oversight

Passenger Facility Charges: Program Implementation and the Potential Effects of Proposed Changes

Published by the Government Accountability Office on 1999-05-19.

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

                  United States General Accounting Office

GAO               Report to Congressional Committees




May 1999
                  PASSENGER
                  FACILITY CHARGES
                  Program
                  Implementation and
                  the Potential Effects of
                  Proposed Changes




GAO/RCED-99-138
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-281079

      May 19, 1999

      Congressional Committees

      In response to your request, this report (1) describes how the passenger facility charge program
      is helping airports fund their capital development, and (2) discusses the potential impact of
      various proposals to change the program, including the option of making no change.

      We are also sending copies of this report to other congressional committees; the Honorable
      Rodney E. Slater, Secretary of Transportation; and the Honorable Jane F. Garvey,
      Administrator, Federal Aviation Administration. We will also make copies available to others on
      request.

      If you or your staff have any questions, please contact me at (202) 512-3650 or Randy
      Williamson, Assistant Director, at (206) 287-4860. Major contributors to this report are listed in
      appendix III.




      Gerald L. Dillingham
      Associate Director, Transportation Issues
B-281079

List of Committees:

The Honorable John McCain
Chairman
The Honorable Ernest F. Hollings
Ranking Minority Member
Committee on Commerce, Science, and Transportation
United States Senate

The Honorable Slade Gorton
Chairman
The Honorable John D. Rockefeller, IV
Ranking Minority Member
Subcommittee on Aviation
Committee on Commerce, Science, and Transportation
United States Senate

The Honorable John J. Duncan, Jr.
Chairman
The Honorable William O. Lipinski
Ranking Democratic Member
Subcommittee on Aviation
Committee on Transportation and Infrastructure
House of Representatives




                      Page 2                         GAO/RCED-99-138 Passenger Facility Charges
B-281079




           Page 3   GAO/RCED-99-138 Passenger Facility Charges
Executive Summary


                 Since the early 1990s, most of the nation’s passenger service airports have
Purpose          been able to charge passengers a boarding fee of $1, $2, or $3, called a
                 passenger facility charge, to help pay for their capital development
                 projects. These charges now total about $1.4 billion a year. The program is
                 managed by the Federal Aviation Administration, which approves an
                 airport’s application to participate and the specific projects to be funded.

                 Within the industry, there are different views about whether the passenger
                 facility charge program should be expanded, limited, or left as is. Airport
                 associations support higher charges as a way to finance additional airport
                 development that they view as necessary. By contrast, airlines question the
                 need for some of the proposed development projects and have proposed
                 requiring a more stringent screening process for approving projects. To
                 provide information that would assist congressional deliberations, the
                 Chairmen and Ranking Minority Members of the Senate Committee on
                 Commerce, Science, and Transportation, and its Subcommittee on
                 Aviation, and the Chairman and Ranking Democratic Member of the House
                 Committee on Transportation and Infrastructure’s Subcommittee on
                 Aviation asked GAO to review the passenger facility charge program and, in
                 doing so, to address the following questions:

             •   How are passenger facility charges helping airports fund their capital
                 development, particularly in terms of the extent to which the charges fund
                 development, the rate of airports’ participation in the program, and
                 airports’ use of the funds collected?
             •   What are the potential effects of proposals for changing the
                 program—particularly with regard to increasing the fee, changing project
                 eligibility, and providing new project selection criteria—as well as the
                 potential effects of making no change at all?


                 Since the end of World War II, the federal government has been involved
Background       in developing a national airport system for ensuring safe air travel.1 This
                 system now comprises more than 3,300 airports, 529 of which are
                 “commercial service” airports (that is, airports that enplane at least 2,500
                 passengers a year and have scheduled airline service). Under the 1990
                 statute creating the passenger facility charge program, the commercial

                 1
                  Of the more than 18,000 landing facilities in the United States, 3,344 airports are currently part of the
                 national airport system. There are two types of airports in the national system—commercial service
                 airports, which enplane at least 2,500 passengers a year, and general aviation airports. Commercial
                 service airports are divided into primary airports—those that enplane 10,000 or more passengers a
                 year—and other commercial service airports that enplane fewer than 10,000 but at least 2,500
                 passengers a year. Primary airports are divided into classes of hub airports—large hub, medium hub,
                 small hub, and nonhub—on the basis of the number of passengers enplaning each year.



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                   Executive Summary




                   service airports are the airports that may levy the charges but they must
                   apply to the Federal Aviation Administration for approval to do so.
                   Airports may charge a maximum of $3 per boarding passenger. A
                   passenger may be charged no more than two fees on a one-way trip or four
                   fees on a round trip, thus bringing the maximum charge to $12. Airlines
                   collect the money when tickets are purchased and forward the funds to
                   the airports. It may take several years for an airport to receive enough
                   funds from the fee to pay for the approved projects. The collection of
                   passenger facility charges began in 1992.

                   The passenger facility charge program sets forth several broad objectives
                   for the use of these funds in furthering airport development including
                   (1) preserving or enhancing airports’ safety, security, or capacity;
                   (2) reducing noise; or (3) enhancing airline competition. To meet these
                   objectives, the statute authorizes the use of the funds for a broad array of
                   development projects. Airports have more flexibility in using these funds
                   than they have using some of the other major funding sources available to
                   them—federal grants, state grants, bonds, and airport revenues. For
                   example, passenger facility charges may be used to build aircraft gates or
                   pay interest on bonds issued to pay for eligible projects, while federal
                   grants may not. The Federal Aviation Administration must approve an
                   airport’s request to levy the fee, including the total amount to be collected
                   and the projects to be funded.


                   Passenger facility charges provided about 18 percent of the funds available
Results in Brief   to commercial service airports to pay for capital development in 1996, the
                   most recent year for which data for all sources are available. Fifty-two
                   percent of the 529 eligible airports are levying the fee. The larger the
                   airport, however, the more likely it is to participate: 80 percent of the
                   nation’s 70 large commercial airports (those categorized as large and
                   medium hub airports) levy the charges, compared with less than half of
                   the 459 small airports eligible to participate (those categorized as small
                   hub, nonhub, and other commercial service airports). As of
                   September 1998, the Federal Aviation Administration had approved the
                   collection of nearly $22 billion in passenger facility charges overall.
                   Because the amount of funds an airport receives is based on the number of
                   passengers, over 90 percent of those collections will go to the large
                   airports. Forty-four percent of the funds have been approved for projects
                   such as the construction of aircraft gates and access roads, while
                   29 percent have been approved to pay the interest on bonds issued for
                   eligible development projects. Twenty percent of the funds have been



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Executive Summary




approved for projects related to areas such as runways and aprons, while
7 percent have been approved to reduce airport-related noise.

Proposals to change the passenger facility charge program fall into three
main categories: increasing the maximum charge, changing the types of
projects eligible for funding, or adding project selection criteria. Airports’
current receipts total about $1.4 billion a year, with all but one
participating airport charging the maximum $3 fee. GAO’s analysis indicates
that with a $1 increase, if all airports raise their fee, airports would receive
close to one-half billion dollars in additional revenues, even after
accounting for estimated passenger reductions that result from raising the
fee. GAO developed a model to estimate the potential impact of higher fees
on passenger levels, using historical data on the relationship between
prices and passenger levels. GAO’s model estimates the effect of changing
the passenger facility charge independently of other factors that may
occur simultaneously. These other factors could enhance or offset the
effect of changing the passenger facility charge, making the net effect
difficult to determine. For example, data on enplanement levels at
individual airports indicate that enplanements have both increased and
decreased following the initial imposition of passenger facility charges by
airports. GAO’s analysis based on its model suggests that raising the fee by
$1, if applied by all participating airports, would reduce passenger levels
by 0.5 to 1.8 percent, with a midrange estimate of 0.85 percent. Based on
the midrange estimate, less than one passenger in one hundred would be
affected by a $1 increase in the passenger facility charge. In the short term,
forecast growth in passengers would overcome the midrange estimate of
losses unless the fee exceeded $7. On the other hand, in the long term, any
improvements in passenger safety and comfort that may result from
airport improvements could stimulate the demand for air travel.

Increasing the current maximum fee from $3 to $7 at all participating large
airports would generate about $1.63 billion more for large airports
charging the fee, thereby eliminating an annual $1.5 billion funding
difference, on average, that GAO identified between large airports’ future
planned development costs ($7.1 billion a year on average) and the
funding they had available in 1996 ($5.6 billion).2 While a $12 fee—the
largest increase GAO examined—would generate about $376 million more
for small airports eligible to levy the charge, that would not eliminate the
$655 million difference between their planned development
($1,490.2 million) and funding that was available in 1996 ($835.7 million).
Proposals to change the types of projects eligible for funding—whether

2
 Airport Financing: Funding Sources for Airport Development (GAO/RCED-98-71, Mar. 12, 1998).



Page 6                                           GAO/RCED-99-138 Passenger Facility Charges
                             Executive Summary




                             they expand or narrow the coverage—are likely to produce little change.
                             Changing the types of projects eligible, without increasing the fee, would
                             have little effect on participating airports because their collections—for
                             several years, on average—are earmarked for specific projects. Also,
                             eligibility changes alone would provide little new incentive to entice more
                             airports to participate. Among the last category of proposed changes to the
                             program—those affecting how projects are selected—there are three main
                             proposals: applying a priority system, requiring that projects pass a
                             cost-benefit test, and requiring airline approval. Requiring these kinds of
                             new selection criteria is likely to reduce the flexibility that airports
                             currently have in applying the funds to specific projects. Under more
                             stringent selection criteria, some of the projects currently funded might
                             not have been approved. If the program remains unchanged, the
                             distribution of the funds among project types and the participation rates of
                             airports are unlikely to change very much.



Principal Findings

The Passenger Facility       Passenger facility charges provided about 18 percent of the funds available
Charge Program Is Making     to commercial service airports to pay for capital development in 1996—the
a Significant Contribution   most recent year for which data on all funding sources are available.
                             Passenger facility charges provided a greater share of large airports’
to Airport Development       available funds—18 percent—than they provided for small airports, whose
                             receipts from passenger facility charges accounted for about 13 percent of
                             their available funds.

                             Fifty-two percent of the 529 airports eligible to levy passenger facility
                             charges are participating in the program. The larger the airport, the more
                             likely it is to participate. Local factors, such as high rates of travel within a
                             state, may influence the decisions of the 14 large airports that have not yet
                             chosen to levy the fee;3 for small airports, the limited earnings may not
                             provide much incentive, given, among other things, the costs associated
                             with preparing the applications and administering the program.

                             As of September 1998, the Federal Aviation Administration had approved
                             the collection of nearly $22 billion in passenger facility charges. The length
                             of time that the agency has approved for airports to levy the fees ranges
                             from 6 months to more than 40 years, with half of the collection periods


                             3
                              Some are considering and/or preparing their first application.



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                                        Executive Summary




                                        lasting less than 6.6 years and half longer. From 1992, when collections
                                        first started, through 1998, $6.25 billion had actually been collected. As
                                        figure 1 shows, the largest share of the $22 billion has been approved for
                                        “landside” projects such as terminals and access roads, with less than
                                        half as much approved for “airside” projects such as runways and
                                        taxiways. Large and small airports differ in the use of their funds, with
                                        large airports spending over twice as much on landside projects as on
                                        airside projects, while small airports are spending more comparable
                                        amounts on the two categories. Nearly one-third of the approved
                                        collections will be used to pay interest on bonds issued to pay for
                                        development projects that are eligible for funding with passenger facility
                                        charges.


Figure 1: Approved Passenger Facility
Charges by Major Project Category,
Fiscal Years 1992 Through 1998




                                        Note: Amounts do not include $2.3 billion in collections approved for the Denver International
                                        Airport over a period of about 33 1/2 years because those funds are not separated by different
                                        project categories in the Federal Aviation Administration’s information systems. Thus,
                                        percentages in the pie chart are based on collections of $21.9 billion which have been approved
                                        by the Federal Aviation Administration minus the $2.3 billion approved for the Denver airport.




                                        Page 8                                            GAO/RCED-99-138 Passenger Facility Charges
                            Executive Summary




                            Under the law, small airports with little or no ability to raise funds through
                            passenger facility charges can indirectly benefit from the program. Large
                            airports that levy the charges must return to the Federal Aviation
                            Administration up to half of the federal funds they receive from the
                            Airport Improvement Program on the basis of their passenger levels. Most
                            of the returned funds—87.5 percent—must be redistributed as project
                            grants under the Airport Improvement Program to small airports including
                            general aviation airports which, under the law, are not authorized to
                            charge the fee. Between fiscal years 1993—the first year that large airports
                            returned some of their federal grant funds—and 1999, this provision has
                            targeted to small airports, including general aviation airports, about
                            $710 million. Under the statute, small airports were not expected to lose
                            other federal grants they receive through the Airport Improvement
                            Program just because these additional funds were being targeted for their
                            use.


The Effects of Program      Proposed changes to the passenger facility charge program fall into three
Changes Depend Largely      broad categories—increasing the maximum fee that airports may charge
on Accompanying             passengers, changing the types of airport projects eligible for funding, and
                            adding new requirements that must be met before eligible projects can be
Conditions                  approved. The potential effects of such changes depend largely on the
                            specific conditions that accompany their authorization or implementation.

Increases in the Maximum    All but one airport levying the fee charges the maximum $3 allowed; their
Passenger Facility Charge   receipts now total about $1.4 billion a year. If passenger levels were
                            unaffected by a higher fee, then each $1 increase would add about
                            $479 million to total collections each year if all participating airports
                            raised their fee. However, according to GAO’s model, increasing the charge
                            would reduce passenger levels, thereby reducing the additional revenues
                            generated by a higher fee. GAO estimates that, after accounting for
                            estimated passenger reductions, a $1 increase would generate about
                            $463 million and a $2 increase would generate about $917 million more
                            than the current $3 fee. If large airports lost all of the federal grants they
                            receive on the basis of their passenger levels,4 as a condition for levying a
                            higher fee, they would have a net gain of about $255 million from the
                            added revenues of a $1 increase and about $666 million from the added
                            revenues of a $2 increase, after accounting for estimated passenger losses
                            that would result from higher fees.



                            4
                             For fiscal year 1998, those funds totaled about $163 million for large airports charging the fee.



                            Page 9                                                GAO/RCED-99-138 Passenger Facility Charges
Executive Summary




Higher fees would provide a greater benefit for large airports than for
small airports. GAO found in its 1998 study on funding sources for airport
development that all airports in the national system were planning to
spend, on average, $10 billion a year in fiscal years 1997 through 2001 for
capital development. They had about $7 billion available for capital
development expenditures in 1996, leaving a funding difference of about
$3 billion a year. Large airports would need to charge a $7 fee to eliminate
their $1.5 billion share of that $3 billion difference. By contrast, a $12
fee—the largest potential fee increase that GAO examined—would not
eliminate the $655 million shortfall for small airports.5 Changes in airports’
development plans and funding could alter these results.

Increased charges are likely to affect some passengers’ decisions about
whether to fly. The extent of passenger reductions is difficult to estimate,
however, because of the need to estimate measures of certain kinds of
behavior, such as passengers’ sensitivity to changes in ticket prices and
the extent to which airlines may choose to absorb the cost of the increase.
Using a model that GAO developed, GAO examined three scenarios that were
based on different combinations of assumptions about these behaviors to
produce high, midrange, and low estimates of the reduction in passengers
from higher passenger facility charges. (See app. I.) GAO’s model estimates
the effect of changing the passenger facility charge independently of other
factors that may occur simultaneously. These other factors could enhance
or offset the effect of changing the passenger facility charge, making the
net effect difficult to determine. For example, data on enplanement levels
at individual airports indicate that enplanements have both increased and
decreased following the initial imposition of passenger facility charges by
airports.

On the basis of the model that GAO developed, GAO’s analysis suggests that
each $1 increase would reduce passenger levels by about 0.5 to 1.8
percent, and that the midrange estimate would be 0.85 percent.6 On the
basis of the midrange estimate, less than one passenger in one hundred
would be affected by a $1 increase in the passenger facility charge. GAO’s

5
 The funding difference for small airports that are eligible to charge the fee is about $655 million; when
the general aviation airports are included, the funding difference for small airports rises to about
$1.4 billion. In either case, the $12 fee would not eliminate the funding difference. Also, while the
funding difference may disappear for the large airports as a group, individual airports—especially
those not levying the passenger facility charge—may still experience a funding difference. Some
individual airports, whether large or small, may not have a funding difference to start with.
6
 GAO’s analysis was made on the basis of a database of 338 million one-way passenger trips. The three
scenarios GAO examined using that database resulted in a loss of 1.6 million to 6.1 million one-way
passenger trips, with the midrange scenario producing an estimated loss of 2.9 million one-way
passenger trips.



