Airport Funding: Changes in Aviation Activity Are Reflected in Reduced Capacity Concerns
Released: 2015-04-23T00:00:00

Letter

Background

The United States has the largest, most extensive aviation system in the world with over 19,000 airports ranging from large commercial transportation centers handling millions of passengers annually to small grass airstrips serving only a few aircraft each year. Of these, roughly 3,300 airports are designated by FAA as part of the national airport system and thus are eligible for federal assistance.

The national airport system consists of two primary types of airports— commercial service airports, which have scheduled service and enplane 2,500 or more passengers per year, and general aviation (GA) airports, which have no scheduled service and enplane fewer than 2,500 passengers annually. FAA divides commercial service airports into primary airports (enplaning more than 10,000 passengers annually) and commercial service nonprimary airports. The 395 current primary airports are classified by hub type—large-, medium-, small-, and nonhub—based on passenger traffic. Passenger traffic is highly concentrated: 88 percent of all passengers in the United States enplaned at the 63 large- or medium-hub airports in 2013 (see fig. 1).

More than 2,900 airports in the national system are designated as GA airports. These airports range from large business aviation and cargo shipment centers that handle thousands of operations a year to small rural airports that may handle only a few hundred operations per year but may provide important access to the national transportation system for their communities.

Generally, the level of aviation activity, whether commercial passenger and cargo or general aviation business and private aircraft, helps to generate the funds that finance airport development. The three primary sources of funding for airport development are Airport Improvement Program (AIP) grants, PFCs, and locally generated revenue. All three sources of funds are linked to passenger aviation activity.

AIP is supported by the Airport and Airway Trust Fund (AATF), which is funded by airline ticket taxes and fees; GA flights contribute to the AATF through a tax on aviation jet fuel. Airports included in FAA’s NPIAS are eligible to receive AIP entitlement (apportionment) grants based on airports’ size and can also compete for AIP discretionary grants. AIP grants can only be used for eligible capital projects, generally those that enhance capacity, safety, and environmental conditions, such as runway construction and rehabilitation, airfield lighting and marking, and airplane noise mitigation. The amount made available in AIP appropriations totaled $3.35 billion in fiscal year 2014. The grants generally require matching funds from the local match ranging from 10 to 25 percent depending on the size of the airport and type of project.

PFCs, another source of funding for airport development projects, are a federally authorized, statutorily-capped, airport-imposed fee of up to a maximum of $4.50 per enplaned passenger per flight segment, and a maximum of $18 per round trip ticket. The PFC is collected by the airline on the passenger ticket and remitted to the airports (minus a small administrative fee retained by the airline). Introduced in 1991, and capped at $3.00 per flight segment, PFC collections can be used by airports for the same types of projects as AIP grants, but also to pay interest costs on debt issued for those projects. Since its inception, landside development projects—including, for example, new terminal projects—and interest payments on debt used to finance eligible projects have each accounted for 34 percent of total PFC collections spent. The maximum level of PFCs was last increased in Collections totaled almost $2.8 billion in calendar year 2014. 2000.According to FAA, 358 commercial service airports are collecting PFCs as of February 2015.

Airports also fund development projects from revenues generated directly by the airport. Airports generate revenues from aviation activities such as aircraft landing fees and terminal rentals, and non- aviation activities such as concessions, parking, and land leases. Aviation revenues are the traditional method for funding airport development and, along with PFCs, are used to finance the issuance of local tax-exempt debt. Because of the size and duration of some airport development projects—for example, a new runway can take more than a decade and several billion dollars to complete—long-term debt can be the only way to finance these types of projects.

FAA’s main planning tool for identifying future airport-capital projects is the NPIAS. FAA relies on airports, through their planning processes, to identify individual projects for funding consideration. According to FAA officials, FAA reviews input from individual airports and state aviation agencies and validates both eligibility and justification for the project over the ensuing five-year period. Because the estimated cost of eligible airport projects that airports plan to perform greatly exceeds the available grant funding available for these projects, FAA uses a priority system based on airport and project type to allocate the available funds. The Airports Council International-North America (ACI-NA), a trade association for airports, also estimates the cost of planned airport capital projects.

While almost all airport sponsors in the United States are states, municipalities, or specially created public authorities, there is still a significant reliance on the private sector for finance, expertise, and control of airport assets. For example, we have previously reported that the majority of airport employees at the nation’s major airports are employed by private sector firms, such as concessionaires, and some airports are also operated by private companies. Pursuant to statutory authorization, since 1996, FAA has been piloting an airport privatization program that relaxes certain restrictions on the sale or lease of airports to private entities.

