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. 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.