United States Government Accountability Office

GAO Report to Congressional Committees

AVIATION FINANCE

Observations on 

Potential FAA 

Funding Options 

September 2006 

 

GAO-06-973 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 2006

AVIATION FINANCE

Observations on Potential FAA Funding 

Highlights of GAO-06-973, a report to Options 

Congressional Committees 

The Federal Aviation 

Administration (FAA), the Airport 

and Airway Trust Fund (Trust

Fund), and the excise taxes that 

support the Trust Fund are 

scheduled for reauthorization at

the end of fiscal year 2007. FAA is

primarily supported by the Trust 

Fund, which receives revenues

from a series of excise taxes paid 

by users of the national airspace 

system (NAS). The Trust Fund’s 

uncommitted balance decreased by

more than 70 percent from the end

of fiscal year 2001 through the end

of fiscal year 2005. The remaining 

funding is derived from the General 

Fund. This report focuses on the 

portion of revenues generated from 

users of the NAS and addresses the 

following key questions: (1) What 

advantages and concerns have

been raised about the current 

approach to collecting revenues 

from NAS users to fund FAA, and 

to what extent does available

evidence support the concerns? (2)

What are the implications of

adopting alternative funding

options to collect the revenues 

contributed by users that fund 

FAA’s budget? (3) What are the 

advantages and disadvantages of

authorizing FAA to use debt

financing for capital projects? 

This report is based on interviews 

with relevant federal agencies, 

including FAA, the Office of 

Management and Budget, and the 

Congressional Budget Office. GAO 

also obtained relevant documents 

from these agencies, other key 

stakeholders, and academic and 

financial experts. 

Some stakeholders support the current excise tax system, stating that it has 

been successful in funding FAA, has low administrative costs, and distributes 

the tax burden in a reasonable manner. Other stakeholders, including FAA, state 

that under the current system there is a disconnect between revenues 

contributed by users and the costs they impose on the NAS that raises revenue 

adequacy, equity, and efficiency concerns. Trends and FAA projections in both 

inflation-adjusted fares and average plane size suggest that the revenue collected

under the current funding system has fallen and will continue to fall relative to 

FAA’s workload and costs, supporting revenue adequacy concerns. Comparisons 

of revenue contributed and costs imposed by different flights provide support 

for equity and efficiency concerns. The extent to which revenues and costs are

linked, however, depends critically on how costs are allocated. Thus, to assess 

the extent to which the current approach or other approaches aligns costs with 

revenues would require completing an analysis of costs, using either a cost 

accounting system or cost finding techniques to assign costs to NAS users.

The implications of adopting alternative funding options to collect revenue from 

NAS users and address concerns about the current excise tax system vary 

depending on the extent to which users’ revenue contributions reflect the costs

those users impose on FAA. This report considers six selected funding options, 

including two that modify the current excise tax structure and four that adopt 

more direct charges to users. Given the diverse nature of FAA’s activities, a

combination of alternative options may offer the most promise for linking 

revenues and costs. Switching to any alternative funding option would raise

administrative and transition issues. Some stakeholders who support the 

adoption of direct user charges also support a change in FAA’s governance

structure, but GAO found no evidence adoption of direct charges requires this. 

Authorizing FAA to use debt financing for capital projects would have

advantages and disadvantages. Some stakeholders identify debt financing as 

attractive because it could provide FAA with a stable source of revenue to fund 

capital developments, while at the same time spreading the costs out over the 

life of a capital project as its benefits are realized. Debt financing raises 

significant concerns, however, because it encumbers future resources, and 

expenditures from debt proceeds may not be subject to the congressional 

oversight that appropriations receive. Concerns regarding borrowing costs, 

oversight, and encumbering future resources are particularly important in light 

of the federal government’s long-term structural fiscal imbalance. 

The Departments of Transportation and Treasury provided comments and

technical clarifications on a draft of this report which we have incorporated or 

responded to as appropriate. DOT’s comments focused on governance reforms 

required to adopt a user fee approach, and whether we accurately described the 

status of FAA’s accounting system. Treasury's raised concerns about the level of

analytical development for the options and associated issues. Data was not 

available to conduct the analysis Treasury suggested, and we agree necessary. 

However, we believe the report provides useful information to facilitate debate 

on the options. 

www.gao.gov/cgi-bin/getrpt?GAO-06-973.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Gerald

Dillingham at (202) 512-4830 or 

dillinghamg@gao.gov. 
Contents 

Letter 1

Results in Brief 2

Background 4

Some Stakeholders Favor the Current Funding System, but Others 

Raise Revenue Adequacy, Equity, and Efficiency Concerns 11 

Alternative Funding Options Present Both Advantages and 

Disadvantages 22

Alternative Capital Financing Methods Have Advantages and 

Disadvantages 32

Agency Comments 39 

Appendix I Scope and Methodology 43 

Appendix II GAO Contact and Staff Acknowledgments 45 

Tables 

Table 1: Estimated Excise Tax Contribution of One Narrow-body 

Jet Flight Compared with Three Regional Jet Flights 14 

Table 2: Estimated Excise Tax Contribution by Flight Type 18 

Table 3: Estimated Excise Tax Contribution of One Narrow-body 

Jet Flight Compared with One Regional Jet Flight 21 

Figures 

Figure 1: FAA Activities 5 

Figure 2: Sources of Trust Fund Revenue for Fiscal Year 2005 8 

Figure 3: Trust Fund’s End-of-Year Uncommitted Balance, Fiscal 

Years 1971-2005 9 

Figure 4: General Fund and Trust Fund Contributions to FAA’s 

Budget 10

Figure 5: Trust Fund Revenues and Passenger Enplanements, 1971 

through 2005 12 

Figure 6: Average Domestic Fares, 1981-2005 16 

Figure 7: Average Available Seats per Domestic Aircraft 17 

Figure 8: Potential FAA Process for Borrowing from the Treasury 34 

Figure 9: Potential FAA Process for Borrowing from the Private 

Capital Market 35 

Page i GAO-06-973 Aviation Finance
Abbreviations 

AIP Airport Improvement Program 

AOPA Aircraft Owners and Pilots Association 

ARTCC air route traffic control center 

ATC air traffic control 

BPA Bonneville Power Administration 

CBO Congressional Budget Office 

DOT Department of Transportation 

FAA Federal Aviation Administration 

GA general aviation 

GO general obligation bond

GR general revenue bond 

GAO Government Accountability Office 

GARVEE Grant Anticipation Revenue Vehicle 

IRS Internal Revenue Service 

NAS National Airspace System

OMB Office of Management and Budget 

SARS Severe Acute Respiratory Syndrome 

TRACON terminal radar approach control center 

TVA Tennessee Valley Authority 

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reproduce this material separately. 

Page ii GAO-06-973 Aviation Finance
United States Government Accountability Office

Washington, DC 20548 

September 29, 2006 

Congressional Committees 

The Federal Aviation Administration (FAA), the Airport and Airway Trust 

Fund (Trust Fund), and the excise taxes that support the Trust Fund are 

scheduled for reauthorization at the end of fiscal year 2007. Although there 

have been fluctuations in its funding sources, FAA is primarily supported 

by the Trust Fund (82 percent),1

 which receives revenues from a series of 

excise taxes paid by users of the National Airspace System (NAS). The 

Trust Fund’s uncommitted balance decreased by more than 70 percent 

from the end of fiscal year 2001 through the end of fiscal year 2005. These 

excise taxes apply to purchases of airline tickets and aviation fuel, as well 

as the shipment of cargo. FAA’s remaining funding comes from the 

General Fund of the U.S. Treasury (General Fund) (18 percent). The policy 

debate over the reauthorization of FAA, the Trust Fund, and the excise 

taxes that fund it encompasses a host of critical and complex issues, 

including the modernization of the nation’s air traffic control (ATC) 

infrastructure and FAA’s efforts to improve cost control and internal 

management practices. The agency’s reliance on revenues from both users 

and the General Fund recognizes that FAA produces direct benefits for 

NAS users and substantial public benefits, including safety, security, and 

economic benefits. Stakeholders we talked with all agreed that these 

public benefits justify a continued General Fund contribution to FAA’s 

budget. However, a key issue raised in the debate over FAA funding, and

the focus of this report, is how the revenues generated from users of the 

NAS might be collected.2

 Stakeholders are divided over whether Congress 

should continue to rely on the current excise tax structure or adopt an 

alternative structure to collect the funding contributed by users. 

You requested that we examine FAA’s current funding system and 

alternative funding options. Accordingly, we addressed the following key 

 1

These percentages reflect FAA’s revenue composition in fiscal year 2006; from fiscal year 

1997, the year the current tax structure became effective, through fiscal year 2006, the

Trust Fund has contributed an average of 80 percent of FAA’s budget, while General Fund

contributions have averaged 20 percent. 

2

This report does not address the question of what proportion of FAA’s budget should be

derived from the General Fund because of the public benefits created by FAA activities. 

Page 1 GAO-06-973 Aviation Finance
questions: (1) What advantages and concerns have been raised about the 

current approach to collecting revenues from NAS users to fund FAA, and

to what extent does the available evidence support the concerns? (2) What

are the implications of adopting alternative funding options to collect the 

revenues contributed by users that fund FAA’s budget? (3) What are the 

advantages and disadvantages of authorizing FAA to use debt financing for 

capital projects? 

To answer these questions, we reviewed relevant economic literature, 

policy analysis, congressional testimony, industry group publications, and

stakeholders’ responses to questions FAA asked them about its funding 

and alternative options.3

 We also interviewed key stakeholders, including 

officials from FAA, the Office of Management and Budget (OMB), the 

Congressional Budget Office (CBO), and the Department of the Treasury 

(Treasury); representatives of aviation industry groups; and academic and 

financial experts. In addition, we examined FAA budget data, Trust Fund 

revenue data, FAA forecasts, and aviation activity data. We reviewed the

reliability of these data and concluded that they were sufficiently reliable 

for our purposes. We conducted our work from May 2005 through August 

of 2006 in accordance with generally accepted government auditing 

standards. Details of our scope and methodology are provided in appendix

1. 

Some stakeholders4 support the current excise tax system, stating that it

has been successful in funding FAA, has low administrative costs, and 

distributes the tax burden in a reasonable manner. Other stakeholders,5

including FAA, state that under the current system there is a disconnect 

between the revenues contributed by users and the costs they impose on 

the NAS. In their view, this disconnect raises revenue adequacy, equity, 

and efficiency concerns. Trends over the past 25 years in, and FAA 

projections of, both inflation-adjusted fares and average plane size suggest 

that the revenue collected under the current funding system has fallen and

will continue to fall relative to FAA’s workload and costs, supporting 

Results in Brief 

 3

In September 2005, FAA provided stakeholders with information on its operations and

costs and asked for responses to questions about how to fund the agency.

4

Stakeholders that support the current funding system include the Aircraft Owners and

Pilots Association and the National Business Aviation Association. 

5

Stakeholders that have expressed concerns about current funding system include the Air 

Transport Association and the FAA. 

