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A Guide to Transportation Funding Options

Aviation Funding – Summary of Funding Strategies

For more detailed information on innovative financing for airports, please see the Airport Cooperative Research Program's report Innovative Finance and Alternative Sources of Revenue for Airports [PDF] .

Federal

Airport and Airway Trust Fund (AATF)

The Airport and Airway Trust Fund (AATF), created by the Airport and Airway Revenue Act of 1970, is the primary source of federal funding for nation's system of airports. AATF funding currently comes from aviation related excise taxes and collections related to passenger tickets, passenger flight segments, international arrivals/departures, cargo waybills, aviation fuels, and frequent flyer mile awards from non-airline sources like credit cards. The AATF was established to help in the development of a nationwide airport and airway system as well as to fund investments in air traffic control facilities.

The AATF provides for about 82 percent ($11.2 billion in 2006) of the Federal Aviation Administration's total funding. The remainder of FAA funding is received from the General Fund. FFA has four primary accounts:

• Operations (44.8 percent of expenditures)
• Airport Improvement Program (27.3 percent of expenditures): Provides grants for construction and safety projects;
• Facilities and Equipment (22.7 percent of expenditures): Funds technological improvements to air traffic control systems;
• Research, Engineering and Development (1.2 percent of expenditures): Funds research on issues related to aviation safety, mobility, and the environment.

Current Aviation Excise Tax Structure
(Updated 2/7/07, Federal Aviation Administration)

Applied to Passengers
Aviation Taxes	Comment	Tax Rate
Domestic Passenger Ticket Tax	Ad valorem tax	Rate is indexed by the Consumer Price Index starting 1/1/02 $3.00 per passenger per segment during calendar year (CY) 2003 $3.10 per passenger per segment during CY2004. $3.20 per passenger per segment during CY2005. $3.30 per passenger per segment during CY2006 $3.40 per passenger per segment during CY2007
Domestic Flight Segment Tax	"Domestic Segment" = a flight leg consisting of one takeoff and one landing by a flight	Rate is indexed by the Consumer Price Index starting 1/1/02 $3.00 per passenger per segment during calendar year (CY) 2003 $3.10 per passenger per segment during CY2004. $3.20 per passenger per segment during CY2005. $3.30 per passenger per segment during CY2006$3.40 per passenger per segment during CY2007
Passenger Ticket Tax for Rural Airports	Assessed on tickets on flights that begin/end at a rural airport. Rural airport: less than 100K enplanements during 2nd preceding CY, and either 1) not located within 75 miles of another airport with 100K+ enplanements, 2) is receiving essential air service subsides, or 3) is not connected by paved roads to another airport	7.5% of ticket price (same as passenger ticket tax) Flight segment fee does not apply.
International Arrival and Departure Tax	Head tax assessed on passengers arriving or departing for foreign destinations (& U.S. territories) that are not subject to passengers ticket tax.	Rate is indexed by the Consumer Price Index starting 1/1/99 Rate during CY2003 = $13.40 Rate during CY2004 = $13.70 Rate during CY2005 = $14.10 Rate during CY2006 = $14.50 Rate during CY2007 = $15.10
Flights between continental U.S. and Alaska or Hawaii		Rate is indexed by the Consumer Price Index starting 1/1/99 $6.70 international facilities tax + applicable domestic tax rate (during CY03) $6.90 international facilities tax + applicable domestic tax rate (during CY04) $7.00 international facilities tax + applicable domestic tax rate (during CY05) $7.30 international facilities tax + applicable domestic tax rate (during CY06) $7.50 international facilities tax + applicable domestic tax rate (during CY07)
Frequent Flyer Tax	Ad valorem tax assessed on mileage awards (e.g., credit cards)	7.5% of value of miles
Assessed on Freight/Mail
Aviation Taxes	Comment	Tax Rate
Domestic Cargo/Mail		6.25% of amount paid for the transportation of property by air
Assessed on Aviation Fuel
Aviation Taxes	Comment	Tax Rate
General Aviation Fuel Tax		Aviation gasoline: $0.193/gallon Jet fuel: $0.218/gallon
Commercial Fuel Tax		$0.043/gallon

