Commercial Aviation: Raising Passenger Facility Charges Would Increase Airport Funding, but Other Effects Less Certain
Published: 2014-12-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: About $2.8 billion in Passenger Facility Charges (PFCs) were collected in 2013. PFCs are federally authorized fees paid by passengers at the time of ticket purchase to help pay for capital development at commercial service airports and have been capped at $4.50 per flight segment since 2000. Airports are seeking an increase in the PFC cap to $8.50. Airlines, which collect PFCs at the time of purchase and remit the fees to airports, oppose an increase because it could potentially reduce passenger demand. Some airports have suggested that alternative PFC collection methods could allow the PFC cap to be raised without adversely impacting demand.
GAO was asked to examine these issues. This report discusses (1) the potential effects of PFC cap increases, (2) how well the current PFC collection process works, and (3) alternative PFC collection methods. GAO developed a model to assess the potential effects of PFC cap increases on funds for airport investment and the aviation system. GAO interviewed 26 stakeholders, including airports and airlines representing a range of sizes, as well as consumer groups, to discuss PFC collection methods.
section_title: What GAO Found
paragraphs: Increasing the Passenger Facility Charges (PFC) cap would significantly increase PFC collections available to airports under the three scenarios GAO modeled but could also marginally slow passenger growth and therefore the growth in revenues to the Airport and Airway Trust Fund (AATF). GAO modeled the potential economic effects of increased PFC caps for fiscal years 2016 through 2024 as shown in the table below. Under all three scenarios, AATF revenues, which totaled $12.9 billion in 2013 and fund Federal Aviation Administration (FAA) activities, would likely continue to grow overall based on current projections of passenger growth; however, the modeled cap increases could reduce total AATF revenues by roughly 1 percent because of reduced passenger demand. These projected effects depend on key assumptions regarding consumers' sensitivity to a PFC cap increase, whether airlines would pass on the full increase to consumers, and the rate at which airports would adopt the increased PFC cap.
Stakeholders said that the current PFC collection method generally works well, but airport officials said that transparency over PFC collections could be enhanced. Stakeholders universally said that the current method is preferred because the PFC is paid at the time of purchase. Airlines are required to have audits of their PFC collections and FAA provides audit guidance to help provide assurance that collections are accurate. However, the guidance is voluntary and FAA does not know if airlines' auditors use it. FAA relies on airports to alert them of discrepancies but some airports may not be aware they can review audits. FAA could take additional steps beyond what is stated in the guidance to inform airports about their rights, and thus provide reasonable assurance to Congress, airports, and airline passengers about the reliability of those audits and PFCs remitted to airports.
Stakeholders GAO interviewed generally said that alternative methods to collect PFCs, such as airport kiosks or online or mobile payments, are technologically feasible but they would impose additional steps for passengers, costs for airports, and changes in business processes. Therefore, stakeholders said that that the current collection method is better than the identified alternatives.
section_title: What GAO Recommends
paragraphs: GAO recommends that FAA review the extent to which airline independent audits of PFC collections follow FAA guidance and take additional steps to educate airports about their right to review these audits. The Department of Transportation (DOT) agreed to review the extent to which airline audits use FAA guidance, but noted they may not be able to require airlines to respond; and agreed to take additional steps to educate airports about their rights. DOT also provided technical comments which GAO incorporated as appropriate.

section_title: Letter
paragraphs: We have previously found that funding for planned airport development  from Airport Improvement Program (AIP) grants and Passenger Facility  Charges (PFC) will not be sufficient to fund planned airport development  eligible for this support. Other airport revenues may not be available to  fund any shortfall, as they are often committed to projects not eligible for  federal grants like parking garages, airport concessions, and operating  costs. AIP grants have declined in recent years, and the amount of PFCs  that airports can collect per passenger has not changed since 2000, when  it was capped at $4.50. Airports are seeking an increase in the PFC cap  to help fund their planned development projects, such as terminal  rehabilitation and expansion. However, airlines—which collect PFCs at  the time of purchase and remit to airports—oppose an increase, because  they believe that airports have adequate access to outside funding  sources. Airline representatives also assert that an increase in the PFC  cap could lead to a higher cost of travel, thereby reducing passenger  demand and airline revenues. While many aviation stakeholders believe  that the current system of collecting PFCs as part of the ticket purchase is  the most efficient means possible, some airports have suggested that  alternative PFC collection methods could be used, which could allow the  PFC cap to be raised without greatly affecting demand.
In February 2013, we issued a correspondence report, “Alternative  Methods for Collecting Airport Passenger Facility Charges,” in response  to a requirement in the 2012 Federal Aviation Administration (FAA)  Reauthorization that we examine the potential for collecting PFCs outside  of the airline ticket process. The report identified three basic alternatives  but found that each faces considerable challenges to implement. You  asked us to do follow-up work on this topic. This report addresses the  following questions: (1) What are the potential effects of raising the PFC  cap on airport and federal aviation revenues? (2) How well does the  current PFC collection process work? and (3) What is known about  alternative PFC collection methods and how well they might work?
We developed an economic model to assess the potential effects of  increasing the PFC cap on funds for airport investment and the aviation  system, taking into account their effect on passenger demand and  consequently on aviation taxes that contribute to Airport and Airway Trust  Fund (AATF) revenues which help fund the FAA, AIP, and other aviation  programs and activities. To develop this model, we collected and  summarized the most recently available data from FAA on (1) PFC   category from 2009 to 2013 and (2) FAA  collections by airport hub passenger boardings (i.e., enplanement) forecasts from 2016 to 2024.  We determined that the data were sufficiently reliable for our purposes by  reviewing documentation and interviewing knowledgeable FAA officials.
FAA categorizes commercial service airports into four primary hubs—large, medium,  small, and nonhub. Large hubs are defined by statute as having at least 1 percent of total  passenger traffic in the most recent year (approximately 7.4 million passengers in 2013),  while medium hubs have between 0.25 and 1 percent (approximately 1.85 million to 7.4  million passengers in 2013) of total passenger traffic. Small hub airports are those with at  least .05 percent but less than .25 percent of total passenger traffic and non-hub airports  are at least 10,000 enplanements but less than .05 percent of enplanements. Non-primary  commercial service airports that have scheduled air service and process at least 2,500  enplanements annually are eligible to collect PFCs. 49 U.S.C. § 40102(a)(29), (32).
We conducted a literature search on elasticity ratesinterviewed a non-generalizable sample of industry experts selected for  their knowledge of airline passenger demand modeling to discuss our  research, and selected a spectrum of rates to show the potential effects  of PFC changes on passenger demand. With these results, we estimated  the effects on anticipated taxes and fees that fund the AATF. To assess  how well the current PFC collection process works and alternatives, we  updated work from our February 2013 report through a literature review  and interviews with key FAA and industry stakeholders, including the  principal airline and airport trade associations, technology companies,  airline passenger consumer representatives, and four airlines and five  airports. We selected the airlines based on airline size measured by the  number of departures and passengers and type of carrier (legacy, low  cost, and regional carrier). We selected the airports based on airport size,  amount of PFC charged, and percentage of originating versus connecting  passenger traffic. We interviewed representatives from companies that  have developed or installed technologies that could be used in potential  alternative collection systems. We reviewed applicable statutes and  regulations on FAA’s authority to audit collections and interviewed FAA  officials on their role in auditing airlines’ PFC collections and remittances.  To understand how another federal agency audits its passenger fee  collections and modeled increases to its security fee, we interviewed  officials from the Transportation Security Administration (TSA). Additional  information on our methodology is provided in appendices I and II.