Aviation Activity at Many Airports Has Slowed Since 2007

A variety of factors has had a substantial impact on the airline industry. We reported in June 2014 that economic issues such as volatile fuel prices and the economic recession have affected the industry as have airlines’ consolidation and an adoption of business models that focus For instance, the 2007-2009 recession more on capacity management.combined with a spike in fuel prices, helped spur industry mergers and a change in airline business models. Specifically, Delta acquired Northwest in 2008, United and Continental merged in 2010, Southwest acquired AirTran in 2011, and US Airways and American Airlines merged in 2014. Although passenger traffic has generally rebounded as the economy has recovered, the number of commercial aircraft operations has not returned to 2007 levels as airlines are flying larger and fuller aircraft.

In June 2014, we found that one outcome of economic pressures and industry changes had been reductions in U.S. passenger aircraft operations as measured by scheduled flight operations. Many airports lost both available seats and flights since 2007 when aircraft operations last peaked. However, medium- and small-hub airports had proportionally lost more service than large-hub or nonhub airports, as major airlines merged and consolidated their flight schedules at the largest airports. In June 2014, we found—based on our analysis of Department of Transportation’s (DOT) data—that there were about 1.2 million fewer scheduled domestic flights in 2007 as compared to 2013 at large-, medium-, small-hub, and nonhub airports. The greatest reduction in scheduled flights occurred at medium-hub airports, which decreased nearly 24 percent from 2007 to 2013, compared to a decrease of about 9 percent at large-hub airports and about 20 percent at small-hub airports. Medium-hub airports also experienced the greatest percentage reduction in air service as measured by available seats (see fig. 2). While 2014 passenger activity as represented by the number of passengers onboard aircraft departing U.S. airports has rebounded nearly back to 2007 levels (down 4 percent), the total number of commercial passenger and cargo aircraft departures (operations) in 2014 is still down 18.5 percent since 2007. Declining operations reduces pressure on airports’ airside capacity, while rebounding passenger traffic could put pressure on airports’ terminals and gates to accommodate passengers.

We found in June 2014 that air service to small airports, which generally serve small communities, has declined since 2007 due, in part, to volatile fuel costs and declining populations in small communities. According to a study by the Massachusetts Institute of Technology (MIT), regional aircraft—those mostly used to provide air service to small communities— are 40 to 60 percent less fuel efficient than the aircraft used by mainline carriers at larger hub airports. Further, from 2002 to 2012, fuels costs quadrupled and became the airlines’ largest expense at nearly 30 percent of airlines’ operating costs. While more recently oil prices have dropped, it remains uncertain whether currently low oil prices will continue. The second major factor affecting small community service is declining population in many regions of the country over the last 30 years. As a result, in previous work, we have found that population movement has decreased demand for air service to certain small communities. For example, geographic areas, especially in the Midwest and Great Plains states, lost population from 1980 through 2010, as illustrated in figure 3 below. As a result, certain areas of the country are less densely populated than they were 35 years ago when the airlines were deregulated and the Essential Air Service (EAS) was created. For small communities located close to larger cities and larger airports, a lack of local demand can be exacerbated by passengers choosing to drive to airports in larger cities to access better service and lower fares. The EAS program was created in 1978 to provide subsidies to some small communities that had service at the time of deregulation. We reported last year that EAS has grown in cost but did help stem the declines in service to those communities as compared to other airports.

In June 2014, we reported that GA activity has also declined since 2007, particularly affecting airports that rely on general aviation activity for a large share of their revenue. For GA airports—which generate revenues from landing fees, fuel sales, and hangar rents—the loss of traffic can have a significant effect on their ability to fund development. A 2012 MIT study that examined trends for GA operations at U.S. airports with air- traffic control towers indicated that from 2000 to 2010, total GA operations dropped 35 percent. According to the MIT study, the number of annual hours flown by GA pilots, as estimated by FAA, has also decreased over the past decade. Numerous factors affect the level of GA operations including the level of fuel prices, the costs of owning and operating personal aircraft, and the total number of private pilots and GA aircraft. For example, we recently reported on the availability of airline pilots and found that the GA pilot supply pipeline has decreased as fewer students enter and complete collegiate pilot-training programs and fewer military pilots are available than in the past.

Airport Capacity Needs and AIP- Eligible Planned Development Costs Have Mostly Declined

The Projected Number of Future Capacity Constrained Airports Has Declined

Earlier this year, FAA reported on airport capacity needs through 2030. The focus of FAA’s analysis was not on the broad range of investments airports make to serve passengers and aircraft, but on the capacity of airports to operate without significant delay. Therefore, the primary focus was on airside capacity, especially runway capacity. To do this, FAA modeled recent and forecasted changes in aviation activity, current and planned FAA investments in air-traffic-control modernization, and airport investments in infrastructure, such as new runways, to determine which airports are likely to be congested or capacity constrained in future years.with previous studies in 2004 and 2007 following a similar methodology. The most recent study found that the number of capacity-constrained airports expected in the future has fallen dramatically from the number projected in earlier reports, referred to as FACT1 and FACT2 (see fig. 4). For example, in 2004, FAA projected that 41 airports would be capacity constrained by 2020 unless additional investment occurred. However, in the 2015 report, FAA projected that 6 airports will be capacity constrained in 2020. FAA attributed this improvement to changes in aviation activity, investment in air-traffic-control modernization, and the addition of airport runways.

