Airport Funding: FAA's and Industry's Cost Estimates for Airport Development
Published: 2017-03-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Roughly 3,300 airports in the United States are eligible for federal AIP grants from the FAA that can be used for certain types of projects, such as building runways and noise mitigation. To fund development, in addition to AIP grants, airports rely on locally generated revenues and federally authorized PFCs, which are added to the price of an airline ticket and have been capped at $4.50 per flight segment.
The administration's call to boost spending on public infrastructure has renewed attention on the importance of maintaining and improving airport infrastructure.
This testimony discusses: (1) the differences between estimates of airports' planned development costs, (2) the federal funding and other airport funding and revenues that may be available to defray development costs, and (3) the implications of increasing the cap on PFCs, among other objectives.
This testimony is based on previous GAO reports issued from March 1998 through April 2015, with selected updates conducted through March 2017. To conduct these updates, GAO reviewed recent information on FAA's program activities and analyses outlined in FAA reports, and related airport industry estimates of infrastructure development costs. GAO also interviewed officials from FAA, and airport and airline trade associations.
section_title: What GAO Found
paragraphs: The Federal Aviation Administration's (FAA) estimate of the costs for planned capital development at airports over the next five years is about $32.5 billion, compared to the Airports Council International-North America's (ACI-NA) estimate of almost $100 billion, both for the period 2017-2021. The difference between these two estimates can be attributed to a number of factors, but most significantly to the types of projects included in the estimates. FAA's estimate is limited to projects that are eligible for Airport Improvement Program (AIP) grants that do not already have funding arranged, whereas ACI-NA's estimates include all projects regardless of AIP eligibility or whether funding is arranged. The figure below illustrates the disparity between the two estimates since 2005. Note that since 2015, FAA's estimate has decreased by $1 billion whereas ACI-NA's has increased by $24.4 billion.
In addition to the AIP and state grants they receive, airports generate funds through airport-generated income and Passenger Facility Charges (PFC), among other sources. In 2015, GAO estimated that funding from these sources totaled an average of $10.3 billion annually (2013 dollars), $2.7 billion less than airports' planned development costs. Airports have a number of options for addressing any shortfall in funding their planned development costs, including prioritizing development projects, financing projects with long term debt, attempting to increase airport revenues, or entering into public-private partnerships.
Increasing or eliminating the PFC cap would significantly increase PFC collections available to airports under three scenarios GAO modeled in prior work. However, according to GAO's model, an increase in the PFC could also marginally slow passenger growth and therefore the growth in tax revenues to the Airport and Airway Trust Fund (AATF), which is used to fund FAA programs. Such projected effects depend on key assumptions regarding the consumers' sensitivity to a PFC cap increase, whether the airlines decide to pass on the full increase to consumers, and the rate at which airports would adopt the increased PFC cap. Any increase in PFCs is strongly opposed by airlines which contend that an increase could reduce passenger demand.

section_title: Letter
paragraphs: I am pleased to submit this statement on funding airport infrastructure as  you begin considering reauthorization of the Federal Aviation  Administration (FAA). U.S. airports are important contributors to our  economy, providing mobility for people and goods both domestically and  internationally, and often contributing to the economic success of the  communities served. The administration’s call to boost spending on public  infrastructure has focused attention on the importance of maintaining and  improving the state of the nation’s entire infrastructure, including airports.
Since 1998, we have reported on airport funding relative to airports’  planned development. The last time we testified on this topic in 2015, we  noted that following several airline mergers, a spike in fuel prices, and the  Great Recession, aviation activity slowed or even declined at many  airports, while at the same time becoming more concentrated at larger  (i.e., large and medium hub) airports. We also noted that federal support  for airport development declined during this period. In response, airports  have leveraged their expected future revenues and sought to increase  their non-aviation revenues to finance past or current development.  These trends have continued affecting the demands on infrastructure at  these airports, as well as their finances. To meet future planned  development costs, airports have long sought an increase in the cap on  federally authorized but locally imposed Passenger Facility Charges  (PFC), which are added to ticket prices along with federal taxes.  However, airlines strongly oppose a PFC increase because higher ticket  prices could reduce passenger demand and airline revenues.
