Airport Finance: Past Funding Levels May Not Be Sufficient to Cover Airports' Planned Capital Development
Published: 2003-02-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since Congress enacted the Wendell H. Ford Aviation Investment and Reform Act for the 21 Century (AIR-21) 3 years ago, much has changed. At that time, the focus was on reducing congestion and flight delays. Today, flights are being canceled for lack of business, two major air carriers are in bankruptcy, and attention has shifted from increasing the capacity of the national airspace system to enhancing aviation security. Furthermore, as the federal budget deficit has increased, competition for federal resources has intensified, and the costs of airport capital development are growing, especially with the new requirements for security. Nonetheless, analysts expect the demand for air traffic services to rebound. Until that time, the unexpected slump in air traffic creates a window of opportunity to improve the safety and efficiency of the national airport system.
section_title: What GAO Found
paragraphs: Although there is general consensus among stakeholders that maintaining the integrity of the national airport system requires continual capital investment, estimates vary as to the type and cost of planned airport capital development required to ensure a safe and efficient system. For 2001 through 2005, the Federal Aviation Administration (FAA) has estimated annual planned capital development costs of about $9 billion, while the Airport Council International (ACI), a key organization representing the airport industry, has estimated annual costs of about $15 billion for 2002 through 2006. The estimates differ primarily because FAA's includes only projects that are eligible for federal funding, whereas ACI's includes projects that may or may not be eligible for federal funding. Neither FAA's nor ACI's estimate covers the airport terminal modifications needed to accommodate the new explosives detection systems required to screen checked baggage. According to ACI, the total cost of these modifications could be $3 billion to $5 billion over the next 5 years. From 1999 through 2001, airports received an average of about $12 billion a year for planned capital development. The primary source of this funding was bonds, which accounted for almost $7 billion, followed by federal grants and passenger facility charges, which accounted for $2.4 billion and $1.6 billion, respectively. The amounts and types of funding also varied by airport type. Of the $12 billion, large- and medium-hub airports received over $9 billion, and smaller airports received over $2 billion. If airports continue to receive about $12 billion a year for planned capital development, they would be able to fund all of the projects included in FAA's estimate, but they would not be able to fund about $3 billion in planned development estimated by ACI. While this projected shortfall could change with revisions in future funding, planned development, or both, it nevertheless indicates where funding differences may be the greatest. Options are available to increase or make better use of the funding for airport development, and these options would benefit different types of airports to varying degrees. For example, raising the current cap on passenger facility charges would primarily benefit larger airports, while increasing or redistributing Airport Improvement Program grant funds would be more likely to help smaller airports.

section_title: Letter
paragraphs: We are pleased to be here today to discuss airport financing issues, which  are particularly important as you prepare to reauthorize the Wendell H.  Ford Aviation Investment and Reform Act for the 21 Century (AIR-21).  Much has changed since the Congress enacted AIR-21 3 years ago. At that  time, the focus was on reducing congestion and flight delays. Today, flights  are being canceled for lack of business, two major air carriers are in  bankruptcy, and attention has shifted from increasing the capacity of the  national airspace system to enhancing aviation security. Furthermore, as  the federal budget deficit has increased, competition for federal resources  has intensified, and the costs of airport capital development are growing,  especially with the new requirements for security. Nonetheless, analysts  expect the demand for air traffic services to rebound. Until that time, the  unexpected slump in air traffic creates a window of opportunity to improve  the safety and efficiency of the national airport system.
My statement today is based on our ongoing and completed work on  airport funding and addresses the following questions: 1. What are the estimated costs of airports’ planned capital development? 2. How much funding did airports receive for planned capital  development in recent years, and what were their principal sources of  funding?
3.
If past funding levels continue, will they be sufficient to meet estimates  of planned capital development? 4. What options are available to address any potential difference between  planned development and available funding?
Because our information on planned airport capital development, including  the information we obtained from surveying 400 smaller airports, is  preliminary, it is subject to change as we finalize our ongoing work.
Although there is general consensus among stakeholders that  maintaining the integrity of the national airport system requires  continual capital investment, estimates vary as to the type and cost of  planned airport capital development required to ensure a safe and  efficient system. For 2001 through 2005, FAA has estimated annual  planned capital development costs of about $9 billion, while the Airport  Council International (ACI), a key organization representing the airport  industry, has estimated annual costs of about $15 billion for 2002  through 2006. The estimates differ primarily because FAA’s includes only  projects that are eligible for federal funding, whereas ACI’s includes  projects that may or may not be eligible for federal funding. Neither  FAA’s nor ACI’s estimate covers the airport terminal modifications  needed to accommodate the new explosives detection systems required  to screen checked baggage. According to ACI, the total cost of these  modifications could be $3 billion to $5 billion over the next 5 years.