Page 2 GAO-06-973 Aviation Finance
revenue adequacy concerns. Comparisons of revenue contributed and 

costs imposed by different flights provide support for equity and efficiency 

concerns. However, the extent to which revenues and costs are linked 

depends critically on how costs are assigned to NAS users. Thus, to assess 

the extent to which the current approach or any other approach aligns 

costs with revenues would require completing an analysis of costs, using 

either a cost accounting system or cost finding techniques6

 to assign costs 

to the various NAS users. 

Adopting alternative funding options to collect revenues from NAS users 

would have advantages and disadvantages. The degree to which 

alternative funding options could address concerns about the current 

excise tax system ultimately depends on the extent to which the 

contributions required from users actually reflect the costs they impose on 

the system. This report reviews both modifications to the current excise 

tax system and more direct charges based on the use of FAA’s services. 

Given the diverse nature of FAA’s activities, a combination of alternative 

options may offer the most promise for linking revenues and costs. 

Switching to any alternative funding option would raise administrative and 

transition issues, such as developing the administrative capacity to 

implement new charges. Some stakeholders who support the adoption of 

direct user charges also support a change in FAA’s governance structure—

for example, commercializing air navigation services—but we found no 

evidence that the adoption of direct charges would require a governance 

change. 

Authorizing FAA to use debt financing for capital projects would have 

advantages and disadvantages. The use of debt financing—such as 

bonds—has been identified by some stakeholders as a means of funding 

FAA capital projects, such as components of the Next Generation Air 

Transportation System (NGATS) or existing ATC facilities and equipment.7

Some stakeholders believe debt financing is attractive because it could 

provide FAA with a stable source of revenue to fund capital development 

and, at the same time, spread the costs out over the life of a capital project 

 6

Cost finding techniques produce cost data by analytical or sampling methods and typically 

involve analyses of available cost data using spreadsheet applications or manual 

calculations. 

7

In addition, to debt financing, some stakeholders have identified other methods of funding

capital investments, such as leasing or contracting out services (e.g., flight service 

stations). An analysis of these other methods was beyond the scope of this report. 

Page 3 GAO-06-973 Aviation Finance
as its benefits are realized. Debt-financing raises significant concerns, 

however, because it encumbers future resources and expenditures from 

debt proceeds may not be subject to the congressional oversight that 

appropriations receive. In addition, debt financing is subject to federal 

budget scoring rules and raises issues regarding borrowing costs that are 

particularly important in light of the federal government’s long-term 

structural fiscal imbalance. 

We provided a draft of this report to the Departments of Transportation 

(DOT) and the Treasury for review and received comments from both 

agencies. Neither DOT nor Treasury explicitly agreed or disagreed with 

our observations, and both departments raised a number of concerns and

provided technical clarifications. We incorporated these comments and 

technical clarifications throughout the report as appropriate, or responded 

to them in the agency comments section at the end of the report. 

FAA engages in three primary activities: aviation safety oversight, ATC, 

and airport infrastructure development (see fig. 1).8

 The costs associated 

with each of these activities generally depend on the nature and usage of 

the specific service FAA provides. FAA safety activities include the 

licensing of pilots and mechanics, as well as the inspection of various 

aspects of the aviation system, such as aircraft and airline operations. 

According to FAA, the costs associated with these safety activities are 

primarily driven by the volume of each (e.g., the number of licenses and 

inspections). 

Background 

 8

FAA is also responsible for commercial space licensing and oversight; this line of business

is beyond the scope of this report. 

Page 4 GAO-06-973 Aviation Finance
Figure 1: FAA Activities 

Terminal

ILR Operations

Commercial 

VFR Operations

General Aviation 

Small airports

Ground

control

TRACON

center

Weather Beacon station

Radar 

AIR TRAFFIC CONTROL 

Hangar

Air traffic

control tower

Flight service

station

En route

center

Take off

control

Approach

control

AIRPORT INFRASTRUCTURE 

Ground

control

TRACON

center

Weather Beacon station

Radar 

Air traffic

control tower Flight service

station

En route center

Take off ak

control co Approach A

control

Maintenance and inspection 

Manufacturer

Pilot certification 

SAFETY 

Maintenance and inspection 

Manufacturer

Pilot certification

Terminal

Small airports

Hangar

Source: GAO.

ATC includes a variety of complex activities that guide and control the 

flow of aircraft through the NAS. Generally, commercial aircraft fly under 

instrument flight rules (IFR) that require ATC services throughout a flight.

Such flights rely on FAA staff in control towers to guide them from the 

terminal to the runway, and through takeoff. Once in the air and beyond 

the immediate vicinity of the airport, they rely on terminal radar approach 

control centers (TRACONs) to guide them out of the airspace in a broader 

area surrounding the airport.9

 Services provided by control towers and 

TRACONs are referred to as terminal services. The TRACONs then pass 

flights off to air route traffic control centers (ARTCC), which provide en- 

 9

Depending on the airport’s location, the approach control facilities may be located within 

the airport’s control tower or at separate facilities.

Page 5 GAO-06-973 Aviation Finance
route control until the flights near their destinations; services provided by

ARTCCs are referred to as en-route services. When a flight nears its 

destination, control is passed back to a TRACON, and then to tower 

guidance, to land and proceed to an airport gate. General aviation’s (GA) 

use of these services varies greatly. Nearly all business jet flights file flight 

plans for IFR services, as do roughly half of GA piston flights. Many GA 

flights operate entirely under visual flight rules (VFR) and may not require 

any ATC services at all if they do not fly to airports that have towers. 

These other GA flights may require ground control, or rely on beacons or 

flight service stations en route. FAA states that the costs imposed by each

flight are influenced by the amount and nature of the specific services it 

uses, and by whether the flight operates at peak periods. 

FAA funds airport infrastructure development through the Airport 

Improvement Program (AIP). AIP is a multibillion-dollar grant program 

that provides funding for the airports included in FAA’s National Plan of 

Integrated Airport Systems, which includes airports that range from the 

largest commercial service airports in the United States to small GA 

airports. Unlike safety and ATC services, AIP expenditures are not the 

direct result of costs imposed by users of the NAS. FAA distributes AIP 

funding based on congressional priorities established in authorizing and

appropriation legislation. Accordingly, apart from some relatively small 

administrative expenses, FAA’s spending for AIP does not represent a 

“cost” of providing services to users. Therefore, it is not possible to 

establish a direct link between AIP expenditures and taxes or charges paid

by system users based on their use of FAA services. 

FAA Funding The Trust Fund was established by the Airport and Airway Revenue Act of 

1970 (P.L. 91-258) to help fund the development of a nationwide airport 

and airway system. The Trust Fund provides funding for FAA’s two capital 

accounts, AIP and the Facilities and Equipment account, which funds 

technological improvements to the ATC system. The Trust Fund also 

provides funding for the Research, Engineering, and Development 

account, which funds continued research on aviation safety, mobility, and 

environmental issues. In addition, the Trust Fund supports part of FAA’s 

operations. 

To fund these accounts, the Trust Fund is credited with revenues collected 

from system users through the following dedicated excise taxes: 

• 7.5 percent ticket tax on domestic airline tickets 

Page 6 GAO-06-973 Aviation Finance
• $3.30 domestic passenger segment tax (excluding flights to or from rural 

airports)10

• 6.25 percent tax on the price paid for transportation of domestic cargo or 

mail11

• $0.043/gallon tax on domestic commercial aviation fuel 

• $0.193/gallon tax on domestic GA gasoline 

• $0.218/gallon tax on domestic GA jet fuel 

• $14.5012/person tax on international arrivals and departures, indexed to 

inflation 

• 7.5 percent tax on mileage awards (frequent flyer awards tax) 

• $7.30 per passenger tax on flights between the continental United States 

and Alaska or Hawaii (or between Alaska and Hawaii), indexed to 

inflation13

Trust Fund revenues totaled $10.7 billion in fiscal year 2005. The ticket tax

was the largest single source of Trust Fund revenue in fiscal year 2005, 

totaling about $5.2 billion, or about 48 percent of all Trust Fund receipts. 

The passenger ticket tax was followed by the passenger segment tax and 

the international departure/arrival taxes, which each totaled about $1.9 

billion; fuel taxes, which totaled $870 million; the cargo/mail tax, which 

totaled $461 million; and interest income, which totaled $430 million. 

Figure 2 shows the shares received from each source in fiscal year 2005. 

 10The domestic segment tax is levied on each domestic segment a passenger travels on a

flight. For example, a passenger traveling on a flight from New York to Seattle, with a 

connection in Chicago, travels two segments—one from New York to Chicago, and a 

second from Chicago to Seattle. The segment tax rate was $3.30 in 2006; this tax rate

changes annually as it is indexed to the Consumer Price Index. 

11This is also known as the waybill tax.

12The international arrival and departure tax rates are $14.50 in 2006; both rates change 

annually because they are indexed to the Consumer Price Index.

13The per passenger tax on flights between the continental United States and Alaska or 

Hawaii (or between Alaska and Hawaii) is $7.30 in 2006; this rate changes annually because 

it is indexed to the Consumer Price Index.

Page 7 GAO-06-973 Aviation Finance
Figure 2: Sources of Trust Fund Revenue for Fiscal Year 2005 

Since the Trust Fund’s creation in 1970, revenues have, in aggregate, 

exceeded spending commitments, resulting in a surplus or an 

uncommitted balance, although expenditures from the Trust Fund 

exceeded revenues in 2005.14 The Trust Fund’s uncommitted balance, 

which was about $1.9 billion at the end of fiscal year 2005, depends on the 

revenues flowing into the fund and the appropriations made available from

the fund for various spending accounts. Policy choices, structural changes 

in the aviation industry, and external events have affected revenues 

flowing into and out of the fund. For example, the uncommitted balance 

has been declining in recent years because Trust Fund revenues for the 

last 5 years have been less than FAA’s forecasted levels.15 Figure 3 shows 

48.0% 17.7%

17.9%

8.1%

International departure/arrival

Fuel tax

4.3%

Cargo/mail tax

4.0%

Interest on cash balance

Passenger ticket tax

Passenger segment tax

Source: GAO analysis of FAA data. 

 14The Trust Fund’s uncommitted balance represents money against which there is no 

outstanding budget commitment or budget authority to spend. 

15For a more complete discussion of the Trust Fund, see GAO, Federal Aviation 

Administration: An Analysis of the Financial Viability of the Airport and Airway Trust 

Fund, GAO-06-562T (Washington, D.C.: Mar. 28, 2006).

Page 8 GAO-06-973 Aviation Finance
the fluctuations in the Trust Fund’s uncommitted balance since its 

inception. 

Figure 3: Trust Fund’s End-of-Year Uncommitted Balance, Fiscal Years 1971-2005

-1,000 

0 

1,000 

2,000 

3,000 

4,000 

5,000 

6,000 

7,000 

8,000 

1971 

1972 

1973 

1974 

1975 

1976 

1977 

1978 

1979 

1980 

1981 

1982 

1983 

1984 

1985 

1986 

1987 

1988 

1989 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

1998 

1999 

2000 

2001 

2002 

2003 

2004 

2005 

Dollars in millions

Source: GAO analysis of Congressional Budget Office data and FAA budgets. 