Page 10                                              GAO/RCED-99-138 Passenger Facility Charges
                           Executive Summary




                           analysis also suggests that the effects would be proportionally greater for
                           nonbusiness passengers, low-fare airlines, large airports, and passengers
                           on relatively short flights. On the basis of GAO’s midrange estimate,
                           forecast growth in passenger enplanements (about 3.4 percent a year from
                           fiscal year 1999 through fiscal year 2010) would overcome losses in
                           passengers resulting from higher fees unless the higher fee exceeds $7. On
                           the other hand, in the long term, any improvements in passenger safety
                           and comfort that may result from airport improvements could stimulate
                           the demand for air travel.

                           On the basis of GAO’s midrange estimate, airlines would receive about 1.3
                           percent less in gross revenues if the fee were increased by $1.7 A little
                           more than half of this loss would come from the estimated decline in
                           passengers, while the rest of the reduction is attributable to estimates of
                           the airlines’ absorption of the increase in the fee. A decline in the airlines’
                           gross revenues could be accompanied by a decline in their costs, so that
                           the net effect on the airlines’ profits will depend on the extent to which
                           costs decline along with revenues.

Changing Eligibility       Adding or eliminating types of projects that may be funded with passenger
                           facility charges would expand or narrow the scope of the program
                           accordingly. The current scope of project eligibility makes at least
                           57 percent, and possibly more, of the costs of planned development at
                           commercial service airports eligible for funding with passenger facility
                           charges, on the basis of the most recently available data.8 For participating
                           airports, changing the scope of eligible projects may have little near-term
                           effect largely because fees being collected are generally committed to
                           specific projects over a number of years. Expanding the eligibility of
                           projects may provide little new incentive to entice nonparticipating
                           airports to start charging the fee. Most of the nonparticipating airports
                           have relatively few passengers so these airports are more likely to be
                           motivated by how much they may charge than by which types of projects
                           are eligible. If the range of eligible projects were narrowed, in the long run
                           airports would need to find other funding sources for excluded projects or
                           forgo some development.

Adding Project Selection   There are three main types of proposals that would add new selection
Criteria                   criteria for projects: prioritizing projects, requiring projects to meet

                           7
                            On the basis of the 338 million one-way passenger trips and the estimated fares used for travelers,
                           GAO’s midrange scenario analysis produced a loss of about $614 million out of a possible $45.8 billion
                           in gross revenues that those trips would have generated at the fare estimates used in the analysis.
                           8
                            See Airport Financing: Funding Sources for Airport Development (GAO/RCED-98-71, Mar. 12, 1998).



                           Page 11                                             GAO/RCED-99-138 Passenger Facility Charges
                            Executive Summary




                            cost-benefit analysis tests, or requiring that airlines agree that a project
                            should be funded with passenger facility charges. The specific effects of
                            any of these kinds of changes depend largely on how the change is
                            structured. Adding more stringent selection criteria will reduce some of
                            the flexibility that airports currently have under the program. Key issues to
                            consider when reviewing these kinds of proposals include what
                            prioritization criteria to use, whether to require cost-benefit analyses for
                            all projects, and how the approval of airlines serving an airport would be
                            determined.

Making No Program Changes   If the program remains unchanged, there is unlikely to be much change in
                            how many airports are charging the fee or in how they are applying those
                            funds. The extent to which passenger facility charges would continue to
                            contribute to airport development will depend on the changing demands
                            placed on the aviation system and the other resources available to respond
                            to those demands.


                            GAO   is making no recommendations in this report.
Recommendations
                            GAO  provided the Department of Transportation, the Federal Aviation
Agency Comments             Administration, a panel of two experts, the Airports Council
and GAO’s Evaluation        International-North America, the Air Transport Association, and the
                            National Association of State Aviation Officials with a copy of the draft
                            report, or portions thereof, for review and comment. GAO spoke with the
                            Deputy Director of the Federal Aviation Administration’s Office of Airport
                            Planning and Programming, the Air Transport Association’s Director of
                            Airport Planning and Development, and the Vice President of the National
                            Association of State Aviation Officials and received comments from the
                            panel of experts, all of whom generally agreed with the facts presented
                            and thought the report was both thorough and balanced in its discussion
                            of the issues. They provided some suggestions for clarification and
                            additional information that were incorporated in the report as appropriate.
                            GAO met with the President, the Senior Vice President for Economic and
                            Associate Affairs, and the Vice President for Government Affairs of the
                            Airports Council International-North America, who questioned whether a
                            reduction in passengers would actually occur if passenger facility charges
                            were increased. They questioned whether passengers would actually see
                            an increase in ticket fares if passenger facility charges were raised, noting
                            that many factors, not only higher passenger facility charges, affect the
                            pricing decisions of airlines. They also noted that elasticity analysis is




                            Page 12                                GAO/RCED-99-138 Passenger Facility Charges
Executive Summary




theoretical and suggested that it would be more useful to use historical
analysis instead.

GAO  believes that it has appropriately applied generally accepted economic
analysis methods to estimate how higher passenger facility charges may
affect ticket fares and how increases in those fares could affect passenger
levels, including acknowledging the uncertainty associated with such an
estimate. Although many factors influence air fares simultaneously, in
analyzing the impact of one factor, such as higher passenger facility
charges, it is necessary to hold constant the effect of all other factors.
Furthermore, the elasticities used in GAO’s analysis were based on
statistically significant historical relationships between prices and
passenger levels and have been previously used by the Department of
Transportation. Nevertheless, discussion of the uncertainties associated
with analysis of the potential effect of higher fees on passenger levels was
clarified, particularly in the executive summary, to assure a clear
understanding of GAO’s methodology.




Page 13                               GAO/RCED-99-138 Passenger Facility Charges
Contents



Executive Summary                                                                                    4


Chapter 1                                                                                           18
                        Objectives, Scope, and Methodology                                          21
Introduction
Chapter 2                                                                                           25
                        Program Objectives and Project Eligibility Are Broad in Scope               25
The PFC Program         PFCs Offer Airports Some Funding Flexibility                                27
Gives Airports the
Ability to Fund a
Broad Array of
Airport Development
Projects
Chapter 3                                                                                           32
                        PFCs Are a Major Funding Source for Commercial Service                      33
The PFC Program Is        Airports
Making a Significant    273 Airports Are Collecting Nearly $22 Billion in Approved PFCs             34
                        PFCs Fund Many Types of Projects, With Large and Small                      36
Contribution to           Airports Making Different Choices
Airport Development     Small Airports Benefit From the PFC Program Even If They Do                 39
                          Not or Cannot Collect PFCs
                        Use of PFCs as Sole Support for New Bonding Authority Has                   42
                          Been Slow to Develop

Chapter 4                                                                                           44
                        Large Airports Would Gain the Most From an Increase in PFCs                 45
The Potential Effects   Higher PFCs Would Reduce Air Travel in the Short Term, but the              52
of Program Changes        Extent of That Reduction Is Uncertain
                        Changes in Project Eligibility May Have Little Immediate Effect             57
Depend Largely on         on Program Results
Accompanying            Some Proposed Changes Provide New Project Selection Criteria                59
Conditions              The Option of Making No Change to the PFC Program                           61
                        Agency Comments and Our Evaluation                                          62

Appendixes              Appendix I: Methodology for Analyzing the Potential Impact of               64
                          Increases in PFC Fees on Passenger Traffic
                        Appendix II: Advisory Panel Members                                         72




                        Page 14                              GAO/RCED-99-138 Passenger Facility Charges
          Contents




          Appendix III: Major Contributors to This Report                             73


Tables    Table 2.1: Funding Options for Different Kinds of Airport Capital           26
            Development
          Table 3.1: Use of PFCs at Commercial Service Airports,                      35
            September 1998
          Table 3.2: Amount of Returned AIP Funds Targeted for                        39
            Redistribution to Small Airports, Fiscal Years 1993 Through 1999
          Table 4.1: Estimated Annual Total Collections at Different PFC              47
            Fees, Based on 1997 Enplanements, and Program Net Gains
          Table 4.2: Net Gain or Loss for Large Airports From PFC Fee                 48
            Increases That Are Accompanied by Further Reductions in AIP
            Funds
          Table 4.3: Estimated Impact of Higher PFC Fees on the Funding               50
            Difference for Large Airports
          Table 4.4: Estimated Impact of Higher PFC Fees on the Funding               51
            Difference for Small Airports
          Table 4.5: Estimated Reduction in Passengers per $1 Increase in             53
            PFCs
          Table 4.6: Estimated Reduction in Passengers Using Regular-Fare             54
            and Low-Fare Airlines
          Table 4.7: Estimated Reduction in Passengers on Trips Involving             55
            Large or Small Airports
          Table 4.8: Estimated Reduction in Passengers Taking Long and                55
            Short Trips
          Table 4.9: Potential Effects of Expanding the Types of Projects             58
            Eligible for Funding With PFCs
          Table 4.10: Potential Effects of Narrowing the Types of Projects            59
            Eligible for Funding With PFCs
          Table 4.11: Issues to Consider Regarding Proposed Changes to                60
            PFC Project Selection Criteria
          Table I.1: Estimated Decline in Passengers Per $1 Increase in the           68
            PFC - Midrange Case
          Table I.2: Estimated Decline in Passengers Per $1 Increase in the           69
            PFC - High Case
          Table I.3: Estimated Decline in Passengers Per $1 Increase in the           70
            PFC - Low Case

Figures   Figure 1: Approved Passenger Facility Charges by Major Project               8
            Category, Fiscal Years 1992 Through 1998




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Contents




Figure 1.1: Categories of U.S. Airports                                      19
Figure 2.1: FAA’s Review and Approval Process for Applications               30
  to Charge and Use PFCs
Figure 3.1: Distribution of 1996 Funding Sources for Large and               34
  Small Airports
Figure 3.2: Approved PFC Funds by Major Project Category,                    37
  Fiscal Years 1992 Through 1998
Figure 3.3: Approved PFC Funds for Large and Small Airports by               38
  Major Project Category, Fiscal Years 1992 Through 1998
Figure 3.4: Proportional Distribution of AIP Discretionary Funds             41
  to Large and Small Airports, Fiscal Years 1982 Through 1998
Figure 3.5: Proportional Distribution of Total AIP Funds Between             42
  Large and Small Airports, Fiscal Years 1982 Through 1998




Abbreviations

AAAE       American Association of Airport Executives
ACI-NA     Airports Council International - North America
ADO        Airport District Office (FAA)
AIP        Airport Improvement Program
ATA        Air Transport Association
FAA        Federal Aviation Administration
GAO        General Accounting Office
NASAO      National Association of State Aviation Officials
NPIAS      National Plan of Integrated Airport Systems
PFC        passenger facility charge


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Page 17   GAO/RCED-99-138 Passenger Facility Charges
Chapter 1

Introduction


               With more than 18,000 aviation landing facilities—including over 13,000
               airports—the United States has the most extensive aviation system in the
               world. U.S. airports range from large commercial transportation centers
               enplaning more than 30 million passengers a year, such as Chicago’s
               O’Hare International Airport, to small grass strips serving only a few
               aircraft each year. More than 3,300 of these airports are part of a national
               system designed to ensure that every part of the country has an effective
               aviation infrastructure.

               The concept of a national airport system was envisioned more than 50
               years ago and has been developed and nurtured by close cooperation
               among federal, state, and local agencies. The federal interest in aviation
               has focused on several objectives, most notably to ensure the safe
               operation of an airport and airway system, to preserve and enlarge the
               nation’s aviation capacity, to help small airports, to reduce aviation noise,
               and to protect the environment.

               The federal role in airport development began in 1946 with passage of the
               Federal Airport Act establishing the first federal airport grant program,
               which was designed to promote the development of a civil system of
               airports nationwide. Although it has gone through various revisions over
               time, a federal grant program supporting airport capital development
               continues to this day through the Airport Improvement Program (AIP). The
               AIP provides funding for airport planning and capital development projects
               at airports that are part of the national system—those airports in the
               National Plan of Integrated Airport Systems (NPIAS). The funds are
               appropriated by the Congress from the Airport and Airway Trust Fund,
               which is financed by taxes on domestic and international travel, domestic
               cargo transported by air, and noncommercial aviation fuel.

               The national airport system is comprised of two types of airports:
               commercial service airports and general aviation airports. Commercial
               service airports, which, as of January 1999, number 529, are those that
               enplane 2,500 or more passengers a year and have scheduled airline
               service. The Federal Aviation Administration (FAA), which oversees the
               federal government’s involvement in aviation, including airport issues,
               divides commercial service airports further into various categories on the
               basis of the number of passengers they enplane. (See fig. 1.1.) General
               aviation airports, of which there are currently 2,815 in the national system,
               have at least 10 aircraft based at their locations and fewer than 2,500
               scheduled enplanements a year.




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                                          Chapter 1
                                          Introduction




Figure 1.1: Categories of U.S. Airports




                                                                           (Figure notes on next page)




                                          Page 19        GAO/RCED-99-138 Passenger Facility Charges
Chapter 1
Introduction




Note: There are 3,344 airports in the 1998 database for the NPIAS, which covers fiscal years 1998
through 2002. These are the airports referred to in this report as the national system of airports.
The number of airports in each category of commercial service airports is based on
enplanements for calendar year 1997, which totaled 641,561,881.




All airports in the NPIAS are eligible for federal airport development grants,
which are provided today through the AIP. For fiscal year 1998, the
Congress appropriated $1.7 billion for the AIP. Airports also have other
sources of funding that they draw on to help pay for their capital
development, including bonds, state grants, and airport revenues.1

With the passage of the Aviation Safety and Capacity Expansion Act of
1990,2 some airports have also benefited from a major federally authorized
funding program designed to help pay for airport capital development. The
act authorized commercial service airports to seek FAA’s approval to
impose boarding fees—called a passenger facility charge (PFC)—on
passengers boarding aircraft at their facilities. While only commercial
service airports are authorized to charge the PFC, no airport is required to
impose the fee. Airports wishing to participate in the program must apply
to FAA for approval to charge the fee and for approval of the projects that
will be funded with the money collected. Because only commercial service
airports may charge PFCs, the data in this report covers only those airports
unless otherwise stated. Throughout this report, the grouping referred to
as “large” airports comprises large and medium hub airports, while the
grouping referred to as “small” airports comprises small hub, nonhub,
and other commercial service airports.

Under the PFC program, commercial service airports may charge boarding
passengers a $1, $2, or $3 fee. No more than two fees, or a maximum of $6,
may be charged to a passenger on a one-way trip, and no more than four
fees, or a maximum of $12, may be charged to a passenger on a round trip.
If an airport decides to levy a PFC, however, not all passengers may have to
pay it. For example, passengers using frequent flyer programs to purchase
their tickets are exempt. Also, an airport may request that a class of
airlines carrying no more than 1 percent of the airport’s passengers be
exempted from collecting the fee. Thus, total airport collections are based
on the number of boarding passengers required to pay the fee.


1
  See Airport Financing: Funding Sources for Airport Development (GAO/RCED-98-71, Mar. 12,
1998) for a discussion of airport funding sources for development.
2
 49 U.S.C. Section 40117.



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                         Chapter 1
                         Introduction




                         Within the industry, there are different views about whether the PFC
Objectives, Scope,       program should be expanded, limited, or left as is. For example, airport
and Methodology          associations view expansion of this program as a way to help bridge the
                         difference between the cost of planned development projects and the
                         funds available to pay for that development. As we described in our
                         March 1998 report on funding sources for airport development, about a
                         $3 billion difference existed between the annual average cost of airports’
                         planned capital development for fiscal years 1997 through 2001 and the
                         funds that were available to airports in 1996 to pay for their capital
                         development. Airlines have frequently questioned the need for, or
                         eligibility of, some of the development that airports propose to fund
                         through PFCs and have suggested some changes to the program, such as a
                         more stringent screening process for project selection. Because of interest
                         in changing the program, the Chairmen and Ranking Minority Members of
                         the Senate Committee on Commerce, Science, and Transportation and its
                         Subcommittee on Aviation, and the Chairman and Ranking Democratic
                         Member of the House Committee on Transportation and Infrastructure’s
                         Subcommittee on Aviation, asked us to review the program, specifically to
                         address the following questions:

                     •   How are passenger facility charges helping airports fund their capital
                         development, particularly in terms of the extent to which the charges fund
                         development, the rate of airports’ participation in the program, and
                         airports’ use of the funds collected?
                     •   What are the potential effects of proposals for changing the
                         program—particularly with regard to increasing the fee, changing project
                         eligibility, and providing new project selection criteria—as well as the
                         potential effects of making no change at all?

