Airline Competition: Passenger Facility Charges Represent a New Funding Source for Airports

Published by the Government Accountability Office on 1990-12-13.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                                                             Passenger Facility
                                                             Charges Represent a
                                                             New Funding Source
                                                             for Airports


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      United States
GAO   General Accounting  Office
      Washington, D.C. 20648

      Resources, Community,            and
      Economic Development             Division


      The Honorable James L. Oberstar
      Chairman, Subcommittee on Aviation
      Committee on Public Works and
      House of Representatives

      Dear Mr. Chairman:

      In response to your request, this report addresses ways to ensure that
      regulations covering passenger facility charges (PFC) will further the
      Congress* goals of enhancing airport capacity, safety, and security and
      reducing noise. PFCS, which give airports a way to raise funds for capital
      projects that is not dependent on airline approval, were recently author-
      ized in Section 9110 of the Aviation Safety and Capacity Expansion Act
      of 1990.’ As we stated in our June testimony discussing the desirability
      of direct charges, the additional capacity financed by such charges
      should help enhance competition by allowing for additional airline

      Our analysis is based on a series of GAO reviews on competition in the
      airline industry that have examined how changes in the industry since
      deregulation have affected airline fares, the ability of new firms to enter
      the industry, and the ability of existing airlines to enter new markets.
      As part of this work, we surveyed 183 airports in the continental United
      States, including the 66 largest airports.3 Our survey included questions
      about the types of capital projects airports need to finance. (See app. II
      for more details on our methodology and the results of the survey.)

      ‘The Aviation Safety and Capacity Expansion Act of 1990 is part of the Omnibus Budget Reconcilia-
      tion Act of 1990, which was signed by the President on November 6,lQQO. Before any airports can
      impose a PFC, the Secretary of Transportation must establish a program to review airport noise and
      access restrictions and issue a notice of proposed rulemaking to consider more efficient allocation of
      capacity at the four high-density airports where airlines are required to have reservations (called
      slots) in order to offer service.
      2SeeAirline Competition: Passenger Facility Charges Can Provide an Independent Source of Funding
      for Airport Expansion and Improvement Projects (GAO/T-R-90-99,         June 19,199O).
      30ur survey included all 27 large airports in the continental United States, all 39 medium-sized air-
      ports, and 117 of the 163 small/nonhub airports. This report focuses on the census of large and
      medium-sized airports.

      Page 1                                                GAO/RCED-91-39      Passenger Facility   Charges

                      While PFCS are not a panacea for all of the problems faced by airports
Results in Brief      trying to expand capacity or promote competition, they will help air-
                      ports fund projects to expand capacity; reduce noise; or enhance safety,
                      security, and competitive access. The PFC gives airports more control
                      over expansion decisions by reducing the airports’ need for incumbent
                      airline approval of capital projects. Thus, a PFC will be especially useful
                      at airports where one or two airlines control most of the traffic or most
                      of the gates and other essential facilities through restrictive leases.
                      However, problems such as the impact of expansion on surrounding
                      communities may involve decisions between competing economic and
                      environmental goals that cannot be solved by increased funding alone.

                      If the PFC is to be effective in achieving the goals set out in the Aviation
                      Safety and Capacity Expansion Act of 1990, three points remain to be
                      addressed during implementation. First, criteria for the types of projects
                      that can be built with PFC funds need to encompass the wide variety of
                      projects that enhance airport capacity, safety, security, and competition
                      or reduce noise. Second, additional safeguards on the leasing of PFC-
                      funded facilities may be needed to ensure that potential entrant airlines
                      have competitive access to those facilities and that funds collected from
                      the traveling public are not used in ways that ultimately reinforce
                      incumbent airline dominance of airport facilities. Finally, as airports
                      begin to implement PFCS, consumers will need information on where PFCS
                      are charged and their amounts.

                      In our September 1989 testimony, we offered a number of options for
PFCs Can Help         increasing competition in the airline industry, including permitting ~~a.4
AirportsFundNeeded    w e a1so supported authorization of PFCS in our June 1990 testimony

Projects and Reduce   before this Subcommittee (cited earlier) and in our August 1990 testi-
                      mony before the California State Commission on Aviation.5 A PFC gives
Airline Control of    airports a source of revenue for financing airport expansion projects
Development           independent of airline control and reduces airports’ need to rely on air-
Decisions             lines to pay for or guarantee capital projects. Airports that are less
                      reliant on airline financing and guarantees, should be better able to resist
                      pressure to enter into long-term contracts containing restrictive provi-
                      sions. Fewer restrictive contracts, in turn, should give airports more

                      4Barriers to timpetition    in the Airline Industry   (GAO/T-RCED-89-66,      Sept. 20,1989, and GAO/T-
                                - 66 t Sept.21,lQfB).
                                                                                                  Pamqp     Fwilities     Charges   and

                      Page 2                                                     GAO/RCED&41*39       Passen@r      Facility   (%ar@a

flexibility both in stimulating competition and in reducing congestion
and delay.