Fiscal year 

Dollars in millions

In addition to Trust Fund revenues, in most years General Fund revenues 

have been used to fund FAA. The General Fund contribution has varied 

greatly, ranging from 0 percent to 59 percent of FAA’s budget (see fig. 4). 

From fiscal year 1997, the year when existing Trust Fund excise taxes 

were authorized, through fiscal year 2006, the General Fund contribution 

has averaged 20 percent of FAA’s total budget. About $2.6 billion was 

appropriated for fiscal year 2006 from the General Fund for FAA’s 

operations. This amount represents about 18 percent of FAA’s total 

appropriation. 

Page 9 GAO-06-973 Aviation Finance
Figure 4: General Fund and Trust Fund Contributions to FAA’s Budget 

Source: GAO analysis of FAA data.

Percentage 

0

10

20

30

40

50

60

70

80

90

100

Trust fund

General fund

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Congressionally 

Authorized Commission 

Recommended Changes in 

FAA’s Funding Structure 

The National Civil Aviation Review Commission (Commission) issued a 

Congressional report in 1997 analyzing several issues, including alternative 

funding means to meet the needs of the nation’s aviation system. The 

Commission’s report16 identified a number of concerns with FAA’s funding 

structure as it existed at the time the Commission began its work.17 To 

address these concerns, the Commission made several unanimous 

recommendations, including that FAA’s revenues be more closely linked 

to the costs of services provided to support ATC activities, including 

capital investments. The Commission also recommended that General 

Fund revenues be used to fund aviation security and safety activities and 

 16National Civil Aviation Review Commission, Avoiding Aviation Gridlock and Reducing

the Accident Rate: A Consensus for Change (Washington, D.C.: Dec. 1997).

17 The following changes were made after the Commission began its work but before it 

issued its final report: the passenger segment tax was added; the passenger ticket tax was

reduced from 10 percent to 7.5 percent; the international departure tax was increased from 

$6 to $12 and was also applied to international arrivals; the frequent flyer tax was added; 

and the Hawaii/Alaska passenger taxes were added.

Page 10 GAO-06-973 Aviation Finance
government use of the air traffic system, and that GA operators continue 

to pay a fuel tax, although perhaps at a higher rate. 

Some stakeholders support the current excise tax system, stating that it

has been successful in funding FAA, has low administrative costs, and 

distributes the tax burden in a reasonable manner. Other stakeholders, 

including FAA, state that under the current system, the disconnect 

between the revenues contributed by users and the costs they impose on 

the NAS raises revenue adequacy, equity, and efficiency concerns. Trends 

in, and FAA’s projections of, both inflation-adjusted fares and average 

plane size suggest that the revenue collected under the current funding 

system has fallen and will continue to fall relative to FAA’s workload and 

costs, supporting revenue adequacy concerns. Comparisons of revenue 

contributed and costs imposed by different flights provide support for 

equity and efficiency concerns. However, the extent to which revenue and 

costs are linked depends critically on how the costs of FAA’s services are 

assigned to NAS users. Thus, assessing the extent to which the current 

approach or any other approach aligns costs with revenues would require 

completing an analysis of costs, using either a cost accounting system or 

cost finding techniques to distribute costs to the various NAS users. FAA 

stated that it has made substantial progress in designing a cost accounting 

system, implementing it throughout its lines of business, and modifying it 

to determine costs by user group. 

Some Stakeholders 

Favor the Current 

Funding System, but 

Others Raise Revenue 

Adequacy, Equity, and 

Efficiency Concerns 

Stakeholders Who Favor 

Maintaining the Current 

Funding Structure Cite Its 

Success and Reasonable 

Allocation of Funding 

Burden 

Some stakeholders believe that maintaining the current funding structure 

for FAA is appropriate because it has been successful in funding FAA for 

many years, suggesting that there is no urgent reason to change it. 

According to these stakeholders, the revenues collected from users under 

the current funding system, along with General Fund revenues provided by

Congress, have been sufficient for the United States to develop a safe and 

efficient aviation system. As the number of air travelers grew, so did 

revenues going into the Trust Fund. Even though revenues fell during the 

early years of this decade as the demand for air travel fell, they began to

rise again in fiscal year 2004 (see fig. 5); FAA estimates that revenues will

continue to increase. In addition, these stakeholders state that 

administrative costs of the current system are relatively low. 

Page 11 GAO-06-973 Aviation Finance
Figure 5: Trust Fund Revenues and Passenger Enplanements, 1971 through 2005 

Source: GAO analysis of FAA data.

Millions of enplanements Billions of dollars

0

80

160

240

320

400

480

560

640

720

800

0

2

4

6

8

10

12

Revenues in 2005 $ (CPI adjustment)

Enplanements

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

19861987

1988

19891990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Notes: Lapses in tax authorizations were the cause of significant revenue decreases in 1981-1982 

and 1996-1997. Trust Fund revenue is presented by fiscal year and is adjusted to 2005 constant 

dollars. Enplanements are presented by calendar year and are total system scheduled enplanements

for the United States. 

Another argument put forward by some industry stakeholders and analysts 

for maintaining the current funding structure is that this structure provides 

a reasonable allocation of the funding burden between commercial 

aviation and GA. With the current funding structure, system users who are 

subject to the commercial taxes—including commercial airlines, air taxis,

and many fractional ownership operations—contribute about 97 percent 

of the tax revenue that accrues to the Trust Fund. The remaining GA 

operators, including those who operate purely private corporate and 

individual aircraft, contribute about 3 percent. Representatives of the GA 

segment of the industry contend that collecting the bulk of the usercontributed revenues from the commercial segment is appropriate 

because the ATC system exists at its current size to accommodate the 

demands of commercial aviation and GA users should not be asked to 

contribute more than the incremental costs that result from also providing 

services to GA aircraft. Although the incremental costs are not precisely

known, GA representatives have told us that they believe that the revenues 

currently collected from fuel taxes are a rough approximation of the 

Page 12 GAO-06-973 Aviation Finance
incremental costs that FAA incurs from providing services to GA aircraft. 

According to FAA, all cost studies to date concluded that GA users pay 

less than the costs they impose on the system, while commercial aviation 

users pay more than the costs they impose on the system. 

Disconnect between Trust 

Fund Revenues and FAA 

Costs Raises Concerns 

That Revenues Will Not 

Keep Pace with Workload 

Increases under the 

Current System 

The disconnect between sources of Trust Fund revenues and FAA costs 

under the current funding system raises concerns that the current system 

will not produce adequate revenue in the future to keep pace with FAA’s 

workload increases and, consequently, FAA’s costs. The principle of 

revenue adequacy requires a funding system to produce revenues 

commensurate with workload changes over time. However, under FAA’s 

current funding system, increases in FAA’s workload will not necessarily 

be accompanied by revenue increases because users are not directly 

charged for the costs they impose on FAA from their use of the NAS. 

Rather, Trust Fund revenues are primarily dependent on the prices of 

tickets (the domestic ticket tax) and the number of passengers on a plane 

(the domestic ticket tax, the domestic passenger segment tax, and the 

international passenger tax); neither of these factors are directly related to

workload, which is driven by flight control and safety activities. Long-term 

industry trends and FAA forecasts of declines in air fares and the growing 

use of smaller aircraft support revenue adequacy concerns.18

To illustrate the disconnect between revenues and costs, table 1 provides 

an example of revenues generated by different aircraft making similar 

flights. The use of multiple flights by smaller aircraft to carry the same 

number of travelers as one larger aircraft increases FAA’s workload, but 

will not necessarily be accompanied by increased revenues from system

users to fund FAA’s additional costs associated with the workload 

 18In addition to revenue adequacy, a criterion that economists often use to compare funding

methods is year-to-year revenue stability, which generally refers to the degree to which 

both short-term fluctuations in economic activity and other factors not directly linked to

the business cycle affect the level of revenue collected from a funding source. Revenue 

stability has been an important concern for FAA’s funding because of the impact of the 

September 11, 2001, terrorist attacks, the war in Iraq and associated security concerns, the 

Severe Acute Respiratory Syndrome (SARS) outbreak, and global recessions on the 

demand for air travel, and, therefore, on the revenues flowing into the Trust Fund (see 

GAO-06-562T). However, the revenue stability concern will likely exist in a roughly similar 

way under each of the options we reviewed because significant decreases in demand are 

likely to decrease revenues whether they are derived from excise taxes on aviation-related 

activities or from direct user charges. Thus, in this report, we do not address revenue

stability because it is not likely to vary much across options, including the current funding 

system.

Page 13 GAO-06-973 Aviation Finance
increase. This example shows the taxes that would be generated from 

transporting 105 passengers from Los Angeles to San Francisco by (1) one 

flight using a common narrow-body jet (Boeing 737), and (2) three flights 

using a common regional jet (CRJ-200). In this case, the narrow-body jet 

has the capacity to carry 132 passengers, while each regional jet has the 

capacity to carry 48 passengers. 

Table 1: Estimated Excise Tax Contribution of One Narrow-body Jet Flight

Compared with Three Regional Jet Flights 

Approximately 300-mile flight from Los Angeles to San Francisco 

Plane type One 737 flight

Three CRJ-200

flights

Number of seats 132 144

Number of passengers 105 105

Average fare $100 $100 

Gallons of fuel consumed 937 1,797 

Ticket tax $788 $789 

Passenger segment tax $348 $348 

Waybill tax $2 $0 

Fuel tax $40 $78 

Total revenue $1,178 $1,215 

Source: GAO analysis of FAA data. 

As the table shows, differences in FAA’s workload are not reflected in

revenues. FAA states, all other factors being equal (e.g., time of flight), that 

the total ATC costs of the three regional jet flights would be about three 

times the cost of one narrow-body flight. Revenues from the three regional 

jet flights, however, total only about $37, or 3 percent, more than the 

revenue generated by the one narrow-body jet flight. Revenue increases 

are not linked to cost increases because, under the current system, 

revenues are primarily influenced by the number of passengers, the 

average price of tickets, and the amount of fuel used—not the costs 

imposed on FAA through the use of its services. 

The disconnect between revenues and workload can work both ways; 

increases in the number of passengers on planes (e.g., larger planes or 

higher load factors19) or increases in fares can result in higher revenues 

 19A load factor is the percentage of a flight’s total available seat miles actually used to

transport passengers.

Page 14 GAO-06-973 Aviation Finance
relative to workload. In fact, load factors have increased over the past 

several years, and fares have increased over the past year. However, longterm trends and FAA’s projections for both domestic fares and plane size 

suggest that Trust Fund revenues have declined relative to FAA’s 

workload and will likely continue to do so for the next several years. 

