Both FAA and ACI have estimated the costs of planned airport capital development. Our analysis indicates that recent funding levels would cover the costs estimated by FAA, but not all the costs estimated by ACI. Options for addressing the potential difference between funding and planned development estimates include increasing or reallocating Airport Improvement Program (AIP) grant funds and removing the current cap on passenger facility charges. The estimated costs of planned airport capital development vary depending on which projects are included in the estimates. According to FAA’s estimate, which includes only projects that are eligible for AIP grants, the total cost of airport development will be about $46 billion, or over $9 billion per year, for 2001 through 2005. FAA’s estimate is based on the agency’s National Plan of Integrated Airport Systems, which FAA published in August 2002. ACI’s estimate includes all of the projects in FAA’s estimate, plus other planned airport capital projects that may or may not be eligible for AIP grants. ACI estimates a total cost of almost $75 billion, or nearly $15 billion per year, for 2002 through 2006. Projects that are eligible for AIP grants include runways, taxiways, and noise mitigation and noise reduction efforts; projects that are not eligible for AIP funding include parking garages, hangars, and expansions of commercial space in terminals. Both FAA’s and ACI’s estimates cover projects for every type of airport. As table 1 indicates, the estimates are identical for all but the large- and medium-hub airports, which are responsible for transporting about 90 percent of the traveling public. ACI’s estimates are about twice as large as FAA’s for these airports. According to FAA’s analysis of the planned capital development for 2001 through 2005, airports will use (1) 61 percent of the $46 billion for capacity enhancement, reconstruction, and modifications to bring airports up to the agency’s design standards and (2) 39 percent to fund safety, security, environmental, and other projects. See figure 1. Neither FAA’s nor ACI’s estimate includes funding for terminal modification projects that are needed to accommodate the new explosives detection systems. ACI estimates that terminal modifications will cost about $3 billion to $5 billion over the next 5 years. From 1999 through 2001, the 3,364 airports that make up the national airport system received an average of about $12 billion per year for planned capital development. The single largest source of these funds was bonds, followed by AIP grants and passenger facility charges. (See table 2.) It is important to note that the appropriated AIP funding for fiscal year 2002 totaled $3.2 billion and that the authorized AIP funding for fiscal year 2003 is $3.4 billion. However, because data for funding from other sources were not available for these years, we used the figures from 1999 through 2001, the most recent years for which consistent data were available. The amount and type of funding vary depending on the airport’s size. For example, as shown in figure 2, the large- and medium-hub airports depend primarily on bonds, while the smaller airports rely principally on AIP grants. Passenger facility charges are a more important source of revenue for the large- and medium-hub airports because they have the majority of commercial service passengers. If the funding for airport capital development remains at about $12 billion a year over the next 5 years, it would cover all of the projects in FAA’s estimate. However, it would be about $3 billion less per year than ACI’s estimate. Figure 3 compares the average annual funding airports received from 1999 through 2001 with FAA’s and ACI’s annual planned development for 2001 through 2006. This difference is not an absolute predictor of future funding shortfalls; both funding and planned development may change in the future. However, it does provide a useful indication of where funding differences may be the greatest. The difference between past funding and planned development is proportionally greater for smaller airports than for large- and medium-hub airports. If the smaller airports were to continue to receive an average of about $2.4 billion per year, they would be able to fund about 73 percent of the estimated cost of their total planned development. In comparison, large- and medium-hub airports would be able to fund about $9.4 billion per year, or about 80 percent, of the estimated cost of their total planned development. It is important to note that while the airlines may be experiencing financial problems, most large airports have very solid credit ratings and could, if necessary, issue more debt without facing exorbitant interest rates. Figures 4 and 5 illustrate the differences between funding levels and estimated planned capital development at smaller and at large- and medium-hub airports. The primary reason that smaller airports would be able to fund 73 percent of their planned development, rather than the 52 percent reported we reported in 1998, is that they have benefited significantly from the increases in AIP grants, which