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[Federal Register Volume 69, Number 201 (Tuesday, October 19, 2004)]
[Notices]
[Pages 61544-61548]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-23381]

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DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

[Docket No. 16227]

Policy and Procedures Concerning the Use of Airport Revenue: 
Petition of the Sarasota-Manatee Airport Authority To Allow Use of 
Airport Revenue for Direct Subsidy of Air Carrier Operations

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

ACTION:  Denial of petition; disposition of comments.

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[[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

[[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

[[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

[[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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