The Sky Has Financial Limits
by Jan H. Lyons

The sky is not always the limit when it comes to available resources for the redevelopment and expansion of airport infrastructure. For the most part, the federal government supports the maintenance of aviation infrastructure through the Airport Improvement Program (AIP). The AIP, coupled with the passenger facilities charges (PFCs) and airport net operating revenues, are the main sources of revenue for improvements. But there remains an estimated funding shortfall of between $2 and $4 billion annually. To accommodate their financial limitations and to meet the needs of an evolving airline industry, airports are exploring key new avenues.

• The benefit-cost analysis for airport capital projects has long been a requirement in obtaining FAA project funding. Airports are also employing benefit-cost analysis to help maximize their existing resources and infrastructure. The objective is to use construction options that attain required capacity and service levels, offer the greatest flexibility, can be built in independent phases, and offer the greatest efficiency in operating and maintenance.

An economic analysis built on life-cycle costs and returns can help with this determination. In life-cycle analysis, the initial costs and any additions or reductions to operating expenses are projected over the life of the project. The benefits are similarly projected. Using this analysis can help airports choose between projects of varying costs, different construction timing, and various risk levels.

How does it work?

If major improvements are made to restore a project 10 or 15 years into its life, the value of those improvements reduces the physical depreciation of that asset. In financial terms, these improvements add a "salvage value" benefit. The life cycle method then uses the annual benefits less the annual costs to create a cash flow schedule that is then appropriately "discounted," producing a net present value that represents the economic value added by the project in today's dollars.

• Securitization is the collateralization of a discrete stream of revenue through bonds to raise capital. Airports are usually bound to use regular revenues to offset expenses, and these new discrete streams are not pledged to other areas. Through securitization, an airport can secure a bond for improvements from the revenue it generates from a parking garage or a land lease. Airports can also securitize PFCs or AIP entitlements in standalone bonds.

• The U.S. has a $4.50 cap on the per-passenger tax (PFC) that can be charged by airports. Some airports are proposing that this cap be lifted and a system like Canada’s Airport Improvement Fees (AIFs) be utilized instead. If U.S. airports relinquished the AIP program and were allowed to set their PFCs at “market” rates, this change could potentially give airports an instant increase in operating capital for improvements.

• Airports are recognizing the importance of innovative project planning to fully leverage their assets. For example, the George Bush Intercontinental Airport is currently soliciting a new project to have a drainage retention facility built off of airport property in order to use the more valuable airport property for continued development of their services.

• The majority of airports in operation today allow airlines to lease facilities (gates) under exclusive-use agreements. Unfortunately for host airports, if an airline chooses to significantly reduce operations, the airport loses revenue. Common-use airports lease their facilities in a nonexclusive manner to retain a strong measure of operational control.

In a common-use system, airports manage the facilities on a common or preferred use basis where an airline can retain use of the facility as long as minimum use requirements are met. For example, an airline would have to agree to a minimum number of operations through a gate per month. If that minimum standard was not met, the airport could take back the gate and lease it to another airline. In addition to usage requirements, an airport can also require minimum maintenance standards so that the asset is preserved in appearance and functionality.

The idea of a common-use airport is that the airport and not the airlines, manage the network, telecommunications, video feeds, check-in counters, gates, security, and baggage systems. While attaining common-use status may not be immediately possible because of existing lease structures, the movement towards common use can begin with efficiencies like a common-use IT network or telephone system. The common use IT model can save money for both the airport and the airlines: airlines save the costs and hassles of managing their own networks in every city; the airport becomes a full-service IT outsourcer, creating for itself a new source of revenue.

With volatility in the aviation industry, there are strategic and financial advantages to having common-use technology systems in place. With a standardized software and hardware that allows web-based graphical interface rather than various proprietary technologies, it is possible to have common self-service passenger kiosks. With the inevitable restructuring in a competitive airline industry, the common-use IT network will help to eliminate a significant barrier to new entrants.

Customers could walk into an airport and go to any ticket kiosk for baggage-free check-in for any airline. If the hardware (the kiosk) and software in the kiosk are maintained by the airport, a simple programming change is all that is needed to add a new entrant or delete an old one. This keeps infrastructure in use with minimal disruption of service in the event of a carrier ceasing to operate.

What Will Fly?

Airports must make a determination as to their best course of action for supplementing financial shortfalls. Equally important are the decisions they must make regarding control of their assets via common-use lease arrangements. The available resources and new methods are becoming more apparent, but it is in the hands of airports to make the system fly.

Jan Lyons is an economic and financial analyst for PBS&J aviation projects. His project portfolio includes feasibility studies that supported more than $5.6 billion in private investment for public sector projects and more than $10 billion in public funding applications.