Source: Federal Aviation Administration

State and Local

The state role in aviation funding is generally limited to the allocation of funds through state aviation commissions and departments of transportation. Some states also maintain a state aviation capital fund that receives dedicated funding from various sources including general fund revenues. Local and county governments tend to take a more active role in management of airport facilities as they are often the owners of such facilities. Funding at the local level may come from general revenue sources, such as sales and property taxes.

Several states maintain a dedicated Aviation Fund. The State of Iowa maintains just this sort of account. These funds receive revenues from a number of sources, including appropriations from state General Funds.

Aircraft Excise Taxes

These types of taxes are generally imposed on the purchase price of eligible aircraft. Exemptions will often be made for the purchase of aircraft for certain uses (such as purchases by governmental agencies for emergency services) or for certain users (such as disabled veterans.) Definitions of eligibility, exemptions and the amount of the tax levy varies from state to state.

Aviation Fuel Taxes

Like fuel taxes levied on the purchase of motor fuel for use in automobiles, taxes can be levied on the purchase of fuel used for aviation purposes as well. As with traditional motor fuel taxes, aviation fuel taxes are generally levied by the gallon.

Airport Revenues

The majority of funds for airport development are derived from operational income generated by the airports themselves.

Large Hub Airports - Revenues

Aviation Operations	Landing Fees	$1,601,668,626	13.1%
	Terminal Rentals	$2,314,762,403	19.0%
	Other Aviation	$632,572,601	5.2%
	Subtotal	$4,549,003,630	37.3%
Non-Aviation Operations	Parking	$1,543,550,783	12.7%
	In-Terminal Concessions	$1,120,796,143	9.2%
	Rental Cars	$734,007,150	6.0%
	Other non-aviation revenue	$740,527,926	6.1%
	Subtotal	$4,138,882,002	33.9%
Non-Operations	Passenger Facility Charges	$1,667,716,410	13.7%
	Grant Receipts	$723,055,176	5.9%
	Other non-operating revenue	$1,114,372,343	9.1%
	Subtotal	$3,505,143,929	28.7%
	TOTAL	$12,193,029,561

Source: Federal Aviation Administration, CATS Annual Financial Reports

Medium Hub Airports - Revenues

Aviation Operations	Landing Fees	$586,279,065	13.3%
	Terminal Rentals	$616,497,587	14.0%
	Other Aviation	$321,253,565	7.3%
	Subtotal	$1,524,030,217	34.6%
Non-Aviation Operations	Parking	$789,267,930	17.9%
	In-Terminal Concessions	$220,709,073	5.0%
	Rental Cars	$386,365,077	8.8%
	Other non-aviation revenue	$171,052,156	3.9%
	Subtotal	$1,567,394,236	35.6%
Non-Operations	Passenger Facility Charges	$538,114,984	12.2%
	Grant Receipts	$438,877,590	10.0%
	Other non-operating revenue	$338,610,921	7.7%
	Subtotal	$1,315,603,495	29.9%
	TOTAL	$4,407,027,948

Source: Federal Aviation Administration, CATS Annual Financial Reports

Small Hub Airports - Revenues

Aviation Operations	Landing Fees	$150,238,700	7.3%
	Terminal Rentals	$220,968,757	10.7%
	Other Aviation	$170,936,168	8.3%
	Subtotal	$542,143,625	26.4%
Non-Aviation Operations	Parking	$312,951,144	15.2%
	In-Terminal Concessions	$76,104,912	3.7%
	Rental Cars	$184,855,683	9.0%
	Other non-aviation revenue	$139,735,155	6.8%
	Subtotal	$713,646,894	34.7%
Non-Operations	Passenger Facility Charges	$184,765,587	9.0%
	Grant Receipts	$501,515,604	24.4%
	Other non-operating revenue	$114,840,170	5.6%
	Subtotal	$801,121,361	38.9%
	TOTAL	$2,056,911,880

Source: Federal Aviation Administration, CATS Annual Financial Reports

Terminal Leases

One substantial source of funding is the leasing of terminals for use by airlines. Lease agreements and their stipulations are unique to each airport and are developed based on a number of factors but typically reflect actual or reasonably anticipated operations and maintenance costs.