Trends in average fares suggest that the Trust Fund is collecting less 

revenue relative to workload than in the past, and FAA’s projections 

suggest that this decline will continue. Since the passenger ticket tax is a 

percentage of the ticket price, reductions in the average ticket price result 

in lower ticket tax revenues relative to FAA’s workload. Domestic airfares, 

adjusted for inflation, have steadily declined over the past 25 years, from 

an average of $233 in 1981 to $148 in 2005 (see fig. 6).20 This reduction 

represents an average decline of about 1.9 percent per year.21 Even though

there have been increases in fares over the past year, FAA projects 

average fares will continue to decline over time. In FAA’s most recent 

forecast, inflation-adjusted domestic yields—a proxy measure for fares—

are projected to decline approximately 8.5 percent over the next 10 years.22

 20We have adjusted airfare data to 2005 dollars. 

21This is the annual compounded rate of decline. 

22Yield is the amount of revenue airlines collect for every mile a passenger travels.

Page 15 GAO-06-973 Aviation Finance
Figure 6: Average Domestic Fares, 1981-2005 

Source: GAO analysis of FAA data.

In fiscal year 2005 dollars

140

0

150

160

170

180

190

200

210

220

230

240

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Trends in the average size of airplanes also suggest that the Trust Fund is 

collecting less revenue relative to workload than in the past, and FAA’s 

projections suggest that this decline will continue (see fig. 7). Since 

smaller planes carry fewer passengers and burn less fuel, reductions in 

average plane size mean lower ticket tax, segment tax, and fuel tax 

revenue accrues to the Trust Fund relative to FAA’s workload. 

Page 16 GAO-06-973 Aviation Finance
Figure 7: Average Available Seats per Domestic Aircraft 

Source: GAO analysis of FAA data.

Average available seats

110

0

112

114

116

118

120

122

124

126

128

130

2000 2001 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E

This decline in the average number of seats per aircraft is the result of 

airlines’ moving toward a substantially greater reliance on regional and 

narrow-body jets.23 Scheduled capacity (available seat miles) increased 29

percent from 1996 through 2005. During this time, wide-body jet capacity 

fell 42 percent, narrow-body jet capacity grew 35 percent, and regional jet 

capacity grew over 2900 percent. As a result, regional jets accounted for 

nearly 10 percent of scheduled capacity in 2005, up from less than 1 

percent in 1995. In addition to projecting growth in commercial flights, 

FAA is projecting substantial growth in GA traffic, which will also add to 

FAA’s workload. 

 23Generally speaking, wide-body jets are the largest jets, with the capacity to transport

approximately 200 or more passengers; narrow-body jets are smaller, with the capacity to

transport approximately 100 to 200 passengers; regional jets are the smallest of these three

plane types, with the capacity to transport approximately 50 to 90 passengers. 

Page 17 GAO-06-973 Aviation Finance
Some Stakeholders Have 

Raised Equity Concerns 

with the Current Funding 

System 

Some aviation stakeholders have expressed concerns that the current 

approach to collecting funds from users through excise taxes creates 

inequities because the revenue contributions of different flights are not 

directly linked to the costs of the services that these flights receive from 

FAA. As noted, factors that influence the revenue contribution that a 

commercial flight makes to the Trust Fund are the number of passengers, 

the average price of tickets, and the amount of fuel used. None of these 

factors, however, are directly related to the cost of the ATC services that a 

flight receives from FAA. Table 2 shows FAA’s estimates of the revenue

contributions made by various flights. Since FAA estimates that similar 

flights impose similar costs on the agency, the substantial differences in 

the revenue contributions of these flights raise issues of fairness. One 

equity issue is that similar commercial flights may contribute very 

different amounts of revenue. As shown in this example, a 767 flight 

contributes more than twice as much as two similar 737 flights. There is 

also a difference between the contributions for the two similar 737 flights; 

one flight contributes 14 percent more than the other flight. 

Table 2: Estimated Excise Tax Contribution by Flight Type

Approximately 300-mile flight from Los Angeles to San Francisco 

Commercial flights GA business flights 

Plane type 767 737 737 

Citation V

Fractional

Learjet 

35

Number of seats 231 132 132 9 a

Number of 

passengers 180 89 89 5 a

Average fare $82 $84 $67 $235 a

Gallons of fuel 1,646 937 808 442 190

Ticket tax $1,100 $565 $449 $86 $0

Passenger segment 

tax $544 $270 $270 $15 $0

Cargo/Mail tax $27 $2 $2 $0 $0

Fuel tax $71 $40 $35 $19 $41

Total revenue $1,742 $877 $756 $120 $41

Source: GAO analysis of FAA data. 

a

Not applicable. 

Concerns also exist about the fairness of the distribution of the funding 

burden between commercial airlines and GA operators. Domestic 

commercial passenger flights, and some flights typically considered GA 

Page 18 GAO-06-973 Aviation Finance
flights that carry commercial passengers,24 are subject to, among other 

potential excise taxes, the passenger ticket tax, the passenger segment 

tax, the cargo/mail tax, and the fuel tax. GA flights (excluding those that 

carry commercial passengers) are subject only to a fuel tax. As a result, 

the revenue contributions of similar commercial and GA flights may be 

substantially different. For example, the taxes that the Trust Fund would 

receive from two different types of business jet flights would be 

substantially less than the taxes received from similar commercial flights

(see table 2). 

Although the commercial and GA flights might receive the same services 

from FAA, raising equity concerns because of the large difference in 

revenue contribution, there is debate over whether GA and commercial 

flights should be assigned the same costs for similar flights because 

parties disagree on how to assign the fixed costs associated with the ATC 

system. Representatives of the commercial aviation industry favor 

assigning those costs to all system users in proportion to their use of the 

system. Representatives of GA, on the other hand, state that the system 

exists at its present size to serve the needs of the commercial aviation

industry and that GA should be assigned only the incremental costs of 

serving GA (i.e., those costs that would not otherwise exist). Without a 

consensus on how to assign ATC costs to users, it is not possible to assess 

the extent to which the current approach or any other results in a 

distribution of the funding burden between commercial airlines and GA 

operators that approximates the distribution of costs attributable to those 

groups. 

Current Funding System 

Lacks Strong Incentives to 

Encourage Efficient Use of 

the NAS 

Some stakeholders have also raised concerns that the current funding 

system does not provide aircraft operators with incentives to use FAA 

services in the most efficient manner. For users to make efficient 

decisions about their use of the NAS, their price for using the system (the 

taxes or charges they pay) should accurately reflect the costs their use 

imposes on the system. These prices, along with other factors influencing 

supply and demand, will influence users’ decisions about the type, size, 

and number of aircraft to operate, and when and where to operate them.25

 24This includes some flights typically considered GA flights, such as those by air taxis and 

some fractional ownership operations. 

25Supply factors that influence users’ decisions include other costs of operating aircraft, 

such as labor, fuel, and capital costs. Demand factors include the state of the economy and 

the price and convenience of flying compared with using other modes of transportation. 

Page 19 GAO-06-973 Aviation Finance
Given the importance of some of these other factors to users’ decisions 

about using the NAS, the influence of prices charged for FAA’s services on 

these decisions may be comparatively small for some users. 

As discussed previously, FAA states that under the current funding system 

the taxes collected from users do not accurately reflect the costs those 

users impose on the system; some flights likely pay more than the costs 

they impose, while others likely pay less. These price differences suggest 

that the current funding structure creates incentives for inefficient use of 

the NAS. Users who pay more in taxes than the costs they impose may 

make less than optimal use of the system, while those who pay less than 

the costs they impose may make more than optimal use of the system. 

An airline’s decision about how many flights to offer in a given market 

illustrates how the current system does not provide incentives for efficient 

use of the system. In this example (the same one used for the revenue 

adequacy discussion), an airline is deciding how many daily flights it 

should provide for the Los Angeles to San Francisco market (see table 3). 

It estimates that the market demand at the fare it is charging totals 105 

passengers per day, and it faces the choice of providing the market with 

one daily flight with a narrow-body jet (Boeing 737), or three daily flights 

with a regional jet (CRJ-200)—all flight choices are assumed to depart 

during peak periods. In this scenario, the revenue collected from the three 

regional jet flights—$1,215—is about 3 percent more than the revenue 

collected from the one narrow-body jet flight—$1,178. FAA states 

however, that each flight would impose similar costs on the agency, so 

FAA’s costs would be roughly 3 times more to handle the three regional jet 

flights than to handle the one medium jet flight. In this example, however, 

there is little financial incentive ($37) for the airline to limit its imposition

of additional costs on FAA by using one flight instead of three flights. 

Page 20 GAO-06-973 Aviation Finance
Table 3: Estimated Excise Tax Contribution of One Narrow-body Jet Flight

Compared with One Regional Jet Flight 

Approximately 300-mile flight from Los Angeles to San Francisco 

Plane type 737-300 CRJ-200

Number of seats 132 48

Number of passengers 105 35

Average fare $100 $100 

Gallons of fuel consumed 937 599 

Ticket tax $788 $263 

Passenger segment tax $348 $116 

Waybill tax $2 $0 

Fuel tax $40 $26 

Total revenue $1,178 $405

Source: GAO analysis of FAA data. 

This situation is made worse during times when the NAS is congested. 

There are two issues associated with congestion. The first is plane size; if 

all other factors are equal, such as demand for air travel, it is more 

efficient to serve congested airspace with larger planes because they can 

move more passengers per flight. Second, when congestion is a factor, 

efficiency requires consideration of the delay costs imposed on other 

system users. Charging similar flights equally, regardless of plane size, and 

incorporating congestion costs, would create financial incentives to 

improve efficiency. 

Page 21 GAO-06-973 Aviation Finance
Alternative funding options for collecting revenues from NAS users 

present both advantages and disadvantages.26 The degree to which 

alternative funding options could address concerns about the current 

excise system ultimately depends on the extent to which the contributions 

required from users actually reflect the costs they impose on the system. 

Given the diverse nature of FAA’s activities, a combination of alternative 

options may offer the most promise for linking revenues and costs. 

Switching to any alternative funding option would raise administrative and 

transition issues. For example, any cost-based funding system would 

require FAA to complete the appropriate cost analysis using either a cost 

accounting system or cost finding techniques. Some stakeholders who 

support the adoption of direct user charges also support a change in FAA’s 

governance structure—for example, commercializing air navigation 

services—but we found no evidence that the adoption of direct charges 

would require a governance change.

The six funding options considered here include two that would modify 

the current excise tax structure and four that would adopt more direct 

charges to users. Without more detailed information and an understanding 

of the costs different flights impose on the NAS, any assessment of the 

current system or alternative funding options is only preliminary. The 

degree to which alternative funding options could address revenue 

adequacy, equity, and efficiency concerns, relative to the current system, 

ultimately depends on the extent to which the contributions required from

users actually reflect the costs they impose on the system. More precise 

assessments of the current or alternative funding options are possible only 

if cost finding techniques are used throughout FAA. 

Alternative Funding 

Options Present Both 

Advantages and 

Disadvantages 

Modifications to the 

Current System 

The two options we reviewed that would modify the current excise tax 

structure are relying solely on a fuel tax and increasing the passenger 

segment tax to replace the passenger ticket tax. 

 26As discussed earlier, some elements of FAA’s budget cannot be directly linked with taxes

or charges that system users pay for their use of FAA’s services. One example is money

given to airports in grants through the Airport Improvement Program. Another example 

might be expenditures required to control government planes, both military and civilian,

unless other government agencies were treated as system users. As a result, if any of these 

options are adopted and the tax or charge rates are based on the costs of services to users, 

then the revenue collected will not cover all of FAA’s budget. Contributions from the 

General Fund or revenues from other taxes that are not linked to costs would also be 

needed. 