                         To address the first question, we (1) reviewed data in our 1998 report on
                         airport funding sources to identify the extent to which PFCs contribute to
                         airport development in the context of the major funding sources available
                         (Airport Financing: Funding Sources for Airport Development
                         [GAO/RCED-98-71, Mar. 12, 1998]); (2) reviewed the original statute for the
                         passenger facility charge program, its legislative history and amendments,
                         and FAA regulations and requirements implementing the statutory
                         directive; (3) obtained FAA data to identify the PFC collections approved by
                         FAA and the distribution of approved PFC collections by airport size and
                         project types; (4) reviewed statutory provisions and related federal grant
                         data to determine if we could identify whether small airports received a
                         net gain in certain federal grant funds targeted for their use from the
                         return of some federal grant funds by large airports under the PFC statute,



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Chapter 1
Introduction




and (5) reviewed airports’ use of PFCs as sole backing for bonds under new
FAA provisions that help ensure the payment of bonds when an airport may
face termination of its collections because of program violations. We
interviewed officials from FAA headquarters in Washington, D.C.; the
Airports Council International-North America (ACI-NA); the Air Transport
Association (ATA); the National Association of State Aviation Officials
(NASAO); and bond raters and underwriters to obtain their views on these
issues. We tested the validity of FAA’s database on approved PFC
applications by randomly selecting four applications from each year of the
program’s operation (1992 through 1998) and tracing all of the data entries
to their sources. We found FAA’s database to have a very high reliability (a
0.3-percent error rate).

To address the second question, we identified a variety of proposals for
changes to the PFC program by reviewing (1) testimonies on FAA
reauthorization issues before the Senate and the House of Representatives
that were presented during 1998 by representatives of FAA, ACI-NA, ATA, the
American Association of Airport Executives (AAAE), and NASAO;
(2) legislative proposals regarding FAA’s reauthorization for fiscal year
1999; and (3) other related documentation, such as analyses presented by
experts at conferences. We also discussed the issues with congressional
staff and officials from FAA, ACI-NA, ATA, and NASAO, as well as other experts
to obtain their ideas on the kinds of proposals that the Congress might be
asked to consider in its review of FAA’s next reauthorization. As a result of
our documentary review and discussions, we focused our review and
analysis on the kinds of proposals that generated the most attention during
the hearings and that representatives of aviation organizations and other
experts thought were the most important for consideration. Those
proposals were to (1) increase the maximum PFC that airports could
charge passengers, (2) change the eligibility of projects, and (3) add new
project selection criteria. Because the Congress may modify the PFC
program when it considers the next reauthorization for FAA, we analyzed
the potential impacts of these changes on the amount of funds that would
be collected, management of the program, passenger traffic, airports, and
airlines. However, because analyses of the potential effects of changes to
the program are prospective—or “future impact”—analyses, we cannot
say with certainty what the outcomes of any changes will, in fact, be. As a
result, we can only estimate what the potential outcomes may be.

To review the potential impact of proposals that would raise the fee that
passengers may be charged, we reviewed the effect of increases from $1 to
$9 to assess the potential gains from higher fees in the range of $4 to $12.



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Chapter 1
Introduction




This range was chosen to consider the most common proposals for
increasing the charge, which focus on a $1, $2, or $3 increase in the
maximum allowable fee, and to consider the potential impact of proposals
that would give airports more freedom in setting fee levels. We also
interviewed officials and obtained comments on the potential effects of
proposals to increase the PFC from FAA, ACI-NA, ATA, and NASAO.

We developed a model that used data on the number of one-way passenger
trips and the fares paid during the 12-month period ending June 30, 1998,
to estimate the potential impact of increases in the PFC on passenger
levels. We took into account differences between business and
nonbusiness passengers, long and short trips, regular-fare and low-fare
airlines, and trips that involve large versus small airports. We purchased
data showing the one-way trips in various trip categories and the fares
paid for those trips from a firm that produced these data from a
Department of Transportation database of ticket information, and, hence,
we did not verify the data provided. The analysis we performed required
us to make assumptions about several key parameters. Those assumptions
pertain to (1) the degree to which passengers are likely to reduce their
travel as ticket prices increase, (2) the extent to which airlines may absorb
the increase in the PFC, (3) the split of passengers between business and
nonbusiness travel, and (4) the way in which separate average fares for
business and nonbusiness passengers are estimated. In our analysis, we
used the model to develop three scenarios that are based on different
combinations of assumptions for the first two factors that were selected in
order to produce high, midrange, and low estimates of the potential
reduction in passengers due to increases in the PFC. (See app. I for a
detailed discussion of this methodology and the results.)

Statutorily, large and medium hub airports are designated as large primary
airports and must contribute a larger share to projects funded under the
federal grant program as well as forgo a portion of their federal grant
funds if they collect PFCs. This report follows that convention in grouping
large and medium hub airports together as “large” airports and grouping
the small hub, nonhub, and other commercial service airports eligible to
charge a PFC as “small” airports. Except where specifically noted, data for
small airports do not include data for general aviation airports.

A panel of two experts reviewed our design and methodology for
conducting our work and our draft report. These experts were selected
because of their work on aviation and airport issues; they have expertise




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Chapter 1
Introduction




over a broad range of airport issues, including airport finance, airport
administration, and engineering. (See app. II.)

We provided the Department of Transportation, FAA, ACI-NA, ATA, NASAO, and
the two members of our advisory panel of experts with a copy of a draft of
this report, or portions thereof, for review and comment. Their comments
are discussed at the end of chapter 4.

We conducted our review from August 1998 through April 1999 in
accordance with generally accepted government auditing standards.




Page 24                                GAO/RCED-99-138 Passenger Facility Charges
Chapter 2

The PFC Program Gives Airports the Ability
to Fund a Broad Array of Airport
Development Projects
                              The PFC program sets forth several broad objectives to further airport
                              development, such as enhancing airport safety, security, and airline
                              competition. The types of projects eligible for funding—within the context
                              of those objectives—is broader than the scope of projects eligible for
                              federal AIP grants. For example, while all projects eligible for AIP grants
                              may be funded with PFCs, PFCs can also fund projects not covered by the
                              federal grant program, such as the construction of gates and the payment
                              of interest on debt for eligible projects. PFC funds are also a less
                              constrained source of money than some of the other major funding
                              sources that support airport development. For example, projects are not
                              prioritized for funding, as is the case with certain AIP grants. While airline
                              agreement is sometimes needed for an airport to issue bonds,1 it is not
                              required for participation in the PFC program. Moreover, while airports
                              must apply to FAA for approval of both the collection of the fees and the
                              specific projects that the money will pay for, FAA officials note that as long
                              as a project is eligible, meets a program objective, and is adequately
                              justified, they do not have the authority to reject an airport’s proposal for
                              the collection or use of PFC funds.


                              The Congress established broad overall objectives for the PFC program and
Program Objectives            expanded the specific kinds of projects that federally authorized funding
and Project Eligibility       could support. The Congress authorized the PFC program to help airports
Are Broad in Scope            pay for capital development that would further several main objectives. As
                              provided for in the PFC statute, projects funded with PFCs should

                          •   contribute to the preservation or enhancement of an airport’s safety,
                              security, or capacity,
                          •   reduce noise generated by airport activities, or
                          •   enhance competition among the airlines.

                              Within the context of these objectives, the statute authorizes the use of PFC
                              collections for specific projects, including all of those that are eligible, by
                              statute, for AIP funds, such as projects involving runways, airfield lighting,
                              and aprons.2 The PFC statute also authorizes the use of PFCs for some
                              activities that are not eligible for AIP grants—such as the construction of
                              new gates and the payment of interest on debt for eligible development
                              projects. Projects ineligible for either PFCs or AIP grants, such as

                              1
                               At some airports, airlines have agreements that give them the opportunity to review and approve
                              capital projects.
                              2
                               Projects eligible for federal AIP grants are designated in the Airport and Airway Improvement Act of
                              1982 (49 U.S.C. 47102).



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                                               Chapter 2
                                               The PFC Program Gives Airports the Ability
                                               to Fund a Broad Array of Airport
                                               Development Projects




                                               revenue-producing parking areas and terminal concession areas, must be
                                               paid for with funds from other sources. Table 2.1 shows the eligibility of
                                               projects for the various funding sources.


Table 2.1: Funding Options for Different Kinds of Airport Capital Development
Projects eligible for funding with AIP, PFC, Projects eligible for funding with PFC                  Projects eligible for funding with other
and other sourcesa                           and other sources onlya                                 sources only
Development type                                •Construction of gates and related areas             Construction, alteration, or repair of
•Safety and security                            where passengers en/deplane, if not                  •Revenue-producing parking
•Reconstruction of landing area                 long-term exclusive use lease                        •Hangars
•Meeting standards                              •Airline ticketing areas, if not long-term           •Buildings not eligible for AIP or PFC funds
•Upgrade                                        exclusive use lease
•Capacity                                       •Interest payments for debt service                  Other costs relating to
•New airport                                    •PFC administrative expenses                         •Obtaining liability insurance
•Noise and environment                          •Certain noise mitigation                            •Purchasing nonexpendable machinery,
•Planning                                                                                            tools, and materials already purchased by
                                                                                                     airport
Within each development type, projects                                                               •Raising airport funds
can be for                                                                                           •Tuition, travel, and subsistence for airport
•Runway                                                                                              personnel
•Taxiway                                                                                             •Operations and maintenance work
•Apron                                                                                               •Those aspects of projects involving
•Lighting                                                                                            restaurants, concessions, and any other
•Approach aids                                                                                       revenue-producing public use areas, that
•Terminal, if not leased                                                                             are not eligible for AIP or PFC funding
•Access                                                                                              •Airline ticketing, gate, and/or baggage
•Planning                                                                                            areas that are long-term exclusive use
•Equipment                                                                                           lease
                                                                                                     •Advertising
Other eligible project categories                                                                    •Public convenience amenities
•Parking for passengers if at a small hub or                                                         •Decorative landscaping and the
nonhub airport and if not revenue-producing                                                          purchase of art
•Certain aspects of projects involving
restaurants, concessions, and any other
revenue-producing public use areas at
nonhub airports
                                               a
                                                Projects eligible for PFC funding must also meet at least one of the following statutory objectives:
                                               preserve or enhance airport safety, security, or capacity; reduce noise; or enhance competition
                                               among airlines.



                                               Another objective of the program is to channel additional federal grant
                                               funds to the small airports that do not generate much money from PFCs
                                               because of low passenger levels and to airports that are not eligible to
                                               collect the fees. Because the large airports will receive the greatest portion
                                               of revenues from PFCs (91 percent), the statute includes a provision that
                                               requires large airports charging PFCs to forgo part of the money they would
                                               normally receive from the AIP grants. Most of this money must be




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                            Chapter 2
                            The PFC Program Gives Airports the Ability
                            to Fund a Broad Array of Airport
                            Development Projects




                            redistributed to the small commercial service airports and to the general
                            aviation airports within the national system.3 This provision and the
                            degree that small airports are benefiting from it are discussed in chapter 3.


                            The PFC program offers airports greater decision-making control over the
PFCs Offer Airports         use of the funds than some of the other major funding sources available
Some Funding                for airport development. And, while FAA manages the program, FAA officials
Flexibility                 consider their authority over the use of PFCs limited to a determination of
                            whether a project is eligible, meets a program objective, and is adequately
                            justified.


PFCs Are Less Constrained   The PFC program offers airports more flexibility in some ways than some
Than Some Other             of the other major funding sources available to pay for airports’
Development Funding         development costs. First, the PFC program provides more flexibility in
                            project selection than does the AIP grant program by allowing a broader
Sources                     array of projects to be funded. Also, airports have more control over the
                            types of projects they undertake because under the PFC program, projects
                            are not subject to an FAA priority process to establish a ranking order for
                            selecting projects for funding, as is the case with certain AIP grants.
                            Second, while airports must consult with airlines when considering
                            participation in the PFC program and the selection of projects to be funded,
                            airports do not need airlines’ agreement on the use of PFCs or on project
                            selection. In contrast, with general airport revenue bonds, airports that
                            have agreements with airlines that give airlines the right to approve capital
                            projects must obtain airline agreement for the use of the bonds. Third,
                            while airports may have the greatest flexibility when using available
                            airport revenues to pay for capital development, available revenues are an
                            extremely limited funding source—only 2 percent of total funding for
                            development in 1996 (the most recent data available)—thereby
                            contributing little to unconstrained funding opportunities.


FAA Implements the          Airports must seek FAA’s approval both to levy PFCs and to use PFC
Program but Considers Its   revenues for specified projects. When seeking FAA approval, airports
Authority Limited           specify whether they want to charge a $1, $2, or $3 fee, the projects they
                            want to fund with the collections, how much those projects are going to
                            cost, and how long it will take to collect enough money through PFCs to
                            pay for the proposed projects. Under the statute, airports cannot receive


                            3
                             While general aviation airports are not eligible to collect PFCs, airports that collect PFCs may use the
                            funds on any airports they control, including general aviation airports.



                            Page 27                                              GAO/RCED-99-138 Passenger Facility Charges
Chapter 2
The PFC Program Gives Airports the Ability
to Fund a Broad Array of Airport
Development Projects




more money in PFC collections than they need to pay for the approved
projects. When FAA approves an airport’s request, it approves, among other
things, the amount of the PFC to be charged to a boarding passenger, the
maximum amount of funds that may be collected from PFCs, and how long
the airport will be collecting the PFC. Approved collection periods for
airports range from as little as 6 months to more than 40 years, with half of
the airports collecting for less than 6.6 years and half for longer.

According to FAA officials, FAA considers its authority to control airports’
use of PFC funds limited since, under the statute, airports need only
demonstrate that projects are eligible, meet at least one of the program’s
objectives, and are adequately justified. According to FAA officials, while
there are no standardized criteria for determining if a project is adequately
justified, a project’s justification is generally assessed in the context of
how well a proposed project meets the program’s objectives. FAA officials
explained that they use established project review guidance, such as AIP
screening criteria, where relevant, when determining whether a project is
adequately justified. They also noted that if an airline challenges a project,
that challenge will trigger a more in-depth review.

FAA has developed an application and review process to implement its
management and oversight responsibilities for the PFC program. According
to FAA officials, many airports begin the application process by discussing
their proposals with one of FAA’s regional Airport District Offices. An
airport must notify all airlines that operate at its facility that it plans to
submit an application to FAA to charge PFCs so that the airlines may
comment on the proposed collection and use of the PFCs. The airport may
have a draft application at that time, but one is not required. The airlines
have 30 days to acknowledge receipt of the notice from the airport in
writing. The airport then has up to 45 days from the day it provided notice
to meet and discuss the proposed application with airline officials. At the
conclusion of this meeting, the airlines have 30 days to provide a written
statement informing airport officials of their agreement or disagreement
with the proposal to collect PFCs, in whole or in part. The airport may
construe the failure of an airline to provide written comments as
certification of agreement, but airlines’ agreement is not required. After
this consultation process is completed, the airport finalizes the application
and submits it to FAA. The application must include airlines’ comments,
and if any airlines raised objections, the airport must address those
objections in its application.




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Chapter 2
The PFC Program Gives Airports the Ability
to Fund a Broad Array of Airport
Development Projects




Once an application is formally received, FAA has 120 days to review it and
decide whether to approve it. The first 30 days are used to check the
application for completeness to ensure that all of the information that FAA
needs to evaluate the application is included. For example, an application
must include information on the proposed project or projects to be paid
for with PFCs and the results of the airport’s consultation with the airlines.
(See fig. 2.1.) If the information in the application is incomplete for one or
more projects, FAA notifies the airport, which then has 15 days to inform
FAA of whether it intends to provide a supplement to the application.4 Once
an application is complete, FAA publishes a notice in the Federal Register
to solicit comments from the public over a 30-day period. After the 30-day
comment period, FAA reviews the comments and prepares a decision
paper—called a record of decision. Notice of FAA’s decision is published in
the Federal Register. Airports may not begin collecting PFCs until the first
day of a month that occurs at least 60 days after the application has been
approved. The implementation of projects that have been approved for
funding with PFCs must be initiated within 2 years. Once FAA has approved
the collection of PFCs by an airport, the airlines are required by the statute
to collect the fees from passengers and transmit the funds to the airport.
FAA sometimes approves the collection of PFCs before giving final approval
of the projects that the PFCs will fund. In these cases, an airport must seek
authority to use the collected funds on the projects within 3 years. Figure
2.1 illustrates the application and approval process.




4
 FAA’s 120-day countdown stops when an airport is working on an application supplement; the count
starts over at the beginning once FAA receives the supplement.



