Airline Competition: Passenger Facility Charges Can Provide an Independent Source of Funding for Airport Expansion and Improvement Projects

Published by the Government Accountability Office on 1990-06-19.

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

                   United States General Accounting   Office

For Release         Airline  Competition:     Passenger Facility    Charges
on Delivery         Can Provide  An Independent     Source of Funding for
Expected at
1O:OO a.m. EDT      Airport  Expansion    and Improvement  Projects
June 19, 1990

                    Statement    for   the   Record   by
                    Kenneth M. Mead
                    Director,   Transportation      Issues
                    Resources,   Community,      and Economic
                    Development    Division
                    Before the
                    Subcommittee  on Aviation
                    Committee on Public     Works and Transportation
                    House of Representatives

GAO/T-RCED-90-99                                                GAO   Form   160w/87)
Mr.   Chairman    and Members of the         Subcommittee:

         We appreciate       the opportunity      to testify      on whether airports
need to have the option            of assessing      a direct     charge on passengers
in order to engage in airport              expansion     and promote a more
competitive        environment.       Such direct     charges,      called    passenger
facility      charges or PFCs, are currently             prohibited       by the Airport
Development       Acceleration      Act of 1973.        Proposals      for PFCs have
called     for relatively       modest amounts, such $1, $2, or $3 to be
included      in the ticket      price   collected      by airlines,       the same way
the federal        ticket    tax is collected.        However, PFC funds would be
remitted      directly     to the airports,       rather     than going to either        the
airlines      or to the federal        government.

        Our statement     will  focus on whether there is a need for
legislation     authorizing     PFCs and on ways to ensure that PFC funds
would be used for airport          capacity   expansion      and not diverted           to
other uses.      Our analysis      is based on a series          of previous       and
ongoing GAO reviews         on competition     in the airline         industry     that
have examined how changes in the airline                industry      since
deregulation     have affected       airline   fares,     the ability         of new firms
to enter the industry,         and the ability        of existing       airlines     to
enter new markets.          In summary, our findings          are as follows:

       --   PFCs could help shift        more control       over airport        expansion
            decisions     from airlines    back to airports           by reducing
            airports'     need for airline      approval      of capital      projects.
            A PFC could be especially        useful      at airports      where one or
            two airlines       control  most of the traffic           or most of the
            gates and other essential         facilities       through     restrictive
            leases.      PFC funds could also help fill             the gap between
            airport    capital     needs and federal       funding.      However, a PFC
            would not be a panacea, because a lack of independent

             funding  is not the          only problem faced by airports               trying
             to expand capacity           or promote competition.

       --    Potential      problems,    such as the diversion        of PFC funds to
             nonairport      uses, can be avoided if the authorizing
             legislation       includes    adequate safeguards.        Specific
             safeguards      could ensure that PFC funds are used only for
             airport     projects     to expand capacity       and competitive       access
             and that potential         entrant   airlines     have access to PFC-
             funded facilities.          Without   such safeguards,        there is a
             risk that PFC funds collected              from the traveling       public
             could be used in ways that would ultimately                 reinforce
             airline     dominance.

        Attachment      I to     our testimony      contains      results     from our
survey of 183 airports              showing current       airport     capital      project
funding     patterns,      the    extent   of leases and contracts              between
airports      and airlines        that limit      access for potential           competitors,
and the wide range of             factors    that could limit         or delay airport
expansion      in the near        future.      Attachment      II contains       a list    of
selected      GAO reports        and testimonies       on airline       competition


        Many airports    need additional      capacity    to reduce congestion
and delays and encourage         greater    competition.       Additional        capacity
could not only provide        for growth by the airlines            already      serving
an airport    but could also make room for potential                competitors        to
begin service.        However, airports      are often unable to add needed
capacity    because of agreements        that give incumbent         airlines
significant     control   over airport      expansion    decisions.         These
agreements    have the effect       of discouraging      expansion       and reducing
competitive     access at many of the nation's           66 largest        airports.      In
our September 1989 testimony          before     this subcommittee,      we offered                 a
number of options         that could increase       competition    in the airline
industry,     including      a PFC.l  While a PFC could help solve the
funding    problems     that prevent   airport      expansion   and reduce the
airports'     need to enter into restrictive            agreements   with airlines,
the PFC would not be a panacea for all of the capacity                   and
competition      problems     faced by airports.