Page 22 GAO-06-973 Aviation Finance
One possible modification to the current system would be to increase the

current aviation fuel taxes—which levy a specific amount per gallon of 

fuel—to replace the revenue lost by eliminating the remaining excise taxes 

and charges. Advocates of reliance on a fuel tax funding system state that 

it is appealing compared to the current system because there is a 

correlation between the time a plane spends in the system and the amount 

of fuel a plane uses. To the extent that time in the system is related to cost, 

this relationship creates at least a partial link between revenues and costs, 

which could partially address the revenue adequacy, equity, and efficiency 

concerns about the current system. In addition, advocates of the fuel tax

state that a fuel tax is inexpensive and simple to administer. Under the 

current system the Internal Revenue Service (IRS) is responsible for 

collecting fuel taxes at the point of sale, and these funds are then 

deposited to the Treasury, which then credits the Trust Fund. FAA has no 

responsibility for collecting the revenue. Thus, transitioning to an all-fueltax funding system would be relatively easy, since the administrative 

system is already in place. Furthermore, the tax is easy for consumers to 

understand, and compliance is simple and inexpensive. 

Fuel Taxes 

From a revenue adequacy perspective, fuel taxes compare favorably with 

other existing excise taxes because they are more directly linked to 

workload. Thus, all things being equal, increases in workload over time 

would likely result in fuel tax revenue increases. Nonetheless, two factors 

that lead to lower fuel consumption will erode the ability of a fuel tax to 

generate revenue over time. First, while the incentive created through the 

tax to conserve fuel will promote more efficient use of the system, it will 

lead to lower fuel consumption, which will reduce revenues. Second, 

technological advances that increase the fuel efficiency of airplanes will 

reduce fuel consumption relative to FAA’s workload, leading to lower 

revenues relative to FAA’s workload; the new 787 aircraft27 and a recent

effort to outfit planes with winglets28 are examples of these advances. 

Thus, it is likely that the fuel tax rate would have to be raised from time to 

time to be adequate in the long run.

The extent to which a fuel tax would address equity issues appears to be 

limited. Although FAA states that there is a correlation between the time a 

 27The 787 aircraft is a new plane under development by Boeing that emphasizes fuel 

efficiency through the use of lightweight composite material and more fuel-efficient 

engines. 

28Winglets are attachments to the wings of planes that reduce fuel consumption. 

Page 23 GAO-06-973 Aviation Finance
plane spends in the NAS and fuel consumption, the extent to which fuel 

consumption correlates with costs imposed on FAA has not been 

established. First, there may be a relationship between time in the system 

and en-route control costs, but the relationship between time in the system 

and the costs of other FAA activities, such as terminal costs, is not 

obvious. Second, even if the fuel tax were limited to funding en-route 

costs, the connection between fuel consumption and those costs appears 

to be incomplete. For example, since heavier planes burn more fuel per 

mile than lighter planes, they would be required to contribute more for 

spending the same amount of time in the system. 

As with equity issues, the potential for a fuel tax to address efficiency

issues appears limited because the connection between revenues and 

costs is incomplete. A fuel tax can create an incentive for operators to 

minimize their fuel consumption (e.g., by flying at off-peak times to avoid 

congestion delays) and, therefore, their time in the NAS. To the extent that 

time in the system correlates with costs imposed, this incentive can lead to

improved efficiency. However, any relationship between time in the 

system and costs imposed on FAA appears to be limited to en-route 

control costs. 

A second option that represents a modification of the current system is to 

increase the current passenger segment tax to replace revenues lost by 

eliminating the current passenger ticket tax. Under this option, all other 

current excise taxes would remain unchanged, implying no change to 

revenues collected from cargo carriers and GA operators. This option 

would likely increase the tax differential between passengers traveling on

one-stop (or more than one-stop) flights and those traveling on nonstop 

flights on the same route. As a result, there might be a shift in travelers’ 

demand toward more nonstop service, which might, in turn, lead airlines 

to operate more nonstop service. Because there is a partial link between 

the number of segments an airline operates and the cost of the services 

FAA provides to that carrier, this option might have some advantages over

the present tax structure in terms of revenue adequacy, efficiency and

equity. However, because there is no link to the cost of some of the other 

services that FAA provides, these advantages are limited. 

Passenger Segment Tax 

Compared to the present funding structure, this option might address 

concerns about revenue adequacy over time, but many of the concerns 

associated with the current system would likely remain. One way in which 

a passenger segment tax might better correlate to FAA’s workload is that 

commercial flights that include a stop require more terminal services from 

FAA than nonstop flights, and taxes based on the number of passenger 

Page 24 GAO-06-973 Aviation Finance
segments traveled will increase as the number of stops increases. In 

addition, the current passenger segment tax is indexed to the Consumer 

Price Index so that it is adjusted each year to account for inflation, which

preserves the purchasing power of the revenues collected. However, other 

services that FAA provides could increase without any increase in 

passenger segment tax revenues. For example, if the average distance of 

commercial flights increases, the cost of providing en-route services will 

rise, but the passenger segment taxes paid will not rise because they are 

not based on distance traveled or time in controlled airspace. 

Furthermore, passenger segment taxes apply only to commercial flights, 

so they have no advantage over ticket taxes in providing revenue adequate

to fund cost increases associated with providing services to cargo and GA

aircraft. In addition, there would be no improvement in providing adequate 

revenue for safety and security expenditures. 

Compared to ticket taxes, higher flight passenger segment taxes have the 

potential to increase equity by better aligning revenues with costs, and 

they create some additional incentives for efficient use of FAA services. 

However, these effects are likely to be limited because the tax revenues 

are aligned only to some cost elements and the tax applies only to 

commercial aircraft. With increased passenger segment taxes, the 

difference in the amount of taxes commercial airlines would have to pay 

for one-stop service compared with nonstop service would be greater. This

greater difference in taxes might represent an improvement in equity 

compared to the present funding system because one-stop flights require 

more terminal and approach services from FAA than nonstop flights. This 

greater difference in taxes could also create an incentive to provide more 

nonstop service. Substituting nonstop for one-stop service could reduce 

the airlines’ need for FAA’s terminal and approach services. However, this 

incentive could be quite small relative to other factors that influence 

airlines’ service-offering decisions, so the effect on efficiency could also be 

quite small. In addition, airlines would have no additional incentive to be

efficient in their use of en-route services because the passenger segment 

tax is not linked to time in controlled airspace, and there would be no 

change from the current structure in incentives for cargo and GA 

operators. 

Administrative and transition issues would be minimal, since this option 

would require only a change in the current tax per flight segment and the 

elimination of the passenger ticket tax. 

Page 25 GAO-06-973 Aviation Finance
The four funding options we reviewed that would involve more direct 

charges to users include weight/distance charges, en-route charges, flight 

segment charges, and certification charges. 

Charges based on weight and distance traveled are used by a number of 

foreign air navigation service providers and are supported by the 

International Civil Aviation Organization. As suggested by the name, this 

option would base charges to users on the weight of the plane and the 

distance it travels within the NAS. According to their advocates, 

weight/distance charges are more appealing than the current system 

because they would establish a more direct relationship between revenues 

and costs by incorporating distance into the formula, thereby creating an 

incentive to limit excess use of FAA’s ATC en-route services. In addition, 

advocates say, weight/distance charges would strike a balance between 

basing charges on the ability-to-pay principle29 and more directly linking 

costs and revenues by incorporating both weight and distance in the 

distribution of costs among users. 

Direct Charges 

Weight/Distance Charges 

A weight/distance charge, relative to the current funding system, would be 

likely to improve the revenue adequacy of the system. Revenue adequacy

is addressed by the incorporation of a cost component into the 

weight/distance formula. Generally, air navigation service providers that 

use a weight/distance formula regularly adjust the cost component to 

ensure that revenues match costs. For example, FAA’s counterpart in 

France—la Direction Générale de l’Aviation Civile—annually adjusts the 

cost component of its weight/distance formula on the basis of en-route 

charges. This adjustment ensures that revenues not only cover costs, but 

also do not exceed costs. 

As with the fuel tax, the extent to which a weight/distance charge would 

address equity issues appears to be limited. While there may be a 

relationship between the distance a plane travels in the NAS and the costs 

it imposes, the introduction of the weight component into the formula 

weakens any such connection. For example, since heavier planes would 

be charged more than lighter planes, they would be required to contribute 

more for traveling the same distance in the system, even though they may 

not impose greater costs on the ATC system. If a relationship between 

 29The ability-to-pay principle is a concept of tax fairness that states that those individuals 

with a greater financial capacity—measured by wealth, income, or other levels of wellbeing—to bear a tax burden should pay more in taxes than those individuals with a lesser 

financial capacity. 

Page 26 GAO-06-973 Aviation Finance
weight and distance in the system and costs imposed can be established, it 

is likely to be limited to en-route control costs. There is no obvious 

relationship between the weight/distance formula and other FAA 

activities—terminal control services and safety activities. 

Since the connection between revenues and costs is incomplete because 

of the weight component, the potential for a weight/distance charge to 

address efficiency issues also appears limited. The distance component of 

a weight/distance charge creates an incentive for operators to minimize 

their use of the NAS. To the extent that distance in the system correlates 

with costs imposed, this incentive could improve efficiency. However, the 

correlation between distance and costs imposed is limited by the 

introduction of the weight component. Furthermore, the relationship 

between distance in the system and the costs imposed on FAA is likely to

be limited to en-route control costs, excluding consideration of the costs 

associated with terminal control and safety activities. 

Implementing a weight/distance charge would also involve significant 

administrative and transition issues. FAA would have to determine how to 

administer a weight/distance charging system for which it does not 

currently have the organizational capacity. FAA stated that one option 

would be to contract the billing out to a private party, much as European 

Union countries such as France contract out their billing to Eurocontrol.30

En-route charges would be based on the time users spend in the NAS or 

the distance they travel through the NAS. According to their advocates, enroute charges are more appealing than the current system because they 

would create a more direct relationship between revenues and costs. 

Therefore, compared to the current system, advocates say en-route 

charges would (1) better ensure that revenues are adequate to cover costs 

over time, (2) address equity issues, and (3) create incentives for efficient 

use of the current system. 

En-route Charges 

An en-route charge, relative to the current funding system, would be likely 

to improve the revenue adequacy of the system. As with weight/distance 

charges, en-route charges could address revenue adequacy concerns by 

 30Eurocontrol is the European Organisation for the Safety of Air Navigation. Eurocontrol’s

core activities span the entire range of gate-to-gate air navigation service operations—from 

strategic and tactical flow management to controller training; from regional control of

airspace to development of leading-edge, safety-proofed technologies and procedures, and 

the collection of air navigation charges. 

Page 27 GAO-06-973 Aviation Finance
incorporating a cost component into the charging formula that could be 

regularly adjusted to reflect any changes in costs. This approach could 

ensure, over time, that revenues match costs. 

