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###### Department of Transportation

###### Federal Aviation Administration

          - [Docket No. 16227]

# AGENCY:

Federal Aviation Administration (FAA), Department of Transportation (DOT).

# ACTION:

 Denial of petition; disposition of comments.

      ( print page 61545)    

# SUMMARY:

On March 10, 2003, the Sarasota-Manatee Airport Authority (SMAA) petitioned the FAA to amend the Policy and Procedures Concerning the Use of Airport Revenue (Revenue Use Policy). FAA requested comments. This notice responds to the comments received and denies the petition.

# ADDRESSES:

                         Comments received on the petition are available for public review in the Dockets Office, U.S. Department of Transportation, Room Plaza 401, 400 Seventh Street, SW., Washington, DC 20590-0001. The documents have been filed under FAA Docket Number 2003-16227. The Dockets Office is open between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The Dockets Office is on the plaza level of the Nassif Building at the Department of Transportation at the above address. Also, you may review public dockets on the Internet at                         *http://dms.dot.gov.*

# FOR FURTHER INFORMATION CONTACT:

Charles Erhard, Manager, Airport Compliance Division, AAS-400, Federal Aviation Administration, 800 Independence Ave. SW., Washington, DC 20591, telephone (202) 267-3085.

# SUPPLEMENTARY INFORMATION:

## I. The Petition

On March 10, 2003, the Federal Aviation Administration (FAA) received a petition from Frederick J. Piccolo, President, Chief Executive Officer of the Sarasota Manatee Airport Authority (SMAA), requesting that the FAA provide an opportunity for notice and comment on SMAA's proposed change to FAA's Policy and Procedures Concerning the Use of Airport Revenue (Revenue Use Policy). The petitioner requested that the FAA amend the Revenue Use Policy to permit certain airport  sponsors to use airport revenue for the direct subsidy of commercial airline service under specific and limited circumstances. The FAA has interpreted Federal law to prohibit an airport sponsor that is the recipient or subject of Federal assistance for airport improvements from using airport revenue for a direct subsidy to an air carrier, and that interpretation is reflected in the Revenue Use Policy. The petitioner represents that some airport sponsors have been able to provide either financial subsidies or revenue guarantees carriers to secure airline service using non-airport funds. These airport sponsors are general-purpose municipalities that can use funds from non-airport sources for general economic development without restriction on their use under the Revenue Use Policy. In contrast, those airport sponsors governed by a special-purpose airport authority cannot provide direct subsidies to carriers, or use any revenue for general economic development, because all of their funds are considered airport revenue subject to the requirements in Federal law and the Revenue Use Policy.

Specifically, the petitioner requested an amendment to the Revenue Use Policy that would “permit airports that have less than 0.25 percent of the total U.S. passenger boardings to use airport revenues at their discretion for subsidies to air carriers willing to provide service to those airports.” The petitioner suggested the following conditions to be contingent to this amendment:

1. The community must have a minimum population of 200,000 residents in the airport's local county(s).

2. Airport revenues considered for use are not subject to the airline agreement in place and do not affect the rate-making methodology of the agreement.

3. Subsidy is limited to new service.
    - Airline not presently at the airport.
    - City pair not presently served by any airline at the applicant airport.

4. Subsidy cannot exceed 12 consecutive months to any airline.

5. Airline receiving the subsidy must be willing to provide the following:
    - Daily scheduled service with a minimum seating capacity of 50 seats.
    - Must commit to a minimum of twelve consecutive months of service.

Airline cannot utilize the program more than once at the same airport.