Incumbent Airlines  Exercise             Sianificant
Control  Over Many Airnorts'             DeVelODment       Decisions

        Our work shows that incumbent                   airlines    now exercise
significant        control      over airport         expansion     and suggests      that a PFC
could help shift           more control          over expansion       decisions     back to
airports.         Airports      have entered         into two major types of agreements
that give airlines            control       over development        decisions.       The first
type of agreement,            called     a majority-in-interest             agreement or MII,
gives airlines          with a majority           of the airport's        operations      a voice
in airport        decisions.        MIIs give these airlines              the right     to
approve airport           budgets or capital            projects    that would affect        the
airlines'       pre-existing        commitments to cover payments on
outstanding        airport      bonds.        Under the second type of agreement,
called      residual      funding,      airlines       agree to pay sufficient          fees to
cover all of the airport's                  expenses that are not covered by other
revenues,       such as revenues            from concessions        and parking.        In
return,      the airlines        get the right          to approve airport        decisions
that would increase             airport       expenses.        Both types of agreements
help airports         get lower interest             rates on their       bonds.

       MIIscan force airports    to delay capital   projects  or, in
effect,  to forego them altogether.      MIIS are in effect   at 36 of
the 66 largest   airports  in the country,   as shown in attachment    I.

lBarriers     to Comnetition  in the Airline   Industry                 (GAO/T-RCED-89-65,
Sept. 20,     1989, and GAO/T-RCED-89-66,    Sept. 21,                 1989).
(See tables    I.1 and 1.2.)      For instance,   an official       at one large
airport   told us it took years to get airline         approval       for a new
air cargo facility.        At another   airport,  several     projects    that
would provide     expanded capacity     to meet expected      growth and would
improve airport     security   have been rejected     by the incumbent

        Our work suggests       that MIIs do represent          a barrier      to
expansion      and competitive      entry and could detract          from the
usefulness      of a PFC. Our analysis          of airline      fares indicates       that
fares are about 3 percent           higher    on routes    from airports         where an
MI1 is in force.2          Some MI1 agreements       could prevent        an airport
from using PFC funds effectively,              since they require         airline
approval     for any projects       that could affect        incumbent      airlines'
cost of operation,         even if the projects        are not financed          with
airline-backed        bonds.    Thus, at some airports,           PFC funds could not
be used to support         a bond issue or combined with funds from other
sources,     including     federal    grants.

        According       to the Airport       Operators     Council     International
(A@=) t 25 of the 30 largest               airports     have restrictions               in their
agreements      with airlines         that limit     the airports'          ability       to make
effective     use of a PFC. Some agreements                 contain       specific        clauses
prohibiting       the airport       from (1) charging         fees to airline
passengers:        (2) changing       the way airline       landing       fees are
calculated;       or (3) charging         any additional        rates,      fees, or charges
of any kind other than those specified                   in the agreement.                 In
addition,      residual      funding     agreements     would include           PFC funds as
part of the airports'            revenues     in calculating        airline         fees.
Therefore,       airline     fees would be lowered to the extent                      that a PFC
generated      funds and the airport            would not have any net increase                     in
revenue.       Thus, a PFC could provide             an independent           funding        source

2We are currently          completing    our estimates    using an econometric
model to estimate          the relationships      between air fares and factors
that could limit          competitive    entry  into airline    markets.
to airports,         but    only if the authorizing     legislation     exempts              PFC
funds from        these     types of restrictive    provisions      in existing
airport/airline            agreements.

Airnorts      Rely Heavilv        on Airlines      to
Finance      or Guarantee        Capital    Proiects

        Many airports       rely heavily          on airlines       to fund capital
projects     for capacity       expansion         and improvement.          As shown in
attachment       I to our testimony,           half of the nation's            66 largest
airports     relied     on incumbent        airlines       to back airport        revenue
bonds.     Half of the 66 airports                also relied       on individual        airlines
seeking    facilities       to fund major projects.                  (See table     1.3.)       Thus,
airlines    wanting       to expand or begin service                at an airport        sometimes
pay for gates and other facilities                    to be added to accommodate their
new service.          At one large airport,             for instance,       half of the 30
gates leased to domestic            airlines         are "owned" by the airlines                that
paid for them.3           At another      large airport          with an MII, a low-cost
airline    wanting      to begin service           paid for the construction               of two
additional       gates in order to gain full                 access to the airport.

