AIRPORT FINANCE AND HOW GROUND TRANSPORTATION FEES FIT IN

AIRPORT FINANCE AND HOW GROUND TRANSPORTATION FEES FIT IN

Presented by

Joan ZatopekLeigh Fisher Associates

April 5, 2005

Airport Ground Transportation Association

Spring Meeting, 2005

LEIGH FISHER ASSOCIATESA Division of Jacobs Consultancy Inc.

LFA927-E.ppt

Airport Ground Transportation Association, April 5, 20052AIRPORT FINANCE AND LANDSIDE FEES LEIGH FISHER ASSOCIATES

A Division of Jacobs Consultancy Inc.

Presentation Outline

Airport financial overview

Historical context

How are airlines charged?

What are the funding sources?

Landside fees and considerations

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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

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Overview of Airport Finance--Governance Structure

County15%

Regional23%

City40%

State9%

Authority4%

Other9%

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.

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Factors Governing Airport Financial Operations– U.S. Airports

Capital Markets:• Bondholders• Rating agencies• Credit and liquidity providers

• Congress• FAA/DOT•TSA• NTSB• EPA• OSHA

• State government• County or local government• Governing board or authority

• Signatory air carriers• Nonsignatory air carriers• Air cargo carriers

• Merchants/vendors• Car rental franchises• Taxi/limo operators• Hotel operators• Parking garage operators• Fixed based operators

Airport Operator

Federal Regulations and Policies

Sponsor Assurances

Bond Ordinance/Resolution/

Trust Indenture

Concession/Operating

Agreements and Permits

Authorizing Legislation

Airline Use and Lease Agreement

Generallyaccepted

accountingprinciples

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Historical Context: National Traffic Perspective

Airport operators need to continue their focus on longer-term needs despite current uncertainties

U.S. enplanements generally recovered by 2004.

While the long term trend has been positive, potential war and further terrorist attacks are uncharted territory.

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Historical Context: Signs of Airline Profitability

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Why Diversify The Revenue Base?

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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”)

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Compensatory Rate-Making Methodology

O&M costs,debt service

andcoverage

Airport Sponsor’s Net Cash Flow

Landing fieldrevenue

Terminal buildingrevenue

Parkingrevenue

Cargo/hangarrevenue

Commercialpropertyrevenue

General aviationrevenue

Recover fully allocated operating and capital costs from airlines for each facility occupied or used

• 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


andcoverage


andcoverage


andcoverage


andcoverage


andcoverage

LFA927-E.ppt



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

Nonairline Revenue

- Parking and rental car - Terminal concessions - Ground/building rent - Commercial property - General aviation - Interest income

- Equipment and small capital outlays - Debt service and coverage - Operating - Reserves - Amortization

Expenses

minus

equals

Airline Landing Fees

Airline Terminal Rents

Airport discretionary cash flow for capital improvement or reimbursed to signatory air carriers

minus

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Hybrid Rate-Making Example

Airfield cost center residual

minus

Landing Fees Requirement

Terminal Rental Requirement

Airport Net Revenues

Airline share of terminalconcession revenue

OperatingCapital

Reserves

Expenses

Other Airfield Revenues

Nonairline Revenues

OperatingCapital

Reserves

Expenses

OperatingCapital

Reserves

Expenses

Nonairline Revenues

Terminalcompensatory

All other cost centers

equals

minus

equals

Airport Discretionary cash flowfor capital improvement

Airline share

less

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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.

Hybrid38%

Compensatory 25%

Residual13%

Other 24%

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.

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Example—Airline cost per enplaned passenger can range from $2.00-$12.00

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FFY 1999 – 2001 Average Annual Funding ($11.8 billion)

PFCs13%

AIP grants21%

Tax-exempt bonds 46%

Special facility bonds 12%

State grants4%

Airport revenue 4%

Source: GAO, “Airport Finance: Past Funding Levels May Not Be Sufficient to Cover Airports’ Planned Capital Development,” February 25, 2003.

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AIP Funding Levels

Fu

nd

ing

(bill

ion

s)

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.

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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

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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

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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

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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

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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

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Typical Distribution Of Operating Revenues

LandingFees24%

AirlineRentals

33%

OtherAviation

2%

Other4%

In-TerminalConcessions

11%

RentalCars8%

Parking17%

Other GroundTransportation

1%

Airline Revenues57%

Large Hubs

LandingFees18%

AirlineRentals

28%

OtherAviation

4%

Other10%

In-TerminalConcessions

7%

RentalCars13%

Parking20%

Airline Revenues46%

Small Hubs

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Ground Transportation, Rental Car and Parking are 70%-85% of all Non-Airline Revenue

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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

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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

Typical Ground Transportation Fees

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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

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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

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