is a larger source of funding for smaller airports than it is for larger airports. Of the $2.4 billion in AIP grant funds that airports received each year, on average, from 1999 through 2001, smaller airports received almost 63 percent, whereas large- and medium- hub airports received about 37 percent. Smaller airports have received an increasing share of AIP grants primarily because of statutorily required changes in the distribution of these funds. For example, in AIR-21, the Congress increased the funding for two categories that primarily or exclusively benefit small airports—the state apportionment fund and the small airport fund—and created general aviation entitlement grants, which also benefit smaller airports. Options are available to increase airport funding or to make better use of the existing funding. These options, some of which were authorized or implemented as part of AIR-21, include increasing the AIP grant funding for smaller airports, increasing passenger facility charges, and using innovative financing approaches. The various options would benefit different types of airports to varying degrees. To help address the difference between funding and planned development, AIR-21 provided that up to $150,000 a year in AIP grant funds be made available to all general aviation airports for up to 3 years for airfield capital projects such as runways, taxiways, and airfield construction and maintenance projects. In our report issued yesterday, we reported that since the program’s inception in fiscal year 2001, general aviation airports have received a total of about $325 million, which they have used primarily to help build runways, purchase navigational aids, and maintain pavements and airfield lighting. Most of the state aviation officials and general aviation airport managers we surveyed said the grants were useful in meeting their needs, and some suggested that the $150,000 grant limit be increased so that general aviation airports could undertake larger projects. However, a number of state officials cautioned that an increase in the general aviation entitlement grant could cause a decrease in the state apportionment fund, which states use to address their aviation priorities. Another option would be to increase or eliminate the cap on passenger facility charges. This option would primarily benefit larger airports, because passenger facility charges are a function of the volume of passenger traffic. However, under AIP, airports that collect passenger facility charges must forfeit a certain percentage of their AIP formula funds. These funds are subsequently divided between the small airport fund, which is to receive 87.5 percent, and the discretionary fund, which is to receive 12.5 percent. Thus, smaller airports would benefit indirectly from any increase in passenger facility charges. In our 1999 report on passenger facility charges, we estimated that a small increase in passenger facility charges would have a modest effect on passenger traffic. At that time, we estimated that each $1 increase would reduce passenger levels by about 0.5 to 1.8 percent, with a midrange estimate of 0.85 percent. Since AIR-21 raised the cap on passenger facility charges from $3.00 to $4.50, the full effect of the increase has not been realized because only 17 of the 31 large-hub airports (55 percent) and 11 of the 37 medium- hub airports (30 percent) have increased their rates to $4.50. Additionally, 3 large-hub airports and 6 medium-hub airports do not charge a passenger facility fee. The reluctance to raise passenger facility charges is likely to be the result of several factors, including the views of airlines, which are opposed to any increase in passenger facility charges because an increase would raise passenger costs and reduce passenger traffic. Nonetheless, if all airports were to increase passenger facility charges to the current ceiling, additional revenue could be generated. FAA has introduced other mechanisms to make better use of existing funding sources, the most successful of which has been letters of intent, a tool that has effectively leveraged private sources of funding. A letter of intent represents a nonbinding commitment from FAA to provide multiyear funding to an airport beyond the current AIP authorization period. Thus, the letter allows the airport to proceed with a project without waiting for a future AIP grant because the airport and investors know that allowable costs are likely to be reimbursed. A letter of intent may also enable an airport to receive a more favorable interest rate on bonds that are sold to refinance a project because the federal government has indicated its support for the project. FAA has issued 64 letters of intent with a total commitment of about $3 billion; large- and medium-hub airports account for the majority of the total. Other approaches to making better use of existing funding resources were authorized under AIR-21. Specifically, the act authorized FAA to continue its innovative finance demonstration program, which is designed to test the ability of innovative financing approaches to make more efficient use of AIP funding.