## II. Discussion

### A. Summary of Comments

*Comments in support of the petition:*                     In its petition and subsequently submitted comments, the SMAA argues that there is an inequity within the Revenue Use Policy that places airports governed by general-purpose municipalities at an advantage over airports governed by independent authorities. SMAA contends that municipally-run airports are free to use non-airport revenue to offer subsidies for airline service while independent authorities are prevented from providing subsidies from their airport revenues because of the Revenue Use Policy. SMAA states that in a few cases authority-governed airports have funds that FAA defines as airport revenue, but the funds are separate and distinct from revenues required to support airline costs under the airport rate-setting methodology. SMAA proposes that these funds should be allowed for use as a direct subsidy in the manner proposed in its petition, because the cost of the subsidy will not be borne by the incumbent airlines at those airports. In addition, SMAA contends that a successful subsidy program will add airline service and benefit the incumbent airlines by reducing their airport fees. SMAA also adds that this proposal is consistent with the intent of Congress, despite legislative language that might suggest otherwise, in part because SMAA and other airports like it are not monopolies, but rather experience passenger leakage to nearby, larger airports that can serve the same population. Therefore, airport authorities should have the ability to fight passenger leakage by subsidizing air service, to promote a long-term sustainable market.                

Four airport operators besides the petitioner submitted comments in support of SMAA's proposal. Five other airport operators submitted comments generally in support, but with suggested changes in the limiting conditions. One airport operator suggested that any airport authority offering such subsidies, as outlined by the petitioner, be prevented from accepting funding under the Essential Air Service program.

The Airports Council International North America (ACI) and the American Association of Airport Executives (AAAE) submitted identical comments supporting the petition. ACI/AAAE stated that the FAA should allow any non-discriminatory subsidies, or at least the FAA should accept SMAA's proposal but without SMAA's proposed limits on population or aircraft capacity. ACI/AAAE also observed that:

“Under the current revenue-use policy, airport sponsors which are general-purpose municipalities may use funds from a non-airport source to provide direct subsidies. However, airport sponsors governed by a special-purpose airport authority cannot provide direct subsidies to air carriers, because all the funds are considered airport revenue subject to the revenue use policy prohibitions. Although general-purpose municipalities may use non-airport revenues for air carrier subsidies, the truth of the matter is that these municipalities and other airport sponsors, such as State departments of transportation, are also facing severe financial difficulty. Revising the revenue use policy to afford any airport the opportunity to offer a subsidy, regardless of airport sponsor status, should at lease provide a more level playing field for airports to solicit new routes and services.”

                    ACI/AAAE acknowledged that GAO determined that direct subsidies “have not produced an effective transportation solution for passengers at many small communities.” However, ACI/AAAE contend that even though “direct                           ( print page 61546)                        subsidies provided by individual airports will not address all or even the majority of inadequate air service issues, they are a legitimate tool.” Finally, ACI/AAAE contend that the Revenue Use Policy is contradictory in that it permits airports to spend airport revenues for promotional and marketing programs and to waive landing and other fees for a limited period in order to entice new market entrants or encourage incumbent airlines to add service, but denies airports the ability to directly subsidize airline service from airport revenues.                

Five airports submitted comments that the SMAA proposal is too narrow and would “result in different treatment for different airports.” The City of Fresno suggested that municipal airports be allowed to spend airport revenue for direct subsidies without the limitations requested in the petition. Other airports objected to the population limits, the 12-month duration limit, and aircraft size limits. Two individual users of Sarasota Bradenton International Airport commented in favor of the proposal, citing the high cost of fares at their preferred airport and the inconvenience of driving to a larger airport in a neighboring community. Two Sarasota area Chambers of Commerce submitted similar comments, stating, “[t]he lack of adequate local air service has been a severe impediment to our efforts to attract new industry to our area.” They also stated that the proposal would provide a region-wide benefit.

*Comments opposing the petition:*                     Three airport operators objected to the proposal. Generally, these commenters noted that unintended, potentially detrimental consequences could result from such a policy change. These consequences could include airports bidding for airline service or airlines demanding subsidies to keep service in a market. The manager of Ithaca Tompkins Regional Airport stated, “In our fight for better airline service we would lose out to bigger airports simply because they can offer more money * * * * I think the Sarasota proposal could set a dangerous precedent for the nation's smallest airports. In addition, it would unfairly discriminate against incumbent carriers and create an uneven playing field. Ultimately, it could start a free-for-all and even end up being a detriment to Sarasota itself.”                

