and Medium Airports collecting PFC
Revenue, forfeit up to 50% of Federal Airport
Improvement Plan (AIP) Entitlements
These forfeitures are divided to:
• AIP Small Airport Fund (87.5%)
• AIP Discretionary Fund (12.5%)
Airport Finance
Passenger Facility Charges (PFC’s)
Upside:
PFC Revenues have been recognized by
private finance community as leverage
potential
collateral against debt
Airport Finance
Passenger Facility Charges (PFC’s)


Banks and Bond Underwriters have
provided credit enhancement for PFC
secured debt instruments
Several Credit Rating Agencies consider
PFC secured debt (bonds) for
investment grade rating
Airport Finance
Traditional Sources of Airport Capital Funding
Revenue &
General
Obligation Bonds
Passenger Facility
Charges (PFC’s)
Airport Cash Flow
State and
Local Grants
Airport
Improvement
Program (AIP)
Airport Finance
Bond Markets


Airport Bonds are the single most
important financing tool available to
airports
Under current Federal law, the
government exempts holders of
municipally issued bonds from paying
federal tax on interest income
Airport Finance
Bond Definition
A Security where an issuer borrows money
from an investor and agrees, in writing, to
pay a fixed principal sum on a specified
date (maturity date) and at a specified
rate of interest (coupon rate) and possibly
annual payments of interest only
(dividends)
Airport Finance
Bond Markets


Tax-exempt status permits airports to
borrow money at lower interest rates
than commercial business enterprises
Estimated that tax-exempt airport
bond status saves airports in excess of
$1,000,000,000 in interest costs alone
Airport Finance
Types of Interest Free Municipal Bonds



General Obligation Bonds
Self-Liquidating General Obligation
Bonds
Revenue Bonds
• General Airport Revenue Bonds
(GARB’s)
• Special Facility Revenue Bond
Airport Finance
Airport Bonds:
General Obligation Bonds



Secured by the full faith and credit of the entity
issuing the bond (city, state, municipality or port
authority)
Issuing entity pledges to pay interest and
principal over the term of indebtedness
Because of extremely low risk, GOBs are
marketable and command lower interest rates
than any other type debt instrument
Airport Finance
Airport Bonds:
General Obligation Bonds

Because of their flexibility and ease of
issuance General Obligation Bonds are sought
after by various community interests
Sewer Districts
 Lighting
 Schools etc.



Almost universally, debt cannot exceed
predetermined percent of taxable property
base
Customarily issued for 10 to 15 year period
Airport Finance
Airport Bonds
Self-Liquidating GP Bonds


Similar in nature to General Obligation
Bond structure
Major Differences
• Cash flow from project financed is
adequate to repay principal
• Not considered a part of community
limitations for general obligation bond
debt.
Airport Finance
Airport Bonds
Airport Revenue Bonds

A debt instrument that is secured by a
pledge of airport revenues
• Not backed by full faith and credit of the
municipality
• Not secured by and taxing power of a
municipality

Payable solely from the revenue derived
from the operation of project
constructed with proceeds of bonds.
Airport Finance
Airport Bonds
Airport Revenue Bonds



Most common airport financing method
in the United States
Presents an opportunity to provide
improvements without direct burden to
the taxpayer
If the bond is secured by all revenues of
the airport it is called a General Airport
Revenue Bond (GARB)
Airport Finance
Airport Bonds
Airport Revenue Bonds

Obligation is limited because the airport is
not obligated to provide any other source
of repayment than the revenue generated
• Thus, bondholder at greater risk
• Coupon Rates of bond higher than general
obligation bonds


Interest slightly higher than general
obligation bonds
Can be issued for terms of up to 25-30
Airport Finance
Airport Bonds
Special Facility Revenue Bonds




Secured by single source of revenue and are
not backed by taxing powers
Issuing party pledges interest and principal
guarantees over the life of bond
Bondholder at risk that “special revenue” will
be insufficient to pay obligation
Most often utilized to fund single purpose
facilities such as hangers/terminal building
Airport Finance
Bond Ratings



Precise level of bond interest rates
determined by the bond rating.
Individual financial situation of an
airport determines ability to secure
favorable financing.
Perceived credit quality of an airport
is the product of performance in
many areas
Airport Finance
Factors Influencing Bond Ratings

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
Financial & Operational
Comparatives
Nature of Airline Rates and
Charges

Airports Current Debt Level
and Debt Service
Requirements

Airport Layout
Local Communities Economic  Managerial Strengths and
Base
Abilities
Airports Current Financial
Situation
Airport Finance
Examples of Ratio’s Influencing Bond Ratings

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Total Origin & Destination
(O&D) traffic ratios

Traffic Generated by Air
Carriers using Airport
Passenger ratios to transfer
passengers

Annual Increases in Air
Cargo
Annual Increases and
projections in O&D transfer
passenger traffic

Local per capita income

Total Locality Employment
Statistics
Debt per Passenger
originating and transiting
Airport