We conducted this performance audit from April to December 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient and 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: PFCs are federally authorized fees which were established in 1990 to  help pay for capital development at commercial service airports. PFCs  are currently capped at $4.50 per flight segment with a maximum of two  PFCs charged on a one-way trip or four PFCs on a round trip, for a  maximum of $18 total. About $2.8 billion in PFCs was collected by airlines  on behalf of airports in 2013. Certain categories of passengers and flights  are exempt from paying PFCs. For example, passengers flying on  frequent-flier award coupons are exempt from paying a PFC. The intent  of the PFC program is to further airport development that (1) preserves or  enhances airports’ safety, security, or capacity; (2) reduces noise  generated by airport activities; or (3) enhances airline competition. PFCs  give airports a source of funding for airport development over which they  have greater local control because airlines have more limited say  regarding how PFCs are used than they may have regarding the use of  airport terminal rents or landing fees. This way, if an airport wants to build  additional gates to attract new competition, an incumbent airline cannot  block the project by refusing to fund it. PFCs can be applied to FAA  approved eligible projects, and can be used as a match for AIP grants  or to finance the debt on approved projects.
Airports must apply to the FAA for authority to collect PFCs for use on  approved projects, and if approved by FAA, airlines are required to collect  PFCs and remit them to appropriate airport recipients. Each airport’s  application must list specific eligible projects that PFCs will fund and the  total amount to be collected. Once PFC applications are approved,  airlines must add any approved PFC to the base fare (along with other  federal taxes and fees) at the point of sale on the ticket by an airline, a  travel agent, or Global Distribution Systems (GDS). Airlines must remit  PFCs to airports on a monthly basis. Airlines are able to keep the “float”— that is, interest accumulated on the fees between the time they are  collected and remitted—as well as 11 cents per PFC collected for  administration costs. Airlines that annually collect at least 50,000 PFCs  are required to have annual independent audits of their PFC collections,  and airports can request and receive the results of audits. FAA has the  authority, though not an obligation, to review the audits. (See fig. 1).
From 1990 through August 2014, FAA approved airports’ requests to  collect a total of around $89 billion in PFCs. This amount includes future  approved collections—with about a third of collecting airports approved to  collect PFCs to at least 2024 or later. Of the $89 billion, about 34 percent  has been committed for “landside” projects such as terminals; 34 percent  for interest on debt used to pay for projects either in development or  completed; 18 percent for “airside” projects such as runways and  taxiways; 7 percent for airport access such as roads and rail connecting  to airports; 4 percent for noise reduction; and 4 percent for the  construction of Denver International Airport. (See fig. 2).
Most airports that are eligible to collect PFCs do so at the maximum rate  $4.50 per flight segment. As of October 1, 2014, according to FAA data,  358 out of 538 eligible airports were collecting PFCs, and 351 of the 390  approved airports chose to collect at the maximum rate. In all, 98 of the  top 100 airports have been approved to collect PFCs, with approximately  90 percent of all PFCs (by amount) collected by large and medium hubs.  Airports that impose a PFC may become ineligible to receive up to 50  percent (if collecting PFCs at the $1, $2, or $3 level) or 75 percent (if  collecting PFCs at the $4 or $4.50 level) of the formula AIP grants that  they would otherwise receive. The vast majority of the funding reduction  (87.5 percent) is then made available to smaller airports through AIP  discretionary grants through the Small Airport Fund, with the remainder  available to any airport under FAA’s AIP discretionary grant program.
The President’s 2015 Budget proposes an increase of the PFC cap to  $8.00, while the airport trade associations have proposed an increase in  the PFC cap to $8.50 but also periodically adjusted for inflation thereafter.  Some airports have advocated for a complete lifting of any cap on PFCs,  and while one airport trade association previously advocated for  alternative collection methods to collecting the PFC on the ticket as a way  to increase the PFC cap; the association is no longer doing so. As part of  the last FAA reauthorization process, legislation was introduced that  would have allowed up to six airports to impose an unlimited PFC  collected directly from passengers by the airport, if the fee were not  collected on the ticket;  however, this proposal was not part of the final  Act.
In addition to PFCs, there are federal taxes and fees that support aviation  activity, including the 7.5 percent ticket tax and a $4.00 per-flight segment  fee for domestic flights and an international arrival and departure tax of  $17.50 per segment for international flights which are deposited into the  AATF, as well as security and customs and border protection taxes,  among others which are distributed to their respective agencies. All these  taxes and fees are part of the ticket purchase transaction and together  make up to 13.7 percent of the total cost of a ticket on average, with  PFCs representing about 2.9 percent of the total ticket cost. In Fiscal  Year 2013, aviation taxes contributed almost $12.9 billion to the AATF,  with roughly $11.7 billion (91 percent) from passenger-related taxes and  the rest from fuel-based or cargo taxes.
section_title: Increasing the Cap on PFCs Would Significantly Increase Airport Funding but Could Also Have Other Effects
subsections: section_title: Increasing the PFC Cap Would Significantly Increase Airport PFC Collections, but Key Assumptions Influence These Estimates
paragraphs: To estimate the potential amount of funding available to airports, as well  as associated effects on passenger demand and ticket tax revenues from  increasing the PFC cap, we developed an economic demand model. 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. Those  three scenarios are:
PFC cap of $6.47 (which is 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 based on the  airports’ trade associations’ legislative proposal.
Assuming that the PFC increase is fully passed on to consumers and not  absorbed through a reduced lower base (before tax) fares, the higher cost  of air travel could reduce passenger demand according to economic  principles. Economic principles and past experience dictate 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 or not. 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. An increase in the price  will also have different effects depending on the type of air travel, for  example, on short-haul and long-haul flights, and the availability of  substitutes such as driving or taking a train instead of flying. Thus, the  extent to which people decide whether to fly depends on the extent of  consumer sensitivity to changes in the cost of air travel and is referred to  as the “elasticity of demand”—the more elastic the demand, the more  passenger air traffic is reduced by increases in price. For our base model analysis, we assumed a demand price elasticity of -0.8. In addition,  to show the potential funding available to airports, we assumed that  airports would adopt the maximum possible PFC cap at the start of 2016,  but in reality, adoption of higher PFC levels would likely be a gradual  process undertaken by individual airports according to their financial  needs. Accordingly, model results in this report should be considered  upper bound estimates of the funds available to airports that were  approved to collect PFCs as of July 31, 2014. A full description of the  model, data sources, and key assumptions appears in appendix II.
Increasing the PFC cap under the three different scenarios that we  modeled would significantly increase the potential amount of PFC  collections in comparison to what could be available without an increase  in the PFC cap. (See table 1).
As with any modeling exercise, these projections depend on assumptions  about participants’ behavior, in this case the behavior of consumers,  airlines, and airports. The results presented above reflect three key  assumptions about these behaviors.
Elasticity of demand. There is uncertainty associated with demand  analysis, because the estimated reductions in air travel are highly  dependent on the assumptions about consumers’ sensitivities to  changes in price. As noted above, to account for this uncertainty, we  used an elasticity rate of -0.8, meaning that a 1 percent increase in  price would result in a 0.8 percent reduction in the quantity of air  travel. This rate is based on the assumption that PFC increase will  affect all routes across the nation and will affect all routes equally. If  PFC increases occur at fewer airports, demand would be more elastic  because consumers could substitute their routing to some extent and  the elasticity rate might be greater. As a result, we modeled three  different elasticity rates drawn from economic literature to test the  sensitivity of our results to these rates and found that for small price  increases, small differences in the elasticity rate have very little  impact. We discussed the selection of this elasticity rate with experts  who have published on aviation economics, and they generally  agreed with the selection. The model results from all three elasticity  rates are shown in appendix II (table 5).