Page 29                                          GAO/RCED-99-138 Passenger Facility Charges
                                                          Chapter 2
                                                          The PFC Program Gives Airports the Ability
                                                          to Fund a Broad Array of Airport
                                                          Development Projects




Figure 2.1: FAA’s Review and Approval Process for Applications to Charge and Use PFCs

                                      Airport sends a notice to all airlines of intent to apply for PFC program


                              Airlines have 30 days to acknowledge written notice and must meet with airports within 45 days of
                              issuance of written notice



                              Airlines' written response certifying agreement/disagreement to airport within 30 days of meeting


                                                         Airport's finalized PFC application contains

                                                         --Airport capital improvement plan
                                                         --Project information
                                                         --Air carrier consultation information
                                                         --Exemption of air carrier class (if any)
                                                         --Alternative uses/projects
                                                         --Financial plan/additional information



                                                                       Airport submits formal
                                                                       PFC application to FAA
                                                                       Airport District Office
                                                                       (ADO)

                                                                      FAA's ADO submits one
                                                                      copy to FAA
                                                                                   a
                                                                      headquarters

                                                                    FAA's ADO reviews
                                                                    application for
                                                                    completeness (30 days)


 Airport advises if it will            FAA sends notice          No
 supplement application                to airport of                       Substantially
 within 15 days                        incompleteness                       complete?


                                                                                     Yes

  Airport does/does                                                                                                     120 days approval
  not submit                                                           Publish in the Federal                           timeframe (Time frame
                    b                                                  Register for 30-day                              restarts if airport submits
  supplement to FAA
                                                                       comment period                                   a supplement)


                                                                           Draft record
                                                                           of decision


                                                                          Issue record
                                                                          of decision




                                                          Page 30                                                 GAO/RCED-99-138 Passenger Facility Charges
Chapter 2
The PFC Program Gives Airports the Ability
to Fund a Broad Array of Airport
Development Projects




a
 FAA headquarters has retained decision-making authority, according to FAA officials, over those
PFC applications that are controversial or involve issues such as major policy or legal issues. FAA
has delegated decision-making authority over all other applications to FAA’s regional Airports
Division managers.
b
The 120-day time frame starts over upon receipt of the supplement.


In practice, according to FAA officials, FAA tries to provide informal
technical review and comments on prospective applications to facilitate
processing within the required 120-day time frame, particularly since
applications can contain as many as 30 to 40 projects or more. FAA’s
informal review allows many technical issues to be resolved before an
application is formally submitted. Partly as a result of this informal
technical review, FAA has rejected only one airport application for the
collection of PFCs in its entirety; the reason for the rejection was
inadequate justification for the proposed projects. Nevertheless, FAA does
not necessarily approve all of the projects that may be included in a single
application. FAA has formally rejected over 200 projects since 1992
generally because of ineligibility.

Once FAA approves an airport’s application, airlines have the responsibility
under the statute for collecting the fee, which they do along with the
passenger’s ticket fare. Airlines must remit the fees to the appropriate
airports on a monthly basis. To help cover their costs for the
administration of this part of the program, airlines may retain 8 cents of
each fee as well as any interest earned on the money prior to its
transmission to the airports.

Airports must maintain separate accounting records on the funds received
for each of their PFC applications that have been approved. They must
submit copies to FAA of quarterly reports on the collection, use, and
holdings of their PFC funds as well as report annually to FAA on expected
PFC revenues for the ensuing fiscal year. Airports must also contract with a
private auditing firm for an annual independent audit of their PFC records.




Page 31                                            GAO/RCED-99-138 Passenger Facility Charges
Chapter 3

The PFC Program Is Making a Significant
Contribution to Airport Development

              PFCs provided about 18 percent of the total funds available to commercial
              service airports to pay for their capital development in 1996, the most
              recent year for which data could be obtained on all of the major funding
              sources. With nearly $22 billion in collections approved by FAA at the
              request of airports, and with about $6.25 billion of that already collected,
              the PFC program is making a significant contribution to funding airport
              development, especially for the nation’s largest airports. As of October 1,
              1998, 273 airports were participating in the program, including most of the
              nation’s 70 large airports, which will receive 91 percent of the collections
              that FAA has approved. Airports are using PFCs to pay for a broad range of
              projects that include terminals, new gates, access roads, runways, land
              acquisition, interest on bonds issued to pay for eligible projects, and noise
              reduction. Large and small airports participating in the PFC program are
              using their funds somewhat differently. Large airports are spending twice
              as much for landside projects, such as terminals and access, as for airside
              projects, such as runways and taxiways, while small airports are spending
              comparable amounts on both.

              Small airports also benefit indirectly even if they do not collect PFCs.
              Under the PFC program, large airports that levy PFCs must return some of
              their federal AIP grants to FAA for redistribution, primarily to the small
              airports to supplement their other AIP receipts. This provision has targeted
              about $710 million to small airports from fiscal year 1993, the first year
              large airports returned AIP funds, through fiscal year 1999. Under the
              statute, small airports were not expected to lose other federal grants
              because these additional funds were being targeted for their use. However,
              we cannot determine whether small airports have gained from these funds
              as the statute intended because a required minimum level of AIP funding is
              not clearly established; furthermore, the amount of AIP funds that small
              airports would have received without this redistribution is unknown. FAA
              officials note, however, that small airports have always received greater
              benefits from the AIP overall because their share of total AIP funds has
              always been greater than the share that large airports have received.

              In addition to the benefits provided by the statutory objectives of the PFC
              program, some airports have used PFC revenues as the sole source of
              financial backing for bonds issued to pay for eligible projects. But the use
              of PFCs as the sole financing source for such bonds has been slow to
              develop because bond raters and underwriters have been concerned about
              the Department of Transportation’s ability to terminate the collection of
              PFCs if it finds that an airport has violated the program’s requirements.




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                     Airports pay for their capital development primarily through five major
PFCs Are a Major     funding sources: federal grants, PFCs, tax-exempt bonds, state grants, and
Funding Source for   airport revenues.1 Tax-exempt bonds are the single largest source of
Commercial Service   funding (about 61 percent) for airport capital development, providing
                     commercial service airports in the national system with $3.84 billion in
Airports             1996—the most recent year for which data for all of the major funding
                     sources are available.2 PFCs were the second largest funding source for
                     those airports, providing $1.11 billion, or about 18 percent, of their
                     available funds, while AIP provided another $1.05 billion, or about 17
                     percent, of their funds, and states provided $155 million in grants, or 2.5
                     percent. Airports also had available to them about $152 million
                     (2.4 percent) in airport revenues in 1996 that could be used to pay for
                     capital development projects.

                     The availability of the five major funding sources differs for large
                     commercial service airports versus small commercial service airports. As
                     figure 3.1 shows, in 1996 bonds were the largest single source (65 percent)
                     of development funding for the large airports, whereas about 55 percent of
                     the small airports’ funds came from AIP funds.




                     1
                      See Airport Financing: Funding Sources for Airport Development (GAO/RCED-98-71, Mar. 12, 1998).
                     2
                      These percentages do not include data for general aviation airports that are not allowed to impose
                     PFCs.



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Figure 3.1: Distribution of 1996 Funding Sources for Large and Small Airports




                                           Of the 529 airports eligible to participate in the PFC program, 273
273 Airports Are                           (52 percent) were collecting PFCs as of October 1, 1998. The larger the
Collecting Nearly $22                      airport is, the more likely it is to participate. Overall participation for large
Billion in Approved                        airports is 80 percent, while among small airports it is 47 percent. For
                                           large and medium hub airports separately, the participation rates are 83
PFCs                                       and 78 percent, respectively. While small hub airports are participating at a
                                           similarly high rate (77 percent), the rate drops to 54 percent for nonhubs
                                           and only 12 percent for other commercial service airports. According to
                                           FAA officials, there are various reasons why an airport may not participate.
                                           Local factors, such as high rates of travel within a state, may influence the
                                           decisions of the 14 large airports that have not yet chosen to levy the fee.3

                                           3
                                            Some are considering and/or preparing their first application.



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                                       For small airports, for example, revenues from PFCs may be too low to
                                       provide them with sufficient incentive to charge the fee.

                                       As table 3.1 shows, large airports will receive most of the PFC collections
                                       that FAA has approved. From June 1992, when the collections first began,
                                       through September 1998, FAA approved the collection of $21.9 billion in
                                       PFCs. Large airports will receive $19.9 billion of this amount (91 percent),
                                       reflecting their high participation rate in the PFC program and their
                                       passenger traffic (90 percent of all 1997 enplanements were at the large
                                       participating airports). Small airports will receive about $2 billion (9
                                       percent). All but one of the participating airports are currently charging
                                       the $3 maximum allowed by law.4 Only about $6.25 billion, or 29 percent of
                                       approved PFCs, had actually been collected as of December 31, 1998,
                                       because FAA has approved additional applications during each year of the
                                       program since 1992, and collection periods approved for airports range
                                       from 6 months to over 40 years.5

Table 3.1: Use of PFCs at Commercial
Service Airports, September 1998                                   Number of       Number of                     PFCs approved
                                                                   airports in         airports                 Dollars
                                       Airport category              category collecting PFCs                 (millions)         Percentage
                                       Large hub                             30                   25          $16,157.6                   73.7
                                       Medium hub                            40                   31             3,714.2                  16.9
                                       Small hub                             71                   55             1,480.9                   6.8
                                       Nonhub                               276                  149               433.6                     2
                                       Other                                112                   13               130.5                   0.6
                                       commercial
                                       service
                                       Total                                529                  273          $21,916.7                   100




                                       4
                                        The airport at Morgantown, West Virginia, charges a $2 PFC.
                                       5
                                        As of October 1, 1998, the longest collection period was 40 years and 2 months at the Palm Springs,
                                       California, airport for $81.9 million in collections. One of the shortest approved periods was for 6
                                       months at Bradley International Airport in Windsor Locks, Connecticut, for $3.3 million in collections.
                                       In anticipation of the commercial service classification of a new airport in Bentonville, Arkansas, FAA
                                       has also approved a period of 50 years and 3 months for $125 million in collections.



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                           The $22 billion in approved projects encompasses a wide variety of
PFCs Fund Many             projects as well as the payment of interest on bonds issued to pay for
Types of Projects,         eligible projects. As figure 3.2 shows, excluding the $2.3 billion in PFCs
With Large and Small       approved for the Denver International Airport,6 the funding is distributed
                           into major categories as follows:
Airports Making
Different Choices      •   44 percent is for landside 7 projects, such as gates and certain access
                           roads;
                       •   29 percent is being used to pay interest on debt incurred for development
                           eligible for PFCs (FAA’s database does not break down this debt in terms of
                           whether it is for airside, landside, or other categories);
                       •   20 percent is for airside projects, such as runways and taxiways;8
                       •   7 percent is for noise reduction projects; and
                       •   0.02 percent is for administration of the program.




                           6
                            FAA’s information systems do not separate the $2.3 billion in approved PFC collections for the Denver
                           International Airport by project type; instead, it is categorized in FAA’s data bank for a period of about
                           33 1/2 years as a “new airport” project.
                           7
                            The landside portion of an airport encompasses the airport from its boundary, where the general
                           public enters airport property, to the point where passengers leave the terminal to board the aircraft.
                           According to FAA officials, landside projects include projects such as access, security, and terminal
                           projects.
                           8
                            According to FAA officials, the airside portion of an airport encompasses areas such as the runway,
                           taxiway, and apron. In addition, projects such as purchasing land for airfield expansion as well as
                           purchasing equipment to be used in the airfield are considered airside projects. Lastly, projects for
                           airfield lighting, planning, and security are also considered airside.



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Figure 3.2: Approved PFC Funds by Major Project Category, Fiscal Years 1992 Through 1998 (Dollars in millions)




                                           Note: Amounts in this figure do not include $2.3 billion in PFC collections approved by FAA for a
                                           period of about 33 1/2 years for the Denver International Airport, which is a single “new airport”
                                           listing in FAA’s information systems. Total approved collections for all participating airports are
                                           $21.9 billion.

                                           a
                                           Does not add to 100 because of rounding.


                                           Nearly two-thirds of the funds for landside projects are for terminal
                                           projects, while the single largest category of airside projects is for runways
                                           (39 percent). Although the largest portion of funds will be spent on
                                           landside projects, only 23 percent of the number of approved projects are
                                           landside, while 66 percent of the number of approved projects are airside
                                           projects.

                                           The overall expenditure patterns vary somewhat for large and small
                                           airports. (See fig. 3.3.) Large airports are using about 46 percent of their
                                           funds for landside projects, 29 percent for interest payments, and




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                                         19 percent for airside projects. Large airports will spend nearly two-thirds
                                         of their landside funds on terminal projects and about one-third on access
                                         projects. Small airports are using about 38 percent for landside projects,
                                         just under one-third for airside projects (32 percent), and about 27 percent
                                         for interest payments. About 89 percent of small airports’ landside funds
                                         will be spent on terminal projects.



Figure 3.3: Approved PFC Funds for Large and Small Airports by Major Project Category, Fiscal Years 1992 Through 1998




                                         Note: Amounts in this figure do not include $2.3 billion in PFC collections approved by FAA for a
                                         period of about 33 1/2 years for Denver International Airport because the approved funds are not
                                         separated by project type in FAA’s information systems. The percentage for PFC administration
                                         for large airports is too low to show on the graph. For large airports, PFC administration amounted
                                         to about $1.03 million (0.01 percent).




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                                       a
                                           Does not add to 100 because of rounding.




                                       The 1990 law authorizing PFCs contains a provision designed to benefit
Small Airports Benefit                 small airports that have little or no ability to raise revenue by collecting
From the PFC                           the fees. Under this provision, large airports that choose to charge PFCs
Program Even If They                   must return part of their AIP funds to FAA for redistribution to small
                                       airports. This provision applies to AIP “apportionment” funds—those AIP
Do Not or Cannot                       funds distributed by formula to commercial service airports on the basis of
Collect PFCs                           their enplanement levels. Large airports must return 50 cents of AIP
                                       apportionment funds for every dollar of projected revenues from PFCs, up
                                       to a maximum of 50 percent of each year’s AIP apportionment funds. The
                                       apportionment funds returned by large airports must be redistributed as
                                       AIP discretionary grants to other airports.9 Of the total amount returned,
                                       87.5 percent is targeted to small airports—50 percent is targeted to nonhub
                                       and other commercial service airports, 25 percent to general aviation
                                       airports that are not eligible to levy PFCs, and 12.5 percent to small hub
                                       airports. The remaining 12.5 percent of the returned funds may be
                                       redistributed by FAA to any category of airport in the national system.
                                       Table 3.2 shows the amount of funds targeted to each airport category, on
                                       the basis of these distribution requirements, for fiscal years 1993 through
                                       1999.10

Table 3.2: Amount of Returned AIP
Funds Targeted for Redistribution to   Dollars in millions
Small Airports, Fiscal Years 1993                                                     Targeted funds by fiscal year
Through 1999
                                       Airport category          1993      1994       1995       1996     1997       1998       1999      Total
                                       Small hub                  $7.0    $12.9       $12.6     $14.5     $15.6     $18.5      $20.2 $101.4
                                       Nonhub and
                                       other commercial
                                       service                    28.0      51.7       50.3      58.2      62.4       74.2      80.8     405.6
                                       General aviation           14.0      25.9       25.2      29.1      31.2       37.1      40.4     202.8
                                       Total                    $49.0     $90.5       $88.1 $101.8 $109.2 $129.8 $141.4 $709.8
                                       Note: The amount of the returned AIP apportionment funds that is targeted to small airports,
                                       including general aviation airports, is 87.5 percent of the total. The remaining 12.5 percent may
                                       be distributed to any airport in the national system, regardless of type.




                                       9
                                        AIP discretionary grants may be awarded for projects at any national system airport, whereas AIP
                                       apportionment funds are awarded to primary airports (large hub, medium hub, small hub, and nonhub
                                       airports) on the basis of a statutory formula tied to passenger levels.
                                       10
                                         Although the statute was passed in 1990, returns of AIP funds by large airports did not begin until
                                       fiscal year 1993, while actual collections of the PFC began in fiscal year 1992.



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The PFC law passed in 1990 states that it was the sense of the Congress that
the Department of Transportation “should not reduce funding under the
discretionary fund . . . for small commercial service and general aviation
airports as a result of additional funds made available to such airports
under this” provision. However, we cannot determine the extent to which
this provision has been met for two reasons. First, the sense of the
Congress states that funding should not be reduced but does not provide a
specific minimum dollar threshold or more specifically define the
minimum protected funding level. The implication is that small airports
should not receive less discretionary funds than they would have received
had there been no requirement for redistribution of AIP funds from large to
small airports. However, the level of discretionary funding that small
airports would have received without redistribution is unknown.