Parking Revenues

A major source of nonairline revenue is parking revenue. Innovative ideas for enhancing parking revenues include premium parking services, parking operational enhancements and off-airport parking percentage fees.

Premium parking services

• Valet parking – Customers drop off vehicles in a premium location and retrieve them at this same location. Vehicles are stored in underutilized portions of a garage or lot.
• Monthly or corporate reserved parking – Airport may sell monthly or corporate access cards, which guarantee that users can always locate an available space in the reserved parking area.
• Discount parking coupons – These allow an airport to develop an electronic database of frequent customers and compete with off airport lots.
• Parking based loyalty programs – Frequent customers may receive a reduced rate for parking services and/or frequent parking points that could be applied to goods and services or converted into frequent flyer miles.
• Remote lot parking service enhancement – These services include free pick up and drop off shuttles, clearing of snow from parked cars, washing of windshields or the entire car, offering free newspapers and providing vehicle repair services.
• Internet based parking reservation – This allows the customer to reserve and pay for parking prior to their arrival at the airport and provides for a receipt in advance of payment for improved marketing, promotional opportunities and less diversion.

Parking Operational Enhancements

• Cashier-less parking through the development of "pay on foot" automatic stations
• Ticketless parking through the use of credit card in/out control systems or vehicle identification transponders
• Parking guidance systems including message signs activated by vehicle detectors. The signs clearly display if there are empty spaces in an aisle.

Off-Airport Parking Percentage (or Privilege) Fees

Privilege fees are calculated as a percentage of the company's gross revenues. The fees are charged to off airport parking lots that benefit from the presence of the entire airport. These fees have generated revenues that exceed $1 million per year at some large airports.

Rental Car Revenues

Revenues from rental cars companies can be structured in one or more of the following ways:

• Percentage (privilege) Fees – 10% of gross revenue from airport related car rentals, or a minimum annual guarantee, whichever is greater. Off-airport companies pay up to 8% of gross revenue from their airport-related car rentals.
• Terminal Rentals – Rent paid by car rental companies for ticket counters and office space in terminals.
• Land leases – Land on airport for refueling, cleaning, storing vehicles, and/or maintenance facilities
• Customer Facility Charge – This is a fee collected from rental car customers at the airport. It is charged on a per-transaction or a per-transaction-day basis. They are usually used to pay all or a portion of the operating and capital costs of a consolidated rental car area or facility, and may include the cost of transportation to the terminals.
• Contingent rent – In the event of an unanticipated shortfall between cost and revenue, rent may be charged to the rental car companies.

Terminal Concessions

Airports can receive a significant percentage of revenues from leasing space within terminals to private vendors such as food service providers, print media outlets, and souvenir stores. Concession sales have increased dramatically as airlines discontinue meal services and changes in airport security require that passengers arrive early. Concession partnerships are turning airport terminals into places that effectively serve the dining and shopping needs of customers.

There are several strategies being undertaken to reinvent terminal concessions programs. These include:

• Recognizing the consumer by understanding the key market segments
• Creating an inviting shopping experience
• Providing an accommodating dining opportunity
• Considering concessionaires that best meet the profile of the airport's passengers and that generate higher sales and commissions.
• Branding.