Estimated AIP-Eligible Development Costs for Next 5 Years Are Lower, Though Estimates of Overall Development Costs Have Increased

In the September 2014 NPIAS, FAA estimated that airports have roughly $33.5 billion in planned development projects for the period 2015 through 2019 that are eligible for federal support in the form of AIP grants.estimate is roughly 21 percent less than FAA’s previous estimate of $42.5 billion for the period 2013 through 2017 (see fig. 5). FAA reported a decrease in estimated needs for most hub-airport categories and all types of airport development except projects to reconstruct or rehabilitate airport facilities, security related infrastructure projects, and safety projects (see fig. 6). Notably, according to FAA, planned capacity-related development decreased to $4.9 billion, a 50-percent decrease. Planned terminal-related development also saw a major decline, down by 69 percent from the previous estimate.

The ACI-NA also estimated airports’ planned development for the 2015 through 2019 period for projects both eligible and not eligible for AIP funding. According to ACI-NA, the total estimated planned-development cost for 2015 through 2019 is $72.5 billion, more than twice FAA’s estimate for just AIP eligible projects.percent over its prior estimate of $68.7 billion for the prior 2013–2017 ACI-NA’s estimate increased 6.2 estimating period. According to ACI-NA, the difference in the respective estimates is attributable to ACI-NA’s including all projects rather than just AIP-eligible projects like the NPIAS, as well as including projects with identified funding sources, which the NPIAS excludes. For example, ACI- NA’s estimate includes AIP-ineligible projects such as parking facilities, airport hangars, and commercial space in large passenger terminal buildings. ACI-NA attributed more than half of the development costs to the need to accommodate growth in passenger and cargo activity. ACI- NA estimated that 36 percent of planned development costs were for terminal projects. We are currently analyzing FAA and ACI-NA’s most recent plan estimates and will be reporting later this year on the results.

Federal Support for Airport Development Has Decreased, While Debt Levels May Leave Little Room for New Development at Some Airports

Federal Funding for Airport Development Has Declined in Recent Years

In Fiscal Year 2015, Congress made $3.35 billion available in appropriations acts for AIP funding, a reduction from the annual appropriations of $3.52 billion for fiscal years 2007 through 2011. The President’s 2016 budget proposal calls for a reduction in annual AIP funding to $2.9 billion in conjunction with an increase in the PFC cap. As we testified in June 2014, if amounts made available in appropriations acts for AIP fall below the $3.2 billion level established in the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century of 2000and no adjustments are made, under the 2000 Act the amount of AIP entitlement grants would be reduced, but more AIP discretionary grants could be made as a result. The larger amount of AIP funding that would go to discretionary grants would give FAA greater decision-making power over the development projects that receive funding.

Previous proposals have considered changing how GA airports are allocated their share of AIP funds, which represented approximately one- quarter of total AIP funds in fiscal year 2014. For example, in 2007, the Administration’s FAA reauthorization proposal suggested changing the funding structure for GA airports. Specifically, FAA would have tiered GA airports’ funding based on level of and type of aviation activities. AIP entitlement funding would then range, based on the tier, up to $400,000. While this proposal was not adopted, FAA recently undertook an exercise to classify GA airports based on their activity levels. reported that 281 airports remained unclassified because they did not meet the criteria for inclusion in any of the new categories, thus having no clearly defined federal role.airports with few or no based aircraft. According to the most recent NPIAS report, many of these 227 airports have received AIP funding in the past and may be considered for future funding if and when their activity levels meet FAA’s criteria for inclusion.

In a 2012 report, FAA categorized GA airports as National (84), Regional (467), Local (1,236), and Basic (668). In addition, another 497 GA airports were unclassified. Federal Aviation Administration, General Aviation Airports: A National Asset (ASSET 1), May 2012. large- and medium-hub airports collecting PFCs must return a portion of their AIP entitlement grants, which are then redistributed to smaller airports through the AIP. As previously noted, 68 percent of PFCs have been used to pay for landside development (terminals) and interest charges on debt. In addition, many airports’ future PFC collections are already committed to pay off debt for past projects, leaving little room for new development. For example, at least 50 airports have leveraged their PFCs through 2030 or later, according to FAA data.