Relations between airports and their tenant airlines are governed by
contracts called use agreements. These agreements often contain clauses
giving incumbent airlines some control over airport decisions in return
for a commitment by the airlines to pay sufficient fees to cover desig-
nated airport costs. Many of these agreements predate deregulation and
run for the same time period as bonds issued to pay for capital projects.
(App. I contains a more detailed discussion of airport-airline financing

While restrictive clauses in airport-airline agreements are not the only
impediments to airport expansion, their prevalence suggests that air-
ports will benefit from having an independent source of funding. For
instance, we found that 36 of the nation’s 66 largest airports have
majority-in-interest agreements (MII) that can force airports either to
delay capital projects or forgo them entirely. Officials at eight airports
told us that MIIs greatly impede projects and thus have the effect of dis-
couraging expansion and reducing competitive access. (See app. II,
tables II.1 and 11.2.) The PFC gives such airports an alternative source of
funding for capital projects,

Under the Aviation Safety and Capacity Expansion Act of 1990, MIIS and
other restrictive clauses in existing airport use agreements will not pre-
vent the effective use of PFCfunds. While PFC funds must be used for
specific projects approved by the Secretary of Transportation, incum-
bent airline approval of those projects will not be required, even if the
PFCfunds are used to support a bond issue or combined with funds from
other sources, such as federal grants. At airports where airline fees are
set to meet only those airport expenses not covered by revenues from
nonairline sources, such as parking fees, any increase in nonairline reve-
nues is normally used to reduce airline fees. However, the act specifi-
cally exempts funds collected from a PFCfrom inclusion in airport
revenues. Therefore, airports levying a PFCwill not have to reduce air-
line fees and will have additional revenue that can be used without air-
line approval.

Page 8                                  GAO/WED-91-29   Passenger   Facility   Charges

                              Our work shows that a wide range of factors affect airport capacity,
Three Issues Need             safety, security, and competition, Specific criteria for airport projects
Careful Consideration         should be developed so they will not exclude projects that would
During                        enhance airport capacity, safety, security, or competition, even indi-
                              rectly. Second, competitive access to Pm-funded facilities should not be
Implementation of             restricted by exclusive leasing of facilities. Third, consumers should
PFCs                          have adequate information on the number and cost of PFCS. The act
                              gives the Secretary authority to address each of these concerns,

Criteria for Projects to Be   Our work suggests that each airport faces a unique combination of needs
Built Using PFC Funds         and constraints. While it is apparent how some projects, such as
                              building a new runway or adding gates, would increase an airport’s
Need Not Unduly Restrict      capacity, the need for other projects is not as obvious. For example, air-
Airports’ Choice of           ports must also provide facilities such as airplane sewage treatment
Projects                      plants and noise barriers around areas used to test airplane engines.
                              Without these facilities, an airport’s growth is limited just as surely as it
                              is by a lack of runways or gates.

                              The airports responding to our survey cited a range of problems,
                              including state and federal requirements for environmental studies, the
                              need for noise mitigation, a lack of highway access roads, and airline
                              opposition to expansion. More than half of the nation’s 66 largest air-
                              ports reported at least one factor that could greatly limit or delay
                              expansionS In addition, nearly one-third of the airports identifying addi-
                              tional factors reported that the unavailability of funding could greatly
                              impede expansion. (See app. II, tables II.3 and 11.4.) While PFC funding
                              will not eliminate the problems airports face because of noise and other
                              environmental impacts of expansion, the funds can help pay for
                              required studies and mitigation measures.

                              The act provides broad criteria for the types of projects that airports
                              could finance with PFC funds: capacity, safety, and security projects
                              eligible for funding under the Airport Improvement Program; projects
                              for airport planning and noise reduction; and projects for construction
                              of gates and related facilities. The Secretary has some discretion in
                              determining which proposed projects meet these criteria before an air-
                              port can implement a PFC. On the basis of our work and the wide range

                              6The survey question asked airports to describe the extent to which community opposition to
                              increased noise, community opposition to other consequencesof expansion, and limitations in the
                              capacity of the air traffic control system would delay expansion in the next 6 years. Respondents
                              were also asked to write in any additional factors that pose problems for their airport.