Airport operators are taking a more competitive look at retail space through different approaches:

• Airport operators are gradually tying rental increases to the Consumer Price Index, implementing fixed-percentage increases, and/or aggressively negotiating leases to raise minimum rents by 10% or more in order to capture increasing values,
• Operators may set a minimum annual guarantee, using a percentage for the first year and then reevaluating each year based on enplanements.
• Establishing point of sale procedures to minimize retail payment challenges.
• Monitoring pricing and inventory to ensure compliance of tenant and concessionaire leases and contracts by incorporating regular audits.

Advertising Programs

With more time spent inside airports, customers have more time to view advertisements. Technological innovations offer opportunities for airport revenue enhancements:

• Touch-screen directories – Offer a complete directory and area maps for finding area hotels, car rentals, restaurants and shopping.
• Wi-Fi applications – Airports can receive a percentage of user fees from these applications. Some airports offer free Wi-Fi service, collecting revenue from advertising on the launch page.
• Internet based Flight Information Display Systems (iFIDS) provide real time airline information through the use of the Internet on multimedia kiosks.

Effective sponsorship programs may defray costs while providing valuable customer amenities. Opportunities also exist for advertising in nontraditional locations such as moving walkways, escalators, and websites to generate extra revenue. In Johannesburg, South Africa, advertising has been placed on an unpaved airfield to maximize advertising revenues.

Commercial Development and Land Use

Depending on the type and size of airport, there can be a variety of revenue producing leases from nonairline operations. Non-aviation commercial development can create additional revenue sources without increasing the number of aircraft or the level of operations. This enables the building up of airport reserves and provides for additional improvements to facilities.

Industrial uses include importing/exporting, manufacturing, warehousing, research and development, cargo facilities, bulk storage, outside storage and petroleum exploration and mineral rights.

Commercial uses include restaurants, commercial office space/complexes, hotels, recreational centers, training facilities, small business centers, retail sales, industrial businesses, car rental agencies, automobile dealers, golf courses, movie theaters, agricultural uses and recreational facilities.

Passenger Facility Charges (PFC)

With passage of the Aviation Safety and Capacity Expansion Act of 1990, the U.S. Congress authorized certain airports to collect PFCs for qualifying enplaned passengers to be used on certain projects. Eligible projects include those that:

• Preserve or enhance airport capacity, security, or safety;
• Mitigate the effects of aircraft noise; or
• Enhance airline competition

PFCs are levied on a per-enplaned passenger basis and are capped at $ 4.50 per-enplaned passenger. Airports wishing to impose PFCs must submit an application to the Federal Aviation Administration and undergo a rigorous approval process to ensure transparency and need.

Bonding and Credit Assistance

General Obligation (GO) Bonds

These types of bonds are issued to finance airport capital improvements and are backed by general tax revenues from the city, county, or state that owns and operates the airport. The airport operator generally pays debt service from airport based revenues. Occasionally, a general local tax may directly pay debt service of proceeds used to fund airport projects. GO bonds are a widely used financing tool for small airports because they have lower issuance costs, can offer stronger credit with lower interest rates (because they are backed by the full faith and credit of the issuing entity), and they have no coverage requirement. Early airport construction was characterized by a strong reliance on these types of bonds, as airports themselves were unable to generate sufficient revenue to finance infrastructure development.

General Airport Revenue Bonds (GARBs)

These types of bonds are the most commonly issued bonds for airport infrastructure development. Since WWII, GARBs have replaced GO bonds as the preferred means of financing new airport construction, expansion or improvement. A GARB's credit rating is based on revenues generated from airline rates and charges, parking, rental car operations, terminal concessions, other leases, interest, and any other revenue generated by the airport seeking to issue the GARB.

Other types of innovative bonds related to GARBs include:

• Use of sureties in lieu of funded reserves – Sureties may be obtained from financial markets either at the time of or anytime after a bond issuance. These may be used in lieu of a funded reserve for debt service and are recognized as an equivalent security and can reduce the size of a bond issue. Annual debt service can therefore be reduced by eliminating the need to fund a debt service reserve account and/or free cash held in a reserve to be used for other purposes.
• Use of intermediate and subordinate liens – Airline operators may issue bonds with a lower pledge of airport revenues than its senior debt. This allows for a reduction of coverage requirements and annual airline rates and charges. However, these types of liens generally require new bond indentures or ordinances which can add time and cost to the issuance process.
• Interest rate swaps – Airport operators may enter into contracts with investment banks to exchange a stream of interest payments for another party's stream of payments.