PFC pass-through. We assumed that the entire PFC increase would  be fully passed on to consumers and not absorbed by the airlines by  adjusting of their base fares downward. Airline statements and  experts with whom we spoke largely support our assumption that  airlines would attempt to pass the PFC increase on to consumers.  However, consumers’ response may vary from market to market and  may not happen all at once, as airlines adjust capacity to respond to  higher fares. For example, in the immediate period when airlines have  fixed capacity, airlines’ may have to absorb all or some of this  increase in order to maximize their revenues.as airlines adjust their capacity, they may gradually pass on the PFC  increase to passengers. In addition, funding airport projects through  PFCs instead of through airline rates and charges could reduce airline  costs in the long run. If such conditions occur, airlines may adjust their  airfares downward so that an increase in the fee is not fully passed  onto consumers. The more the airlines absorb, the less the increase  in the cost of travel for passengers and the lower the adverse effect  on passenger demand. We consider the effect of different pass- through rates in appendix II.
In the following years,
Airport adoption. We assumed that airports that currently impose a  PFC would raise it to the maximum allowed amount in the first year.  While it is unrealistic to assume that all airports would immediately  raise their PFC level in the first year, based on near universal  adoption of the current maximum by nearly all of the largest airports, it  is not unrealistic to expect that most airports would be at the  maximum by 2024.  Following the introduction of the PFC in 1991 and  the increase in the level in 2000, airports quickly moved to the higher  PFC level as indicated in figure 3 below. If fewer airports increase  their PFC level that would proportionally reduce PFC collections and  the associated changes to the AATF and allow some consumers to  avoid the PFC making the consumer response more elastic as noted  above. The results of using a scenario with a reduced PFC adoption  rate by airports are shown in appendix II (table 6).
section_title: Increasing the PFC Cap Could Marginally Slow Growth in Revenues to the Airport and Airway Trust Fund
paragraphs: Increasing the PFC cap under the three different scenarios that we  modeled could marginally slow the growth of AATF revenues compared  to what it could have been without the PFC increase. About 91 percent of  AATF revenues in 2013 were derived from taxes and fees on  passengers. Under all our cap scenarios, AATF revenues from  passengers would likely continue to grow overall based on current  projections of passenger growth; however, passenger growth could be  slower with a PFC cap increase if it results in a higher total cost of air  travel and thus reduces passenger demand. As a consequence of fewer  anticipated passengers flying, the tax base on which these taxes are  levied would be reduced compared to the tax base with no PFC increase.  If the PFC increase is not passed on to consumers but absorbed by  airlines through their adjustment of base fares downward, it would still  reduce the trust fund’s revenues from the ad valorem tax that is levied as  7.5 percent on the base fare. Similarly, when airlines introduced ancillary  fees for such services as checked baggage, there is some evidence that  airlines adjusted their base fares downward to lessen the effect on  passenger demand but not by as much as the amount of the fees.  Because ancillary fees are not taxed, both reduced passenger demand  and reduced base fares resulting from the introduction of fees would have  reduced trust fund revenues. We did not include ancillary fees as part of  our base fare calculation due to the lack of comprehensive ancillary fee   but including ancillary fees would result in higher air-travel costs  data;thereby making any PFC increase a smaller percentage of the total price  and therefore resulting in a smaller loss of passenger demand. Under an  $8 PFC cap and the entire PFC increase passed on to consumers, AATF  revenues could be lower by $161 million to $186 million annually, as  compared to what they could be without a PFC increase, assuming a  demand elasticity of -0.8. This potential loss in AATF passenger revenues  is small relative to total AATF passenger revenues—for example,  between -0.58 and -1.68 percent of the total in 2024 depending on the  size of the cap increase. The extent to which the AATF is affected will  depend on the extent of the reduction in passenger traffic (elasticity  assumption) as well as the extent to which the increase is passed on to  consumers under each scenario (pass through rate). (See table 2.)
section_title: A PFC Cap Increase Could Benefit Airports, but the Effects Differ Depending on Their Size
paragraphs: Because passenger traffic is highly concentrated at larger airports, that is,  large and medium hub airports, PFC collections are similarly  concentrated. Thus, larger airports could benefit most from an increase in  the PFC. 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 what they do now. 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. (See table 3.)
While an increase in PFCs could largely flow to the larger airports,  smaller airports could also benefit from increased PFC collections,  especially under the President’s proposed budget for 2015. As previously  noted, under current rules, 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. Under the President’s 2015 budget proposal, all  AIP formula grants for large hub airports, which FAA estimates to be $80  million in fiscal year 2015, would be eliminated in return for an $8 PFC.
In addition, the President’s 2015 budget proposal calls for a decrease in  the total amount of AIP funds, a decrease that under current law would  result in automatic changes in how AIP grants are allocated.
Increasing PFCs also could affect the dynamics of how airports and  airlines can influence airport investment decisions. Airports rely on  several funding mechanisms in order to pay for airport development  projects. These include PFCs, non-aeronautical revenues (e.g., parking  and concession revenue), AIP grants, rates and charges agreements with  airlines, and state and local funds. 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 have an incentive to  listen to airline concerns. Airport representatives said that one of the  reasons airports want an increased PFC cap is because airports have  already committed a significant portion of their current PFCs to past and  current projects and have relatively fewer PFC-approved funds available  with the $4.50 cap in place. According to FAA, $30 billion in PFCs was  approved from1992 to September 2014 to pay interest on debt, with some  airports scheduled to service debt for as long as 2058. Some airports  have indicated that an increased PFC would allow them to reduce their  debt costs, which could limit revenues available to those airports to  secure new debt financing. Conversely, airline representatives told us that  in their view, airports have many sources of revenue available and ready  access to debt markets, so there is no need to increase the PFC cap. 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.
section_title: Stakeholders Reported That the Current PFC Collection Method Works Well but Lacks Some Transparency for Airports
subsections: section_title: Stakeholders Said That the Current PFC Collection Method Works Well
paragraphs: In order to evaluate the current PFC collection method, we used the  following factors that we identified as key considerations for evaluating  passenger fee collection methods in our February 2013 report: passenger  experience, costs to administer, legal issues, customer transparency, and  technology readiness.
subsections: section_title: Passenger Experience
paragraphs: Industry experts and representatives from airports, airlines, trade  associations, and consumer groups universally said that the current  method of PFC collection has the least impact on passenger experience,  because the PFC is paid as part of the total ticket price and at the time of  purchase. Airlines and travel agencies use computerized reservation  networks that facilitate payments for fares and required taxes and fees  (including the PFC) as part of one transaction. Passengers therefore do  not need to determine which taxes and fees they must pay in accordance  with their itinerary, as this is done automatically through the ticketing  process. In addition, passengers are only required to pay one time, a  method that saves passengers time, provides transparency, and reduces  confusion. Including taxes and fees as part of the ticket purchase is also  the standard globally for collecting government and airport fees, such as  the PFC.
section_title: Costs to Administer
paragraphs: Both airport and airline representatives that we spoke with agreed that the  administrative and infrastructure costs of the current collection method  system are relatively low, as the method is integrated into existing  infrastructure and business processes. As we mentioned previously,  airlines currently keep 11 cents per PFC to cover their costs—which  include costs for transactions such as credit card fees, legal and audit  fees, and maintenance and upgrades of information systems—as well as  the “float” (interest accumulated on the fees between the time they are  collected and remitted). Airline representatives told us that they do not  regularly track their administrative costs associated with collecting PFCs  and therefore could not immediately say whether the administrative fee  covers these costs. The administrative fee was last raised from 8 to 11  cents per PFC in 2004.