The Aircraft Owners and Pilots Association (AOPA), the Regional Airline Association (RAA), and the Air Transport Association (ATA), American Airlines, and Continental Airlines all submitted comments in opposition. AOPA stated that it is strongly opposed to the proposal: “The safety and utility of our national air transportation system relies on the ability of an airport sponsor to maintain an airport in a safe and serviceable condition. An airport sponsor remains responsible for funding airport projects. Using airport revenue to subsidize airline service would take away from an airport's ability to fund airport improvement projects.” AOPA also states its concern that air carriers will pressure airports to provide such subsidies, basing service on the amount or availability of the subsidy, instead of the underlying market, echoing some of the comments from airports in opposition. ATA and other users stated that the change proposed by the petitioner would require a change in Federal law, since the law prohibits the use of airport revenue for general economic development. They noted that both the SMAA and the Sarasota area Chambers of Commerce acknowledge that a purpose of the proposal is general economic development. ATA argues that the Revenue Use Policy explicitly prohibits the use of airport revenue for the subsidy of airline service, regardless of the governing structure of an airport. ATA contends that SMAA's premise that the policy is somehow inequitable is flawed because the Revenue Use Policy currently treats all airports exactly the same. ATA also contends that, regardless of the governing structure, “an airport may receive financial assistance from local or state governments or from private organizations without running afoul of the Revenue Use Policy.” ATA concludes that, notwithstanding the prohibition of subsidies under Federal law and policy, the SMAA proposal, if enacted, would violate Federal grant assurances 22 and 23, because it would limit subsidies to airlines not presently serving SMAA and would therefore discriminate against incumbent airlines. Finally, ATA stated, “the use of any airport revenue to subsidize air service suggests that other airport needs are going unmet, or alternatively that charges are higher than they otherwise would have to be to maintain a self-sustaining rate structure.”

### B. Summary of Relevant Law and Policy

Petitions to amend the Revenue Use Policy must be evaluated with consideration of the controlling Federal law.

Title 49 U.S.C. 47107(b)(1) requires that grant agreements for airport development grants include an assurance that “the revenues generated by a public airport will be expended for the capital or operating costs of—(A) The airport; (B) the local airport system; or (C) other local facilities owned or operated by the airport owner or operator and directly and substantially related to the air transportation of passengers or property.” A substantially similar requirement is included in 49 U.S.C. 47133, which applies directly to any airport that has received Federal assistance. In 1994, Congress expressly prohibited “the use of airport revenues for general economic development, marketing and promotional activities unrelated to airports or airport systems.” 49 U.S.C. 47107(1)(2)(b). Sections V and VI of the Revenue Use Policy, at 64 FR 7718-20, respectively, list uses of airport revenue considered to be permitted or prohibited under the above statutes. The list of prohibited uses of airport revenue in section VI B. includes the following:

“12. Direct subsidy of air carrier operations. Direct subsidies are considered to be payments of airport funds to carriers for air service. Prohibited direct subsidies do not include waivers of fees or discounted landing or other fees during a promotional period. Any fee waiver or discount must be offered to all users of the airport, and provided to all users that are willing to provide the same type and level of new services consistent with the promotional offering. Likewise prohibited direct subsidies do not include support for airline advertising or marketing of new services to the extent permitted by Section V of this Policy Statement.”

Some of the commenters discussed the applicability of Federal law under the Airline Deregulation Act of 1978 (ADA). Under the ADA's preemption provision, 49 U.S.C. 41713(b), State and local governments are prohibited from enacting or enforcing any provision having the force or effect of law related to a “price, route, or service of an air carrier * * *”

### C. Discussion

*Legal issues:*                     The FAA fully appreciates the impact of the loss of air service at commercial airports and the interest of the petitioner and other airports in obtaining the ability to subsidize air service at their airports. While there are policy arguments for and against the requested change in Federal policy, the initial question in reviewing the petition is whether the FAA could adopt the requested policy change without a change in the authorizing statute. As noted above by statute, all revenues of the airport must be used for airport “capital or operating” costs. In its 1999 Revenue Use Policy, the FAA interpreted this statute to prohibit use of airport revenue to subsidize airline service, on the basis                           ( print page 61547)                        that such a subsidy would not be a capital or operating cost of the airport. Granting the petition would require a reversal of that interpretation.                