                              Page 4                                               GAO/RCEDBl-39      Passenger   Facility   Charges

                            of needs airports reported, we believe that the Secretary should give air-
                            ports a great deal of discretion in choosing capital projects to fund with

Competitive Access to       If PIXS are to stimulate competition, potential competitor airlines need
PFC-Funded Facilities Can   access to the new or expanded facilities paid for with PFC funds. Our
                            work indicates that simply prohibiting the long-term exclusive-use
Be Ensured                  leasing of PFc-funded facilities, as the act does, might not, by itself,
                            ensure competitive access. Further definition of appropriate lease terms,
                            delegated to the Secretary, needs to be carefully formulated to prevent
                            abuses that could allow facilities built with PIT funds collected from the
                            traveling public to ultimately benefit incumbent airlines, without
                            improving access for potential competitors.

                            For instance, it is standard industry practice to allow expired leases to
                            continue on their old terms under “carryover” provisions while new
                            leases are being negotiated. While airport officials told us these provi-
                            sions provide continuity of service, we found that leases sometimes
                            remain in force under such provisions for years while negotiations con-
                            tinue. Renewal options can also add many years to the original term of
                            the lease. At one large airport, an airline leasing facilities has renewal
                            options giving the airline control over some facilities for up to 20 years
                            after the original lease term expires. Without some limitation on the use
                            of standard automatic carryover and renewal options in the new leases
                            on PFc-funded facilities, short-term leases could be extended until they
                            operate, in effect, as long-term leases.

                            The new act attempts to ensure competitive access to PFc-funded facili-
                            ties by requiring that the facilities not be leased for long-term exclusive
                            use. Airports can lease PFc-funded facilities to airlines using preferential
                            leases, which protect the tenant airline by giving it the first right to use
                            the leased facilities, but also allow the airport operator to assign sec-
                            ondary use to other airlines when the tenant airline does not have oper-
                            ations scheduled. However, we believe that leases on PFC-funded
                            facilities should also contain a clause providing that the tenant airline
                            agree to accommodate a secondary user at some of the facilities the air-
                            line leases if its use of its total leased facilities-including those on pre-
                            existing exclusive leases-permits. Without such a clause, an airline
                            could lease PFc-funded facilities on a preferential basis, use the new
                            facilities intensively, and leave exclusive-use facilities of the same type
                            unused for extended periods, thus negating the enhancement of capacity
                            and competition the new facilities could provide.

                            Page 6                                   GAO/RCED-91-39   Passenger   Facility   Charges

ConsumersWill Need        At least 16 million passengers (representing about 38 percent of the
Information About the     trips taken) had either connecting flights or stopovers in more than one
                          city, based on fourth quarter 1989 data. If the passenger must pay a PFC
Number and Cost of PFCs   at each airport on the route, the total PFCS on a trip could add substan-
                          tially to its cost. Congress has limited the size of PF’CS and the number of
                          charges that can be assessed on one-way and round-trip tickets. How-
                          ever, specific criteria for determining which airports could charge PFCS,
                          especially on “open-jaw” trips (i.e., trips in which the traveler does not
                          return to the starting point) and trips with stopovers in numerous cities,
                          are still needed. For example, the act limits to two the number of PFCS
                          that can be collected on a one-way trip. However, it is not clear which
                          two airports could collect a PFC on a one-way trip requiring stops in
                          three or more cities, if more than two of the airports levy a PFC.

                          The act also requires that the amount of fees collected be noted on the
                          airline ticket. However, a traveler must choose a flight before the ticket
                          can be written and, therefore, before the traveler is informed about the
                          presence and amount of PFCS on alternative routes. The Secretary, under
                          his general authority to regulate unfair and deceptive airline trade prac-
                          tices, could require other methods of informing air travelers about PFCS.
                          One approach would be to require that PFCS be included in advertised
                          airline fares. Another approach would make information on PFCS avail-
                          able in the computerized reservation systems used by airlines and travel
                          agents. Thus, the information would be available if the traveler asks for
                          it, in the same way that on-time performance data are available. Finally,
                          airlines and travel agents could be required to inform the consumer of
                          PFCS when the consumer books a flight, in the same way the consumer is
                          now informed about a code-shared flight.’ If informed about the pres-
                          ence of PFCS, especially those levied at connecting hub airports, the con-
                          sumer will have better information to use in deciding between competing
                          airlines and routes.