My statement today focuses on funding for airport capital development.  Specifically, this statement discusses (1) the differences between  estimates of airports’ planned development costs; (2) federal funding,  other airport funding, and revenues that may be available to defray capital  development costs; (3) the implications of any potential gap between the  estimated costs of planned development and expected future funding;  and (4) the implications of increasing the cap on PFCs.
This statement draws from our body of work, completed from March 1998  through April 2015, on airport and aviation-industry trends. Specific  products are cited throughout the statement. We have updated this work  through March 2017 with interviews with key FAA and trade association  officials and updated FAA and trade association airport-funding data from  2005 through 2017.
More detailed information on our objectives, scope, and methodology for  that work can be found in the issued reports. We conducted the work on  which this statement is based in accordance with generally accepted  government auditing standards. Those standards require that we plan  and perform the audit to obtain sufficient, appropriate evidence to provide  a reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence obtained provides a reasonable  basis for our findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The United States has more than 19,000 airports, ranging from busy  commercial service airports such as Hartsfield-Jackson Atlanta  International Airport that enplanes millions of passengers annually, to  small grass airstrips that serve only a few aircraft each year. Of these,  roughly 3,300 airports are designated by FAA as part of the national  airport system and are therefore eligible for federal assistance for airport  capital projects.
The national airport system consists of two primary types of airports— commercial service airports, which have scheduled service and board  2,500 or more passengers per year, and general aviation airports, which  have no scheduled service and board fewer than 2,500 passengers.  Federal law divides commercial service airports into various categories of  airports, based on the number of passenger boardings, ranging from  large hub airports to commercial service nonprimary airports (see fig. 1).  The majority of passenger traffic occurs at large hub airports: almost 73  percent of all passengers in the United States boarded at the 30 large  hub airports in 2015.
The federal government provides grants to help fund airport capital  development through its Airport Improvement Program (AIP). Congress  appropriates funds for AIP and other FAA programs from the Airport and  Airway Trust Fund (AATF), which is itself funded by a variety of aviation- related taxes, such as taxes on tickets, cargo, general aviation gasoline,  and jet fuel. FAA’s tool for identifying airports’ future capital projects that  are eligible for AIP grants is the National Plan of Integrated Airport  Systems (NPIAS). FAA relies on airports, through their planning process,  to identify individual projects for funding consideration. Federal law and  FAA’s rules establish which types of airport development projects are  eligible for AIP’s funding. Generally, most types of airfield  improvements—such as runways, lighting, navigational aids, and land  acquisition—are eligible. AIP-eligible projects for airport areas serving  travelers and the general public—called “landside development”—include  entrance roadways, pedestrian walkways and movers, and common  space within terminal buildings, such as waiting areas. Hangars and interest expense on airport debt are not eligible for AIP grants. Some  landside development projects—including revenue-producing terminal  areas, such as ticket counters and concessions—are also ineligible.
PFCs are another federally authorized source of funding that commercial  airport sponsors can levy on passengers to help pay for capital  development at national system airports. Commercial airports must  designate which projects PFCs will fund and must seek and obtain FAA’s  approval to charge a PFC. Funding for both AIP and PFCs is linked to  passenger activity. In this way, Congress aimed to direct funds to where  they are needed most. Airports also fund their development with state and  local contributions as well as airport generated funds, such as income  from airports’ tenants and commercial activities. Airport-generated  revenue is typically used to finance the issuance of local debt such as  tax-exempt bonds, which for larger commercial airports constitute more  than half of their financing. Because of the size and duration of airport  development—for example, planning, funding and building a new runway  can take more than a decade and several hundred-million dollars to  complete—long-term debt is used to help finance these types of projects.