section_title: Legal Issues
paragraphs: The statute that authorizes the PFC program provides an exemption to  the Anti-Head Tax Act which generally prohibits states, local  governments, and airport authorities from levying or collecting any tax,  fee, head charge, or other charge, directly or indirectly on individuals  traveling by air. The statute authorizing PFCs also authorizes the  Secretary of Transportation to require airlines to collect the fee and remit  it to airports.an airline, we did not identify any legal issues associated with the current  collection method as part of this work.
section_title: Customer Transparency
paragraphs: Representatives from consumer groups that we spoke with said that the  current collection system provides transparency to the customer in terms  of total travel costs. Current DOT policy requires that fares be advertised  with PFCs and other taxes and fees, and included at the time of  purchase. However, one airline representative with whom we spoke told  us that there could be greater transparency for customers in terms of  other factors, such as how fees are used for airport projects. Some  airports provide information about their PFC-funded projects through their  websites, signage at the airport, and community outreach, and all airports  are required to distribute a notice locally to the public, with general  information about PFC projects, amounts, and timing, in advance of  submitting an application to impose or use PFCs. FAA does not publish  information on specific PFC-funded projects at airports on its website but  does provide aggregated information for the entire PFC program on PFC  approval amounts and project categories, such as landside, airside, and  noise reduction, and subcategories. According to FAA, airports’ PFC  applications and the FAA’s decisions are public documents that airports  may release to the public. In addition, the FAA provides information on  applications and decisions upon request if they are not under deliberation.  FAA does not require airports to track each fee paid to a specific project  at an airport, only to an approved application which may be for many  projects. Thus, a passenger may not have readily accessible information  about the use and intended purpose of their fee payment at the time of  payment but could obtain some additional information if desired.
section_title: Technology Readiness
paragraphs: The current collection method has been in place since the inception of the  PFC program in 1992 and relies on widely used and accepted ticketing  technologies for both online and in-person transactions. Technology  company representatives whom we interviewed generally indicated that  PFC collection is not constrained by current technology. However,  implementing new fee rules could be problematic. For example, according  to media reports, instituting the TSA security fee increase in July 2014,  which uses the same ticketing technologies as PFCs, resulted in  inaccurate collections while the programming code was being updated.  According to an airline industry representative, that problem was  subsequently fixed.
section_title: The Accuracy of PFC Collections Is Not Transparent to Airports
paragraphs: Airport officials with whom we spoke generally told us that the PFC  collection process by airlines is not adequately transparent to them, and  therefore, they cannot be sure they are receiving all of PFC collections  they are due. While airports receive monthly remittances, quarterly  reports, and in some cases, annual audit reports from airlines, airport  officials told us it can be very difficult for airports to ensure the accuracy  of the remittances because they cannot be reconciled to passenger  enplanements at the airport. Passengers flying on frequent flyer coupons  as well as flight segments beyond the first two, Essential Air Service  flights, and some Alaska and Hawaii flights are exempt from paying  PFCs. In addition, airlines and airports have different fee-collection and  remittance systems, and airline code shares mean that the airline  collecting and remitting PFCs may not be the airline transporting the  passenger. Furthermore, airport officials told us that the timing of  collections and remittances can hinder their efforts to track and verify the  accuracy of PFC remittances. Airlines receive PFCs with ticket payments,  while airports receive remittances on a monthly basis. Passengers,  however, may fly on a later date well outside the monthly window.
To help ensure that airports receive the full amount of the collections they  are due, FAA requires that all airlines that annually collect at least 50,000  PFCs have an annual independent audit of their PFC accounts and  processes. Airports can request a copy of the independent auditor’s  report, but airlines are not required to provide audit reports absent a  request. In addition, FAA may periodically audit or review the collection  and remittance of airline PFC collections under the FAA’s federal  oversight responsibility. To assist airlines, FAA has developed audit  guidance for airlines’ auditors to follow in conducting their audits. This  guidance is comprehensive and includes testing procedures to ensure  that airline systems are properly recording PFC collections. While  adherence to the guidance is voluntary, FAA has determined that using  the guidance will provide sufficient assurance that the airline has met its  PFC regulatory requirements and that additional reports, a government  audit, or other investigations will not normally be needed. FAA’s guidance  expressly underscores the importance of the assurance that using the  guidelines provides, stating that it is reflected in FAA’s approach to  resolving alleged collection and remittance discrepancies raised by  airports to estimate local PFC collections. In cases where the airlines’  auditors did not use the guidance, any allegation of a discrepancy by  airports could trigger additional FAA activities, including additional  reporting or an audit by the Department of Transportation’s Office of  Inspector General.
FAA officials told us they do not know to what extent airlines’ auditors use  the audit guidance and only review the audit reports if questions are  raised by airports about possible discrepancies. FAA officials also told us  that they generally do not receive airline audits and do not know how  many airlines’ auditors follow the audit guidelines. FAA officials also do  not know how many airports are receiving the audit reports, but explained  that disputes over the accuracy of collections have been rare and have  been generally limited to collections by smaller airlines or those in  bankruptcy. However, as noted above, it would be very difficult for an  airport to know if its PFC remittances were not accurate, and in some  cases, airports are not receiving audit reports and may not be aware they  can be requested. Moreover, although airports have the right to review  audits, our interviews with a limited number of airport officials raise  questions about the extent to which airports are aware of their rights to  review the audits. Three of the five airport managers whom we  interviewed told us that they have received unsolicited copies of audits in  the past, whereas two other airport managers had not received copies.  Absent a request, there is no requirement for airlines to give airports or  FAA the audits, even if there is a qualified or adverse audit opinion. FAA  officials told us that while airports’ rights to review the audits are set forth  in FAA guidance that is available to all airports, they could consider  additional steps to ensure that all airports understand their right to request  copies of the airline’s audits as well as FAA’s reliance on airports to  identify discrepancies. Doing so would be consistent with Standards for  Internal Control in the Federal Government, which call for agencies to  ensure that there are effective means of communicating with, and  obtaining information from, external stakeholders’ that may have a  significant impact on the agencies achieving its goals. Given that FAA  relies on airports to alert it to potential inaccuracies in PFC collections  and those airports have difficulty determining the accuracy of PFC  collections for the reasons discussed earlier in this report, it is important  that airports are aware of their right to request copies of airline PFC audit  reports and to ask for additional follow-up by FAA, such as an audit by the  Department of Transportation’s Office of Inspector General if the audits or  other information indicate discrepancies. By taking actions to better  educate airports about the importance of obtaining and reviewing airline  PFC audits, such as through notifications or posting this on the FAA’s  website, FAA would better position airports to understand their rights  including the potential for requesting further investigations, as needed.  Thus, both FAA and airports could be better informed about the accuracy  of PFC remittances.
Standards for Internal Control in the Federal Government call for  agencies to design their internal controls to assure that ongoing  monitoring occurs in the course of normal operations. However, as  previously discussed, FAA does not know the extent to which airlines use  its audit guidance or generally review the airlines’ audit reports. Thus,  FAA is not well positioned to provide a reasonable assurance to  Congress, the airports, or airline passengers who pay the PFCs about the  reliability of those audits or the PFCs collected. Determining the extent to  which airlines’ independent auditors use FAA’s guidance could provide  FAA with additional assurance about the reliability of those audits.  Moreover, if the guidance is not being extensively used, then taking  additional actions to assess the soundness of existing airline audits and  the associated costs of airlines following the guidance would better  position FAA to determine if it should make its guidance mandatory.