                          PPCS give airports an important alternative to reliance on airline funding
Conclusions               or guarantees in building facilities and expanding capacity. The availa-
                          bility of such an alternative is particularly important for those airports
                          having restrictive MIIs or having most or all of their present facilities
                          leased on long-term exclusive-use contracts. Consumers should benefit
                          from increased competition and greater capacity through lower fares

                          71na code-sharing agreement, a commuter airline enters into a partnership with a larger airline to
                          transport connecting passengers to the larger airline’s flights. The passenger’s ticket shows the two-
                          letter airline code of the larger airline for all segments of the trip, even though part of the trip is
                          s&ally flown on the smaller airline.

                          Page 6                                                 GAO/RCED-91-39      Passenger       Facility   Charges

                                                        ,“,                                                      1
                                                           I ”
                                                         *          :*   ’

                  and better service. The legislation allowing airports to levy a PFC has
                  been structured to protect the interests of the consumers paying the PFC,
                  while still affording each airport a great deal of flexibility in meeting its
                  particular needs.

                  The Congress has included safeguards in the act that prevent pre-
                  existing airport-airline agreements from limiting airports’ ability to levy
                  a PFC and to use the proceeds for eligible projects. In addition, the Secre-
                  tary needs to take certain actions to ensure that a variety of facilities
                  can be built with PFC funds, airlines have competitive access to those
                  facilities, and consumers are informed of PFCS.

                  The legislation authorizing PFCs provides that the Secretary of Transpor-
Recommendations   tation issue regulations implementing or clarifying some important
                  aspects of PFCS. The Secretary is charged with defining lease terms
                  applicable to PFc-funded facilities. To ensure that Pm-funded facilities
                  increase competitive access, we recommend that the Secretary require
                  tenant airlines wanting to lease such new facilities to agree to accommo-
                  date other airlines at the unused or underused facilities the tenant air-
                  lines already lease, when their operations permit. Thus, an airline
                  leasing new Pm-funded facilities would not be able to leave older exclu-
                  sively leased facilities idle while other airlines are unable to gain access
                  to similar facilities. We further recommend that the Secretary (1) con-
                  sider additional methods of informing consumers about PFCS and (2)
                  establish criteria to clarify which airports will collect a PFC on trips that
                  do not easily fit into the legislation’s one-way and round-trip limitations,
                  such as open-jaw trips or trips with stopovers in numerous cities.

                  We did not obtain official agency comments on a draft of this report.
                  However, we have discussed the facts contained in this report with
                  Department of Transportation officials. They generally agreed with our
                  results; our analysis takes their comments into account. Our work was
                  performed between June and October 1990, in accordance with gener-
                  ally accepted government auditing standards.

                  We are sending copies of this report to the Secretary of Transportation
                  and other interested parties and will make copies available to others
                  upon request. This work was performed under the direction of

                  Page 7                                  GAO/RCED-91-39   Passenger Facility   Charges

                                  1.              1
                                          ;,A’,                                            ”     ,<’
                                         .I’,’                                            I,           s

    Kenneth M. Mead, Director, Transportation Issues, (202) 276-1000.
    Major contributors to this report are listed in appendix III.

    Sincerely yours,

    J. Dexter Peach
    Assistant Comptroller General


    Page 8                               GAO/RCED-91-89   Passenger   Facility   Charges
Page 9   GAO/RCEiD-91-39   Passenger   Fsdity   Chaxges

Appendix I
Airport-Airline         Airport Use Agreements and the Financing of Airport
Agreements and the      Airport Operations Are Supported by Two Types of
Funding of Airports          Funding Mechanisms
                        Majority-In-Interest and Other Restrictive Clauses in
                             Airport Use Agreements       I

Appendix II
SelectedResults of the Airpofis
                                   toOurSurvey                                                            16
                        Majority-In-Interest Agreements                                                   15
GAO Airport Survey      Factors That Could Greatly Limit or Delay Expansion                               16
                            During the Next 5 Years

Appendix III                                                                                              19
Major Contributors to
This Report
Related GAO Products                                                                                      20

Tables                  Table II. 1: Number and Percentage of Airports With a                             16
                            Majority-In-Interest Agreement, and the Ability of
                            One Airline to Block Expansion
                        Table 11.2:Number of Airports Where a Majority-In-                                16
                            Interest Agreement Limits or Delays Expansion
                        Table 11.3:Percentage of Airports Where One or More                               17
                            Factors Could Greatly Limit or Delay Expansion in
                            the Next 5 Years
                        Table 11.4:Factors That Could Affect Airport Expansion                            18
                            in the Next 6 Years


                        Page 10                               GAO/WED-91-39   Passenger   Facility   Charges

 .   ”   L.