section_title: Airport Planned Development Cost Estimates Differ due to Multiple Factors
paragraphs: The FAA’s estimate of the costs for infrastructure development at airports  over the next 5 years is about $32.5 billion compared to the airport  industry’s estimate of almost $100 billion for the same period. In 2016,  FAA estimated that airports have roughly $32.5 billion in planned  development projects for the period 2017-2021, which represents a 3  percent, or $1 billion, decrease from its estimate for the 2015-2019  period. The FAA attributes the decline in capital development costs to a  range of factors, including a reduction in current and future traffic relative  to earlier predictions, the use and age of airport facilities, and costs  related to changing aircraft technology. FAA reported a decrease in  estimated costs for planned projects at most large and medium hubs, with  increases at other hub types. For instance, according to the FAA, there is  an increase in terminal projects at small airports, while FAA notes that  many large and medium sized airports have terminal projects planned.  Further, according to FAA’s analysis, airports will experience decreased  demands for building new airside capacity, such as runways, to reduce  delays.
The airport industry’s estimate of 5-year planned development cost, as  developed by Airports Council International-North America (ACI-NA), is  three times FAA’s. ACI-NA’s most recent estimate of almost $100 billion  in planned investment is a 32 percent increase over its 2015 5-year  estimate of $75.5 billion. According to ACI-NA officials, of the nearly $100  billion in total planned development costs, $61 billion are for AIP-ineligible  projects and $38.9 billion are for AIP-eligible projects (as compared to  FAA’s $32.5 billion estimate), with most of the ineligible projects for  terminal or landside improvements such as ground access. The  percentage increase in planned development estimates is greatest for  large hub airports, where estimated costs have increased more than 50  percent, from about $40 billion to about $60 billion in ACI-NA’s most  recent estimate. For example, according to the latest ACI–NA report, the  Los Angeles International Airport reported that its planned new  development will cost about $10 billion between 2017 and 2021 for  infrastructure projects. In contrast, most small airports reported single- digit increases in infrastructure costs, according to ACI-NA, although  there are some exceptions. ACI-NA officials told us that a key driver for its  increasing cost estimate is that airports have deferred some airport  projects due to a lack of funding in the past.
The principal reason why FAA’s and ACI-NA’s planned development  costs differ so significantly is that the ACI-NA cost estimate encompasses  substantially more projects than does FAA’s, according to ACI-NA. As we  have previously reported, the ACI-NA uses AIP-eligible and AIP-ineligible  projects to develop its estimates, while the FAA only uses AIP-eligible  projects. Additionally, ACI-NA cost estimates are made up of projects  that have already identified funding sources as well as those that have  not. According to ACI-NA officials, 77 percent of the cost of planned  development for large hub airports in their most recent cost estimate has  funding already arranged. In contrast, FAA’s estimates only include  projects without financing arranged.
Additional reasons for differences in FAA’s and ACI-NA’s estimates are  technical and methodological. First, the sources and methods for  surveying information from the airports differ. FAA estimates are  developed by reviewing information from airport plans that were available  through 2015. The ACI-NA costs estimates are based on a survey of  airports completed in 2017. Second, the FAA does not adjust its  estimates for inflation, but the ACI-NA uses a 1.5 percent annual inflation  adjustment. Without the inflation adjustment, ACI-NA’s estimate would  drop $4.2 billion to $95.7 billion in constant 2016 dollars. Third, the ACI- NA estimate includes contingency costs for potential design changes,  whereas FAA’s estimate does not.
While FAA and ACI-NA cost estimates have long differed for the reasons  outlined above, the most recent estimates diverge considerably, as  shown in figure 2. The 5-year FAA estimate for 2017 through 2021 fell  from the prior estimate to $32.5 billion, whereas ACI-NA’s estimate  increased by $24.4 billion to $99.9 billion, or three times FAA’s estimate.
section_title: Airports Rely on Federal and Locally Generated Revenues to Fund Development
paragraphs: In 2015, we estimated that in recent years national system airports had  generated an average of $10 billion annually for capital development.  These funds come from a variety of sources, as noted in figure 3.