Similar to PFCs, TSA imposes a security fee on passengers which is  collected by the airlines; however, unlike PFCs, security fee revenues are  remitted directly to one entity—the TSA.way trip on passengers on each ticket. TSA conducts direct audits of its  fee collections through which it has found remittance discrepancies. This  process suggests that, without adequate assurance that airlines are  following FAA’s audit guidance, some PFCs may not be collected or, if  collected, not accurately remitted to airports. TSA has a compliance office  that performs its own on-site audits of approximately 20 airlines annually.  TSA officials stated that they regularly identify additional funds that should   TSA charges $5.60 per one- have been collected and remitted to TSA, though these unremitted funds  are relatively small when compared to overall collections. According to  TSA officials, the agency identified and collected $2 million in unremitted  funds in fiscal year 2013 from its audits compared to its $2-billion annual  fee collections. TSA’s audit findings have been upheld in court when  challenged by an airline. For example, a TSA audit of Alaska Airlines  found that the airline owed an additional $1 million in security fee  remittances for flights between 2002 and 2006, which Alaska Airlines  unsuccessfully challenged. TSA officials stated that the agency used to  require that all airlines that collect the security fee from at least 50,000  passengers provide an annual audit to TSA. However, this audit  requirement was waived on January 23, 2003, because according to the  federal registry announcement, TSA initiated its own audits of air carriers,  and according to TSA, air carriers have demonstrated a high level of  compliance with TSA’s collection and remittance rules and thus find it  unnecessary for air carriers to expend resources for independent audits.
section_title: Alternative Methods of PFC Collection Are Feasible but Would Impose Additional Steps and Costs
subsections: section_title: Stakeholders Identified Three Alternatives to the Current Ticket-Based PFC Collection but Said They Could Diminish Passenger Experience
paragraphs: Stakeholders we interviewed identified three general alternatives to the  current method of PFC collection, alternatives that could be used in  combination or independently.
subsections: section_title: Kiosks/Counter Payments
paragraphs: An alternative collection method that has been used at a few airports  internationally is the use of a self-service kiosk or payment counter to pay  for airport fees. Departing passengers pay the fee at the airport using a  kiosk or payment counter as part of the check-in process. Connecting  passengers could pay the fee at a facility within the terminal between  departure gates. Payment could be verified prior to departure at check-in,  security, or the boarding gate. We identified few airports around the world  that currently use this method. Those that do include Blackpool Airport in  the United Kingdom, which required passengers to purchase an airport-  development fee ticket at a kiosk or retail outlet at the airport. In addition,  Ireland West Airport Knock in the Republic of Ireland requires passengers  to pay a development fee that can be done at a dedicated desk at the  airport. Both of these are relatively small regional airports and Blackpool  Airport closed on October 15, 2014. Other airports have instituted kiosk  and payment counters but later abandoned the method in favor of  imposing the fee on the ticket at time of purchase. For example,  Vancouver International Airport, Calgary International Airport, and  Montréal–Pierre Elliott Trudeau International Airport (all in Canada)  initially used payment counters to collect airport-improvement fund fees  from passengers following airport privatization in Canada in the 1990s.  However, the payment counter approach was abandoned, and the fee  was added back onto the ticket after payments at the airport became  cumbersome and inconvenient for passengers, according to a Canadian  airport trade association representative. There is some evidence,  however, that in-airport kiosks and payment counters can work. Airlines  use self-service kiosks and counters for their airline check-in processing  and ancillary fee purchases, such as for checked baggage. Some  airports, such as McCarran International Airport in Las Vegas, have  implemented common use self-service kiosks in which passengers can  check in to any airline that operates at the airport and make ancillary fee  purchases. Such kiosks could also be configured to collect PFCs.
section_title: Online Payments
paragraphs: Another alternative collection method that the Airports Council  International-North America (ACI-NA), an airport trade association,  identified more than 10 years ago is online payments in which a  passenger would pay the PFC fee through a dedicated website at the  time of ticket purchase or at some point before check-in. Individual  airports or a group of airports would directly operate or contract with a  third party provider to manage a website to collect required fees directly  from the passenger who would pay via credit card or debit card.  Passengers could also be automatically directed to the website to pay  PFCs after paying for a ticket online, a process that would require airline  and travel agent cooperation. Passengers could go directly to the website  at any time before check-in to pay the fee. In all these cases, airports  would have to establish or contract with a clearinghouse that would  collect and distribute PFCs or perform that function. Payments could be  verified at the airport at a check-in counter, security checkpoint, or the  boarding gate. We did not identify any airports currently using this  method, but clearinghouses collect and distribute other aviation taxes and  fees on tickets purchased online through GDSs.
section_title: Mobile Payments
paragraphs: Another alternative collection method technology company  representatives identified are mobile payments. Passengers would pay  the PFC at the airport using a mobile technology—such as a smartphone  or tablet, or a credit, debit or prepaid card—with payment functionality  embedded or added through an application. Departing passengers could  scan their mobile device or card at kiosks, payment counters, or other  payment stations. Connecting passengers could also use this method to  pay at kiosks or payment counters and stations as they move through the  airport to their next departure gate. Like the other alternative collection  methods, airports could individually or as a group develop and implement  information systems and infrastructure to collect and distribute PFCs on  their own or contract through a third party. Airports could also use an  existing clearinghouse such as those used by airlines which could collect  and distribute PFCs to airports. We did not identify any airports using this  method, but technology company representatives told us that they are  being used in other sectors such as retail. In addition, technology  company representatives with whom we spoke said that airport kiosks  used for check-in could be modified or configured to accept additional  forms of payment, including near-field communication (NFC)-enabled   Many airlines  devices, chip-and-PIN or magnetic strip, or mobile wallets.also have mobile applications for check-in and boarding processes, which  could be modified to transmit payment of PFCs. Airlines also use  handheld devices to collect ancillary fee payments for additional services  like carry-on luggage, and in-flight meals and beverages. NFC payment  through mobile phones has been implemented by MasterCard, mobile  phone providers such as Verizon, and retailers such as Office Max® and  Toys “R” Us®. Some transit systems have also begun to pilot NFC  payments for passenger travel, such as the Metropolitan Transit Authority  in New York City and the Washington Metropolitan Area Transit Authority  in Washington, D.C.
section_title: Though the Technology Exists, Alternatives Would Impose Additional Steps and Costs
paragraphs: We evaluated these alternative methods relative to the current ticket- based PFC collection method using the same factors that we identified as  key considerations for evaluating alternative passenger-fee collection  methods—passenger experience, costs to administer, legal issues,  customer transparency, and technology readiness. Stakeholders  including airports and airlines and their respective domestic and  international associations, and industry experts that we interviewed said  that the current collection method is better than the identified alternatives.  Stakeholders told us that the technology to support alternative PFC  collection methods is ready to be implemented, though it would require  additional steps and costs and changes to business processes.
subsections: section_title: Passenger Experience
paragraphs: All three alternative-collection methods introduce additional steps to the  ticketing and boarding process, which could potentially diminish the  passenger experience. Payment at kiosks or payment counters  introduces an additional requirement at check-in, which could increase  check-in time for passengers. Technology company representatives told  us that it can take between 2 and 4 minutes for a passenger to interact  with a standard airport kiosk. Additionally, a technology company  representative told us that only about 50 percent of eligible passengers at  one large airport use check-in kiosks, and unfamiliar passengers may  need additional time or assistance to complete transactions. Connecting  passengers could be required to pay the fee between flights, a step that  could lead to missed connections or flight delays.
Online payments introduce an additional step to online ticket purchases  and potentially additional costs. Customers who are not aware of the  required PFC purchase could be confused or suspicious of additional  websites. Technology company representatives suggested that additional  steps for online payment may cause consumers to abandon their  purchase. Required mobile payments could present challenges for  customers who do not use enabling devices. While 91 percent of  individuals in the United States currently use mobile phones, only 50  percent of cell phone owners download applications, according to a 2013   This would require the airport to create enforcement  nationwide survey.and backup collection systems to ensure that it is collecting all required  PFCs.