CBO       Congressional Budget Office
Dar       Department of Transportation
FAA       Federal Aviation Administration
GAO       General Accounting Office
MI1       majority-in-interest agreement
PFC       passenger facility charge

Page 11                               GAO/RCED-91-39   Passenger Facility   Charges
Appendix I

Airport-Airline Agreementsand the F’unding
of Alrports

                       Some airport-airline agreements give the airlines serving an airport the
                       right to approve or disapprove airport decisions that would change fees
                       the airlines pay. Many of these agreements were first signed before air-
                       line deregulation. Before deregulation, the Civil Aeronautics Board
                       determined which airlines flew routes to and from which cities, and the
                       airport’s primary concern was securing a long-term commitment from
                       the tenant airlines to finance the capacity needed to provide air service
                       to the local community. Since deregulation has allowed airlines to
                       change routes and fares at their discretion, airports now have the addi-
                       tional need to provide facilities to potential entrants in order to foster

                       Relations between airports and the airlines serving a community are
Airport Use            governed by contracts called airport use agreements. These contracts
Agreements and the     contain provisions detailing the rights and responsibilities of each party,
Financing of Airport   the terms and conditions of leases of airport facilities, and the method
                       for determining fees to be paid by the airline. Many of these contracts
Development            cover very long periods, such as 20,30, or 40 years. According to a 1984
                       report by the Congressional Budget Office (CBO), more than two-thirds of
                       the nation’s largest airports had use agreements running for more than
                       20 years, and many of these agreements were signed before airline
                       deregulation in 1978.’ Our recent survey of gate leases shows that 37
                       percent of the gates leased at large and medium-sized airports are still
                       leased on agreements beginning in 1978 or earlier, and 60 percent of the
                       leased gates are on leases that have at least 10 years left until

                       Most projects to improve or expand airport facilities are financed, at
                       least in part, by the issuance of general obligation or revenue bonds.
                       Most airports are owned by public entities (cities, counties, or airport
                       authorities), and their bonds are repaid with local funds. While some
                       bonds used for airport development are general obligation bonds backed
                       by the full faith and credit of a state or local government, most are rev-
                       enue bonds that are repaid with an airport’s revenues and often backed

                       ‘Financing US. Airports in the 198Os,CBO (April 1984), p. 26. The CBO report was based on a
                       survey done in 1983 of all 24 large airports and 36 of the 47 medium-sized airports (airport size
                       designations were based on 1982 enplanements).

                       20ur survey included all 27 of the airports meeting the Federal Aviation Administration’s (FAA) large
                       hub criterion and all 39 of the airports meeting the medium hub criterion, on the basis of 1988
                       enplanements. FAA categorizes airports as large, medium, and small/nonhub on the basis of the per-
                       centage of total passengers enplaned in a city and the surrounding standard metropolitan statistical
                       area. We applied FAA’s criteria to individual airports (such as LaGuardia) rather than to all of the
                       airports in a community (such as New York City).

                       Page 12                                               GAO/RCED-91-39     Passenger   Facility   Charges
                       Appendix   I
                       ~&$llne          Agreements    and the Funding

                       by the incumbent airlines’ guarantees. Airports get lower interest rates
                       on their bonds when they have guarantees from the incumbent airlines
                       ensuring the bonds’ repayment. In return for the financial guarantees,
                       airlines usually get the right to approve proposed projects. The long
                       time periods over which airport use agreements generally run coincide
                       with the terms of bonds issued to finance airport capital projects.

                       Airports rely heavily on bond issues to finance capital projects. In its
                        1984 report, CBO reported that large airports used bond issues for about
                       82 percent of their capital needs from 1978 to 1982, while medium-sized
                       airports used bond issues for 73 percent of theirs. Our recent survey
                       confirms this heavy reliance on bonds. We asked airports how they had
                       funded major expansion and improvement projects undertaken since
                       1980 and found that over 60 percent of the 53 large and medium-sized
                       airports responding to that question have relied on airport revenue
                       bonds requiring airline approval to fund capital projects.3 Over that
                       same period, only about one-third of the responding airports have used
                       revenue bonds that do not require airline approval of projects. On the
                       other hand, only 16 percent of the responding airports used state or
                       local general obligation bonds to pay for capital projects.