AIP grants: Since 2012, AIP authorizations have been unchanged,  although the health of the AATF, which funds AIP, has improved. The  AATF’s balance has recovered in recent years, ending fiscal year 2016  with an uncommitted balance of $5.7 billion and a cash balance of $14.3  billion. AIP grants must be used for eligible and justified projects, which  are planned and prioritized by airports, included in their capital  improvement plans, and reviewed and approved by FAA staff and the  Secretary of Transportation. The distribution system for AIP grants is  complex. It is based on a combination of formula grants—which are often  referred to as “entitlement grants” within this program—that go to all  national-system airports, and discretionary grants that FAA awards for  selected eligible projects. In 2015, we reported that, for fiscal years  2009 through 2013, national-system airports received an average of $3.3  billion annually in AIP grant funding. Grant awards in fiscal year 2016  totaled almost $3.3 billion.
PFC collections: Congress last raised the PFC cap in 2000 to $4.50 per  flight segment, with a limit on the total PFCs that a passenger can be  charged per round trip of $18 total. Large and medium hub airports that  collect PFCs of $3 or less per flight segment have their AIP entitlement  funding reduced by 50 percent; any of these airports that collect PFCs of  more than $3 have their AIP entitlement funding reduced by 75 percent.  Most of these AIP reductions to large and medium airports are distributed to smaller airports through the AIP. We found in 2015 that for fiscal  years 2009 through 2013, commercial airports had an annual average of  $1.8 billion of their PFC collections available for capital projects after  deducting interest payments on debt. Ninety percent of that amount was  collected by larger airports. Of the $90 billion in FAA approved PFC  collections, 34 percent has been committed for landside projects, such as  terminals; 34 percent for the interest payments on debt used to pay for  capital projects, and 18 percent for airside projects, such as runways and  taxiways. As of January 2017, 96 of the top 100 airports have been  approved to collect PFCs.
State grants: Airports can also obtain funding for capital development  projects from state grants. This money is often used to provide the  airport’s share of matching funds required for AIP-funded projects.  According to the results of a survey we conducted in collaboration with  the National Association of State Aviation Officials (NASAO), for fiscal  years 2009 through 2013, states provided an annual average of $477  million to national system airports, with $345 million (72 percent) going to  smaller airports and $131 million (28 percent) going to large and medium  hub airports.
Capital contributions: Capital contributions are funds contributed for  infrastructure projects by the airport sponsor or entities that use the  airport, such as airlines or tenants. According to FAA data on commercial  airports’ annual financial reports, for fiscal years 2009 through 2013,  commercial airports received an annual average of $644 million in capital  contributions. Of this amount, $419 million went to larger airports and  $225 million went to smaller airports.
Airport-generated net income: Airports generate both aeronautical  revenues, such as revenues earned from leases with airlines and landing  fees, and non-aeronautical revenues, such as earnings from terminal  concessions and parking fees. We found that for fiscal years 2009  through 2013, airport-generated net income available for capital  development projects averaged $3.8 billion annually—55 percent from  aeronautical revenues and 45 percent from non-aeronautical revenues  (see fig. 4).