Second, changes in the distribution formula for AIP funds have altered the
amounts of funds targeted to small airports as discretionary versus
apportionment funds. Since 1990, some AIP funds targeted to small airports
as discretionary funds were deleted from the AIP distribution formula while
some apportionment funds targeted to small airports were increased. For
example, in fiscal year 1991, 10 percent of total AIP appropriations were
targeted to certain general aviation airports as discretionary funds. That
portion was reduced to 5 percent for fiscal year 1993 and was completely
eliminated for fiscal year 1997. State apportionment funds, however,
which are targeted to general aviation airports, increased from 12 percent
of total AIP appropriations for fiscal years 1995 and 1996 to 18.5 percent for
fiscal years 1997 and 1998.

While actual gains from the redistribution of federal grant funds to small
airports cannot be determined, the distribution of discretionary funding
between large and small airports shows that the total dollar amount of AIP
discretionary funding for small airports has remained above the fiscal year
1990 level (the year the PFC statute became law). However, discretionary
funding for small airports declined between fiscal years 1992 and 1995,
both in absolute terms and relative to discretionary funding for large
airports. Moreover, since fiscal year 1994, small airports have received less
discretionary funds than large airports. Various factors can affect the
actual distribution of discretionary funds including, for example, the total
amount of AIP appropriated, formula changes such as those already
discussed, and the array of airports receiving discretionary grants for
projects (in contrast to the distribution of apportionment funds which is
based on the number of passengers enplaning at an airport). Figure 3.4




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                                           illustrates the proportional distribution of AIP discretionary funds between
                                           large and small airports.



Figure 3.4: Proportional Distribution of AIP Discretionary Funds to Large and Small Airports, Fiscal Years 1982 Through
1998




                                           Note: Large airports consist of large and medium hub airports, while small airports consist of
                                           small hub, nonhub, other commercial service, and general aviation airports.




                                           FAA officials note that statutory changes in the AIP distribution formula
                                           eliminated some discretionary funds targeted to small airports while
                                           increasing some apportionment funds targeted to small airports. Because
                                           of that, they stated, an assessment of small airports’ benefits must include
                                           consideration of the shares of total AIP funds awarded to large and small
                                           airports. Figure 3.5 shows that small airports have received a greater
                                           proportion of total AIP funds than large airports for fiscal years 1982
                                           through 1998.




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Figure 3.5: Proportional Distribution of Total AIP Funds Between Large and Small Airports, Fiscal Years 1982 Through 1998




                                          Note: Large airports consist of large and medium hub airports, while small airports consist of
                                          small hub, nonhub, other commercial service, and general aviation airports.



                                          With the initiation of the PFC program, some airport representatives had
Use of PFCs as Sole                       hoped that PFCs would indirectly benefit airports by providing additional
Support for New                           cash flow that could be used as the sole support for the issuance of new
Bonding Authority                         airport bonds used to pay for capital development. Currently, the vast
                                          majority of airport bonds are issued using general airport revenues as the
Has Been Slow to                          payment source because they provide a guaranteed future cash flow.
Develop                                   While PFC revenues have been used for debt service payments since the
                                          program started, some aviation and airport representatives hoped that
                                          PFCs could also provide a continuous source of future cash flow that could
                                          be used as the sole revenue source for the issuance of new bonds.

                                          However, until 1996 airports had little success in using PFCs for this
                                          purpose. According to bond raters and underwriters, the difficulty was
                                          that PFCs were not an assured funding source. Under federal statutes, the
                                          Department of Transportation may terminate an approved PFC collection if
                                          the airport does not use the funds as agreed or if it violates the Airport



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Noise and Capacity Act. If PFC collections were terminated, bond payments
supported by those collections would be at risk. For this reason, bond
raters and underwriters have been reluctant to support bonds backed
solely by PFCs.

FAA  has taken steps to facilitate the use of PFCs as the sole funding source
to secure debt. In response to the financial community’s concern about the
potential for early termination of PFC collections, FAA developed an
extended resolution process for correcting an airport’s possible violations
of the terms of its PFC agreement.11 That process includes provisions for
increasing the financial community’s confidence that bond payments
would be met even if termination eventually occurred. If FAA remains
unsatisfied with attempts to resolve possible violations, it could reduce the
airport’s authority to collect PFCs to the amount necessary to complete
payment on the bonds. FAA may include the extended resolution provisions
in its approval of applications at the request of the applying airport. FAA
officials stated that an airport must meet certain conditions, such as
limiting the portion of PFC collections that will be used to back the bonds,
in order to obtain these termination protection provisions when FAA
approves the application.

As a result of these extended resolution and termination protection
provisions, some airports have been able to use PFCs as sole backing for
new bonds. Since 1996, FAA has included the extended resolution process
in its approval of PFC collections for seven airports (Little Rock, Chicago,
Boston, Fort Lauderdale, Palm Springs, Seattle, and Des Moines), and has
had requests for the provisions from airports in Portland, Oregon, and
Kansas City, Missouri. Six of these approved PFC applications include the
language protecting payment of the bonds in cases of termination.
According to FAA officials, the Fort Myers airport was apparently able to
issue bonds backed solely by PFCs without this extended resolution
process because it made a commitment in its bond agreement to meet any
FAA requirements for rectification if potential violations are identified.




11
  FAA regulations require that the first step in resolving potential violations consist of an informal
resolution process that, in practice, according to FAA officials, involves telephone conversations,
correspondence, and informal meetings between FAA officials and airport representatives. If this
approach does not resolve all of the violations, the extended resolution provisions create the
opportunity for two successive 90-day periods for the airport to resolve any remaining possible
violations. During these periods, PFC collections would be held by a trustee directed by FAA to use the
collections to continue debt payments. After the second 90-day period, FAA can also start to withhold
current and future AIP entitlement funds up to the amount of PFCs that would be collected each year.
According to FAA officials, FAA would retain these AIP funds if FAA and the airport could not resolve
their differences regarding violations, but FAA would return the funds to the airport if timely and
satisfactory resolution occurred.



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               Proposed changes to the PFC program fall into three broad
               categories—increasing the fee charged to passengers, tightening or easing
               restrictions on the types of airport projects eligible for funding, and adding
               new requirements that must be met before eligible projects can be
               approved. Proposals for increasing PFCs take two main forms. The first
               approach involves raising the fee from its current maximum of $3 per
               flight segment. Our analysis indicates that with a $1 increase over the
               current $3 maximum, commercial airports would receive close to one-half
               billion dollars more each year in PFC revenues over what they would
               receive from the first $3, even after taking into account estimated
               passenger reductions. The second approach to increasing PFCs would
               allow airports to increase the fee but at the expense of losing more, or all,
               of their AIP funding. Large airports are likely to benefit the most under
               either approach. According to a model we developed, increasing PFC fees
               would reduce the number of passengers in the short term, but the extent
               of that reduction is difficult to estimate because of the need to estimate
               measures of certain kinds of behavior, such as passengers’ sensitivity to
               changes in ticket prices. Also, many factors influence air fares
               simultaneously, but in order to analyze the impact of one factor, our
               analysis holds constant the effects of all other factors. These other factors,
               however, could enhance or offset the effect of increasing the PFC, making
               the net effect difficult to determine. On the basis of the model we
               developed, we estimate that for a $1 increase in the PFC, passenger
               reductions would range from 0.5 to 1.8 percent (and have a midrange
               estimate of 0.85 percent) and would be proportionally greater for
               nonbusiness passengers, low-fare airlines, large airports, and passengers
               taking relatively short flights. In the short term, forecast growth in
               passengers could overshadow all or some of the passenger reduction,
               depending on how high the fee is raised. On the other hand, in the long
               term, any improvements in passenger safety and comfort that may result
               from airport improvements could stimulate the demand for air travel.
               According to our model, passenger reductions and the extent to which an
               airline may choose to absorb the increase in the PFC instead of passing it
               on to passengers would reduce an airline’s gross revenues.

               Proposals to change the types of projects eligible for PFC funding—whether
               they expand or narrow the coverage—are likely to produce little change in
               how airports are using the program. Participating airports can expect to
               experience little impact, especially in the short term, because most of
               them have had PFC collections approved that are set to run for a number of
               years. Collection periods approved for airports range from 6 months to
               more than 40 years. Among the last category of proposals—those affecting



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                         how airport projects are selected—there are three main types: funding
                         projects on the basis of a priority system, requiring that projects pass a
                         cost-benefit test, or requiring that they be approved by airlines before they
                         can be authorized for funding. Any such change is likely to reduce the
                         flexibility that airports currently have in levying PFCs and applying them to
                         specific projects. Under more stringent eligibility requirements, some of
                         the projects currently funded with PFCs might not have been approved. If
                         the program remains unchanged, there is unlikely to be much change in
                         how many airports are charging the fee or in how they are applying those
                         funds.


                         Increasing PFCs will benefit both large and small airports but not to the
Large Airports Would     same degree. Receipts from higher PFCs would help both large and small
Gain the Most From       airports reduce the differences between funding and planned development
an Increase in PFCs      that we identified in our 1998 analysis.1

Gains Are Greatest for   At the current maximum $3 fee, airports charging the PFC as of October 1,
Large Airports           1998, will collect about $1.4 billion a year in total receipts on the basis of
                         1997 enplanement levels.2 If passenger levels were to be unaffected by a
                         higher fee, then each $1 increase in the fee would add about $479 million
                         to annual receipts from PFCs if all of those airports imposed the higher fee.3
                          As we will discuss, however, according to a model we developed, an
                         increase in the PFC will reduce enplanements, thereby reducing the
                         revenues that any increase in the fee would generate. When the reduction
                         in enplanements is taken into account, we estimate that the gain from a $1
                         increase in the fee would be about $463 million a year. We further estimate
                         that a $2 increase would produce about $917 million a year over the
                         receipts of a $3 fee, and a $3 increase would produce about $1.36 billion
                         more a year than the $3 fee. The total revenues from an increase in the PFC
                         would be higher if additional airports choose to participate in the program.

                         Large airports would gain the most by fee increases because they enplane
                         substantially more passengers than small airports. If all participating large
                         airports raised their fee to $6, for example, that fee would produce an
                         estimated $2.5 billion in total receipts for large airports, compared with


                         1
                          Airport Financing: Funding Sources for Airport Development (GAO/RCED-98-71, Mar. 12, 1998).
                         2
                          Calendar year 1997 enplanements are the most recently available enplanement data.
                         3
                          This calculation is based on the most recently available enplanement levels—those for calendar year
                         1997—and the median collection rates for airport categories, which are based on calendar year 1997
                         collections. The calculations include only those airports collecting the fee as of October 1, 1998.



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about $268 million for small airports, after adjusting for potential
passenger reductions but before adjusting for returned AIP apportionment
funds.

To gain a more accurate picture of how airport revenues would be
affected overall by higher PFCs, it is also necessary to consider the effects
of the law’s requirement regarding the redistribution of AIP grants. For
large airports, the current requirement to return a portion of their AIP
apportionment funds reduces their net gain from the PFC program.
Currently, large airports are required to return 50 cents of every AIP
apportionment dollar for every dollar of projected revenues from PFCs, up
to a maximum of 50 percent of their AIP apportionment funds. Small hub,
nonhub, and other commercial service airports, on the other hand, are not
required to return any IP apportionment funds and are targeted, as a
group, to receive 62.5 percent of the returned funds; even if the small
airports collect PFCs they are allowed to receive grants from the
apportionment funds returned by the large airports.4 Table 4.1 shows the
gross receipts from PFC collections at higher fees and the net gains after
adjusting for returned AIP apportionment funds under the current
redistribution formula.




4
 Twenty-five percent of the returned apportionment funds must be redistributed to general aviation
airports that are not eligible to collect PFCs. The remaining 12.5 percent may be awarded for projects
at any airport in the national system.



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Table 4.1: Estimated Annual Total
Collections at Different PFC Fees,                                             Estimated receipts (in millions)
Based on 1997 Enplanements, and                                Large airports                     Small airports
Program Net Gains                                                                                                                    Total
                                                                                       a
                                     PFC fee                Receipts         Net gain          Receipts         Net gaina         receipts
                                     $3 (current
                                     maximum
                                     level)                    $1,263           $1,101              $136             $237            $1,399
                                     4                           1,681            1,519              181               282            1,862
                                     5                           2,091            1,930              225               326            2,316
                                     6                           2,495            2,333              268               369            2,763
                                     7                           2,891            2,729              311               412            3,202
                                     8                           3,279            3,118              352               453            3,631
                                     9                           3,660            3,499              393               494            4,053
                                     10                          4,034            3,873              434               535            4,468
                                     11                          4,401            4,239              473               574            4,874
                                     12                          4,760            4,598              512               613            5,272
                                     Note: Large airports are large and medium hub airports, and small airports are small hub,
                                     nonhub, and other commercial service airports. Calculations are based on airports collecting
                                     PFCs as of October 1, 1998, using 1997 median collection rates and 1997 enplanements.
                                     Calculations include our midrange estimate of the potential loss of passengers as a result of
                                     higher fees. (See discussion in this chapter.)
                                     a
                                      Net gains for large airports result from deleting apportionment funds that must be returned by
                                     large and medium hub airports that choose to charge PFCs, using fiscal year 1999
                                     apportionments returned. Net gains for small airports include 62.5 percent of apportionment
                                     funds returned by large airports because that is the percentage required to be redistributed to
                                     small hub, nonhub, and other commercial service airports, whether the airports levy PFCs or not;
                                     some of the redistributed funds may go to small airports that are not levying a PFC. Twenty-five
                                     percent of the returned apportionment funds are required to be redistributed to general aviation
                                     airports, which are not eligible to collect PFCs; those funds are not reflected in the net gains for
                                     small airports. The remaining 12.5 percent of the returned funds may be distributed to any airport
                                     in the national system; those funds are not reflected in the net gains for airports.



                                     Some proposals suggest that additional AIP funds—apportionment funds,
                                     discretionary funds, or both—could or should be forfeited if airports are
                                     allowed to collect higher PFC fees. Table 4.2 shows how revenues at large
                                     airports would be affected under three scenarios related to the forfeiture
                                     of AIP funds after taking into consideration the potential loss of
                                     passengers: (1) the loss of all remaining AIP apportionment funds, (2) the
                                     loss of all discretionary funds, and (3) the loss of all funding in both AIP
                                     categories. For example, if large airports were able to collect $4 per
                                     enplanement (representing a $1 increase per enplanement) but had to give
                                     up their remaining AIP apportionment funds in return, they would still
                                     collectively have a net gain from the $1 increase of about $255 million. If
                                     the PFC fee rose $2, the net gain could be about $666 million, and with a $3




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                                        increase, it could approach $1.1 billion. Even if large airports lost all of
                                        their AIP funds (both apportionment and discretionary), they would still
                                        benefit from a net gain of about $366 million if the PFC fee were increased
                                        by $2.

Table 4.2: Net Gain or Loss for Large
Airports From PFC Fee Increases That                                       Net gain or loss for large airports after adjusting AIP
Are Accompanied by Further                                                        funding as follows (dollars in millions)
Reductions in AIP Funds                                                                                                No apportionment
                                                                        No apportionment         No discretionary        or discretionary
                                        PFC fee increase                           funds                    funds                   funds
                                        $1                                              $255                    $118                    –$44
                                        2                                                 666                    529                     366
                                        3                                              1,069                     932                     770
                                        4                                              1,465                   1,328                   1,165
                                        5                                              1,854                   1,717                   1,554
                                        6                                              2,235                   2,098                   1,935
                                        7                                              2,609                   2,472                   2,309
                                        8                                              2,975                   2,839                   2,676
                                        9                                              3,335                   3,198                   3,035
                                        Note: Large airports are large and medium hub airports that currently levy PFCs. These data
                                        represent a 100-percent loss of AIP apportionment funds for the large airports, thus removing the
                                        remaining AIP apportionment funds (about $163 million in fiscal year 1998) that large airports
                                        retain after returning up to 50 percent when they charge PFCs. If the return of only 75 percent of
                                        apportionment funds were required instead of 100 percent, then the net gain for large airports
                                        would be, for example, about $336.6 million with a $1 increase in the PFC, $747.2 million with a
                                        $2 increase, and about $1.15 billion with a $3 increase. The loss of AIP apportionment funds for
                                        large airports is based on fiscal year 1998 AIP funding. All AIP data used in the calculations are
                                        AIP receipts only for those airports levying PFCs as of October 1, 1998. Net gain or loss data
                                        incorporate our midrange estimate of the potential loss of passengers as a result of higher PFCs.



                                        If similar requirements were put in place for small airports, the fee would
                                        have to rise considerably more than for large airports before small airports
                                        could achieve a net gain. For example, if small airports had to return their
                                        apportionment funding, they would have a net loss of funds, as a group,
                                        until the fee reached $8. A $7 fee would produce a net gain if small airports
                                        lost only their discretionary funds.