                       Airports generally use one of two basic approaches for meeting oper-
Airport Operations     ating costs: compensatory funding or residual fundingS Under a com-
Are Supported by Two   pensatory funding approach, the airport operator assumes the financial
Types of Funding       risk that the airport will not raise enough revenue to meet all of its oper-
                       ating costs. The airport sets fees and lease rates paid by the airlines to
Mechanisms             recover only the actual cost of the facilities and services the airlines u,se.
                       Under a residual funding approach, airlines serving the airport collec-
                       tively agree to pay all airport costs not covered by other sources of rev-
                       enue, such as restaurants, newsstands, and parking garages. Airline
                       fees, such as landing fees and lease payments, make up the difference
                       between the airport’s total expenses and revenues from nonairline
                       sources. As nonairline revenues increase, then, airline fees are reduced.
                       However, because tenant airlines assume significant financial risk under
                       a residual funding approach, they often receive the right to review or
                       approve the airport’s budget, including the right to approve or disap-
                       prove capital improvement projects,

                       3This represents 33 airports or one half of the total population of 66 large and medium-sized airports.
                       Table II.2 in appendix II shows actual responses by airport size category.
                       4A few airports set charges for tenant airlines by local ordinance rather than through negotiation
                       with the airlines.

                       Page 13                                               GAO/RCED-91-39      Passenger   Facility   Charges
                            Appendix   I
                            p&EUne         Agreements   and the Funding

                            Majority-in-interest agreements (MII) give the airlines performing the
Majority-In-Interest        majority of operations at an airport a voice in airport decisions that
and Other Restrictive       could change the fees the airlines pay, MIIS are more common at airports
Clauses   in &rpofi   Use   that use a residual funding approach, but they are also found at a few
                            airports that use a compensatory funding approach. Most MIIS give air-
Agreements                  lines having a larger share of the operations at an airport a greater voice
                            in decisions than airlines having a smaller presence. Like the general use
                            agreements that encompass the MII, the MII clause generally runs for the
                            term of the bond issue. We found that 36 of the 66 largest airports have
                            an MII, and most of those airports report that the MI1 limits or delays
                            capital projects.

                            Other provisions in airport use agreements can also limit airports’
                            ability to make capital investment decisions without the approval of
                            incumbent airlines. These provisions require approval of projects above
                            a certain cost or of bond sales to fund capital projects. They also require
                            that the airlines approve (1) changes in the fees they pay or (2) the
                            addition of any “rates, fees, and charges” not detailed in the use agree-
                            ment. Some agreements specifically prohibit an airport from assessing
                            any charges on airline passengers.

                            Twenty-five of 30 major airports surveyed by the Airport Operators
                            Council International have one or more restrictive provisions in their
                            use agreements that limit the airports’ ability to make capital invest-
                            ment decisions without the approval of incumbent airlines, In addition
                            to the 16 airports in this group that have an MII, 3 airports need airline
                            approval for large capital projects, and 3 need approval for bond sales.
                            Fifteen of these airports need airline approval to change landing fees,
                            terminal rental fees, or use fees. Fifteen of the airports cannot assess
                            any additional “rates, fees, or charges” without airline approval. The
                            Secretary of Transportation’s Task Force on Competition in the U.S.
                            Domestic Airline Industry, in its February 1990 report, found that
                            restrictive agreements between airports and airlines constitute a barrier
                            to entry:

                            The ability of airports to construct new facilities to expand capacity and enhance
                            competition is often severely restricted by airline-airport contractual agreements,
                            many of which were signed prior to deregulation. . . [Rlestrictive clauses, such as
                            [those specifying] “no additional rates, fees and charges,” may operate indepen-
                            dently or in conjunction with MI1 clauses to stifle airport efforts to finance, build,
                            and assign new capacitys6

                            %ccretary’sTask Forceon Competitionin the U.S.DomesticAirline Industry: Airports, Air Traffic
                            Control, and RelatedConcerns(Impact on Entry) (Feb. lQQO),p. 3-14.

                            Page 14                                           GAO/RCED-91-39    Passenger   Facility   Charges
    Appendix II

I   SelectedResultsof the GAO Airport Survey

                           We surveyed 183 large, medium-sized, and small airports in the conti-
    Airports Responding    nental United States. Using the Federal Aviation Administration’s (FAA)
    to Our Survey          size categories for the communities that airports serve, we included in
                           our sample all 27 large airports and all 39 medium-sized airports.1 We
                           also included 117 of the 163 small airports that are end points on routes
                           traveled by at least 20 passengers per day. We chose a stratified sample
                           of those routes and surveyed the small airports that are end points on
                           the routes. Thus, the small airports we surveyed did not comprise a
                           random sample of small airports, since airports with more qualifying
                           routes had a greater chance of being selected than airports with fewer
                           qualifying routes. Therefore, the data we received from the large and
                           medium-sized airports represent a census of conditions at those airports,
                           while the data from the 117 small airports in our survey represent only
                           conditions at those particular airports and are not generalizable to all
                           small airports. Nevertheless, our survey included 72 percent of the small
                           airports that are end points on routes traveled by at least 20 passengers
                           per day.