To leverage these funding sources, some airports also issue bonds to  finance infrastructure projects, often for larger and longer-term  developments. Bonds allow an airport to fund a project up front and pay  for its cost, plus interest, over a much longer time frame compared to the  construction of the project. Because many U.S. airports are owned by  states, counties, cities, or public authorities, bonds issued by these  entities to support airport projects may qualify as tax-exempt bonds for  federal tax purposes. The tax-exempt status enables airports to issue  bonds at lower interest rates than taxable bonds, thus reducing a project’s  financing costs. Tax-exempt bonds can be issued at lower rates because  the federal income-tax exclusion on the interest paid by the purchasers  can make these investments more attractive to investors than taxable  bonds. Based on our analysis of data from Thomson Reuters on airport  bond issuances, from 2009 to 2013, airports obtained an average of $6.3  billion per year for new projects by issuing bonds. Bond financing has  traditionally been an option exercised by larger airports because they are  more likely to have a greater and more certain revenue stream to support  repayment of debt. Smaller airports tend to be less reliant on bonds and,  to the extent that they do issue bonds, make greater use of general  obligation bonds that are backed by the tax revenues of the airport  sponsor, which is often a state or municipal government. Data from FAA’s  airport financial-reporting system indicate that from fiscal year 2009 to  fiscal year 2013, 94 percent of bond proceeds—including both new bonds  and refinancing—went to larger airports and 6 percent went to smaller  airports.
The total amounts of funding by source differ between larger and smaller  airports. As shown in figure 5, larger airports are more dependent than  are smaller airports on airport-generated net income and larger airports  are less dependent than are smaller airports on AIP grants.
section_title: Airports Continue to Report Funding Gap for Planned Investments
paragraphs: In 2015, we estimated airports’ planned capital-development costs for  fiscal years 2015 through 2019 at $13 billion annually, which exceeded  airports’ average funding of $10 billion by roughly $3 billion in recent  years ($2.7 billion in constant 2013 dollars). We have examined airport  funding and planned development four times since 1998 and, as figure 6  shows, the difference between planned development and historical  funding has never exceeded $3 billion. Note that the gap also tends to be  proportionally greater for smaller airports.
As we reported in 2015, airports have a number of options for addressing  any shortfall in funding their capital development, including prioritizing  capital development projects, financing projects, attempting to increase  airport revenues, or entering into public-private partnerships. States and  local communities can also choose to increase state grant funding. For  individual airports, a common method for aligning funding with planned  development is to prioritize projects. This generally entails decisions  about which projects to move forward with and which to defer, but could  also include scheduling a project in phases or reducing the scope of or  cancelling a planned project. Another method that airports can use to  align funding with capital development is to borrow money to fund a  project. Most commonly, this consists of issuing a bond. However, as  previously discussed, borrowing has traditionally been an option  exercised by larger airports. To be able to finance projects, an airport’s  financial situation must be viewed positively enough to be able to borrow  money at affordable rates in the bond market. Two of the airport financial- consulting firms with whom we spoke in 2015 noted that some airports  are already leveraged to a large extent, and one bond-rating agency  stated that taking on additional debt is always a risk. A third method for  airports to fund capital development is to try to increase airport-generated  net income. We have found in recent prior work that in addition to  traditional commercial activities to generate non-aeronautical revenue,  such as parking fees or terminal concessions, some airports have  developed commercial activities with stakeholders from local jurisdictions  and the private sector to help develop airport properties into retail,  business, and leisure destinations.
section_title: Increasing Passenger Facility Charges Would Increase Airport Funding, but Other Effects Are Less Certain
paragraphs: One approach to increasing funding for airports that has been advanced  by airports and others is to increase or eliminate the current $4.50 cap on  PFCs. However, any increase in PFCs is controversial and strongly  opposed by airlines, which contend that airports currently have adequate  access to funding for their development. We have previously found that  increasing the PFC cap would significantly increase PFC collections  available to airports. Specifically, in 2014, we developed an economic  demand model to estimate the potential funding airports might generate  using three different PFC amounts. The general approach of this  analysis was to model airport collections and passenger traffic under  various PFC cap levels. We modeled three different increases in the PFC  cap amount, each starting in 2016:
PFC cap of $6.47 (the 2016 equivalent of $4.50 indexed to the  Consumer Price Index (CPI) starting in 2000 when the cap was first  instituted);
PFC cap of $8 based on the President’s 2015 budget proposal; and
PFC cap of $8.50 that would be indexed to inflation.