        A PFC could give airports          a source of revenue independent             of
airline     approval     for financing     airport    expansion     projects    needed to
meet expected        growth in operations        and to allow competitive          entry.
Airports     that are less reliant         on airline     financing      could be better
able to resist        pressure     to enter into long-term         contracts    with
airlines     containing      exclusive    use or MI1 provisions.            Fewer
restrictive      contracts,      in turn,   could give airports          more
flexibility   both in providing    facilities                  to potential        competitors
and in reducing    congestion   and delay.

3These gates         are leased      to the airlines          who paid     for   their
construction         on 99-year,       exclusive-use        leases.
Manv Airnorts       Lack Comnetitivelv
Available    Facilities

          Previous    GAO studies       have shown that airline               fares are
substantially         higher      when one or two airlines              control      most of the
traffic       and when there are barriers                to new entry.4           Fifteen      of the
top 75 airports          in the country          are concentrated,          that is, have one
airline       that handled at least             60 percent        of the traffic         or two
airlines        that handled at least            85 percent        of the traffic.li           Fares
at these airports           were about 27 percent               higher   than fares at
unconcentrated          airports,      and most of the gates and passenger
waiting       rooms at these airports              are leased to the dominant airlines
on long-term,          exclusive-use         leases.       If entrant      airlines        are to
compete on a level            playing     field,      they need access to airport
 facilities        on terms similar          to those received          by incumbent
 airlines.         Otherwise,      the entrants         would be at a disadvantage                if
their       operating     costs were higher           than the incumbents'              costs.       We
 found that many of the major airports                        in this   country       lack the
 gates and other essential               airport      facilities,       such as passenger
waiting        rooms, ticket       counters,       and baggage claim facilities,                  to
 accommodate competitive              entry.

         One indication       of the extent      of this problem is that 24 of
the 27 largest        airports     have all of at least        one essential
facility     leased for the exclusive            use of tenant     airlines.      In
addition,      as shown in attachment          I, these airports         often have no
unused facilities          as well.     (See table      1.4.)   AOCI found that only
5 of 30 major airports           have enough gates available             on competitive
terms for a potential           entrant   airline     to start    a mini-hub

4See Airline   ComDetition:      Hiaher Fares and Reduced Comnetition      at
Concentrated   Airnorts     (GAO/RCED-90-102,   July 11, 1990) and Effects
of Airline   Entrv Barriers     on Fares   (GAO/T-RCED-90-62, April  5, 1990.
5A total   of 22 airports   met the concentration                       criteria.    However,
we excluded    7 of those airports    because they                     were in multi-airport
cities   or outside   the 48 contiguous    states.

operation.       Thus, airlines      seeking to start    or expand service                at
many major airports          must arrange to use another        airline's
facilities.        According     to airline   officials,   such arrangements                 are
much more expensive          than leasing   facilities   directly        from the
airport     operator.

ComDetitive  Access to Facilities             Built   or
Exnanded With PFC Funds Could              Be Ensured

      One of the issues that has arisen               in the discussion           of PFCs
is ensuring    that increased         capacity    paid for with PFC revenues be
made available      to airlines       on a competitive       basis.       One proposal
under consideration        by the Subcommittee          to try to ensure
competitive    access calls        for a prohibition       on long-term         exclusive-
use leasing    of facilities         built    or expanded with PFC funds.              Our
work suggests     that such a prohibition,            by itself,      will     not ensure
competitive    access.       Allowing      even short-term       exclusive-use       leases
could limit    access,     especially       if the leases include           options    to
renew the lease at the discretion               of the leasing       airline.       Our work
suggests     that all exclusive-use             leasing     of PFC-funded    facilities           be
discouraged.          Otherwise,     facilities       built   with funds collected             from
the traveling         public    could ultimately         serve only to benefit
incumbent      airlines      without    improving       access for potential