From 1999 through 2001, airports received an average of about $12  billion a year for planned capital development. The primary source of  this funding was bonds, which accounted for almost $7 billion, followed  by federal grants and passenger facility charges, which accounted for  $2.4 billion and $1.6 billion, respectively. The amounts and types of  funding also varied by airport type. Of the $12 billion, large- and  medium-hub airports received over $9 billion, and smaller airports  received over $2 billion.
If airports continue to receive about $12 billion a year for planned  capital development, they would be able to fund all of the projects  included in FAA’s estimate, but they would not be able to fund about $3  billion in planned development estimated by ACI. While this projected  shortfall could change with revisions in future funding, planned  development, or both, it nevertheless indicates where funding  differences may be the greatest.
Options are available to increase or make better use of the funding for  airport development, and these options would benefit different types of  airports to varying degrees. For example, raising the current cap on  passenger facility charges would primarily benefit larger airports, while  increasing or redistributing Airport Improvement Program grant funds  would be more likely to help smaller airports.
subsections: section_title: FAA’s and the Airport Industry’s Estimates of Airports’ Planned Capital Development Vary Substantially
paragraphs: The estimated costs of planned airport capital development vary depending  on which projects are included in the estimates. According to FAA’s  estimate, which includes only projects that are eligible for Airport  Improvement Program (AIP) grants, the total cost of airport development  will be about $46 billion, or about $9 billion per year, for 2001 through 2005.  FAA’s estimate is based on the agency’s National Plan of Integrated Airport  Systems, which FAA published in August 2002. ACI’s estimate includes all  of the projects in FAA’s estimate, plus other planned airport capital projects  that may or may not be eligible for AIP grants. ACI estimates a total cost of  almost $75 billion, or nearly $15 billion per year for 2002 through 2006.  Projects that are eligible for AIP grants include runways, taxiways, and  noise mitigation and noise reduction efforts; projects that are not eligible  for AIP funding include parking garages, hangars, and expansions of  commercial space in terminals.
Both FAA’s and ACI’s estimates cover projects for every type of airport. As  table 1 indicates, the estimates are identical for all but the large- and  medium-hub airports, which are responsible for transporting about 90  percent of the traveling public. For these airports, ACI’s estimate of  planned development costs is about twice as large as FAA’s.
According to FAA’s analysis of the planned capital development for 2001  through 2005, airports will use 61 percent of the $46 billion for capacity  enhancement, reconstruction, and modifications to bring airports up to the  agency’s design standards and 39 percent to fund safety, security,  environmental, and other projects. See figure 1.
Neither ACI’s nor FAA’s estimate includes funding for the terminal  modification projects that are needed to accommodate the new explosives  detection systems required to screen checked baggage. ACI estimates that  these projects will cost a total of about $3 billion to $5 billion over the next  5 years. A key reauthorization issue facing the Congress is how these  terminal modification projects will be funded. In 2001, the Congress  allowed FAA to use AIP funds to help pay for some new security projects;  however, this use of AIP funds affected the amount of funding that was  available for some development projects. Specifically, in fiscal year 2002,  FAA used $561 million in AIP grant funds for security projects, or about 17  percent of the $3.3 billion available. The use of AIP grant funds for new  security projects in fiscal year 2002 reduced the funding available for other  airport development projects, such as projects to bring airports up to FAA’s  design standards and reconstruction projects. The use of AIP grant funds  for security also caused FAA to defer three letter-of-intent payments  totaling $28 million to three airports until fiscal year 2003 or later.
section_title: $12 Billion a Year, Mostly from Bonds and Federal Sources
paragraphs: From 1999 through 2001, the 3,364 airports that make up the national  airport system received an average of about $12 billion per year for planned  capital development. The single largest source of these funds was bonds,  followed by AIP grants and passenger facility charges. (See table 2.)  It is  important to note that the authorized AIP funding for fiscal years 2002 and  2003 totaled $3.3 billion and $3.4 billion, respectively. However, because  data for funding from other sources were not available for these years, we  used the figures from 1999 through 2001, the most recent years for which  consistent data were available.