Our analysis indicated that all three scenarios would significantly increase  the potential amount of PFC collections in comparison to what would be  available without a PFC increase, as shown in table 1. For example, we  estimated that raising the PFC cap to $8.00 would result in an additional  $2.6 billion in PFCs, an increase of 77 percent in PFC revenue in 2020.
Because passenger traffic is highly concentrated at larger airports, PFC  collections are similarly concentrated. Thus, larger airports would benefit  most from a PFC increase. A hub level analysis of a PFC cap increase  shows that large hub airports could receive nearly three-quarters of all  PFCs, while large and medium hubs together could account for nearly 90  percent of total PFCs, similar to the current distribution. For example,  under an $8 PFC, large hub airports could receive additional PFC  revenues of $1.74 to $2.08 billion annually and medium hubs could  receive additional PFC revenues of $372 to $435 million annually from  2016 to 2024. Small and non-hub airports could receive up to $212 million  and $82 million in additional annual PFC revenues, respectively, from  2016 to 2024.
While an increase in PFCs would mainly flow to the larger airports,  smaller airports could also benefit from increased PFC collections. As  previously noted, under current law, large and medium hubs’  apportionment of AIP formula funds may be reduced, which in fiscal  year 2014, resulted in a redistribution of approximately $553 million. The  majority of this funding (87.5 percent) goes to the Small Airport Fund for  redistribution among small airports. The remaining 12.5 percent became  available as AIP discretionary funds, which FAA uses to award grants to  eligible projects regardless of airport size.
According to our model, while increasing the PFC cap could raise PFC  revenue, it could decrease passenger demand. Such a decrease would  also result in marginally slowing growth in revenues to the AATF.  Assuming that the PFC increase is fully passed on to consumers and not  absorbed through a reduced lower base in (before tax) fares, the higher  cost of air travel could reduce passenger demand according to economic  principles. Economic principles and past experience suggest that any  increase in the price of a ticket—even if very small—will have an effect on  some consumers’ decisions on whether to take a trip. For example, an  increase in the price by a few dollars may not affect the decision of a  business flyer going for an important business meeting but could affect  the decision of a family of four going on vacation. Under all three  scenarios, AATF revenues, which totaled $14.3 billion in 2016 and are  used to fund FAA activities, would likely continue to grow overall based  on current projections of passenger growth; however, the modeled cap  increases could reduce total AATF’s revenues by roughly 1 percent  because of reduced passenger demand. For example, under a $6.47  PFC, we estimated that AATF’s revenues would total $105 million less in  2024 than they would total if the cap were not raised.
For more than a decade, airlines and airports have hotly debated a PFC  increase because it would give greater control over airport investment to  airports. All else being equal, lower PFCs can provide airlines with more  influence over airport infrastructure decisions and higher PFCs can  provide airports more control over local capital-funding decisions,  including the ability to decide how to apply PFC revenues to support  capital projects and thus how those revenues might influence airline rates  and charges. Generally, PFCs offer airports relative independence over  investment decisions at their airports. While airports must notify and  consult with the airlines on how they spend PFCs, as long as FAA  approves, airlines cannot block these decisions. Airlines can choose to  serve other airports, however, so airports still have an incentive to listen  to airline concerns.
Chairman Blunt, Ranking Member Cantwell, this concludes my statement  for the record.
section_title: Contact
paragraphs: For further information about this testimony, please contact Gerald L.  Dillingham at (202) 512-2834 or dillinghamg@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this statement.
section_title: Staff Acknowledgments
paragraphs: Key contributors to this testimony include Paul Aussendorf (Assistant  Director), Amy Abramowitz, Dave Hooper, Malika Rice, Amy Suntoke,  Melissa Swearingen, and Michelle Weathers.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.