       Our work indicates      that common leasing               practices     could limit
future    competitive    access to PFC-funded            facilities        by extending
the length    of time airlines        control     exclusively          leased facilities.
For instance,       it is a standard      industry       practice        to allow expired
leases to continue       on their     old terms under ncarryover"                 provisions
while new leases are being negotiated.                   While airport         officials
told us these provisions          provide     continuity         in service,       our work
has shown that some leases remain in force under their                           carryover
provisions     for years while negotiations              continue.          In addition,
some leases      allow    the   original     lease    to be renewed       at the    option         of
the airline.           Such renewal options          can add many years to the
original      term of the lease.            At one large airport,          an airline
leasing     facilities         has two renewal option          terms of 10 years each,
giving    the airline          control    of some facilities        up to 20 years after
the original         lease term expires.            The results     of our econometric
model indicate           that the larger       the share of gates an airline            leases
at an airport,           especially     if those gates are on long-term
exclusive-use          leases,      the higher    the airline's       fares are at that
airport.        (See table        I.5 and I.6 in attachment           I for information      on
long-term       and exclusive-use          gate leasing.)

        These problems            could be reduced if the facilities                    built    or
expanded with PFC funds were leased under preferential                                  leases.
Preferential         leases protect          the tenant         airline       by giving    it the
first    right     to use the facilities               under lease but also allow the
airport      operator       to assign secondary              use of the facilities            to
other airlines          when the tenant          airline        does not have operations
scheduled.          Leases on PFC-funded             facilities          could also contain         a
clause providing            that the tenant          airline        agree to accommodate a
secondary        user at some of the facilities                     it leases if the airline's
use of its total            leased facilities            (including         those on pre-existing
exclusive-use          leases)      permits.      Without         such a clause,        it would be
possible       for an airline           to lease PFC-funded              facilities     on a
preferential         basis,       use the new facilities               intensively,       and leave
exclusive-use          facilities         of the same type unused for extended
periods,       thus negating          the capacity         and competition          enhancing
effect     of the new facilities.

PFCs Could HelD         Close the GaD Between
Federal  Fundina        and AirDort Needs

        PFCs could help close the gap between federal            funding  and
airport    needs for funding    for capital    projects     in two ways.
First,    a PFC could give airports     additional      funds to use on
projects    eligible  for federal   funds but for which federal          funds
are not now available.               Second, PFC funds could be used for
projects      that are needed to expand capacity               or to promote
competition       that are not eligible           for federal     funds.       While it is
apparent      how some projects,          such as building       a new runway or
adding gates,        would increase        an airport's      capacity,     the need for
other projects         is not as obvious.           For instance,      airports      must
also provide        facilities       such as airplane      sewage treatment          plants
and noise barriers             around areas used to test airplane              engines.
Without     these facilities,          an airport's     growth is limited          just as
surely    as it is by a lack of runways or gates.

        Our work suggests         that each airport           faces a unique
combination      of needs and constraints.                 Airports     responding        to our
survey cited       a range of problems           including       state    and federal
requirements       for environmental          studies,      the need for noise
mitigation,      lack of highway access roads,                  and airline      opposition
to expansion.          As shown in attachment            I, more than half of the
nation's     66 largest      airports      reported      at least      one factor       that
could greatly        limit   or delay capacity           expansion.         (See tables       I.7
and 1.8.)      In addition,         nearly    one-third       of the airports         listing
problems on our survey reported                that unavailability            of funding,
such as funds from the Airport                Improvement        Program (AIP),         could
greatly     impede expansion.67            While PFC funding           would not eliminate
the problems       airports     face because of the environmental                   and noise
impacts of expansion,           it could help to fund required                  studies      and
pay for mitigation          measures.

6This question       asked airports      to give the extent               that    community
opposition     to increased      noise,    community opposition                to other
consequences      of expansion,      and   limitations     in the           capacity    of the
air traffic      control    system would delay expansion                  plans in the next
5 years.     In addition,       respondents      were asked to            write     in any
additional     factors    that posed problems          for their          airports.
7FAA provides      federal   grants to airports        for capacity,    security,
and safety    projects     under the Airport       Improvement    Program. However,
expansion   of revenue-producing       facilities,        such as gates,    are not
covered by this program.