As with other funding options discussed here, the ability of en-route 

charges to address equity and efficiency issues raised by the current 

system appears to be limited. According to FAA, there is a strong 

relationship between time and distance in the system and en-route costs 

imposed by users. Thus, if en-route charges were limited to funding enroute control costs, they might address equity issues raised by the current

system by equating charges to costs imposed, depending on how costs are 

assigned. Furthermore, en-route charges for en-route control would create 

clear financial incentives to use the system more efficiently; less use of the 

system would lead to proportionately lower charges. However, there is no 

obvious relationship between time or distance in the system and other 

FAA activities—terminal control services and safety activities. As a result, 

if en-route charges were used to fund all FAA activities, their ability to 

address equity and efficiency issues is unclear. 

Implementing en-route charges would also involve significant 

administrative and transition issues. FAA would have to develop the 

organizational capacity to administer and collect en-route charges, which 

would include completing the appropriate cost analysis using either a cost 

accounting system or cost finding techniques. 

Flight segment charges to users would be based on the departures and 

landings that aircraft make at various airports throughout the NAS. 

According to their advocates, flight segment charges are more appealing 

than the current system because they would establish a more direct 

relationship between revenues and costs. Therefore, compared to the 

current system, advocates say that flight segment charges would (1) better 

ensure that revenues are adequate to cover costs over time, (2) address 

equity issues, and (3) create incentives for efficient use of the current 

system by directly connecting charges with costs imposed by users. 

Flight Segment Charges 

A flight segment charge, relative to the current funding system, would be 

likely to improve the revenue adequacy of the system. As with 

weight/distance charges, flight segment charges could address revenue 

adequacy concerns by incorporating a cost component into the charging

formula that could be adjusted regularly to reflect any changes in costs. 

This approach could ensure that, over time, revenues match costs. 

Page 28 GAO-06-973 Aviation Finance
As with other funding options discussed here, the ability of flight segment

charges to address equity and efficiency issues raised by the current 

system appears to be limited. FAA states that there is a strong relationship 

between departures and landings in the system and costs imposed by 

flights for terminal control handled by TRACONs. Thus, if flight segment 

charges were limited to funding terminal control costs, they might address 

equity issues raised by the current system by equating charges to costs 

imposed, depending on how costs were assigned. Furthermore, flight 

segment charges for terminal control would create clear financial 

incentives to use the system more efficiently: less use of the system would 

lead to proportionately lower charges. However, there is no obvious 

relationship between flight segments and other FAA activities—en-route 

control and safety activities. As a result, if flight segment charges were 

used to fund all FAA activities, their ability to address equity and 

efficiency issues would be limited. 

Implementing flight segment charges would involve administrative and 

transition issues similar to those associated with en-route charges. FAA 

would have to develop the organizational capacity to administer and 

collect flight segment charges and complete the appropriate cost analysis 

using either a cost accounting system or cost finding techniques. 

Certification charges to users would cover specific safety services 

provided by FAA, such as certificates for air worthiness, air operators, and 

air agencies; registration for air personnel, aircraft, and medical personnel;

designees and delegations; and international training. According to their 

advocates, certification charges would be more appealing than the current

system because they would establish a direct relationship between 

revenues and costs, which would address the revenue adequacy, equity,

and efficiency concerns associated with the current system. 

Certification Charges 

Certification charges have the potential to fulfill revenue adequacy 

requirements for safety costs over time because they are directly linked to

workload; charges would be assessed for each certificate issued. Thus, as

workload changed over time (increasing or decreasing), so would the 

revenue from certification charges. In addition, any certification system 

would likely have the flexibility to adjust charges as costs changed. 

Certification charges, however, could not support all of FAA’s funding 

requirements, so this option would have to be used in combination with 

other revenue sources. According to FAA officials, there is a clear 

relationship between certification charges and the specific safety activities 

for which users would be charged. Thus, if certification charges were 

limited to funding the associated safety costs, they would address equity 

Page 29 GAO-06-973 Aviation Finance
issues raised by the current system by equating charges to costs imposed; 

this equity improvement, however, would be limited to funding for safety 

activities. Furthermore, certification charges would likely create financial 

incentives to use the system efficiently, since charges would increase in 

proportion to use. 

FAA raises the concern that imposing certification charges for safety 

services would adversely affect safety because such charges would create 

incentives to avoid the use of safety services and, in some cases, ATC 

services. Our review of available data from five air navigation service 

providers in other countries found that since their air traffic control 

services were commercialized and charges were implemented, the safety

of the services remained the same or improved. For example, data from 

New Zealand and Canada show fewer incidents of loss of separation (the 

distance required between planes) since commercialization.31

Implementing certification charges would involve administrative and 

transition issues similar to those associated with en-route and flight 

segment charges. FAA would have to develop the organizational capacity

to administer and collect certification charges and complete the 

appropriate cost analysis using either a cost accounting system or cost 

finding techniques.32

Combining Funding 

Options Might Best 

Address Concerns

Using a combination of workload-related taxes or charges to fund FAA 

might best address the revenue adequacy, equity, and efficiency concerns 

associated with the current funding structure, given that the costs of FAA’s 

ATC and safety activities are driven by different factors. No single option 

that we reviewed creates a direct link between revenues and all 

components of FAA’s activity costs. Fuel taxes, weight/distance charges, 

or en-route charges based on time or distance spent in the NAS could be 

used to create a more direct link with FAA’s costs of providing en-route 

ATC services. A segment tax for passengers or a flight segment charge 

could be used to create a more direct link with the costs of FAA’s terminal 

services. Certification charges could be used to create a more direct link 

 31See GAO, Air Traffic Control: Characteristics and Performance of Selected

International Air Navigation Service Providers and Lessons Learned from Their 

Commercialization, GAO-05-769 (Washington, D.C.: July 29, 2005). 

32FAA is currently prohibited from charging certain certification and registration fees under

49 U.S.C. §45302 until several specific regulations have been promulgated. 

Page 30 GAO-06-973 Aviation Finance
with the costs of FAA’s various safety-related activities. Thus, some 

combination of options, such as en-route charges to fund en-route costs, 

flight segment charges to fund terminal control costs, and certification 

charges to fund some safety costs, might best address concerns with the 

current system by providing a better link between revenues and costs than 

any of these options used separately. According to one stakeholder, 

however, the administrative expense of using multiple funding options 

might outweigh the benefits of such an approach. According to FAA, other 

air navigation service providers, such as those in the European Union, 

have been able to administer direct charges without incurring excessive 

administrative costs. 

Cost-Based Charges Can 

Be Imposed under FAA’s 

Current Governance 

System 

In discussing alternative funding options, some stakeholders have stated 

that if user charges are adopted, users should have more input into FAA’s 

operation, citing the “user pays, user says” principle. To many

stakeholders, this principle implies that the adoption of direct user 

charges would require a change in FAA’s governance structure that could

limit congressional influence on the agency while expanding the influence 

of airlines and other users. Many stakeholders support such a change, 

pointing out that many countries that rely on direct charges to fund 

aviation activities have commercialized their air navigation service 

providers. 

We did not find any evidence that a change in FAA’s governance structure 

would be required if direct charges were adopted. Federal law provides 

general authority for federal agencies to institute user charges except 

when otherwise prohibited.33 In FAA’s case, Congress has specifically

prohibited the agency from instituting any new user charges under this 

general authority in every DOT appropriation act since 1998. Furthermore, 

under the current funding system, users already provide most of the 

revenue used to fund FAA programs through excise taxes. Adopting direct 

charges would change the manner in which revenues are collected from 

users, but would not necessarily change the aggregate contribution from 

users. Since users pay most of FAA’s program costs now, it is unclear what 

additional role users should play in FAA’s decision-making under an 

alternative system. 

 3331 U.S.C. 9701. 

Page 31 GAO-06-973 Aviation Finance
Recent reforms in France’s Direction Générale de l’Aviation Civile 

illustrate how a government agency has moved toward a cost-based 

system of charges to fund the air navigation services it provides without 

changing the underlying governance structure. The French organization’s 

activities fall into two broad divisions —safety and regulation, and ATC.34

Safety and regulation are funded through a combination of general 

government support and specific user charges. For example, there are 

charges for pilots’ licenses, medical certificates, inspections, and aircraft 

registration. ATC activities are split into two categories—en-route control

and terminal control. For en-route control, France must abide by the 

European Union’s regulations, which are based on principles established 

by the International Civil Aviation Organization. This approach 

incorporates a weight/distance formula that is used to determine charges 

for specific aircraft based on their activity. Although the formula 

distributes charges across aircraft differently by incorporating weight as a 

factor, the amount of the charges is based on cost data that are verified by 

the European Union. Eurocontrol actually bills users of the system; all 

European Union countries collect en-route charges through this 

organization. Terminal control charges are not directly based on cost 

factors, but are billed along with the en-route control charges through 

Eurocontrol. 

Allowing FAA to use debt financing for capital projects have advantages 

and disadvantages. Many stakeholders have identified the use of debt 

financing—such as bonds—as a means of funding FAA capital projects, 

such as components of NGATS or existing ATC facilities and equipment. 

Some stakeholders believe debt financing is attractive because it could 

provide FAA with a stable source of revenue to fund capital development 

and, at the same time, spread the costs out over the life of a capital project 

as its benefits are realized. If Congress approved the use of debt financing 

for FAA, the agency could borrow through the Treasury or directly from 

the private capital market, depending on what authority Congress 

provided. Debt-financing raises significant concerns, however, because it

encumbers future resources and because expenditures from debt 

proceeds may not be subject to the congressional oversight that 

appropriations receive. In addition, debt financing is subject to federal 

Alternative Capital 

Financing Methods 

Have Advantages and 

Disadvantages 

 34Most airports in France are independent from the national government, and their 

infrastructure is funded through charges levied by individual airports.

Page 32 GAO-06-973 Aviation Finance
budget scoring rules35 and raises issues associated with borrowing costs 

that are particularly important in light of the federal government’s longterm fiscal imbalance. 

Some Stakeholders Believe 

Debt Financing Offers 

Advantages 

According to its supporters, debt financing has a number of advantages, 

one of which is that it could provide FAA with a stable source of revenue

to fund capital development. FAA officials state that the uncertainty 

associated with the appropriation process makes planning for large, 

complex, and expensive ATC systems difficult. Another advantage cited is

that debt financing would allow the costs of capital projects to be repaid

as the benefits are received, better aligning costs and benefits. Finally,

supporters of debt financing, including an investment firm, state that the 

private capital market may offer disciplinary mechanisms that may 

encourage FAA to manage itself more efficiently. The discipline occurs 

because, to receive funding for projects, FAA would need to adhere to 

bond covenants, which are rules that govern how FAA will pay obligations. 

One investment firm noted, however, that projects could be 

overcapitalized, or “gold plated,” if FAA were given the authority to 

borrow without caps on the number and costs of projects it funds. For 

example, a significant amount of debt could be issued for projects with 

minimal marginal benefits to users. As a result, an investment firm noted, 

there may need to be a governing board with multiple aviation 

stakeholders, including airlines, airports, and air traffic controllers, to 

determine which capital projects are needed and how they will be funded.

