August 2 7 , 2010

Members of the Subcommittee on Competition Future of Aviation Advisory Committee

Airports Council International

– North America (ACI

- NA) fully supports the goals of the Future of Aviation Advisory Committee (FAAC) and the work of the S ubcommittee on Competition. We understand that the Subcommittee has discussed and received a presentation on aviation taxes and fees which may ultimately be the subject of a recommendation to the FAA for inclusion in the final report to Secretary LaHood. It is critically important that the FAAC Subcommittee and full Committee base its recommendations on accurate information. Therefore, we are submitting this document to correct some misleading statements and inaccurate information presented by the Air

Tran sport Association (ATA) at the August 4 meeting of the Competition Subcommittee in Chicago, Illinois.

In their presentation, “Analysis of Industry Tax Policy”, ATA incorrectly conflates the Passenger Facility Charge (PFC) with the federal taxes and fees w hich are charged to fund the Airport and Airway Trust Fund (AATF) and federal aviation security programs. The PFC is in fact not a tax but a locally imposed user fee. In fact, in the original preamble to the PFC regulations the FAA states: “The PFC will be a local charge generating local revenue to be used locally.” The Congressional Research Service concurs that the PFC is not a tax: ““Although the FAA oversees the PFC program, the agency does not impose the fee. The PFC is a state, local, or port authorit y fee, not a federally imposed tax.” The PFC is a project

- based, time

- limited user fee. It is only paid by users of the system who will benefit from the projects it finances.

It is unfortunate that the airline industry has consistently attempted to paint the PFC as a tax on the industry. The latest example is on slide 4 of the ATA presentation where the PFC is lumped in with the federal ticket tax, waybill tax, segment fee and other federal taxes. What is never disclosed in the presentation is that airlin es are compensated to collect the PFC from passengers. Each time an airline collects a PFC from a passenger and remits it to an airport, they keep $0.11. The airline is also entitled to any interest earned on PFC funds while they are held by the airline. I n 2008, airlines retained about $78 million in PFC handling fees, plus any interest earned.

It is also curious that airlines oppose the PFC publically when many of those same airlines, when dealing with individual airports, strongly support the use of PF Cs to finance infrastructure or reduce debt costs. In fact, ninety

- five percent of all PFC applications are submitted to the FAA without opposition. PFCs have proven to be very effective in keeping airline operating costs low. Data provided by the Port Au thority of New York and New Jersey indicate that using PFCs to finance the $300 million BayRunway project at New York’s John F. Kennedy International Airport will save airlines $25 million annually in reduced debt service payments for 30 years. At Seattle

- Tacoma International Airport, a savings of $73 million annually was realized by using PFC funding, rather than issuing revenue bonds to cover construction expenses.

The rhetoric from the airlines on the PFC is not only inaccurate, it is also hypocritica l. PFCs are effective local user fees paid by passengers to fund infrastructure improvements to improve safety, reduce congestion and facilitate airline price and service competition. Airline charges for services provided to passengers are also user fees, which the airlines defend vigorously. The chart below shows the trend in airline fee revenue compared to airport PFC collections.

$3.55 $5.48 $7.84

$1.98 $2.79 $2.66 $2.52

$0.70

$0 $1 $2 $3 $4 $5 $6 $7 $8 $9

2007 2008 2009 1Q2010Billions Total Ancillary Revenue* PFC Collections

* Ancillary revenue includes baggage fees, reservation change fees and miscellaneous operating revenue, including pet transportation, sale of frequent flyer award miles to airline business partners and standby passenger fees. Revenue from seating assignments and on-board sales of food, drink, pillows, blankets, entertainment, or any other ancillary items are reported as Transport Related Revenue and cannot be identified separately.

Figure 1

- ACI

- NA analysis of BTS, FAA data.

As you can see, while airport PFC collections have actually gone down over the past several years, airlines have more than doubled the revenue they receive from passenger

fees.

Since its inception in 1990, the PFC has become recognized as one of the most efficient and effective financing mechanisms in mu nicipal finance. When an airport proposes to impose a PFC, it must follow a rigorous application process to ensure transparency and need. PFC projects are extensively reviewed by the FAA and the process includes mandatory consultation with the airlines, an d public comment. In the application the airport must demonstrate that the project is eligible and justified. In addition, PFCs cannot be used for revenue producing projects such as parking garages, terminal areas used for concessions or leased exclusively by a specific airline for more than five years, and projects that are incompatible with airport sponsor assurances agreed to with thereceipt of federal grants. PFC applications are approved for a specific amount of

collections with an end date.

Additio nally, the PFC helps airports of all sizes by freeing up Airport Improvement Program (AIP) funds for smaller airports which are more reliant on AIP for their capital funding. When a large or medium hub airport implements a PFC, they must forgo either

50 or 75 percent of their

AIP entitlements to the FAA (depending on the level of PFC). The “Small Airport Fund” is the recipient of 87.5 percent of these forgone

entitlements with the remaining 12.5 percent going into the AIP discretionary program. In FY2008, the PFC

turnback resulted in over $482 million additional dollars for small airports.

The purchasing power of the PFC has greatly diminished since the cap was increased to $4.50 by Congress in 2000, since it is not indexed to inflation. In the last 10 ye ars, construction costs have increased, far surpassing consumer inflation. The current maximum PFC of $4.50 is worth only $2.46 today when construction cost inflation is applied. Fully adjusting the PFC to account for construction cost inflation would pla ce the fee at $8.33. If no action is taken by 2011, the $3.00 PFC will have lost over half its value and the $4.50 PFC will have lost 45 percent of its value. In fact, ATA’s own presentation, on slide 18 includes the finding of the Mineta Commission (1997) which states: “The Commission recommends that the Congress look to AIP and Passenger Facility Charges (PFCs) as sources of additional revenues to finance future airport capital needs.”

ACI

- NA appreciates the opportunity to provide complete and accurate i nformation for the record and Subcommittee’s consideration. Please feel free to contact me should you have any questions.

Sincerely,

Greg Principato

President Airports Council International

– North America