Airport and airline trade association representatives whom we spoke to  reported that the industry is focused on reducing customer check-in  times, and expressed concern that PFC payments at airports could delay  these efforts. The International Air Transport Association is developing  international standards for mobile check-in to streamline the passenger  experience with a goal of moving the passenger from curb to gate in 10  minutes. Other airlines are increasing the use of mobile applications and  automatic check-in. For example, Air New Zealand terminals in Auckland,  Wellington, and Christchurch in New Zealand allow passengers to drop  off their checked baggage and proceed directly to security and then to the  gate, where passengers can also scan their boarding pass for domestic  flights. JetBlue has introduced automatic check-in processes for select  passengers, where boarding passes are emailed 24 hours before flight,  and Air France introduced an NFC-enabled boarding pass and check-in  process pilot in Toulouse, France.
section_title: Costs to Administer
paragraphs: Airports would incur greater administrative and infrastructure costs if they  implemented an alternative PFC collection method. A technology  company representative told us that electronic payment kiosks can cost  from $10,000 for a computer screen and magnetic credit card reader to  $60,000 for a payment kiosk that incorporates additional methods of fee  collection and higher-end design standards and elements. Technology  company representatives also told us that electronic kiosks require  network connections and infrastructure in order to send payment to banks  through payment networks. Kiosks would require additional terminal  space, increasing the need for terminal modifications at a time when pre- departure areas of terminals are shrinking. However, as we discuss later,  existing airport kiosks could be reconfigured to allow for PFC collections.
Technology company representatives told us that online payments would  require website development and information service infrastructure and  that all methods could require additional staff to verify collections and  provide oversight to payments. An airport representative expressed  concern that in order to collect PFCs from all eligible passengers when  using alternative collection methods, airport operators would need to  establish new systems. For example, in an airport which establishes a  mobile payment system, customers that do not own NFC-enabled mobile  phones would need to pay using a credit card or other means.  Passengers who could not pay using a credit card would require a cash  transaction. This process could increase financial security risk and  associated costs related to securing and accounting for cash  transactions.
Mobile payments present additional difficulties, as NFC standards have  not been created. The two dominant forms of mobile phones—Subscriber  Identity Module and Global System for Mobile Communications—have  different readers, and a kiosk or mobile payment station utilizing NFC- based payment would require two separate scanners. In addition, an  industry survey has shown that only 12 percent of mobile phone owners   and  in the United States have utilized their phones as payment devicessome stakeholders we interviewed cited lack of awareness, difficulty and  unfamiliarity of use, as well as security and privacy concerns, as barriers  to mobile payment adoption. Alternative collection methods would thus  require additional steps and costs and changes to business processes.  (See fig. 4).
All alternative methods would require legal modifications to enable  airports to collect the PFC directly. As discussed above, the Anti-Head  Tax Act prohibits local and state governments, and airport authorities  from collecting user fees or taxes on travelers. The Anti-Head Tax Act  was enacted in response to significant public concern and objection to  local and state governments that imposed a tax on enplaning or departing  passengers. Any alternative collection method implemented by an airport  would require an exemption to the Anti-Head Tax Act or express statutory  authority in order to collect fees. Furthermore, current DOT regulations  require airlines to disclose the total price of airfare, including all taxes and  fees; and would need to be revised if airports directly collect the fee from  passengers. Also, airlines cannot be required to publicly disclose  proprietary business information, including individual airfare transactions  and passenger itineraries, which airports would need to determine  whether a particular passenger is required to pay a PFC and to ensure  that the total PFC imposed does not exceed the statutory maximum  (currently $18).
section_title: Customer Transparency
paragraphs: All alternative collection methods could decrease transparency to the  customer because individuals may not be aware of the need to pay the  PFC until after the ticket has been purchased. In addition, since payment  of the PFC is not verified until check-in or departure, passengers may not  be prepared to pay an unexpected fee. In this way, customers may not  know the full cost of travel at the time of ticket purchase, which raises  questions about transparency. An industry expert and representatives  from consumer groups that we spoke to noted the importance of  informing customers of all mandatory fees and taxes at the time of ticket  purchase to ensure that customers are aware of the full cost of their  travel. Similarly, we have recommended that the Department of  Transportation (DOT) require airlines to consistently disclose optional  fees at the time of purchase. Rulemaking that proposes to require airlines and ticket agents to disclose  optional fees at the time of purchase.
GAO, Commercial Aviation: Consumers Could Benefit from Better Information about  Airline-Imposed Fees and Refundability of Government-Imposed Taxes and Fees,  GAO-10-785 (Washington D.C.: July 14, 2010).
section_title: Technology Readiness
paragraphs: Stakeholders such as technology company representatives told us that all  the alternative collection methods discussed above are feasible, have  been implemented for other applications by airports or retailers, and could  be adapted for use in the airport environment. For example, kiosks could  be adapted to collect PFCs. Technology company representatives we  spoke to said that existing common-use self-service and airline kiosks  could be modified, if not already enabled, to have a magnetic stripe card  reader and an NFC reader. Technology company representatives also  stated that airlines have online websites and mobile applications for  passenger ticketing, check-in, and ancillary fees payments that could  automatically link a passenger to an airport or third-party website to pay  the fee as well as handheld devices that are used to accept ancillary fee  payments that could also be used at the gate to collect PFCs. However,  some means of verifying payment would still be needed before boarding  the flight. Retailers in the United States have accepted online payments  for decades and have begun to integrate mobile payments into their  business practices. Some merchants have established “tap and pay” NFC  terminals alongside traditional magnetic stripe readers, allowing  customers to use credit cards as well as NFC-enabled mobile devices.
section_title: Conclusions
paragraphs: As part of any consideration of an increase in the PFC cap, it is  paramount that FAA and airports have confidence that airlines are  accurately collecting and remitting existing PFCs. Ensuring the accuracy  of PFC collections and remittances to airports depends on audits  conducted by airlines’ auditors and oversight by FAA and airports to  identify possible inaccuracies. However, while FAA has promulgated  comprehensive audit guidance for airlines’ auditors’ use, it is voluntary  and FAA does not know to what extent airlines’ auditors’ use the  guidance, if at all. Thus, FAA is not well positioned to provide reasonable  assurance to Congress, airports, or passengers who pay PFCs on the  reliability of those audits and the PFCs collected. Further, some airports  may not be aware that they can request and review airline audits and ask  for an investigation if they suspect PFC remittances are inaccurate. As a  result, FAA does not have sufficient assurance that PFC collections and  remittances to airports meet its own regulatory requirements.
section_title: Recommendations for Executive Action
paragraphs: To ensure the accuracy of Passenger Facility Charge collections and  remittances to airports, we recommend that the Secretary of  Transportation should require the FAA to take the following two actions:
Review the extent to which airlines’ auditors use FAA’s audit guidance  and, if found to be minimal, evaluate whether airlines’ auditors should  be required to use the FAA’s audit guidance by considering the  soundness of existing airline audits and the associated costs of  airlines’ having to follow the guidance.