                           Some airports have an MI1 with their tenant airlines, which gives the air-
    Majority-In-Interest   lines some control over airport expansion. (See table II. 1.) Under an MII,
    Agreements             an airport may be required to get the airlines’ approval of the proposed
                           project itself, or the airlines may have some control over the airport’s
                           ability to issue additional bonds or raise fees to pay for improvements.
                           For example, an agreement might require approval by airlines enplaning
                           61 percent of the passengers in the previous year for any project costing
                           over $60,000 whose costs would be recovered from fees charged to the

                           ‘According to the FAA’s definition, a large hub enplanes at least 1 percent of the total passengers
                           enplaned in a city and its surrounding standard metropolitan statistical area, a medium hub enplanes
                           0.26 to 0.99 percent of the passengers, and a small/nonhub enplanes less than 0.26 percent.

                           Page 16                                             GAO/RCED-91-39      Passenger Facility   Charges
                                            Appe*       II
                                            Selected   Results of the GAO Airport     Survey

Table 11.1:Number and Percentage of
Airports With a Majority-in-interest                                   Number of Airpaonrt;,;ith Number of airports, by the ability of
Agreement, and the Ability of One Airline                                airports                  one airline to block expansion
to Block Expansion                          Size of airport             surveyed Number Percent’ One canb One cannor: Unknownd
                                            Large                                27         15         56%              6                   7               2
                                            Medium                               39         21         54%              3                   9               9
                                            Small                               117         18         15%              4                   3              11
                                            Total                               183
                                            BThis column shows the percentage of airports in each size category that have an MII

                                            bThis column shows the number of airports where one airline has a sufficiently large share of operations
                                            to block approval of airport expansion projects under the terms of the MII.
                                            CThis column shows the number of airports where no single airline has a large enough share to block
                                            approval of projects under the terms of the MII.
                                            dFor airports in this column, we did not have enough information to determine whether a single airline
                                            could block projects.

                                            We also asked airports with an MI1 whether the agreement limits or
                                            delays their expansion efforts. (See table 11.2.)

Table 11.2:Number of Airports Where a
Majorhy-in-interest Agreement Limits or                               Number of airports, by the effect of the Mii on
Delays Expansion                                                                         expansion
                                                                       Greatly  Moderately       Somewhat        Does not             Total
                                                                      limits or     limits or      limits or        limit or airportinwit;
                                            Size of airport             delays        delays         delays           delay
                                            Largea                             2                 3                  3                   6                14
                                            Medium                             4                 5                  9                   3                21
                                            Small                              1                 2                 12                   3                18
                                            aOne large airport with an MII did not respond to this question. That airport is not included in this table.

                                            We combined the airports’ answers to questions concerning the avail-
Factors That Could                          ability of land for expansion, the extent the airports’ MI1 limits or delays
Greatly Limit or Delay                      expansion, the effects of community opposition to increased noise and to
Expansion During the                        other effects of airport expansion, the ability of the air traffic control
                                            system to handle expansion, and other concerns listed by the airports in
Next 5 Years                                order to determine the number of airports where one or more of these
                                            factors could greatly limit or delay expansion in the next 5 years. (See
                                            table 11.3.) While a PFC would not eliminate all of these problems, it could
                                            help pay for required environmental studies and impact mitigation

                                            Page 16                                                   GAO/RCED-91-39        Passenger   Facility   Charges
                                          Appendix II
                                          Selded   Resulta of the GAO Alrport   Liiurvey

Table 11.3:Percentage of Airports When
One or More Factors Could Greatly Limit                                                    Percentage of alrports, by number of factors
or Delay Expansion in the Next 5 Years                                                            limiting or delayina expansion
                                                                        Number of                                      Four or   At least
                                          Sire of airport                 airports          One       Two Three          more         one
                                          Large                                   27          33%      15%      15%          11%          74%
                                          Medium                                  39          31%      10%       5%           0%          46%
                                          Small                                  117          21%       6%       5%           2%          34%
                                          Total                                 183

                                          Airport representatives checked boxes to indicate the extent to which
                                          community opposition to increased noise, community opposition to other
                                          consequences of airport expansion, and the ability of the air traffic con-
                                          trol system to handle expansion could limit or delay expansion in the
                                          next 6 years at their airport. They were also given an opportunity to
                                          write in additional factors of particular concern for their airport, which
                                          are tabulated in table II.4 in the column headed “other factors.”