The amount and type of funding vary depending on the airport’s size. For  example, as shown in figure 2, the large- and medium-hub airports depend  primarily on bonds, while the smaller airports rely principally on AIP  grants. Passenger facility charges are a more important source of revenue  for the large- and medium-hub airports because they have the majority of  commercial-service passengers.
section_title: Past Funding Levels Would Cover All of FAA’s Planned Development Estimate but Would Fall About $3 Billion Short of ACI’s Estimate
paragraphs: If the funding for airport capital development remains at about $12 billion a  year over the next 5 years, it would cover all of the projects in FAA’s  estimate. However, it would be about $3 billion less per year than ACI’s  estimate. Figure 3 compares the average annual funding airports received  from 1999 through 2001 with FAA’s and ACI’s estimated annual planned  development costs for 2001 through 2006. This difference is not an absolute  predictor of future funding shortfalls; both funding and planned  development may change in the future. However, it does provide a useful  indication of where funding differences may be the greatest.
subsections: section_title: Funding Difference Would Affect Smaller Airports Proportionally More Than Larger Airports
paragraphs: In percentage terms, the difference between recent funding levels and  ACI’s estimate of planned capital development is somewhat greater for  smaller airports than it is for large- and medium-hub airports. From 1999  through 2001, smaller airports received an average of about $2.4 billion a  year for planned capital development while large- and medium-hub airports  received an average of about $9.4 billion. If these funding levels continued,  smaller airports would not be able to fund about 27 percent of their  planned development, while large- and medium-hub airports would not be  able to fund about 20 percent of their planned development. Figures 4 and 5  illustrate the differences between recent funding levels and the costs of  planned capital development projected for smaller and for large- and  medium-hub airports.
section_title: Ability to Fund Planned Capital Development Has Improved for Both Smaller and Larger Airports
paragraphs: The difference between past funding and planned development has  declined over the past 5 years, and, at recent funding levels, airports would  be able to fund a higher percentage of their planned capital development  than they could fund in 1998. At that time, we reported that smaller airports  could fund about 52 percent of their planned capital development,  compared with about 73 percent today, which represents an increase of 21  percent. We also reported that large- and medium-hub airports were able to  fund about 80 percent of their development and are able to fund the same  amount today. See figure 6.
The primary reason why smaller airports can fund more of their planned  capital development today than they could in 1998 is that AIR-21 increased  both the total amount of funding for AIP grants and the proportion of AIP  funding that went to smaller airports. Specifically, AIR-21 increased the  funding for two AIP funds that primarily or exclusively benefit smaller  airports—the state apportionment fund and the small airport fund—and it  created general aviation entitlement grants, which also benefit smaller  airports.  As a result of these changes, smaller airports received almost 63  percent of the $2.4 billion in AIP grant funds that airports received each  year, on average, from 1999 through 2001. Large- and medium-hub airports  can also fund more of their planned development today than they could in  1998 primarily because they are able to issue more bonds and to charge a  higher passenger facility fee.
section_title: Options Are Available to Address Difference between Funding and Planned Development
paragraphs: Options are available to increase airport funding or to make better use of  the existing funding. These options, some of which were authorized or  implemented as part of AIR-21, include increasing the AIP grant funding for  smaller airports, increasing passenger facility charges, creating a separate  fund for new security projects, and using innovative financing approaches.
The various options would benefit different types of airports to varying  degrees. It is also important to note that even though the airlines may be  experiencing financial problems, most large airports have very solid credit  ratings and could, if necessary, issue more debt without facing exorbitant  interest rates.
To help address the difference between funding and planned development,  AIR-21 provided that up to $150,000 a year in AIP grant funds be made  available to all general aviation airports for up to 3 years for airfield capital  projects, such as runways, taxiways, and airfield construction and  maintenance projects. On February 11, 2003, we reported that since the  program’s inception in fiscal year 2001, general aviation airports have  received about $325 million, which they have used primarily to help build  runways, purchase navigational aids, and maintain pavements and airfield  lighting.  Most of the state aviation officials and general aviation airport  managers we surveyed said the grants were useful in meeting their needs,  and some suggested that the $150,000 grant limit be increased so that  general aviation airports could undertake larger projects. However, a  number of state officials cautioned that an increase in the general aviation  entitlement grant could cause a decrease in the state apportionment fund  that states use to address their aviation priorities.