Better educate airports that collect PFCs, such as through  notifications or the FAA’s website, about airports’ rights to review  airline audits and ask for additional investigation if the audits reveal  issues or inaccuracies are suspected.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOT, ACI-NA, AAAE, and Airlines for  America (A4A) for their review and comment. In an email received on  November 24, 2014, the Deputy Director of Audit Relations at DOT  provided us with the Department’s comments. Specifically, in response to  our recommendations, DOT partly concurred with the first  recommendation to review the extent to which airlines’ auditors use the  FAA’s audit guidance. DOT noted that responses by the airlines will be  voluntary, as FAA’s PFC oversight authority may not be sufficient to  compel responses. However, based on the responses FAA does receive,  if airlines’ auditors’ usage is found to be minimal, FAA stated that it will  evaluate whether the auditors should be required to use the guidance  pursuant to regulation or policy. GAO believes that this will fully address  the intent of our recommendation. DOT fully concurred with the second  recommendation to better educate airports about their rights to review  airline audits and noted that it planned to better educate airports by  including notification on its website. GAO believes that this will fully  address the intent of our recommendation. DOT also provided technical  comments that we incorporated as appropriate. In an email received on  November 19, 2014, an Executive Vice President at ACI-NA provided us  with the association’s comments, principally noting that the model  estimations of future collections under various PFC caps could be  misconstrued by some readers to be the actual amounts that airports will  be collecting rather than the PFC-funding capacity of airports. They also  noted that they believe -0.65 is a more appropriate elasticity rate than the  -0.8 that we used in our base model. We disagree for two reasons. First,  our report clearly notes that depending on the assumptions applied, the  model could provide different results and indicates that the base model  reflects the funding capacity of airports under each cap scenario and not  the likely outcome. Second, we believe -0.8 is a more appropriate  elasticity rate based on our economic literature review of air traffic  demand elasticity rates and discussions with experts who have published  on aviation economics. Nonetheless, we also modeled -.65 and found  very little difference in the model results, as demonstrated in appendix II.  ACI-NA and AAAE provided technical comments that we incorporated as  appropriate. A4A reviewed the draft and did not have any comments.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Secretary of Transportation and other  interested parties. In addition, the report will be available at no charge on  GAO’s website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me 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 report. Contact information and major contributors to  this report are listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of this report were to examine (1) what are the potential  effects of raising the PFC cap on airport and federal aviation revenues?  (2) how well does the current PFC collection process work? and (3) what  is known about alternative PFC collection methods and how well they  might work?
To assess potential impacts of increasing the PFC cap, we developed an  economic demand model, including a series of scenarios that vary the  amount of the cap and various assumptions. The development of this  model is discussed in detail in appendix II.
To determine how well the current PFC-collection process works and  alternative fee-collection methods, we updated GAO’s report Alternative  Methods for Collecting Airport Passenger Facility Charges issued in  February 2013 in response to a congressional mandate. In summary, we  identified three basic alternative methods to the current airline-ticket- based method of PFC collections. These methods are not mutually  exclusive and could be used by either individual airports or a group or  airports—methods such as kiosk/payment counter; online payment; and  mobile payments. We evaluated these alternative methods relative to the  current ticket-based collection method using factors that we identified as  key considerations for evaluating alternative passenger-fee- collection  methods—the factors: passenger experience, customer transparency,  administrative costs, technology readiness, and legal effects. For this  study, we conducted additional work by interviewing 17 aviation  stakeholders and we interviewed or collected responses from officials  representing airports and airlines that we had interviewed in our February  2013 report to obtain any additional views on the current collection  method. We selected the airlines based on airline size measured by the  number of departures and passengers and type of carrier (legacy, low  cost, and regional carrier). We selected the airports based on airport size,  amount of PFC charged, and percentage of originating versus connecting  passenger traffic. Our interviews with these airlines and airports provided  qualitative information that is non-generalizable to all airlines and airports.
Given that work, we examined issues regarding the verification of airline  PFC collection and remittance amounts with airlines and airports and their  trade associations and consumer groups. We reviewed the FAA’s  Passenger Facility Charges Audit Guide for Air Carriers to identify audit  requirements and recommended internal controls audit procedures for  airline collection, handling, remittance, and reporting of PFCs. We  reviewed an airline’s independently conducted audit of PFC collections for  an airport. We reviewed applicable statutes and regulations regarding  FAA’s role and authority to audit airline PFC collections and remittances  and discussed with the agency its efforts to revise the PFC FAA Order  5500.1, which provides guidance and procedures for FAA’s airports’  offices to administer the PFC program. We also interviewed  Transportation Security Administration officials to discuss the agency’s  procedures and processes for audits of its security fee collections.
For this study, we also conducted additional work looking at alternative  collection methods by conducting a review of literature on changes that  have occurred since February 2013 that could support alternative  collection methods. We spoke with technology company representatives,  including those companies that have implemented kiosks for passenger  check-in and customs and border protection processing at airports, to  obtain their views on the applicability of using kiosks to collect payments  at airports. We interviewed officials from technology companies that  develop emerging technology systems and devices to obtain their views  on the applicability of using online and mobile payment systems to collect  payments. We interviewed FAA, principal airport and airline trade  associations and airline-passenger consumer representatives, and  interviewed or collected responses to our follow-up questions from five  airports and four airlines to obtain their views on the use of alternative  methods to collect PFCs. As we did for our February 2013 report, we  evaluated these alternative methods relative to the current ticket-based  collection method using factors that we identified as key considerations  for evaluating alternative passenger-fee-collection methods—passenger  experience, customer transparency, administrative costs, technology  readiness, and legal effects. For a list of interviewees and airports and  airlines from which we collected responses to our follow-up questions,  see table 4.
section_title: Appendix II: Economic Demand Model
paragraphs: The model described in this appendix is designed to estimate the  potential impact of increases in the PFC cap on funds available for airport  investment and federal aviation revenues between 2016 and 2024. This  model presents results for three PFC-cap level scenarios in addition to a  baseline scenario representing no change in the current PFC cap. The  first scenario is a $6.47 cap, which is the 2016 equivalent of the $4.50  cap indexed to the Consumer Price Index starting in 2000 when the cap  was first instituted. The second scenario is taken from the President’s  budget proposal for 2015, which sets the cap at $8. A hub level analysis  of this scenario was also conducted to illustrate the distributional effects  of the PFC increase. The third scenario is the airport trade associations’  proposal of $8.50 annually adjusted for inflation using the CPI. The  following sections describe the 1) model’s structure and data sources; 2)  key assumptions; and 3) sensitivity analysis.
subsections: section_title: Model’s Structure and Data Sources
paragraphs: The general approach of the model was to use passenger enplanement  forecasts from 2016 through 2024 to project changes in PFC revenue  under the four scenarios outlined above for the 362 airports that had  approval to collect PFCs as of July 31, 2014. Passenger enplanement  data for these airports were taken from FAA’s Terminal Area Forecast  (TAF) enplanement projections. Enplanements were separated into  international enplanements (i.e., enplanements originating in the U.S. with  a foreign destination) and domestic enplanements (i.e., enplanements  originating in the U.S. with a U.S. destination). We used projections from  FAA Aerospace forecasts, which indicate that international enplanements  will gradually rise from 12 percent of total enplanements in 2014 to 14  percent in 2024. The remaining enplanements were considered to be  domestic.
Due to several exemptions to PFC collection, including for segments  beyond the first two and nonfare (e.g., frequent flyer) passengers, a PFC  is not collected for all enplanements at airports that charge a PFC. Thus,  we reduced international enplanements by 4 percent and domestic  enplanements by 10 percent for each year in order estimate the total  number of chargeable enplanements. The 4 percent exemption rate for  international enplanements is based on the percentage of passengers  using frequent flyer miles to purchase international tickets. The 10  percent exemption rate for domestic enplanements is a 5-year average  calculated using data from 369 airports that collected PFCs between  2009 and 2013. To calculate the domestic exemption rate, PFC revenues  from international enplanements (estimated assuming the 4 percent  international exemption rate) were first subtracted from total PFC  collections to get domestic PFC collections. These domestic PFC  collections were then divided by the average PFC level for that calendar  year in order to estimate how many enplanements were charged a PFC.  This estimate was compared to the total enplanements from the TAF  data, and the gap between the two was considered to be the number of  domestic TAF enplanements that were not charged a PFC (10 percent on  aggregate).