There has been no fundamental change in the respective roles of airport operators and air carriers and other airport users at U.S. airports since 1999. Nor has there been any amendment to the statutes governing use of airport revenue that would suggest that Congress favored a different interpretation. The FAA continues to believe that payments to airlines to increase airline use of the airport are not an operating cost of the airport itself. It is clear even from supporting comments that airline service is considered primarily an economic development benefit to the general community.

Another argument made for considering subsidies to airlines as a cost of airport operation is that there is no practical business or economic distinction between a subsidy using airport revenue, which is now prohibited, and a reduction in the fees charged to the carrier, which is permitted on a temporary promotional basis. The FAA's different treatment of subsidies and promotional fee waivers is based on specific statutes controlling airport revenue and airport fees, respectively. When an airport accepts Airport Improvement Program (AIP) grants, it agrees not to use its revenue in ways that might otherwise be legal and perhaps even routine for Government agencies and businesses that are not subject to AIP grant assurances. This restriction is grounded in Congress' interest in a “closed” system that dedicates airport revenue for airport purposes, and prevents a hidden municipal tax on air transportation. The requirement to use airport revenue for airport purposes is absolute; once a federally obligated airport receives a dollar of airport revenue, that dollar must be used for the purposes listed in 49 U.S.C. 47107(b) and 47133—effectively the capital and operating costs of the airport. If subsidizing airline service is not considered to be a capital or operating cost of the airport, then the airport operator cannot use any revenue for that purpose, even a small amount, or even temporarily.

In contrast, the statutes relating to airport rates and charges are much less prescriptive. Airport fees are subject to broad requirements of reasonableness and nondiscrimination, under 49 U.S.C. 40116 and 47107(a)(1), but the actual fees are set by the airport operator. Airport operators have substantial discretion in setting fees and routinely set fees to accomplish a variety of objectives. The FAA reviews fee methodologies and resulting fees to see that they are reasonable and not unjustly discriminatory, but does not generally inquire in the airport operator's policies or strategic objectives. Accordingly, the FAA evaluates promotional fee waiver programs to ensure the programs are not unjustly discriminatory and that the costs of a fee waiver are not in any way passed on to other operators, but does not consider the purposes or effectiveness of the program. Given the latitude provided the airport operator by 49 U.S.C. 40116 and 47107(a)(1) to set fees, the FAA has found that a temporary promotional fee discount or waiver is not inconsistent with those statutes. In contrast, the laws controlling use of airport revenue do not provide that latitude, and the FAA believes that its respective treatment of revenue use and promotional fee waivers is the correct interpretation of two substantially different statutes. Accordingly, we do not believe an analogy of subsidies to fee waivers justifies a reversal of the interpretation that airline subsidies are not a capital or operating cost of the airport.

Finally, some commenters thought that the preemption provision in the ADA, 49 U.S.C. 41713(b), argue against airport subsidies for air carriers. We believe that the applicability of section 41713(b) would be the same for air carrier subsidies, which are the subject of the petition, and for promotional fee waiver programs, which are currently permitted under the self-sustaining rate requirement (grant assurance 24). A particular program might raise a preemption issue, but that could be the case with fee waiver programs just as easily as with subsidy programs. Therefore, the fact that some carrier subsidy programs could be preempted by section 41713(b) is not a factor in evaluating whether carrier subsidies in general could be allowed at all.

                    In summary, the FAA understands that the SMAA and many other airport operators consider it critical to find ways to attract new air service, promote airline competition, and reduce ticket prices at their airports. Airport operators have various options available for this purpose that are consistent with the AIP grant assurances. However, the FAA remains convinced that the policy stated in the 1999 Revenue Use Policy,                     *i.e.,*                     that direct subsidies to airlines to provide service are not a capital or operating cost of the airport, remains the best interpretation of section 41713(b) and section 47133. If Congress at any point changes the requirements applicable to the use of airport revenue, the FAA would revise its policy to reflect the change.                