                                          Page 17                                               GAO/RCED-9139   Passenger Facility   Charges
                                        Awendix   II
                                        Selected Results of the GAO Airport       Survey

Table 11.4:Factors That Could Affect
Airport Expansion in the Next 5 Years                                               Number of airports citing each factor
                                                                           Community opposition
                                                                                            To other
                                        Size of airport and               To lncreared    aspects of Air traffic control                      Other
                                          effect on expansion                     noise   expansion              capacity                  factorsa
                                        Large airports
                                        Greatlv limit                                   18                  6                        6                7
                                        Somewhat limit                                     4                9                        9                4
                                        Would not limit                                    4              11                        10                    b

                                        No response                                        1               1                         2             18
                                        Medium-sized airports
                                        Greatly limit                                      6               3                         4                6
                                        Somewhat limit                                  23                 9                         8                3
                                        Would not limit                                  9                26                        25                    b

                                        No resDonse                                        1                1                        2             31
                                        Small airports
                                        Greatly limit                                   13                10                         7             25c
                                        Somewhat limit                                  32                15                        14              6
                                        ??ould not limit                                69                89                        91        -           b

                                        No response                                        3                3                        5             88
                                        Qata in this column reflect the number of additional constraints on expansion written in by airports.
                                        Some airports cited more than one such factor; other airports did not respond. Factors cited include a
                                        lack of funding, airline opposition to expansion, and concern over the impact of expansion on wetlands
                                        bThe “would not limit” category is not applicable for these factors that airport representatives   wrote in

                                        ‘A lack of funding was the leading “other factor” cited by small airports. Eleven said a lack of funding
                                        would greatly limit expansion, while three said it would somewhat limit expansion.

                                        Page 18                                                  GAO/RCED-91-39       Passenger Facility    Charges
Appendix III

Major Contributors to This &port

                        Francis P. Mulvey, Assistant Director
Resources,              John V. Wells, Assignment Manager
Community, and          Delores Parrett, Evaluator-in-Charge
                        Fran Featherston, Senior Social Science Analyst
Development Division,
Washington, D.C.

                        Page 19                               GAO/RCJtD-91-39   Pawenger   Facility   Chargea
~ RelatedGAO Products

               Airline Competition: Industry Operating and Marketing Practices Limit
               Market Entry (GAO~RCED-90-147,Aug. 29, 1996).

               Air Travel: Effectiveness of State Consumer Protection Efforts Varies
               (GAOIRCED-90-136, Aug. 29, 1996).

               Airline Competition: Higher Fares and Reduced Competition at Concen-
               trated Airports (GAO/RCED-90-102,July 11, 1990).

               Effects of Airline Entry Barriers (GAO/T-RCED-90-62, Apr. 5, 1990).

               Barriers to Competition in the Airline Industry (GAO/T-RCED-8966,
               Sept. 20, 1989, and GAO/T-RCED-89-66, Sept. 21, 1989).

               Airline Competition: DOT’SImplementation of Airline Regulatory
               Authority (GAOIRCED-89-93, June 28, 1989).

               Air Fares and Service at Concentrated Airports (GAO/T-RCED-8937,
               June 7, 1989).

               Airline Service: Changes at Major Montana Airports Since Deregulation
               (GAO/RCED-~~-~~~F~,May 24, 1989).

               Airline Competition: Fare and Service Changes at St. Louis Since the
               TWA-Ozark Merger (GAO/RCED-88-217BR,Sept. 21, 1988).

               Competition in the Airline Computerized Reservation System Industry
               (GAO/T-RCED-88-62, Sept. 14, 1988).

               Airline Competition: Impact of Computerized Reservation Systems (GAO/
               RCED-86-74,May 9, 1986).

               Airline Takeoff and Landing Slots: Department of Transportation’s              Slot
               Allocation Rule (GAO/RCED-86-92, Jan. 81, 1986).

               Deregulation: Increased Competition Is Making Airlines More Efficient
               and Responsive to Consumers (GAO/RCED-86-26, Nov. 6, 1985).

 (341287)      Page 20                                GAO/RCED81-39   Passenger   Facility   Charges
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