The model assumes that all increases in PFC are passed onto the  consumers and not absorbed by the airlines. When these PFC increases  are passed onto the consumers, it increases their air travel costs. Our  model thus takes into account these effects of raising the total cost of air  travel on passenger demand and the resulting secondary impacts on PFC  and trust fund revenues. Generally an increase in the cost of air travel will  convince some number of passengers to seek other travel arrangements  or to not travel at all. In order to model this potential decrease in  passenger demand, we calculated the increase in the PFC level as a  percentage of both international roundtrip and domestic average gross  fares per enplanement. Data on average gross fares were collected and  summarized from Department of Transportation Origin and Destination  survey data for average annual fares from calendar year 2013. Fares  were adjusted for inflation annually from 2014 onwards using the CPI. In  order to calculate the fare per enplanement, we divided the domestic fare  by the average number of flights per ticket (1.37), which is derived from  U.S. DOT’s non-directional data from calendar year 2013. International  trips are assumed to have only one flight per ticket because other  domestic flights that may be part of the ticket are captured in the domestic  category. We also use roundtrip fares for international enplanements as  that is the relevant cost of travel to which PFCs should be compared  since incoming international flights do not have to pay a PFC. The  increase in the PFC was added to the domestic ticket price per  enplanement and international roundtrip ticket price to calculate the  percentage change resulting from the change in the PFC cap.
To translate the increase in ticket price into an impact on passenger  demand, an elasticity rate was applied. The elasticity rate is a ratio  representing the percentage change in quantity to a percentage change  in price. Air travel elasticity thus shows the percentage change in trips  demanded by customers as result of percentage change in air fare.  Applying the elasticity rate provides an estimate of the reduction in  passenger demand for enplanements due to the increase in price per  enplanement, which is used to calculate net chargeable enplanements.  The net enplanements are then used to estimate PFC revenues. PFC  revenues are estimated by multiplying these demand- adjusted  enplanements by the maximum allowable PFC under each scenario less  an 11-cent administrative fee kept by the airlines. PFC revenues thus  reflect the collections that the airports would expect to receive if all 362  airports adopted the maximum rate starting in 2016. It is important to note  that adoption of the maximum rate is likely to be a gradual process, and  thus actual collections are likely to be lower than these estimates,  especially in earlier years. The reduction in enplanements due to higher  ticket costs also affects trust fund revenues as it reduces the passenger  tax base that contributes to the trust fund. Our model results show the  projected change in trust fund revenues from passengers under the  various cap scenarios relative to the baseline. Negative estimated  changes in trust fund revenue would likely represent a marginal slowing  of growth in trust fund revenues from passengers rather than an absolute  decline. The impact on the trust fund is calculated by multiplying the  change in domestic enplanements due to demand effects by the $4  segment tax and the change in international enplanements by the $17.50  international arrival and departure tax. We also calculate the loss from  the ad valorem tax based on the fewer number of trips that are taken as a  result of the higher PFC.
section_title: Key Assumptions
subsections: section_title: Elasticity of Demand
paragraphs: As indicated above, elasticity rates are a measure of the demand  response of passengers to changes in price, and thus, they can have an  impact on passenger demand projections. The higher the demand  elasticity, the more sensitive the demand is to a change in price, and  hence the higher the reduction in enplanements due to a PFC increase.  The elasticity rate we chose for our base model analysis was -0.8, which  was drawn from a 2007 study conducted by InterVISTAS consulting for  IATA and is based on a universal price increase at a national level. We  also examined different elasticity rates of -0.65 and -1.122 to see how it  affected our results. The -0.65 elasticity is drawn from a November 2014  study of demand elasticity also conducted by InterVISTAS Consulting Inc.  for ACI-NA. The -1.122 elasticity comes from a study completed by D.W.  Gillen et al. in 2003.
section_title: PFC Pass-Through
paragraphs: Edward Huang and Adib Kanafani, Taxing for Takeoff: Estimating Airport Tax Incidence  through Natural Experiments (January 2010). and their industry’s trade association generally oppose PFC increases at  a national policy level. However, if funding airport projects through PFCs  instead of through airline rates and charges would reduce airline costs,  then it would increase the ability and likelihood of airlines absorbing some  of the PFC increase by lowering fares instead of making consumers pay  for it. The more the airlines absorb, the less the increase in travel costs  and the lower the adverse effect on passenger demand. However, under  any PFC increase and pass-through scenario, trust fund revenues from  passengers will be reduced relative to the baseline because even if  airlines lower fares enough to absorb the entire PFC increase, the lower  fares will result in less revenue from the 7.5% excise tax on fares.
section_title: Airport Adoption
paragraphs: We assumed that airports that were approved to impose a PFC as of July  31, 2014, would raise their PFC to the maximum allowed amount in the  first year and that airports that do not currently have approval to collect a  PFC would not obtain approval to impose one. Interviews with FAA and  airport representatives indicate that the number of airports charging PFCs  is not expected to change significantly in the future. While it is unrealistic  to assume that all airports that are currently collecting a PFC would  immediately raise their PFC in the first year, based on near universal  adoption of the current maximum by nearly all of the largest airports, it is  not unrealistic to expect that airports would be at or near the maximum by  2024. Following the introduction of the PFC in 1991 and the increase in  2000, airports quickly moved to the higher PFC level as indicated in figure  3 in the report. However, the extent to which airports continually have  projects that fall under the PFC-eligibility criteria and gain FAA approval  will also influence the adoption of higher PFCs by airports over time.  Small airports in particular may not have as many PFC-eligible projects to  justify moving to a higher PFC. If a significant number of airports that  currently collect a PFC do not move to the maximum under a new cap, it  would offer passengers more alternatives as passengers could avoid  paying the higher PFC by substituting a nearby airport that does not  charge at the higher rate. This would result in a higher overall rate of  demand elasticity. Thus the final effect would depend on the specific  pattern of airports that do or do not adopt a higher PFC.
section_title: Sensitivity Analysis
paragraphs: In order to test the sensitivity of the results to changes in the key  assumptions about elasticity and pass-through, changes to PFC and trust  fund revenue from passengers were modeled using a -0.65 and a -1.122  elasticity rate, and a 50 percent pass-through rate. The results are  presented below in table 5. Under these alternative elasticity scenarios  and the $8 cap, estimated changes to PFC revenues vary by less than  1.5 percent from the standard scenario estimated using a -0.8 elasticity.  Similarly, under a scenario that uses an $8 PFC cap, an elasticity rate of - 0.8, and a 50 percent pass-through rate, estimated changes to PFC  revenues varied by less than 2 percent relative to the standard scenario.  Changes in trust fund revenues from passengers showed greater  sensitivity to changes in elasticity rate and pass-through in percentage  terms as these are the only variables in the calculations of these  changes.
To test the sensitivity of our results to key assumptions about airport  adoption, we developed an alternative adoption scenario based on airport  adoption behavior after the previous increase in the PFC cap in 2000. For  the results located in Table 6, we assume that 50% of airports charge the  maximum rate of $8 from 2016 to 2018, 75% of airports from 2019 to  2021 and 90% of airports from 2022 to 2024. The results show that  additional revenue from the increase in the cap varies proportionally to  the percentage of airports that adopt the higher cap. The impact on trust  fund revenues from passengers is lower relative to the standard scenario  because fewer passengers are affected by the PFC cap increase if fewer  airports adopt it.
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Gerald L. Dillingham, Ph.D, 202-512-2834, or dillingham@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, the following individuals made  important contributions to this report: Paul Aussendorf, Assistant Director;  Namita Bhatia Sabharwal; Benjamin Emmel; Bert Japikse; Delwen Jones;  Maureen Luna-Long; Josh Ormond; Madhav Panwar; and Reed Van  Beveren.