Palm Springs, CA

May 3, 1999

Introduction to PFCs

American Association of Airport Executives (AAAE)

Federal Affairs Department

Introduction

In 1990, Congress became concerned that the AIP would not be able to meet the future infrastructure needs of U.S. airports. Consequently, the 1990 AIP reauthorization law permitted an airport to assess a fee on passengers. This is known as the Passenger Facility Charge (PFC). PFCs are collected by the airlines and paid directly to the airport without going through the federal treasury. They are intended to supplement AIP by providing more money for runways, taxiways, terminals, gates and other airport improvements (for a project to be PFC eligible, it must also be AIP eligible or involve the construction of gates).

No airport may charge a PFC of more than $3 per passenger and no passenger has to pay more than $12 in PFCs per round-trip regardless of the number of airports through which the passenger connects. No airport may charge a PFC unless the FAA first approves it. The FAA has approved PFCs at almost 301 airports and nearly 273 of those airports are actually collecting money.

If a medium or large hub airport charges a PFC, it must forego up to 50% of its AIP entitlement. The foregone entitlements go into a special Small Airport Fund to be distributed as follows:

• 50% to non-hub airports;

• 25% to general aviation airports;

• 12.5% to small hub airports; and

• 12.5% to the discretionary fund.

* The FAA has discretion to decide which airports within the above categories will receive the grants.

How Much Money Do Airports Need?

In the course of the 1996 reauthorization process, a dispute arose between the airports and airlines over how much money the airports really needed. The airlines claimed that only $4 billion per year was needed. The airports countered that its needs were closer to $10 billion per year.

In order to resolve this discrepancy, the House Transportation & Infrastructure Committee asked the General Accounting Office (GAO) to examine the competing assessments of airport needs. GAO found that the difference was explained by the fact that (1) airports looked at the needs of all 3,300 airports eligible for federal funding while airlines looked at the needs of only those 421 primary airports that they served and (2) airports counted both those projects that were eligible for AIP grants as well as those that were not while airlines counted only those projects that were eligible for AIP grants, thereby excluding many terminal, parking and roadway projects.

GAO did its own assessment of airport requirements in which it provided a range of needs depending on how those needs were defined. It found that airport needs were:

• $1.41 billion per year if one counts only those projects needed to maintain the current infrastructure and meet safety, security and environmental needs;

• $2.78 billion per year if one adds high priority projects such as those that would increase airport capacity;

• $6.1 billion per year if one counts all projects that were eligible for AIP funding; and

• $10.1 billion per year (the amount claimed by airports) if one counts all projects at airports including those not eligible for AIP funding such as some roads, terminal buildings and parking lots.

Can Airports Meet Those Needs with Existing Resources?

In addition to AIP, airports have other funding sources to meet their capital needs. According to GAO, AIP represents only about 20% of airport capital funding. The remainder comes from tax-exempt bonds (58%), PFCs (16%), state and local contributions (4%) and airport landing fees, airport leases and airport concession revenue (2%). All together, AIP, PFCs, bonds and other funding sources provide the airports about $7 billion per year.

Accordingly, if airports need $10 billion per year, there is a $3 billion gap (30%) between airport needs and airport funding sources. However, the impact of this gap varies among the different sizes of airports. For example, according to GAO:

• Large hub airports have enough money to pay for all their AIP eligible projects but they fall about $1.5 billion short (29% gap) in their ability to pay for all their AIP ineligible projects;

• Medium hubs have enough money to fund all their planned development;

• Small hubs do not even have enough money to fund all their AIP eligible projects and suffer a funding gap of just under $300 million (38% gap);

• Non hub airports only have enough money to maintain infrastructure, meet safety, security and environmental mandates, fund high priority projects and pay for a few other AIP eligible projects leaving none for ineligible projects and a funding gap of about $250 million (44% gap); and

• General aviation airports can pay for about half of their AIP eligible projects and none of their ineligible ones and suffer a funding gap of about $860 million (53% gap).

As can be seen, the funding shortfall tends to be greater in dollar terms at the larger airports but greater in percentage terms at the smaller airports. Also, the larger airports are usually able to pay for their AIP eligible projects while the smaller ones often are not. The AIP eligible projects tend to be the important airside items such as runways, taxiways and noise abatement. AIP ineligible projects are landside projects such as roads, parking lots, hangars and some terminal buildings. Airports usually pay for ineligible projects with bonds, local grants or internally generated funds.

Should the PFC be Increased?

The PFC is currently capped at $3 per passenger per airport. Airports want to increase it and airlines oppose the increase.

Airports cite the increase in passenger traffic and the loss of purchasing power as a result of inflation as justifying an increase in the PFC. According to the FAA, total domestic passenger traffic has grown from 473 million in 1992 to 615 million in 1998 and is expected to grow to just under 1 billion by 2009. Airports also cite the $3 billion funding gap described above as justifying an increase.

Airlines, as noted, question the existence of a funding gap and claim that any increased need can be met by raising airline landing fees and lease payments. They say they will agree to such higher payments for important safety, security or capacity-enhancing airport projects. However, airlines claim that most of the PFC money goes to "lower priority" projects such as roads and terminal buildings. According to the FAA, in 1996, the $1.1 billion in PFC funds were authorized as follows:

• 35% for airside projects such as runways, taxiways and safety related projects;

• 30% for landside projects, primarily terminal buildings;

• 17% to pay interest on bonds;

• 11% for noise abatement projects; and

• 6% for roads.

The National Civil Aviation Review Commission (NCARC), or the "Mineta Commission," in December, 1997 recommended that the $3 cap be waived at an airport where "there is written agreement between an airport and its tenant airlines for the airport to levy a PFC higher than $3."

Americans for Tax Reform (ATR) stated last year that it would view a vote to increase the PFC as a vote to increase taxes. Airports counter that they are merely asking Congress to give local officials the power to decide whether local fees should be increased.