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Large Airports Could        Our March 1998 report found that the annual average cost of planned
Address Their Capital       development at all national system airports for fiscal years 1997 through
Needs With a Moderate       2001 was about $10 billion, while funds available for airport capital
                            development in 1996 totaled about $7 billion at the 3,304 airports included
PFC Increase, While Small   in the NPIAS for fiscal years 1997 through 2001.5 The funds available to large
Airports Could Not          and medium hub airports in 1996 would have covered about 79 percent of
                            the average annual cost of their planned development for fiscal years 1997
                            through 2001, leaving a funding difference of about $1.5 billion. For small
                            hub, nonhub, and other commercial service airports, available funds
                            would have covered just 56 percent of their planned development costs,
                            leaving a funding difference of about $655 million.6

                            Increased PFC collections will help large airports more than small ones in
                            eliminating this difference. Our analysis shows that under current AIP
                            redistribution rules, large airports, as a group, may be able to eliminate
                            their shortfall with a $4 increase in the PFC (producing a $7 fee in total).7
                            With a $5 increase, large airports could eliminate the difference even with
                            a loss of all of their AIP funds. (See table 4.3.)




                            5
                             Besides the 529 commercial service airports that are the focus of this report, these estimates include
                            the 2,815 general aviation airports in the national airport system. Data in the analysis of the impact of
                            higher PFCs on closing the funding difference for small airports include data only for small hub,
                            nonhub, and other commercial service airports in the national system.
                            6
                             The funding difference for general aviation airports, which benefit only indirectly from the PFC
                            program through the redistribution of some AIP apportionment funds from large and medium hub
                            airports that collect PFCs, and through ownership by a commercial service airport authority, was
                            $754 million.
                            7
                             While the overall funding difference for large and medium hub airports, as a group, may disappear,
                            funding differences for individual airports could continue to exist and would do so for airports not
                            collecting PFCs, assuming all other funding levels remained the same. Some individual airports, of
                            course, may have no funding difference. Receipts from the higher fees are calculated on the basis of
                            those airports charging PFCs, while the funding difference is based on data for all large and medium
                            hub airports in the national system. Calculations of the remaining funding difference include our
                            midrange estimate of the potential loss of passengers as a result of higher PFCs.



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Table 4.3: Estimated Impact of Higher
PFC Fees on the Funding Difference                                  Remaining funding differencea (dollars in millions)
for Large Airports                                                                                                     Loss of both
                                                         PFC increase Loss of all AIP               Loss of all AIP  apportionment
                                                         only—no loss apportionment                  discretionary and discretionary
                                        PFC fee         of AIP funding         funds                         funds             funds
                                        $4                          $819                $982                  $1,119                  $1,282
                                        5                            409                  572                     708                        871
                                        6                               5                 168                     305                        468
                                        7                               0                    0                       0                        72
                                        8 and
                                        above                           0                    0                       0                         0
                                        Note: Calculations include our midrange estimate of the potential loss of passengers as a result of
                                        higher PFCs.
                                        a
                                         The funding difference used in the calculations is based on data in our report Airport Financing:
                                        Funding Sources for Airport Development (GAO/RCED-98-71, Mar. 12, 1998).



                                        In contrast, small airports, as a group, are unlikely to be able to eliminate
                                        their funding shortfall with higher fees, even if the fee is increased to $12
                                        per flight segment—the highest fee level we examined. As table 4.4 shows,
                                        with a PFC of $12, the shortfall for these airports would still be over
                                        $250 million. If small airports were required to give back part of their AIP
                                        funds as a condition of levying PFCs, the shortfall would be larger.




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Table 4.4: Estimated Impact of Higher
PFC Fees on the Funding Difference                                                                         Remaining funding differencea
for Small Airports                      PFC fee                                                                      (dollars in millions)
                                        $4                                                                                                 $586
                                        5                                                                                                    542
                                        6                                                                                                    499
                                        7                                                                                                    456
                                        8                                                                                                    414
                                        9                                                                                                    373
                                        10                                                                                                   333
                                        11                                                                                                   294
                                        12                                                                                                   255
                                        Note: The funding difference for small airports is about $655 million. When general aviation
                                        airports are included in the data, the funding difference rises to about $1.4 billion. The analysis of
                                        small airports’ funding includes data on PFC collections only for those small airports collecting
                                        PFCs as of October 1, 1998. Planned development costs are for all small hub, nonhub, and other
                                        commercial service airports in the national system and do not include data for general aviation
                                        airports. Calculations of the remaining funding difference include our midrange estimate of the
                                        potential loss of passengers as a result of higher PFCs.
                                        a
                                         The funding difference used is based on data in our report Airport Financing: Funding Sources
                                        for Airport Development (GAO/RCED-98- 71, Mar. 12, 1998).




Some Proposals to                       Some proposals for increasing the PFC would target the use of the
Increase the PFC Target                 additional funds that would be collected (beyond what the current $3
the Use of the Additional               provides) either by specifying more narrowly the types of projects that the
                                        additional funds should be spent on or by requiring projects to be
Funds                                   screened through new selection criteria. With all but one of the
                                        participating airports charging the $3 maximum PFC, it is likely that
                                        participating airports will seek permission to collect the additional funds
                                        as soon as practicable. While targeting the use of the additional funds
                                        would focus that money on the designated projects, the risk involved in
                                        targeting is that the additional collections may, over time, become the only
                                        funds used on those types of projects. Moreover, this result could occur
                                        sooner if airports request amendments to their existing applications in
                                        order to shift previously approved eligible projects to the new funding.
                                        Under that circumstance, collections already approved at the $3 fee level
                                        could be used to complete other approved projects in a shorter time than
                                        originally expected, or they could be freed up for use on additional
                                        projects not eligible for the increase in collections. With regard to
                                        nonparticipating airports, even if the additional funds collected from an
                                        increase in the fee are targeted for use more narrowly than the law now




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                         provides, the increase in the PFC could entice more airports to participate
                         in the program.


Authorizing Higher Fee   We examined the likely effects of PFC increases on FAA’s management of
Options Is Unlikely to   the program. We found that adding only new fee levels as options for
Affect the Program’s     airports would not add to FAA’s review and approval process for individual
                         airport applications. However, allowing a higher fee, whether the
Management               additional funds are targeted for specific uses or not, could have a
                         near-term impact on the program’s administration to the extent that
                         airports submit new applications or amendments in order to apply the
                         higher fee as soon as possible.8 FAA’s workload could also increase under
                         some specific funding scenarios—for example, increasing the fee on the
                         basis of inflation or giving FAA discretion to authorize higher funding levels
                         by individual airport.


                         On the basis of a model that we developed to analyze the impact of higher
Higher PFCs Would        PFCs on passengers, increases in PFCs would result in short-term reductions
Reduce Air Travel in     in passenger traffic, but the extent of this reduction is difficult to estimate
the Short Term, but      because of unknowns, such as the extent to which higher prices will cause
                         travelers not to fly. Increasing PFCs is likely to cause some passengers to
the Extent of That       forgo trips or to use another form of transportation. Measuring the size of
Reduction Is             the reduction, however, is difficult and imprecise because the analysis
                         requires making critical assumptions. The estimated reductions in air
Uncertain                travel are highly dependent on the assumptions underlying the
                         calculations because different assumptions yield different passenger
                         reduction estimates.

                         The results of our analysis are affected by assumptions about four key
                         variables: (1) the price sensitivity of air travelers—that is, at what price
                         will travelers decide to forgo air travel? (2) the extent, if any, to which
                         airlines absorb the increase in PFCs by not passing the increase on to
                         passengers; (3) the distribution of passengers between business and
                         nonbusiness travel; and (4) the estimates of the different fares paid by
                         business and nonbusiness passengers. A detailed discussion of each of
                         these issues can be found in appendix I. Our model estimates the effect of
                         changing the PFC independently of other factors that may occur

                         8
                          Because the PFC statute prohibits the collection of funds in excess of the cost of approved projects,
                         an increase in PFC collections is likely to reduce the number of years currently required to accumulate
                         sufficient money to pay for the current catalog of approved projects. Thus, with an increase in the fee,
                         airports could fund additional projects within the same time frame now allotted to pay for currently
                         approved projects, and/or retire existing PFC-backed debt earlier.



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                                     simultaneously. These other factors could enhance or offset the effect of
                                     changing the PFC making the net effect difficult to determine. For example,
                                     data on enplanement levels at individual airports that first started levying
                                     the fee in 1996 indicate that enplanements have both increased and
                                     decreased following the initial imposition of the fee by airports.

                                     In our analysis, we used a model to develop three scenarios that are based
                                     on different combinations of assumptions in order to produce high,
                                     midrange, and low estimates of the potential reduction in passengers
                                     resulting from increases in PFCs. In each scenario, we used different
                                     assumptions about the sensitivity of passengers to price changes and the
                                     extent to which airlines will adjust their prices in response to an increase
                                     in PFCs. (See app. I for a discussion of the assumptions used in each
                                     scenario.) On the basis of these scenarios, we estimate that passenger
                                     reductions would range from about 0.5 to 1.8 percent for each $1 increase
                                     in PFCs; the midrange estimate is 0.85 percent. Based on this midrange
                                     estimate, less than one passenger in one hundred would be affected by a
                                     $1 increase in the PFC. These estimates represent a reduction of about
                                     1.6 million to about 6.1 million of the 338 million one-way trips used in our
                                     analysis for the 12 months ending June 30, 1998. The assumptions in our
                                     midrange scenario lead to an estimate of a 2.9 million reduction in those
                                     one-way trips. In the short term, FAA’s estimated 3.4 percent annual growth
                                     in enplanements would overshadow passenger losses identified in our
                                     midrange estimate unless the fee increase exceeded $4. On the other hand,
                                     in the long term, any improvements in passenger safety and comfort that
                                     may result from airport improvements could stimulate the demand for air
                                     travel.


Higher PFCs Would                    Because nonbusiness travel is generally much more sensitive to price
Reduce Travel More for               changes than business travel, a disproportionately larger share of the
Nonbusiness Passengers               decrease in travel comes from nonbusiness passengers. Table 4.5 presents
                                     the expected reductions in passengers in the three scenarios we examined.

Table 4.5: Estimated Reduction in
Passengers Per $1 Increase in PFCs                          Low estimate        Midrange estimate       High estimate
                                                            Number Percent      Number Percent      Number Percent
                                                        (thousands) decline (thousands) decline (thousands) decline
                                     Business
                                     passengers                  497     0.31          884     0.56         1,104    0.70
                                     Nonbusiness
                                     passengers                1,127     0.63        2,004     1.12         5,010    2.80
                                     Total                     1,624     0.48        2,888     0.85         6,114    1.81




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Air Travel Will Be More             While these estimates represent the overall reduction in passengers that
Affected on Some Trips              can be expected from a $1 increase in PFCs, some types of travel are more
Than on Others                      likely to be affected than others. Because of this, we reviewed the extent
                                    to which higher PFCs might affect business and nonbusiness travelers in
                                    the context of three basic ways to categorize trips: (1) trips involving
                                    passengers traveling on regular-fare versus low-fare airlines,9 (2) trips
                                    between two large airports versus those that include at least one small
                                    airport at the beginning or end of a trip, and (3) trips shorter than 500
                                    miles versus longer trips. The results of the midrange scenario are
                                    reported here because those estimates are derived from midrange
                                    assumptions about price sensitivity and airlines’ pricing strategies. The
                                    high and low scenarios are reported in appendix I.

Regular-Fare Versus Low-Fare        Many airlines have been offering low fares as a standard practice. As table
Airlines                            4.6 shows, the rates of reduction in passengers on low-fare airlines is more
                                    than one-third greater than the percent decline on regular-fare airlines.
                                    Low-fare airlines are likely to be more affected by price increases because
                                    a $1 increase in the PFC represents a larger percent change in price
                                    (assuming, as our analysis does, that the increase in the PFC is passed on to
                                    passengers at the same rate for all airlines and varies only for business
                                    versus nonbusiness fares).

Table 4.6: Estimated Reduction in
Passengers Using Regular-Fare and                                       Regular-fare                                   Low-fare
Low-Fare Airlines                                                       Number              Percent                 Number          Percent
                                                                    (thousands)             decline             (thousands)         decline
                                    Business
                                    passengers                                 586              0.47                          297      0.87
                                    Nonbusiness
                                    passengers                               1,464              1.04                          539      1.40
                                    Total                                    2,050              0.77                          836      1.15

Large Versus Small Airports         To determine the impact of raising PFCs on airports, we estimated the
                                    impact of higher PFCs on trips to or from small airports separately from
                                    those trips with large airports as both the origin and destination. All trips
                                    that both began and ended at a large or medium hub airport were included
                                    under the heading of large airports. However, when either the origin or
                                    destination was a small airport, then the trip was included under the small
                                    airports designation. As table 4.7 shows, the rates of decline in the number
                                    of passengers for small airports were considerably less than those for
                                    large airports. Trips to or from small airports are likely to decline less


                                    9
                                     See appendix I for a list of airlines designated as low-fare airlines in the analysis.



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                                      because a $1 increase in the PFC represents a smaller increase in the total
                                      fare since fares are higher, on average, for such trips.

Table 4.7: Estimated Reduction in
Passengers on Trips Involving Large                               Large airports                     Small airports
or Small Airports                                               Number                             Number
                                                            (thousands) Percent decline        (thousands) Percent decline
                                      Business
                                      passengers                     625              0.64              259             0.42
                                      Nonbusiness
                                      passengers                   1,368              1.24              636             0.92
                                      Total                        1,993              0.96              895             0.69

Long Versus Short Routes              Passengers on short routes are expected to be more sensitive to price
                                      changes than those on long routes because switching to driving is a more
                                      practical alternative for trips less than 500 miles. This is especially true for
                                      less time-sensitive nonbusiness travel. As table 4.8 shows, the rates of
                                      decline on short routes were considerably greater than on long routes.

Table 4.8: Estimated Reduction in
Passengers Taking Long and Short                                   Long routes                        Short routes
Trips                                                           Number                             Number
                                                            (thousands) Percent decline        (thousands) Percent decline
                                      Business
                                      passengers                     530              0.49              354             0.71
                                      Nonbusiness
                                      passengers                   1,156              0.94              848             1.50
                                      Total                        1,685              0.73            1,202             1.13



Effects of Higher Prices              In the short term, the projected growth in enplanements—about
Could Be Offset                       3.4 percent a year according to FAA forecasts for fiscal years 1999 through
                                      2010—will mitigate the extent to which higher PFCs reduce passenger
                                      levels. On the basis of our midrange estimate of passenger losses, the
                                      forecast growth in passenger enplanements would overcome passenger
                                      losses resulting from higher fees unless the higher fee exceeded $7. On the
                                      other hand, in the long term, the effect of increasing PFCs on the number of
                                      passengers traveling is likely to be reduced or eliminated if PFC funds are
                                      used to enhance air travel. If PFCs are spent on projects that improve air
                                      travel in some way—for example, by enhancing safety, comfort, or
                                      convenience—those improvements could stimulate the demand for air
                                      travel, thereby offsetting any decrease in passengers resulting from higher
                                      fees.




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Higher PFCs Could Reduce   Two factors could cause airlines to receive less gross revenues if PFCs are
Airlines’ Gross Revenues   increased: the reduction in ticket sales resulting from fewer passengers
                           flying at the higher prices and the extent, if any, to which airlines choose
                           to absorb the increase in PFCs. On the basis of our midrange scenario,
                           airlines could receive about 1.3 percent less in gross revenues with a $1
                           increase in PFCs.10 A little more than half of this loss would come from the
                           estimated decline in passengers. These two factors would cause the larger
                           shares of gross revenue losses to be attributable to the reductions in
                           nonbusiness travelers, trips involving large airports, trips on regular-fare
                           airlines, and trips of 500 miles or longer.

                           Any decline in passengers because of higher PFCs would mean that airlines’
                           gross revenues from ticket sales would also decline. Given our midrange
                           estimate of passenger losses and a $1 increase in the PFC, airlines could
                           receive about 0.7 percent less of the $45.8 billion they could have expected
                           (from the 338 million one-way trips and estimated fares we used) before
                           PFCs were increased. The percent decline in revenue would be less than
                           the 0.85 percent decline in passengers because nonbusiness travelers are a
                           greater portion of the reduction in passengers and they usually pay less for
                           their tickets, on average, than business travelers. While airlines’ gross
                           revenues would decline because of the loss of passengers, costs would
                           also decline; thus, the loss of profits would depend on how much costs
                           decline in conjunction with the decline in gross revenues.