Treasury officials also question whether the private capital market will 

provide any market discipline to FAA debt obligations because investors 

may perceive that the obligations are backed by the federal government, 

and not just agency revenues. Treasury officials further noted that they

could perform credit analyses similar to those done by private investment

firms, which, when combined with statutory borrowing caps and other 

credit terms and conditions, would serve to protect the financial interests 

of the general taxpayer.

 35Budget scorekeeping rules or guidelines are developed by the House and Senate Budget 

Committees, CBO, and OMB (the scorekeepers). The purpose of the guidelines is to ensure

that the scorekeepers measure the effects of legislation on the deficit consistent with 

established scorekeeping conventions and with the specific requirements of the 

Congressional Budget Act of 1974 and the Balanced Budget and Emergency Deficit Control 

Act of 1985. Budget scorekeeping rules are published in OMB Circular A-11. 

Page 33 GAO-06-973 Aviation Finance
Page 34 GAO-06-973 Aviation Finance 

To borrow from the Treasury, FAA would need borrowing authority from 

Congress. There are various ways Congress can provide borrowing 

authority, each with different legal, financial, and structural implications. 

For example, some government entities generate their own revenue to pay 

for borrowing costs, whereas others pay with appropriations.36 Some 

government entities with borrowing authority are federal agencies, such as 

the Bonneville Power Administration (BPA), while others are independent 

establishments, such as the U.S. Postal Service.37 Once borrowing 

authority is granted, the Treasury sets the terms and conditions for 

borrowing. FAA could borrow from the Treasury, using revenue options 

such as taxes, user fees, or appropriations to repay the debt, depending on 

the type of bond. Figure 8 describes the process for borrowing from the 

Treasury. 

Figure 8: Potential FAA Process for Borrowing from the Treasury 

In borrowing from the private capital market, FAA could issue general 

revenue (GR) or general obligation (GO) bonds. Both types of bonds 

would require FAA to pay interest and principal to bond holders, but the 

revenue sources used to make these payments would differ. A GR bond 

 36GAO, Budget Issues: Agency Authority to Borrow Should Be Granted More Selectively, 

GAO/AFMD-89-4 (Washington, D.C.: Sept. 15, 1989). 

37BPA is a self-supporting agency in the Department of Energy that borrows from the 

Treasury to finance capital investments such as new transmission facilities that it owns. 

BPA receives no appropriations and is solely funded by revenues from power sales, which 

it uses to finance its operations and to make debt payments. BPA received direct borrowing 

authority from Congress in 1974 and has a borrowing cap of $4.5 billion. Since BPA is a 

federal agency that is performing a federal function, it is borrowing for federal purposes, 

and its assets are federally owned, the interest rate on BPA debt to Treasury is equal to the 

rate on debt of comparable maturity issued by government corporations. 

FAA Could Borrow from 

the Treasury or the Private 

Capital Market 

FAA Treasury Public

FAA issues notes

to Treasury

Treasury sells securities

to private capital market

FAA obtains funds

from Treasury

Treasury obtains

funds from private

capital market

Flow of bond (debt)

Flow of funding (cash)

Source: GAO analysis of Treasury documents and interviews.
requires taxes or user fees to pay the interest and principal, while a GO 

bond uses expected appropriations. Several nonfederal government 

entities currently borrow from the private capital market using GR and GO 

bonds. In aviation, most commercial airports issue GR bonds for airport 

capital improvements that are backed by general revenues from the 

airport, including aircraft landing fees, concessions, and parking fees, for 

airport capital improvements. In surface transportation, some states issue 

grant anticipation revenue vehicle (GARVEE) bonds backed by anticipated 

federal apportionments to fund highways. However, the eligibility of a 

GARVEE bond for reimbursement with federal apportionments does not 

constitute a commitment by the federal government to provide for paying

the principal or interest on the bond. The Department of Transportation, 

which oversees the GARVEE program, reimburses the state for debt 

service expenses as part of the annual federal-aid obligation authority. 

Figure 9 describes the process for borrowing from the private capital 

market. 

Figure 9: Potential FAA Process for Borrowing from the Private Capital Market 

FAA Bank Bond holders

Bank underwrites

FAA bond

Bank sells bonds

to private market

FAA obtains funds

from Bank

Bank obtains funds

from private market

Flow of bond (debt)

Flow of funding (cash)

Source: GAO analysis of Treasury documents and interviews.

For FAA to borrow from the private capital market, Congress would need 

to give the agency statutory authority. Depending on how Congress writes

the statute, FAA could use any revenue option—taxes, user fees, or 

appropriations—to secure the bond. According to some representatives of 

investment banks and Treasury officials, no organizational changes for 

FAA, such as a change to a government corporation or corporate entity,

would be needed. 

Currently, some government corporations borrow from the private capital 

market, including the Tennessee Valley Authority (TVA). TVA is an 

independent, wholly owned federal corporation established by the 

Tennessee Valley Authority Act of 1933 that sells bonds in the private 

Page 35 GAO-06-973 Aviation Finance
capital market to finance its capital improvements for power programs. 

TVA pays for its operations and debt service with revenues from its energy 

sales. Since TVA first issued bonds, Moody’s Investors Service and 

Standard & Poor’s have assigned TVA’s bonds their highest credit rating—

Aaa/AAA.38 TVA does not receive a direct federal guarantee, although the 

interest rate charged by the private capital market suggests that there is an

implied federal guarantee.39

Debt Financing Raises 

Budgetary Concerns 

Debt financing is subject to federal budget scoring rules and raises issues 

regarding borrowing costs that are particularly important in light of the 

federal government’s long term structural fiscal imbalance. How the 

borrowing authority is carried out will affect both budget scoring and 

costs. When an agency uses borrowing authority to finance a capital 

project, budget authority and obligations are recorded in the budget when 

the investments are made. Current budget scoring rules require that 

budget authority and obligations for the full cost of capital projects be 

scored upfront in the year that the obligations are made. Over time, the 

outlays will equal the budget authority and obligations that were scored 

upfront. As an example, if FAA borrowed $5 million with a 10 year bond to

purchase air traffic control equipment, the $5 million would be scored as 

budget authority and obligations in the year or years in which FAA signed 

the contract or contracts to purchase the equipment, and not distributed 

annually over 10 years. Since this budget treatment is the same as if 

appropriations were obtained, there is little scoring incentive for an 

agency to borrow. 

Among the negative consequences of not scoring all government activities

in the year in which obligations are made, according to CBO, is that the 

federal government’s obligations are understated.40 A Treasury official said 

the Treasury is supportive of budget scoring, noting that if the borrowing 

is for a purely governmental purpose, then that activity should be scored 

according to federal budget scoring rules. We have also reported that up-

 38Between 1974 and 1988, TVA borrowed exclusively from the Treasury’s Federal Financing

Bank and the debt was not rated. 

39GAO, Tennessee Valley Authority: Bond Ratings Based on Ties to the Federal 

Government and Other Nonfinancial Factors, GAO-01-540 (Washington, D.C.: Apr. 30,

2001). 

40CBO, Third-Party Financing of Federal Projects (Washington, D.C.: June 2005). 

Page 36 GAO-06-973 Aviation Finance
front budget scoring for capital projects should be maintained, since the 

budget should reflect the government’s commitments up front.41

If FAA was granted borrowing authority, the associated costs would likely

be higher if the agency borrowed directly from the private capital market

instead of through the Treasury. According to Treasury and 

representatives of investment firms, the federal government’s costs 

associated with debt financing for FAA’s capital projects would likely be

lower if FAA borrowed through the Treasury than if FAA borrowed 

directly from the private capital market because the Treasury would likely 

be charged a lower interest rate to borrow money. Interest rates charged 

to FAA would likely be higher because bonds issued by FAA would likely 

be viewed as a greater credit risk compared to Treasury bonds because 

Treasury’s bonds are backed by the full faith and credit of the U.S. 

government, whereas FAA debt would not be. In addition, if FAA 

borrowed directly from the private capital market, the transaction costs of 

borrowing would likely be higher than if FAA borrowed through the 

Treasury; investment banks that serve as debt underwriters charge fees for 

these services, while the Treasury would charge a minimal administrative

fee, if any. Treasury officials told us that it is the agency’s long-standing 

policy that all debt issued by federal entities, including FAA, should be 

issued solely to the Treasury because centralized financing of all such debt 

through the agency is the least expensive, most efficient means of 

financing this debt. The costs to the government associated with funding 

FAA’s capital spending through appropriations would be comparable to 

the costs of borrowing through the Treasury.42

The costs of borrowing from the private sector are based, in part, on how 

risky the revenue is that will be used for bond interest payments. Although 

all revenue options—taxes, user fees, and appropriations—can be used to

repay borrowings, each option has a different risk profile. The Treasury 

noted that if FAA were to borrow from the private capital market against 

revenues that were subject to appropriations, there would most likely be a 

risk premium added to the credit rating to compensate for the risk that 

 41GAO, Capital Financing: Partnerships and Energy Savings Performance Contracts 

Raise Budgeting and Monitoring Concerns, GAO-05-55 (Washington, D.C.: Dec. 16, 2004).

42Although funding through appropriations might appear less costly to FAA because 

borrowing from the Treasury would require FAA to make interest payments to the

Treasury, from the broader perspective of the federal government as a whole, there is no 

difference if the government is running a deficit. 

Page 37 GAO-06-973 Aviation Finance
appropriations may not be provided. This risk premium would make 

borrowing more expensive. However, representatives from investment 

firms we interviewed noted that FAA may receive a high credit rating given

that ATC services are essential and FAA has a monopoly in providing 

them.43 If a capital project has a high degree of “essentiality,” then it is 

assumed that the government will pay for the project through 

appropriations if that is the revenue source. Representatives of an 

investment firm we interviewed also noted that FAA may receive an 

implied federal guarantee because it is a federal agency. However, 

representatives of another investment firm we interviewed also said that 

many of FAA’s assets may have a low degree of marketability. That is, 

lenders may have difficulty selling an asset in the market in case of a bond 

default because there may be few willing buyers in the market for it. 

Borrowing costs are particularly important in light of the federal 

government’s long-term fiscal imbalance. As the baby boom generation 

ages, mandatory federal commitments to health and retirement programs 

will consume an ever-increasing share of the nation’s gross domestic 

product and federal budgetary resources, placing severe pressures on all 

discretionary programs, including those that fund defense, education, and 

transportation. Our simulations show that by 2040, revenues to the federal 

government might barely cover interest on the debt—leaving no money for 

either mandatory or discretionary programs—and that balancing the 

budget could require cutting federal spending by as much as 60 percent,

raising taxes by up to 21⁄2 times their current level, or some combination of 

the two.44 Accordingly, any program or policy change that may increase 

costs requires sound justification and careful consideration before 

adoption. We previously reported that agencies with authority to borrow 

were financing a large portion of their programs with debt and were 

repaying their debt with appropriations or new borrowing, rather than 

through revenue collections.45 As a result, we recommended that only 

 43Representatives of investment firms said that “essentiality” is the importance of a

particular government project or service. The representatives of investment firms we spoke

with generally agreed that FAA’s core service, which is to provide ATC services, is highly 

essential because the services are a vital part of the national economy. 