The President’s fiscal year 2016 budget proposal and airports have called for increasing the PFC cap to $8—which is intended to account for inflation since 2000, when the maximum PFC cap was last raised—and eliminate AIP entitlements for large-hub airports. reported on the effects of increasing PFCs on airport revenues and passenger demand. Specifically, we found that increasing the PFC cap would significantly increase PFC collections available to airports under the three scenarios we modeled but could also marginally slow passenger growth and therefore the growth in revenues to the AATF. We modeled the potential economic effects of increased PFC caps for fiscal years 2016 through 2024 as shown in figure 7 below. Under all three scenarios, trust fund revenues, which totaled $12.9 billion in 2013 and fund FAA activities, would likely continue to grow overall based on current projections of passenger growth; however, the modeled cap increases could reduce the growth in total AATF revenues by roughly 1 percent because of reduced passenger demand if airlines pass the full amount of the PFC increase along to consumers in the form of increased ticket prices.

Airport trade associations, the ACI-NA and the American Association of Airport Executives, have made prior proposals to raise the PFC cap to $8.50 with periodic adjustments for inflation.

Airports Rely on a Variety of Local Revenues, Which Have Increased since 2004

Pub. L. No. 112-95, § 112, 126 Stat. 11, 18 (2012). totaled $5.2 billion, while nonaviation revenues were just over $5 billion. According to ACI-NA, non-aviation revenue has grown faster than passenger growth since 2004, over 4 percent on average for non-aviation revenue versus 1.5 percent average growth in passenger boardings over the same period. Further, some airports have developed unique commercial activities with stakeholders from local jurisdictions and the private sector to help develop airport properties into retail, business, and leisure destinations. Some examples include:

Non-aviation development on airport property: Airports have turned to an increasing range of unique developments on airport property, including high-end commercial retail and leisure activities, hotels and business centers, and medical facilities for non-aviation revenues. For example, airports in Denver, Miami, and Indianapolis have built cold storage facilities on airport property in an effort to generate revenue by leasing cold storage space to freight forwarders and businesses that transport low-volume, high-valued goods, including pharmaceuticals, produce, and other time-sensitive or perishable items.

Public-private partnerships: Airports can fund airport improvements with private sector participation. Public-private partnerships, involving airports and developers, have been used to finance airport development projects without increasing the amount of debt already incurred by airports. For example, the Port Authority of New York and New Jersey has recently received responses for its request for proposals for the private sector to demolish old terminal buildings and construct, partially finance, operate, and maintain a new Central Terminal Building for LaGuardia Airport in New York City.

Privatization: FAA’s Airport Privatization Pilot Program (APPP), which was established in 1997 to reduce barriers to airport privatization that we identified in 1996, has generated limited interest from the public and private sectors. As we reported in November 2014, 10 airports have applied to be part of the pilot program and one airport—San Juan Luis Muñoz Marín International Airport in Puerto Rico—has been privatized (see fig. 8). In our report, we noted that several factors reduce interest in the APPP—such as higher financing costs for privatized airports, the lack of state and local property tax exemptions, and the length of time to complete a privatization under the program. Public sector airport owners have also found ways to gain some of the potential benefits of privatization without full privatization, such as entering airport management contracts and joint development agreements for managing and building an airport terminal.

In conclusion, last year commemorated one century since the first commercial airline flight,commercial aviation has grown at an amazing pace to become an and in that relatively short time span ubiquitous and mature industry in the United States. While commercial aviation still has many exciting growth prospects for its second century, it also faces many challenges—among them how to ensure that the aviation system can accommodate millions of flights and hundreds of millions of passengers every year in the midst of shifting aviation activity and constrained federal funding. Despite recent declines in airport operations, it remains important for airports to be maintained as well as upgraded to maintain safety and accommodate future growth. Declines in airport operations have reduced demands on AIP, but rebounded passenger activity could continue to put pressure on PFCs to finance terminal and other projects. Developing airports will require the combined resources of federal, state, and local governments, as well as private companies’ capital and expertise. Effectively supporting this development involves focusing federal resources on FAA’s key priorities of maintaining the world’s safest aviation system and providing adequate system capacity, while allowing sufficient flexibility for local airport sponsors to maximize local investment and revenue opportunities. In deciding the best course for future federal investment in our national airport system, Congress is faced with weighing the interests of all aviation stakeholders, including airports, airlines, other airport users, and most importantly passengers, to help ensure a safe and vibrant aviation system.

Madam Chair Ayotte, Ranking Member Cantwell, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time.

GAO Contacts and Staff Acknowledgments

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. Key contributors to this testimony include Paul Aussendorf (Assistant Director), Amy Abramowitz, David Hooper, Delwen Jones, Josh Ormond, Melissa Swearingen, and Russell Voth.

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