Passenger Facility Charge (PFC) Bonds and Bonds backed by Customer Facility Charges (CFCs)

PFC bonds include a pledge of PFC revenues and/or are to be repaid in part or in full from PFC revenues. CFCs are collected by rental car companies from their customers at certain airports to pay for operating expenses and debt service for consolidated rental car facilities. CFC revenues can be structured similarly to the PFC bonds: combined flow of funds, direct debt service offset, back up pledge of subordinate airport revenues and stand alone CFC bonds.

Different approaches to these kind of bonding approaches incorporate:

• Combined flow of funds – This form of GARB is secured by an underlying pledge of airport revenues. PFC and CFC revenues are defined as airport revenues in the bond indenture and combined airport revenues are used to pay GARB debt service.
• Direct debt service offset – In this form of a GARB, PFC or CFC revenues pay all or a part of the GARB debt service, but they do not secure the bonds. Debt service may be included in the airline rate base if PFC or CFC projections are not realized.
• Back-up pledge of subordinate airport revenues – Under this form of a GARB, bonds secured by PFC or CFC revenues with a back-up pledge of airport revenue that is subordinate to a more senior lien on airport revenue.
• Stand alone PFC and CFC bonds – These bonds are solely backed by PFC or CFC revenues.
• Convertible lien PFC bonds – These bonds are initially secured by PFC revenues and then convert to GARB.

Single-Tenant and Multi-Tenant Special Facility Bonds

Single-Tenant Special Facility Bonds are issued by a single tenant and are used to finance unit passenger terminals, portions of terminals, hangar and maintenance facilities, cargo buildings, and ground equipment support facilities for the exclusive use of the tenant airline. They are backed solely by the airline corporations pledge to repay the debt. Multi-Tenant Special Facility Bonds have been issued to fund multi-tenant terminal, fuel storage and distribution facilities. Since these types of bonds are backed by multiple tenants and thus a more diverse revenue base, they have greater credit strength than single-tenant special facility bonds.

Potential new tax credit bonds (TCBs) for baggage screening infrastructure

The TCB process involves the issuance of taxable debt by state and local governments or other non-federal entities for designated capital purposes. Bondholders receive annual tax credits that can be applied against their federal income tax liability instead of cash interest payments. Principal is repayable by the issuer from nonfederal sources. The bond structure is such that the principal is repaid in a lump sum at bond maturity, which maximizes the value of the tax credit. The issuer makes periodic deposits to a sinking fund to provide for principal retirement at maturity.

This tax subsidy encourages private investment in desired infrastructure through lower-cost debt capital for the issuer. Possible pledge revenue streams include:

• General airport revenues (airline rents and fees and non airline sources)
• PFC revenues
• General local government resources such as sales and property taxes.

Commercial Paper

Commercial paper is a money market security that is usually used to manage cash flows as opposed to financing long-term investments. Commercial paper is commonly bought by money funds, is generally regarded as a safe investment and thus relatively low risk. It therefore comes with a correspondingly low interest rate. It is used most often by large airports or airports that operate independently as authorities. Many airports, such as those that operate as enterprise funds of a city, county or state and have centralized financial management, may find the tool more difficult to utilize.

Bond Anticipation Notes (BAN) and Grant Anticipation Notes (GAN)

A BAN is a short term financing mechanism that provides capital in advance of issuing long terms loans. In some cases, commercial paper may be a more-cost effective mechanism. A GAN is a short term financing mechanism that provides capital in advance of receiving expected grants.

Pooled Credit

Most airport operators do not have major issues accessing credit markets. For those that do, there are opportunities for pooling credit.

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