44GAO, The Nation’s Long-Term Fiscal Outlook: September 2006 Update, GAO-06-1077R

(Washington, D.C.: Sept., 15, 2006). 

45GAO, Budget Issues: Agency Authority to Borrow Should Be Granted More Selectively, 

GAO/AFMD-89-4 (Washington, D.C.: Sept. 15, 1989). 

Page 38 GAO-06-973 Aviation Finance
those agencies that would, in all likelihood, be able to repay their 

borrowing through revenue collections be granted authority to borrow. 

We provided a draft of this report to DOT and Treasury for review and 

comment. We received comments from DOT through an e-mail from FAA’s 

Director of the Office of Aviation Policy and Plans on September 11, 2006,

and from Treasury through an e-mail from the Deputy Assistant Secretary 

of Government Financial Policy on September 8, 2006. Neither DOT nor 

Treasury explicitly agreed or disagreed with our observations, and both 

raised a number of concerns. 

Agency Comments 

DOT stated that, in its opinion, although a change in FAA’s governance 

may not be statutorily required, it may be important as a matter of policy. 

DOT stated that because air navigation service providers are by nature 

monopoly providers, users need assurance that their concerns are taken 

into account in cost control and investment decisions, particularly under a 

system that more closely ties users’ contributions to the costs of the 

system. DOT stated that an alternative governance mechanism, along with 

user fees, could give system users a structured advisory role in how 

moneys are spent, costs are allocated, and charges are set to recover those 

costs, while still retaining the inherently governmental decision-making 

authority within FAA and DOT. In addition, DOT maintained that a 

governance mechanism specifically designed to give users input into 

investment decisions and cost recovery would add a valuable layer of 

discipline in optimizing the system to accommodate users’ needs most 

efficiently.

In contrast, according to DOT, a system in which FAA/DOT could charge

fees to cover costs with no meaningful stakeholder involvement would be 

much less attractive to the stakeholders. Finally, DOT stated, such an 

arrangement is fully consistent with the position of the International Civil 

Aviation Organization, which calls for user charges to be set in

consultation between the service provider and the user community. 

DOT may want to encourage Congress to consider the issue of governance 

structure. However, we did not include an analysis of governance issues in

the scope of our review; therefore, we did not provide a more detailed 

discussion of the issue in this report. 

DOT stated that our discussion of the need to analyze FAA’s costs implied 

FAA has not developed any cost accounting or cost allocation systems. 

Although we agree that FAA has made progress in implementing a cost 

Page 39 GAO-06-973 Aviation Finance
accounting system, its current accounting system is not able to provide the 

information required for a cost allocation analysis. Therefore, in our view, 

our report does not mischaracterize the status of FAA’s cost accounting 

system by stating that an analysis of the extent to which the current 

funding approach, or alternative funding approaches, aligns costs with 

revenues would require the completion of a cost accounting system or the 

use of cost finding techniques. Our point is that this capability would be 

needed to operate under a cost-based user charge system. 

DOT stated that it believes user fees would provide greater revenue 

stability than taxes because user fees could be set up to be adjusted 

periodically without changes in the law, thus providing greater flexibility 

in aligning revenues to cover costs. Nonetheless, we continue to believe 

that revenue stability is not likely to vary much across the funding options. 

Significant decreases in the demand for air travel would decrease revenue

regardless of whether the current funding structure is maintained or any of 

the options are adopted. Furthermore, increasing direct user charges while 

air travel demand was falling would increase costs for aircraft operators at 

the same time as their revenues were declining and might be no easier 

than increasing excise taxes. 

DOT also provided some clarifying and technical comments, which we 

incorporated where appropriate. 

According to Treasury, GAO raised several critical issues, but did not 

provide any analysis that would help policymakers judge reform options. 

Specifically, Treasury expressed concern that we did not (1) provide a 

more comprehensive discussion of FAA costs and cost shares, including 

any available cost information that provides insight into the issue, (2) 

evaluate FAA’s efforts to implement cost accounting, and (3) state 

whether FAA’s cost accounting program is likely, when completed, to 

generate cost information that is useful in determining a fair and efficient

distribution of costs among users. We agree with Treasury that a more 

detailed analysis of FAA costs and cost shares should be conducted to 

inform the FAA reauthorization debate, and that this information would 

improve the analysis of specific alternative funding options. FAA’s current 

accounting system is not able to provide the information required for a 

cost allocation analysis. We believe that using partial cost information, as 

suggested by Treasury, would not be appropriate. Moreover, conducting a 

comprehensive cost analysis was beyond the scope of this report. 

Treasury also said that our report repeats claims made by interest groups 

without evaluating them, giving the sense that each argument is equally 

Page 40 GAO-06-973 Aviation Finance
valid, even though policymakers need some way to evaluate them. This 

was not the objective of the report. We provided a basis for evaluating the 

current and alternative funding options by outlining criteria, including 

revenue adequacy, equity, and efficiency, and discussing the implications 

of these criteria with respect to specific funding options. 

Treasury raised concerns that a number of statements were attributed to

“some stakeholders,” rather than the specific groups or individuals that 

made the statements, noting that attribution helps the reader evaluate the 

statements. In response, we added some attribution as appropriate. 

Treasury also noted its long-standing policy that all debt issued by federal 

entities, including FAA, should be issued solely to the Treasury, because 

centralized Treasury financing of all such debt is the least expensive, most 

efficient means of financing this debt. Treasury further maintained that

market discipline would not be applied to FAA debt obligations issued 

directly to the private capital market because investors would perceive the 

obligations were backed by the federal government. We added language to 

the report to clarify Treasury’s position on these issues. 

Treasury also provided some clarifying and technical comments, which we 

incorporated where appropriate. 

As agreed with your offices, unless you announce the contents of this 

report earlier, we plan no further distribution until 30 days from the date 

of this letter. At that time, we will send copies of this report to interested 

congressional committees; the Secretary of Transportation; the 

Administrator, FAA; the Secretary of the Treasury; and the Director, OMB. 

Copies will also be available to others upon request and at no cost on 

GAO’s Web site at www.gao.gov. 

If you or your staff have any questions about this report, please contact me 

at (202) 512-3834 or dillinghamg@gao.gov. Contact points for our Offices 

of Congressional Relations and Public Affairs may be found on the last 

page of this report. GAO staff who made key contributions to this report 

are listed in appendix II.

Gerald L. Dillingham, Ph.D. 

Director, Physical Infrastructure Issues

Page 41 GAO-06-973 Aviation Finance
List of Committees 

The Honorable Ted Stevens 

Chairman 

The Honorable Daniel K. Inouye 

Co-Chairman 

Committee on Commerce, Science,

and Transportation 

United States Senate 

The Honorable Conrad Burns 

Chairman, Subcommittee on Aviation

Committee on Commerce, Science,

and Transportation 

United States Senate 

The Honorable John L. Mica 

Chairman 

The Honorable Jerry F. Costello 

Ranking Democratic Member 

Subcommittee on Aviation 

Committee on Transportation 

and Infrastructure 

House of Representatives 

Page 42 GAO-06-973 Aviation Finance
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

To accomplish all of our objectives, we reviewed relevant research, 

including GAO products, academic research, congressional testimony, 

industry group publications, and stakeholders’ responses to questions FAA 

asked them about its funding.1

 We also interviewed 

• officials from government agencies, including the Federal Aviation 

Administration (FAA), the Office of Management and Budget (OMB), the 

Congressional Budget Office (CBO), and the Department of the Treasury 

(Treasury); 

• representatives of aviation industry groups, including the Air Transport 

Association, the Aircraft Owners and Pilots Association (AOPA), and the 

National Business Aviation Association; and 

• academic and financial experts. 

In addition, as discussed in the following paragraphs, we performed 

further work to accomplish each objective.

To assess the advantages and concerns that have been raised about the 

current approach to collecting revenues from national airspace system 

(NAS) users to fund FAA and the extent to which the available evidence 

supports the concerns, we examined FAA budget data, Airport and Airway 

Trust Fund (Trust Fund) revenue data, FAA forecasts, data reported to the 

Department of Transportation (DOT) on aircraft size and airfares (DOT 

Form 41 data), and FAA aviation activity data. We used data on tax 

revenues associated with different types of flights to assess the link 

between increases in FAA’s workload and increases in Trust Fund 

revenue. We obtained the FAA budget, Trust Fund, forecast, and aviation

activity data from FAA. To assess the reliability of these data, we 

interviewed knowledgeable officials and reviewed the quality control 

procedures FAA applies to these data, and subsequently determined that 

the data were sufficiently reliable for our purposes. We obtained the DOT 

Form 41 data from BACK Aviation Solutions, a private contractor that 

provides these data to interested parties. We used these data to examine 

trends in aircraft size and airfares because of their impact on the 

relationship between Trust Fund revenues and FAA’s workload. 

 1

In September 2005, FAA provided stakeholders with reauthorization packages (packages

of data on its operations and costs) and asked for responses to questions about how to 

fund to agency. 

Page 43 GAO-06-973 Aviation Finance
Appendix I: Scope and Methodology 

To identify potential alternative funding options for FAA and criteria for 

comparing these options, we obtained information on the experience of

foreign air navigation service providers by reviewing relevant GAO reports 

and other literature and interviewing officials at Eurocontrol and France’s 

FAA counterpart, la Direction Générale de l’Aviation Civile. We also 

interviewed representatives of Air France, AOPA-France, the International

Air Transport Association, the Association of European Airlines, and 

Aéroports de Paris. Through our literature review and these interviews, we 

identified longer-run revenue adequacy, equity, efficiency, and

administrative considerations as appropriate criteria for assessing the 

current and alternative funding options. We considered both modifications 

to the current excise tax structure and various forms of direct charges for 

FAA services as possible alternatives to the current tax structure. In 

selecting options for analysis, we considered whether there was a link 

between the option and some element of FAA’s workload. 

To identify the advantages and disadvantages of authorizing FAA to use 

debt financing for capital projects, we reviewed the borrowing authorities

of other U.S. governmental entities, including the Tennessee Valley 

Authority and the Bonneville Power Administration. 

We conducted our work from May 2005 through August of 2006 in 

accordance with generally accepted government auditing standards. 

Page 44 GAO-06-973 Aviation Finance
Appendix II: 

A

GAO Contact and Staff 

cknowledgments 

Page 45 GAO-06-973

Appendix II: GAO Contact and Staff 

Acknowledgments 

Dr. Gerald L. Dillingham, (202) 512-2834 

In addition to the contact named above, the following individuals made 

key contributions to this report: Ashley Alley, Christine Bonham, Jay 

Cherlow, Tammy Conquest, Colin Fallon, Carol Henn, David Hooper, 

Maureen Luna-Long, Maren McAvoy, Rich Swayze, and Matt Zisman. 

GAO Contact 

Staff 

Acknowledgments 

(540119) Aviation Finance
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