Another option would be to increase or eliminate the cap on passenger  facility charges. This option would primarily benefit larger airports,  because passenger facility charges are a function of the volume of  passenger traffic. However, under AIP, large- and medium-hub airports that  collect passenger facility charges must forfeit a certain percentage of their  AIP formula funds. These forfeited funds are subsequently divided between  the small airport fund, which is to receive 87.5 percent, and the  discretionary fund, which is to receive 12.5 percent. Thus, smaller airports  would benefit indirectly from any increase in passenger facility charges. In  our 1999 report on passenger facility charges, we estimated that a small  increase in these charges would have a modest effect on passenger traffic.  At that time, we estimated that each $1 increase would reduce passenger  levels by about 0.5 to 1.8 percent, with a midrange estimate of 0.85 percent.  Since AIR-21 raised the cap on passenger facility charges from $3.00 to  $4.50, the full effect of the increase has not been realized because only 17 of  the 31 large-hub airports (55 percent) and 11 of the 37 medium-hub airports  (30 percent) have increased their rates to $4.50. Additionally, 3 large-hub  airports and 6 medium-hub airports do not charge a passenger facility fee.  The reluctance to raise passenger facility charges is likely the result of  several factors, including the views of airlines, which are opposed to any  increase in passenger facility charges because such an increase would raise  passenger costs and reduce passenger traffic. Nonetheless, if all airports  were to increase passenger facility charges to the current ceiling,  additional revenue could be generated.
Recently, the head of the Transportation Security Administration suggested  setting up a separate fund for security projects. Such a fund might be  comparable to AIP, which receives revenue from various aviation-related  taxes through the Airport and Airway Trust Fund. Having a separate fund  would be consistent with the recent separation of aviation safety and  security responsibilities.
FAA has introduced other mechanisms to make better use of existing  funding sources, the most successful of which has been letters of intent, a  tool that has effectively leveraged private sources of funding. As noted,  letters of intent represents a nonbinding commitment from FAA to provide  multiyear funding to an airport beyond the current AIP authorization  period. Thus, the letter allows the airport to proceed with a project without  waiting for a future AIP grant because the airport and investors know that  allowable costs are likely to be reimbursed. A letter of intent may also  enable an airport to receive a more favorable interest rate on bonds that are  sold to refinance a project because the federal government has indicated its  support for the project. FAA has issued 64 letters of intent with a total  commitment of about $3 billion; large- and medium-hub airports account  for the majority of the total.
Other approaches to making better use of existing funding resources were  authorized under AIR-21. Specifically, the act authorized FAA to continue  its innovative finance demonstration program, which is designed to test the  ability of innovative financing approaches to make more efficient use of  AIP funding. Under this program, FAA enabled airports to leverage  additional funds or lower development costs by (1) permitting flexible local  matching on some projects, (2) purchasing commercial bond insurance, (3)  paying interest costs on debt, and (4) paying principal and interest debt  service on terminal development costs incurred before the enactment of  AIR-21. FAA has provided about $31 million for smaller airports to test  these innovative uses of AIP funding. According to FAA officials, the results  of the program have been mixed. The most popular option for airports has  been flexible matching, which has resulted in several creative loan  arrangements.
In conclusion, Mr. Chairman, the aviation industry and the national  economy are still struggling to recover their health. Analysts nonetheless  expect the demand for air travel to rebound, and the nation’s aviation  system must be ready to accommodate the projected growth safely and  securely. As the Congress moves forward with reauthorizing FAA, it will  have to decide on several key issues, including how it wants to consider the  airports’ estimate of $15 billion a year for planned capital development over  the next 5 years, how terminal modification projects will be funded, and  what priorities it wants to set, both for development and security.  Sustaining recent funding levels would allow the majority of planned  airport capital development to move forward, but it would not cover all of  the airports’ estimated costs, and it would not address the costly terminal  modifications needed to accommodate explosives detection systems.  Options such as additional AIP grant funds, increases in passenger facility  charges, or the creation of a separate fund for new security projects could  make more funding available for airport improvements. However, the  growing competition for federal budget dollars and concerns about the  impact of higher charges on airline ticket sales may limit the practicality of  these options.
section_title: Scope and Methodology
paragraphs: To determine how much planned development would cost over the next 5  years, we obtained planned development data from FAA and ACI. ACI  provided its estimate to us in January 2003, and we are still analyzing the  data on which the estimate is based. To determine the sources of airport  funding, we obtained capital funding data from FAA, the National  Association of State Aviation Officials, Thomson Financial, and our survey  of 400 general aviation and reliever airports. We obtained funding data from  1999 through 2001 because these were the most recent years for which  consistent data were available. We screened the planned development and  funding data for accuracy and compared funding streams across databases  where possible. We also clarified ambiguous development or funding  source information directly with airports. We did not, however, audit how  the databases were compiled, except for our own survey. However, we  have not finished analyzing the results of our survey, and the results  presented in this testimony are still preliminary.
We have been performing our ongoing work from May 2002 through  February 2003 in accordance with generally accepted government auditing  standards.
This concludes my statement. I would be pleased to answer any questions  that you or other members of the Subcommittee might have.