                           The second way in which airlines could receive less in gross revenues if
                           PFCs were increased is the extent, if any, to which airlines decide to absorb
                           the PFC increase rather than pass it on to passengers. To the extent that
                           airlines absorb some or all of the PFC increase, they can limit or eliminate
                           the reduction of passengers. We assumed that airlines might be willing to
                           absorb some of the higher cost to remain competitive in a given market. In
                           our midrange scenario, airlines pass on the full increase in PFCs to business
                           travelers but only half of the increase to nonbusiness travelers. On the
                           basis of that scenario, airlines could receive about 0.6 percent less of the
                           $45.8 billion they could have expected before the increase in PFCs.




                           10
                             The 1.3 percent figure represents about $614 million out of the $45.8 billion in gross revenues that
                           airlines could have expected from the 338 million one-way trips in the database we used and the
                           estimated fares we used for business and nonbusiness travelers.



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                             Some proposals would change the kinds of projects that are authorized for
Changes in Project           funding with PFCs. On the basis of the most recently available data, at least
Eligibility May Have         57 percent, and possibly more, of the development projects planned at
Little Immediate             commercial service airports are eligible for PFC funding.11

Effect on Program            The effects of any changes in the eligibility of projects are difficult to
Results                      assess without knowing which categories of projects would be added or
                             deleted or whether a change will be accompanied by any other conditions.
                             Also, effects are likely to vary depending on such factors as whether an
                             airport is already charging PFCs, whether it is a large or small airport, or
                             whether the change in eligibility is accompanied by an increase in PFCs.
                             However, some general observations can be drawn about the potential
                             effects of making a change in either direction—expanding or reducing
                             eligibility. Generally, any impact on airports now imposing PFCs is likely to
                             be delayed since approved collections are earmarked for specific projects
                             that are now eligible and will generally be made over a period of years.
                             Collection periods range from as little as 6 months to as many as 40 years
                             or more, with half the airports using collection periods less than 6.6 years,
                             and half with collections periods in excess of that length.12 Moreover,
                             changes in eligibility can be expected to have minimal impact, if any, on
                             increasing the number of airports participating in the program. In the case
                             of large airports, most large and medium hubs already participate. In the
                             case of small airports, without an increase in PFCs, changing the types of
                             projects eligible for funding would add little new incentive to participate.
                             The potential impacts of either an expansion or narrowing of eligibility are
                             discussed in the next two sections.


Expanding Project            Any expansion in the eligibility of projects will allow airports to use PFCs
Eligibility Will Not Alter   to pay for additional projects that cannot now be funded through federally
Current Funding at           authorized programs. As noted, because collections occur over several
                             years and are earmarked for specific projects, expanding the eligibility of
Participating Airports       projects will not alter current funding patterns very much at participating
                             airports nor is it likely to entice many new airports into the program.




                             11
                               The cost of AIP-eligible projects at commercial service airports comprised 57 percent of the annual
                             average cost of planned development for 1997 through 2001. (See Airport Financing: Funding Sources
                             for Airport Development [GAO/RCED-98-71, Mar. 12, 1998] ). As we discuss in chapter 2, all projects
                             eligible for AIP funding are also eligible for PFC funding, and PFCs can also fund some projects that
                             are not eligible for AIP funding. Available data did not identify how much, if any, of the planned
                             development that was not eligible for AIP funds are projects that could be funded with PFCs.
                             12
                               The average collection period is 9 years.



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                                            Nevertheless, some factors could prompt new airports to participate. For
                                            example, because the PFC program requires only consultation with airlines
                                            instead of airline approval, an airport’s incentive to participate may
                                            increase if the expanded eligibility includes projects that have lacked
                                            airline support in the past. The type of newly eligible projects—if they are
                                            landside or airside projects—may also affect whether expanded eligibility
                                            generates interest in the PFC program among nonparticipating large or
                                            small airports. Table 4.9 provides an overview of some potential effects of
                                            any expansion in project eligibility.


Table 4.9: Potential Effects of Expanding the Types of Projects Eligible for Funding With PFCs
Impact on                        Potential impact
Participating airports        In the short term, participating airports are likely to experience little immediate impact because
                              approved PFC collections are earmarked for projects and the statute prohibits collection of more funds
                              than needed for the approved projects. In the long term, participating airports would have to file new
                              applications to use PFCs for the newly eligible projects.
Nonparticipating airports     Little increase in participation is likely. In the case of large airports, increased participation would be
                              limited because only 14 of the 70 large and medium hub airports are currently not participating.
                              Expanded eligibility alone may not entice many small airports to participate because of the limited
                              funds generated by their lower passenger levels. The impact of expanding eligibility, nevertheless,
                              may provide some incentive for more airports to participate because
                              •newly eligible projects were not previously eligible for federally authorized funding and
                              •PFCs represent a funding source not subject to an airline veto.
Airlines                      To the extent airports turn to PFCs to fund the new projects instead of using funding sources that the
                              airlines have more influence over, the airlines’ role in development decision-making could be
                              diminished. The impact on the airlines also depends on the extent to which expanded eligibility
                              attracts new airport participants and whether the airlines absorb, usually for competitive reasons, part
                              or all of the new fees or existing fees at other airports.
Passengers                    Passengers could benefit if the expanded eligibility hastens development. The impact on passengers
                              depends also on the extent to which their airfares change because of the airlines’ decisions
                              concerning absorbing or passing on PFCs at newly or previously participating airports.
Management of the program     Expanding eligibility is likely to have little impact on FAA’s management of the program, although a
                              period of increased communication between FAA and aviation groups may be needed to clarify the
                              changes.



Narrowing Project                           Narrowing the eligibility of projects could eliminate projects that remain
Eligibility Will Not                        eligible for AIP funding, or it could eliminate projects that are not eligible
Immediately Affect                          under AIP. Narrowing the eligibility of projects is not likely to have an
                                            immediate impact on funding patterns at participating airports because of
Participating Airports                      the length of approved collection periods and the earmarking of funds for
                                            specific projects, but in the long run, airports will have to find other ways
                                            to pay for the eliminated project types. Table 4.10 provides an overview of
                                            some potential effects of narrowing the eligibility of projects.




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Table 4.10: Potential Effects of Narrowing the Types of Projects Eligible for Funding With PFCs
Impact on                        Potential impact
Participating airports        Participating airports are likely to experience little immediate impact because approved PFC
                              collections are generally earmarked for a period of years. In the long term, airports would have to find
                              other funding sources for projects no longer eligible. Their success in doing so could depend on
                              whether the projects are eligible for AIP and whether airlines are supportive of those kinds of projects.
                              Large airports may have an easier time than small airports in accommodating narrowed eligibility
                              because of their greater access to other funding sources such as bonds and available airport
                              revenues.
Nonparticipating airports     Narrowing the eligibility of projects reduces the scope of the program’s possible benefits. What effect
                              this will have on an airport’s decision to participate is unknown. Narrowing the eligibility of projects
                              may not entice nonparticipants to join the program, but it also does not necessarily discourage
                              participation because an airport could still use PFC funds for the types of projects that remain eligible.
Airlines                      The airlines’ role in development decision-making could be enhanced if the narrowing of eligibility
                              leads airports to use funding sources over which airlines have more influence than over PFCs.
Passengers                    Passengers may be affected by the extent to which reduced eligibility results in delays in airport
                              development.
Management of the program     Narrowing eligibility is likely to have little impact on FAA’s management of the program, although a
                              period of increased communication between FAA and aviation groups may be needed to clarify the
                              changes.



                                            In addition to changes to the fee level and the eligibility of projects, some
Some Proposed                               proposals to change the PFC program would add new criteria for
Changes Provide New                         determining whether an eligible project should be funded. The following
Project Selection                           are three of those proposals:

Criteria                                •   prioritize projects,
                                        •   require projects to undergo cost-benefit analysis and meet a specified
                                            cost-to-benefit threshold, and
                                        •   require airline approval rather than consultation.

                                            Adding new selection criteria will reduce some of the flexibility that
                                            airports have under the PFC program in comparison to their ability to use
                                            some other funding sources such as bonds. Under more stringent
                                            screening requirements, it is possible that some projects that are currently
                                            being funded with PFCs would not have been approved. The overall impact
                                            of these proposals, however, depends mainly on the specifics of their
                                            implementation. In determining how any of these proposals might be
                                            implemented, there are a number of issues that would be useful to
                                            consider. Table 4.11 discusses some of the issues that are important in
                                            connection with the implementation of these proposals.




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Table 4.11: Issues to Consider Regarding Proposed Changes to PFC Project Selection Criteria
Proposal                       New selection criteria  Issues to consider
Prioritize projects          Projects would be ranked       Currently, project type has no impact on the decision to fund a project
                             according to selected          with PFCs beyond the consideration of whether it is eligible and meets a
                             criteria and would be          program objective.
                             funded on the basis of their
                             priority. A lower-priority     If prioritization is required, key issues for consideration include the
                             project could not be funded    following:
                             before a higher-priority       •What should the prioritization criteria be?
                             project.                       •Should project ranking be affected by airport type?
                                                            •What should be the relative prioritization between airside and landside
                                                            projects? Should it be the same as for AIP projects? AIP uses a priority
                                                            system that, if adopted for the PFC program, could cause the distribution
                                                            of PFC funds among projects to more closely reflect the distribution
                                                            pattern under AIP. While the AIP priority system is not the sole factor in
                                                            determining which projects receive grants, it awards a higher priority to
                                                            airside projects than to landside projects. Currently, a larger portion of
                                                            PFC funds is spent on landside projects.
Cost-benefit analysis        Only those projects with       Currently, cost-benefit analyses are not required for PFC projects but
                             benefits that meet or          “adequate justification” is. (See chapter 2.) Cost-benefit analyses would
                             exceed their costs would be    likely replace the adequate justification requirement and could result in
                             funded.                        more stringent selection criteria. Such analyses could also increase
                                                            project planning costs and lengthen the time it takes airports to complete
                                                            their applications.

                                                            If such analyses are required, important issues for consideration include
                                                            the following:
                                                            •Should all projects be required to undergo the analysis? If not, which
                                                            ones should?
                                                            •How would the requirement affect statutorily mandated projects that do
                                                            not meet the cost-benefit threshold?
                                                            •At what stage of project development or review should such analyses
                                                            be required?
                                                            •How will nonfinancial costs and benefits be assessed?
                                                            •FAA is preparing to issue final guidelines for cost-benefit analysis of
                                                            capacity projects that will use $5 million or more in AIP discretionary
                                                            funds. Should the same guidelines apply to analyses of PFC projects? If
                                                            not, how should guidelines be established?
                                                                                                                          (continued)




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Proposal                       New selection criteria      Issues to consider
Airline approval of projects   Projects could not be       Currently, consultation with the airlines is required, but not their approval.
                               funded unless designated    Requiring airline approval would give airlines a veto over the imposition
                               airlines approved the       and use of PFCs.
                               project.
                                                           If airline approval is required, important issues for consideration include
                                                           the following:
                                                           •How would airline approval or disapproval be determined? For
                                                           example, would a percentage of the number of airlines serving the
                                                           airport constitute approval or disapproval, would airlines have weighted
                                                           votes on the basis of some indicator of their share of the use of the
                                                           airport or would both requirements apply as under the airport
                                                           privatization pilot program, where 65 percent of both the number of
                                                           airlines and the landed weight of airlines is required for
                                                           decision-making?
                                                           •Should approval criteria differ for different airports, such as small
                                                           versus large airports?
                                                           •Should airline approval be required for all types of projects, including
                                                           those that enhance competition among airlines?
                                                           •Would airports have an opportunity to appeal airline disapproval of
                                                           projects? If so, to whom?
                                                           •Should the bases for airline disapproval be defined by law or regulation?


                                           If the PFC program remains as currently designed and implemented, PFCs
The Option of Making                       will continue to fund airport development as described in chapter 3. Given
No Change to the PFC                       the high rates of participation among large hub, medium hub, and small
Program                                    hub airports and the lengths of approved collection periods, the array of
                                           projects planned for funding with PFCs is unlikely to change very much in
                                           the near term. Retaining the program’s current profile is unlikely to
                                           increase participation noticeably by eligible airports that do not currently
                                           levy the PFC because there would be no added incentives to entice new
                                           entrants.

                                           The potential effects of retaining the PFC program’s current structure on
                                           airport development will also depend on the changing demands placed on
                                           the aviation system and the resources available to respond to those
                                           demands. Demands appear to be increasing, largely from a growth in air
                                           traffic. For example, the National Civil Aviation Review Commission
                                           reported in December 1997 that airport-related congestion is expected to
                                           increase in the future. Also, FAA is forecasting a 3.4 percent annual growth
                                           in enplanements for fiscal years 1999 through 2010.

                                           As we discussed earlier, participating airports can expect to collect about
                                           $1.4 billion a year from PFCs on the basis of 1997 enplanement levels.
                                           Annual growth in enplanements will increase those revenues somewhat.
                                           But as we noted in our March 1998 report, even when the contribution that



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                     PFCs make toward paying for airport development is considered, the
                     annual average cost of planned development exceeded the amount of
                     funding that was available by about $3 billion for the more than 3,300
                     airports in the national system.13 In an environment in which demands on
                     the aviation system appear to be increasing, holding the PFC program
                     relatively constant will increase pressure on the need for other funding
                     sources to accommodate any future differences between the costs of
                     planned development and total available funding.


                     We provided the Department of Transportation, FAA, our advisory panel of
Agency Comments      two experts, ACI-NA, ATA, and NASAO with a copy of the draft report, or
and Our Evaluation   portions thereof, for review and comment. We spoke with the Deputy
                     Director of FAA’s Office of Airport Planning and Programming, the ATA’s
                     Director of Airport Planning and Development, and the Vice President of
                     NASAO, and we received comments from our advisory panel of experts, all
                     of whom generally agreed with the facts presented and thought the report
                     was both thorough and balanced in its discussion of the issues. They
                     provided some suggestions for clarification and additional information
                     that we have incorporated in the report as appropriate. We met with the
                     President, the Senior Vice President for Economic and Associate Affairs,
                     and the Vice President for Government Affairs of the ACI-NA, who
                     questioned whether a reduction in passengers would actually occur if PFCs
                     were increased. They questioned whether passengers would actually see
                     an increase in ticket fares if passenger facility charges were raised
                     because many factors, not only higher passenger facility charges, affect
                     the pricing decisions of airlines. They also questioned the use of elasticity
                     analysis to assess the potential impact of higher PFCs on passenger levels
                     because it is theoretical; they suggested that a historical analysis might
                     provide more useful information.

                     We believe that we have appropriately applied generally accepted
                     economic analysis methods to estimate how higher passenger facility
                     charges may affect ticket fares and how increases in those fares could
                     affect passenger levels, including acknowledging the uncertainty
                     associated with such an estimate. Although many factors influence air
                     fares simultaneously, in analyzing the impact of one factor, such as higher
                     passenger facility charges, it is necessary to hold constant the effect of all
                     other factors. Furthermore, the elasticities used in our analysis were based

                     13
                       That gap information is based on 3,304 airports that were in the NPIAS for the fiscal years 1997
                     through 2001. (See Airport Financing: Funding Sources for Airport Development [GAO/RCED-98-71,
                     Mar. 12, 1998].) The NPIAS for the fiscal years 1998 through 2002 shows an increase of 40 airports.
                     (See fig. 1.1.)



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on statistically significant real world relationships between prices and
passenger levels and have been previously used by the Department of
Transportation. Nevertheless, discussion of the uncertainties associated
with analysis of the potential effect of higher fees on passenger levels was
clarified, particularly in the executive summary, to assure a clear
understanding of our methodology.




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Appendix I

Methodology for Analyzing the Potential
Impact of Increases in PFC Fees on
Passenger Traffic
                        To estimate the potential impact of increases in the passenger facility
                        charge (PFC) on passenger levels, we used data on the number of
                        passenger trips and the fares paid from July 1, 1997, through June 30, 1998.
                        The general approach of our analysis was to estimate the percent increase
                        in fares that would result from a PFC increase and then to estimate the
                        reduction in passengers likely to result from that fare increase. There is
                        considerable uncertainty associated with this analysis because the
                        estimated reductions in air travel are highly dependent on the assumptions
                        underlying the calculations. As a result, we developed three scenarios to
                        present midrange, high, and low estimates of the reductions in passenger
                        travel.

                        This appendix describes our analysis. The first two sections discuss the
                        key considerations in estimating the percent change in fares resulting from
                        a PFC increase and the reduction in passengers likely to result from that fee
                        increase. The third section presents the scenarios that we use in
                        developing the estimates of the impact. The fourth section presents
                        detailed estimates of the impacts for different types of trips under each
                        scenario. The last section discusses the data that we used.