The Comments on the SMAA petition include a good representation of the arguments for and against a change in law or policy to permit use of airport revenue to subsidize air service. In any legislative reconsideration of the statutory language that controls use of airport revenue, we believe the following points raised by commenters should be considered.

*Relative position of airport authorities and municipally-owned airports:*                     SMAA states that the provisions of the Revenue Use Policy, as applied to the governing structure of an airport, limit the ability to offer subsidies to some airport sponsors,but not others. As the policy stands now, neither municipal governments nor airport authorities can spend airport revenue on direct airline subsidies. Both municipal governments and airport authorities may spend non-airport revenue on subsidies, including general fund revenue but also funds from local economic development authorities and from local businesses and business organizations. SMAA argues that the inequity arises because airport authorities generally do not have access to non-airport revenue, while municipal and State government airport operators do. While this is true with respect to general fund revenue, it is less true with respect to other sources, such as funds provided by local businesses or business organizations, directly or through guaranteed travel. Also, there may be many reasons why it would be difficult for a municipal airport operator to use general funds for an airport project, including a direct air carrier subsidy for air service. Accordingly, the FAA would agree that the lack of direct access to general fund revenue may put an airport authority at a disadvantage. However, that disadvantage is probably not as great as the SMAA and some other commenters represent.                

*Effectiveness:*                     Before any effort to change the law to clearly permit subsidy of air carrier service with airport revenue, the effectiveness of such subsidies would need to be considered. The GAO, in report no. 03-330, Commercial Aviation: Factors Affecting Efforts to Improve Air Service at Small Community Airports, January 2003, indicated that direct subsidies for airline service have not had a demonstrated record of successfully sustaining air service once the subsidies expire. A temporary subsidy, as requested in the petition, would seem to have the potential for a long-term positive result in only a narrow set of circumstances,                     *i.e.,*                     where (1) an airline                           ( print page 61548)                        did not believe that service would currently be profitable, but (2) the airline did believe that a modest subsidy would cover losses in the short term, and (3) the particular market had sufficient potential that it would support profitable service without a subsidy at the end of the promotional subsidy period.                

*Unintended consequences:*                     Some commenters noted that allowing the subsidy of air carrier service with airport revenue, as proposed by SMAA, could produce unintended and counter-productive consequences. Airlines could use such a program to demand subsidies to maintain existing service at an airport. SMAA proposed limitations and conditions on the program that would limit the scope of subsidies (and airline demands for subsidies). However, if promotional subsidy of new airline service were a permissible use of airport revenue, it is not clear what authority FAA would rely on to limit that use to some airports and not others. Several commenters noted another possible consequence of a subsidy to airlines                     *i.e.,*                     a subsidy program could reduce funds available for capital improvements and operating and maintenance costs of the airport. Whether a subsidy resulted in a net cost to the airport would depend on whether fees from new service were sufficient to offset the subsidy, and the success of the subsidy in generating new service in the long term.                

## III. Conclusion

The FAA understands that SMAA and other airports consider it essential to find ways to attract new air service to their airports. While it is unclear whether temporary subsidies to airlines would be effective in generating new service beyond the subsidy period, we can understand why SMAA and others would like to use every possible tool available for this purpose. The FAA has interpreted other laws to provide flexibility for airport operators, such as the ability to reduce or even waive fees charged to carriers for a substantial promotional period. However, we do not find that same flexibility in the laws governing the use of airport revenue. Congress has repeatedly asserted its interest in the strict interpretation and enforcement of the use of airport revenue for purposes which are clearly capital and operating costs of the airport. We do not find that the petition or comments provide a sufficient basis for the FAA to reverse its longstanding interpretation that subsidies to airlines are not a capital or operating cost of an airport. Accordingly, the petition is denied.

Issued in Washington, DC on October 6, 2004.

Woodie Woodward,

Associate Administrator for Airports.

[FR Doc. 04-23381  Filed 10-18-04; 8:45 am]

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