                        Estimating the percent change in fares resulting from a PFC increase
Key Considerations in   requires knowing both the fares before the PFC increase and the extent to
Estimating Fare         which the PFC increase results in higher fares. We used fare data (which
Changes Resulting       are discussed later) for different types of trips to estimate the average fare
                        for each trip type and the 25th and 75th percentiles of the fare distribution.
From PFC Increases      On average, fares paid by business travelers are higher than fares paid by
                        nonbusiness travelers on the same trips. However, ticket samples used to
                        provide fare data do not indicate the purpose of the trip. So, to estimate
                        the average fares separately for business and nonbusiness travelers, we
                        needed to make inferences from the distribution of all fares. For each type
                        of trip, we used the 25th and 75th percentiles of the fare distribution as
                        proxies for the average fares paid by nonbusiness and business travelers,
                        respectively.

                        The percent change in fares due to a PFC increase also depends on the
                        pricing strategies that airlines use in adjusting their fares in response to an
                        increase in the PFC and on the number of PFCs collected per trip. In an
                        attempt to limit passenger losses resulting from higher fares, in some
                        cases, airlines might choose to absorb some portion of the higher fee. The
                        more that they absorb, the smaller the increase in fares. Our scenarios




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                            Methodology for Analyzing the Potential
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                            Passenger Traffic




                            incorporate different assumptions about the extent to which PFCs are
                            absorbed by airlines.

                            We used information on which airports charge PFCs to estimate for each
                            trip the number of PFCs paid per trip. We also took into account the
                            limitation that only two PFCs can be collected per one-way trip even when
                            the trip includes more than two enplanements.


                            Estimating the decline in passenger levels for different types of trips
Key Considerations in       because of a given fare increase requires knowing the number of travelers
Estimating the              on each trip type and the sensitivity of travel demand to a price change on
Decline in Passenger        each type of trip (a concept known as the price elasticity of demand). Our
                            data on trips from the ticket sample could be readily divided into trips
Levels Because of           defined by the following characteristics:
Fare Increases
                        •   distance—less than 500 miles (short-haul) versus 500 miles or more
                            (long-haul);
                        •   airport size—large and medium hubs (large airports) as the origin and
                            destination versus at least one small airport as the origin or destination;
                            and
                        •   carrier—regular-fare carrier versus low-fare carrier.1

                            To estimate the share of travel attributable to business versus nonbusiness
                            purposes, we relied on an estimate provided to us by an analyst at the Air
                            Transport Association that about 47 percent of trips were for business
                            purposes and about 53 percent were for nonbusiness purposes.

                            To identify what price elasticity estimates to use in our analysis, we
                            reviewed the literature on price elasticity estimates for travel.2 We found
                            that existing studies of this sensitivity have produced a variety of
                            estimates. Some of the estimates differ because the studies focus on
                            different groups of travelers, such as business and nonbusiness travelers;
                            but some of the estimates differ because of inherent methodological
                            difficulties in measuring the sensitivity of air travelers to price changes. In
                            general, the more sensitive that travelers are to price changes (that is, the

                            1
                             We classified the following airlines as low-fare carriers: Air South, AirTran Airways, American Trans
                            Air, Carnival, Frontier, Kiwi Air, Morris Air (if prior to acquisition by Southwest), Nation’s Air Express,
                            ProAir, Reno Air, Southwest, Spirit, Tower Air, ValuJet (if prior to merger with AirTran), Vanguard,
                            and Western Pacific. All other airlines were considered full-fare carriers.
                            2
                             We relied heavily on the summary of the literature on price elasticity estimates for air travel that is
                            presented in a May 1995 report of the Secretary of Transportation to the Congress on Child Restraint
                            Systems. We also independently reviewed some of the literature described in that report.



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                        more price elastic the demand for air travel), the larger the decrease in
                        passenger trips that will occur for each $1 increase in the PFC. Studies of
                        passengers’ sensitivity to price changes show that the degree of price
                        sensitivity is typically greater for nonbusiness than for business travelers
                        and greater on short routes for which auto travel is a feasible alternative
                        than on long routes.


                        We developed three scenarios that incorporate different assumptions
Three Scenarios         about the price elasticity of demand for air travel and the extent to which
Incorporate Different   airlines will adjust their prices in response to an increase in PFCs. In each
Assumptions             scenario, we made the same assumptions that 53 percent of the trips
                        represented nonbusiness travel, that 47 percent represented business
                        travel, and that the 25th and 75th percentile fares could be proxies for
                        average nonbusiness and business fares, respectively. In all of the
                        scenarios, we treat the elasticities as constants. That is, if the elasticity is
                        –1.0, a 1 percent increase in fares will lead to a 1-percent decline in the
                        number of passengers, and a 5 percent increase in fares will lead to a
                        5-percent decline in the number of passengers. These scenarios were
                        designed to yield a range of estimates of the reduction in passengers
                        resulting from an increase in PFCs.

                        For our midrange scenario, we used estimates of the price elasticity of
                        demand that we determined to be typical of studies that have produced
                        such estimates. In particular, this scenario incorporates assumptions that
                        for business travel, the elasticity was –1.0 for short routes and –0.8 for
                        long routes; for nonbusiness travel, the elasticity was –2.0 for short routes
                        and –1.6 for long routes. For this scenario, we also incorporated the
                        assumption that because business travel is less sensitive to price than
                        nonbusiness travel, airlines would be able to pass on the full increase in
                        PFCs for business travel by raising fares accordingly. However, for
                        nonbusiness travel, they would have to absorb 50 percent of the increase
                        in PFCs to avoid losing too many passengers.

                        For the high scenario, we raised all of the elasticity estimates by
                        25 percent and for the low scenario we lowered them all by 25 percent.
                        Also, for the high scenario we incorporated the assumption that the
                        airlines would pass on the full increase in PFCs for all travelers, while for
                        the low scenario we incorporated the assumption that to avoid losing too
                        many passengers, airlines would have to absorb more of the PFC increase.
                        In particular, in the low scenario, airlines would be able to pass through




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                      Methodology for Analyzing the Potential
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                      Passenger Traffic




                      only 75 percent of the PFC increase to business travelers and only
                      37.5 percent of the PFC increase to nonbusiness travelers.3

                      In the next section we present results showing the impacts on passenger
                      levels per $1 increase in the PFC. A $2 increase, for example, will result in
                      an estimated decline twice as large as the decline resulting from a $1
                      increase.


                      Tables I.1, I.2, and I.3 show the estimated declines in passenger levels per
Declines in           $1 increase in the PFC for various types of routes under our midrange, high,
Passengers Per $1     and low scenarios, respectively. The calculation of those results was
Increase in the PFC   performed by (1) estimating the number of business and nonbusiness
                      travelers in each trip category by multiplying the percent distribution of
Were Estimated        business and nonbusiness travelers times the total passengers in each trip
Under Each Scenario   category; (2) estimating the percent change in the average business and
                      nonbusiness fare paid in each trip category as a result of a $1 increase by
                      mulitplying the average number of PFCs paid per trip by $1, multiplying the
                      result by the percent of the increase in the PFC that airlines pass on to
                      travelers to calculate the fare increase, and then dividing that number by
                      the average business and nonbusiness fares to calculate the percent
                      change in fares for each trip category; (3) estimating the percent change in
                      one-way business and nonbusiness trips by multiplying the percent change
                      in fares by the price elasticity; and (4) estimating the change in one-way
                      trips for business and nonbusiness travelers in each trip category by
                      multiplying the respective percent changes by the respective number of
                      business and nonbusiness travelers.




                      3
                       In some sense, these combinations of assumptions for the high case and low case scenarios may
                      appear unrealistic when compared to the midrange case. With higher elasticities, as in the high case,
                      one might expect airlines to be less able rather than more able to pass on PFC increases by raising
                      fares than in the midrange case, in which elasticities are lower. However, we do not know the actual
                      ability that airlines would have to pass forward PFC increases. Therefore, in developing the high case
                      and low case scenarios, we have incorporated combinations of assumptions that are designed to yield
                      estimated reductions in passengers substantially different from those in the midrange scenarios to
                      show the wide range of possibilities resulting from the inherent uncertainty of the estimation process.



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                                             Methodology for Analyzing the Potential
                                             Impact of Increases in PFC Fees on
                                             Passenger Traffic




Table I.1: Estimated Decline in Passengers Per $1 Increase in the PFC - Midrange Case
Passengers in thousands
                                Business passengers                      Nonbusiness passengers              Total passengers
Route type                        Number                  Percent             Number         Percent         Number            Percent
Short-haul, small airport
Regular-fare                          60.0                     0.38              198.6          1.11            258.6             0.77
Low-fare                              35.0                     0.56               63.8          0.90             98.8             0.74
Total                                 95.1a                    0.43              262.3a         1.05            357.4             0.76
Short-haul, large airport
Regular-fare                          94.9                     0.64              277.9          1.66            372.7b            1.18
                                                                                                                      b
Low-fare                             163.9                     1.26              308.0          2.10            471.8             1.71
Total                                258.7a                    0.93              585.8a         1.87            844.5             1.43
Long-haul, small airport
Regular-fare                         139.9                     0.41              333.6          0.86            473.4b            0.65
                                                                                                                      b
Low-fare                              24.1                     0.51               39.9          0.75             63.9             0.64
Total                                163.9a                    0.42              373.4a         0.85            537.3             0.64
Long-haul, large airport
Regular-fare                         291.6                     0.49              654.5          0.97            946.1             0.75
                                                                                                                      b
Low-fare                              74.1                     0.73              127.8          1.12            202.0             0.94
Total                                365.7                     0.52              782.3          0.99          1,148.1b            0.77
All short-haul                       353.8                     0.71              848.1          1.50          1,201.9             1.13
All long-haul                        529.7                     0.49            1,155.7          0.94          1,685.4             0.73
All small airport                    259.0                     0.42              635.7          0.92            894.7             0.69
All large airport                    624.5                     0.64            1,368.1          1.24          1,992.6             0.96
All regular-fare                     586.4                     0.47            1,464.4          1.04          2,050.9             0.77
All low-fare                         297.1                     0.87              539.4          1.40            836.5             1.15
                                          a                                            a                                a
All routes                           883.5                     0.56            2,003.9          1.12          2,887.4             0.85
                                             a
                                             Does not total because of rounding.
                                             b
                                                 Does not cross total because of rounding.




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                                              Methodology for Analyzing the Potential
                                              Impact of Increases in PFC Fees on
                                              Passenger Traffic




Table I.2: Estimated Decline in Passengers Per $1 Increase in the PFC - High Case
Passengers in thousands
                                Business passengers                       Nonbusiness passengers              Total passengers
Route type                         Number                  Percent             Number         Percent         Number            Percent
Short-haul, small airports
Regular-fare                          75.1                      0.47              496.4          2.78            571.4b            1.70
                                                                                                                       b
Low-fare                              43.8                      0.70              159.5          2.25            203.2             1.52
Total                                118.8a                     0.54              655.8a         2.63            774.7a,b          1.65
Short-haul, large airports
Regular-fare                         118.6                      0.80              694.6          4.14            813.2             2.57
Low-fare                             204.8                      1.58              769.9          5.26            974.7             3.53
Total                                323.4                      1.16            1,464.5          4.66          1,787.9             3.02
Long-haul, small airports
Regular-fare                         174.8                      0.51              833.9          2.14          1,008.7             1.37
Low-fare                              30.1                      0.64               99.6          1.89            129.7             1.30
Total                                204.9                      0.52              933.5          2.11          1,138.4             1.37
Long-haul, large airports
Regular-fare                         364.5                      0.61            1,636.2          2.43          2,000.8b            1.58
                                                                                                                       b
Low-fare                              92.7                      0.92              319.6          2.80            412.2             1.92
Total                                457.2                      0.66            1,955.8          2.49          2,413.0             1.63
                                                                                                                       b
All short-haul                       442.3                      0.88            2,120.4          3.76          2,562.6             2.41
All long-haul                        662.1                      0.61            2,889.3          2.35          3,551.4             1.53
All small airports                   323.7                      0.53            1,589.4          2.30          1,913.1             1.47
All large airports                   780.6                      0.80            3,420.3          3.11          4,200.9             2.02
All regular-fare                     733.0                      0.59            3,661.1          2.60          4,394.1             1.65
All low-fare                         371.3                      1.09            1,348.6          3.51          1,719.9             2.37
                                           a                                            a                              b
All routes                          1,104.4                     0.70            5,009.7          2.80          6,114.0             1.81
                                              a
                                              Does not total because of rounding.
                                              b
                                                  Does not cross total because of rounding.




                                              Page 69                                         GAO/RCED-99-138 Passenger Facility Charges
                                             Appendix I
                                             Methodology for Analyzing the Potential
                                             Impact of Increases in PFC Fees on
                                             Passenger Traffic




Table I.3: Estimated Decline in Passengers Per $1 Increase in the PFC - Low Case
Passengers in thousands
                                Business passengers                      Nonbusiness passengers              Total passengers
Route type                        Number                  Percent             Number         Percent         Number            Percent
Short-haul, small airports
Regular-fare                          33.8                     0.21              111.7          0.63            145.5             0.43
Low-fare                              19.7                     0.31               35.9          0.51             55.6             0.42
Total                                 53.5                     0.24              147.6          0.59            201.0a,b          0.43
Short-haul, large airports
Regular-fare                          53.4                     0.36              156.3          0.93            209.7             0.66
Low-fare                              92.2                     0.71              173.2          1.18            265.4             0.96
Total                                145.5a                    0.52              329.5          1.05            475.1b            0.80
Long-haul, small airports
Regular-fare                          78.7                     0.23              187.6          0.48            266.3             0.36
                                                                                                                        b
Low-fare                              13.5                     0.29               22.4          0.42             36.0             0.36
Total                                 92.2                     0.24              210.0          0.48            302.3b            0.36
Long-haul, large airports
Regular-fare                         164.0                     0.28              368.2          0.55            532.2             0.42
Low-fare                              41.7                     0.41               71.9          0.63            113.6             0.53
Total                                205.7                     0.30              440.1          0.56            645.8             0.44
All short-haul                       199.0                     0.40              477.1          0.85            676.1             0.64
All long-haul                        297.9                     0.27              650.1          0.53            948.0a            0.41
All small airports                   145.7                     0.24              357.6          0.52            503.3             0.39
All large airports                   351.3a                    0.36              769.6          0.70          1,120.8a,b          0.54
All regular-fare                     329.9                     0.26              823.7          0.59          1,153.6             0.43
All low-fare                         167.1                     0.49              303.4          0.79            470.5             0.65
                                          a                                                                          a,b
All routes                           497.0                     0.31            1,127.2          0.63          1,624.1             0.48
                                             a
                                             Does not total because of rounding.
                                             b
                                                 Does not cross total because of rounding.




                                             We contracted with GRA, Inc., a consulting firm that does extensive work
Description of Data                          on aviation issues, to provide us with data for our analysis. Although we
                                             were not able to verify the data, GRA, Inc. is very experienced in handling
                                             airline data and has worked under contract previously for the Federal
                                             Aviation Administration. GRA, Inc. used data on the number of one-way
                                             trips made and the fares paid by a sample of passengers from the
                                             Department of Transportation’s DB1A database for the period July 1, 1997,



                                             Page 70                                         GAO/RCED-99-138 Passenger Facility Charges
    Appendix I
    Methodology for Analyzing the Potential
    Impact of Increases in PFC Fees on
    Passenger Traffic




    through June 30, 1998. To provide us a more reliable database, at our
    direction, GRA, Inc. applied several screens that excluded data from
    certain tickets. These screens ruled out the following:

•   all routes that average less than one passenger per day,
•   trips with more than 3 coupons one-way,
•   all tickets with fares of $12 or less (to eliminate frequent flyer tickets),
•   tickets with an unreadable fare field, and
•   trips that include an airport outside the continental United States.




    Page 71                                   GAO/RCED-99-138 Passenger Facility Charges
Appendix II

Advisory Panel Members


              Stephen M. Quilty
              Assistant Professor
              Bowling Green State University
              Aerotechnology Annex, East Poe Road
              Bowling Green, OH 43403-0307

              Dr. Seth Young
              Assistant Professor
              Department of Business Administration
              Embry-Riddle Aeronautical University
              600 South Clyde Morris Boulevard
              Daytona Beach, FL 32114-3900




              Page 72                            GAO/RCED-99-138 Passenger Facility Charges
Appendix III

Major Contributors to This Report


                        Beverly Ann Bendekgey
Resources,              Anne A. Cangi
Community, and          Jay R. Cherlow
Economic                Lynne L. Goldfarb
                        Julian L. King
Development Division    Stanley G. Stenersen
                        John A. Thomson, Jr.
                        Randall B. Williamson


                        David K. Hooper
Office of the General
Counsel
                        Joseph D. Kile
Office of the Chief
Economist




(348126)                Page 73                 GAO/RCED-99-138 Passenger Facility Charges
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