       Available       federal     funding       falls     far short Of meeting
projected      airport     capital     development           needs in the next 5 years.
Although     the Airport       and Airway Trust Fund exceeds current
commitments by about $7.6 billion,                     the Trust Fund is also used to
pay for a portion          of the Federal Aviation                Administration's         (FAA)
operating      expenses and to modernize                 the air traffic         control    system
(a task that GAO estimates               will      cost about $27 billion            through     the
year 2000).         FAA estimates        airport       AIP-eligible        capital     development
needs for the next 5 years at $31 billion,                          an average of more than
$6 billion       per year, while the President's                    Budget allocated        only
$1.5 billion        in fiscal      year 1991 for AIP projects.8                    In addition,
AOCI estimates         that there is currently                a $7 billion       backlog     in
unfunded AIP projects.               A PFC could help alleviate                 some of this
shortfall      in federal       funding       for airport        development.

        A PFC could be structured           to benefit       both large and small
airports.      While airports      serving       large numbers of travelers           would
be able to generate       substantial         funds with a PFC, airports            serving
fewer travelers      might not be able to generate                enough funds with a
PFC to pay for needed projects.                Thus, larger       airports    would
probably    gain the most direct          benefits       from levying      a PFC.
However, if an airport‘s         eligibility          for AIP funds were partially
reduced if the airport        levies       a PFC, additional         federal   funds could
be made available      to those airports           less able to use the PFC. It
would not however,       unduly penalize         airports    choosing    to levy a PFC,
since those airports       would benefit         from a PFC in two ways.         First,
as long as the reduction          in eligibility         is not on a dollar-for-
dollar  basis,   airports      levying    a PFC would have a net increase             in
funds for capital      projects.       Second, as mentioned          previously,    the
funds from       the   PFC could      be spent        without    incumbent      airline

8FAAts estimate   of airport     capital   development                  needs     for     the   next
5 years is stated    in constant      1989 dollars.

        Our work suggests      that allowing         airports       to levy PFCs could
lead to four major problems.             First,      funds collected             through     a PFC
could be diverted       to nonairport-related            uses.        Second, PFC funds
could be used for airport          projects       that do not affect               airport
capacity    or promote greater        competition.           Third,      consumers@
interests     need to be safeguarded          so that they are informed                    of the
number and cost of PFCs and so that the additional                            cost of air
travel    does not become burdensome for any individual                          traveler.
Fourth,    as explained     previously,       airline      agreements          and leases
could prevent     competitive      access to PFC-funded               facilities.

Safeauards  Can Prevent  Diversion
of PFC Funds bv Airnorts

       Diversion      of PFC funds to nonairport              uses can be prevented            if
safeguards      are enacted as part of the legislation                   authorizing
PFCs. Airlines         have expressed          concern that airport         authorities
would use revenues          from PFCs for nonairport            purposes.       The Airport
and Airways Improvement             Act of 1982 requires          that airport        operators
receiving     federal     grants      provide    assurances     that airport        revenues
will   be expended for airport              purposes.      The authorizing        legislation
could contain      similar      language ensuring          that PFC funds will          be
spent only on projects            to enhance airport          capacity     and competition.
Thus, the requirement           that airport         funds be spent for airport
purposes would cover all airports                  levying    a PFC, both those that
receive    federal     grants     and those that do not.             In addition,       PFC
proposals     would provide         the Secretary        of Transportation        with the
authority     to devise an effective             program to audit        expenditures        of
PFC funds to ensure the funds are used in an appropriate                            manner.
Should the audit        reveal      that funds are being diverted,              the

legislation      could provide        for   that    airport's     PFC authority        to be
withdrawn      or suspended.

Criteria      Could   Be Set For Proiects           to be Funded      With    PFCs

       The Congress may want to establish       criteria   for the types of
projects    that airports   could finance   with PFC funds to ensure that
projects    so funded further    the goals of expanding      capacity     and
enhancing     competition.    The Secretary  of Transportation        could then
confirm   that proposed projects     meet the criteria     before     an airport
could begin collecting      a PFC.

         Appropriate     criteria        for each category          of projects     would have
to be developed.           A conservative           approach would be to limit           PFC-
funded projects        to those that are eligible                 for AIP funds,      that is
projects      related    to airport         capacity,     security,       and safety.
However, facilities           that will       be leased to airlines,            such as gates
and other facilities            essential        for potential        entrants,   are not
eligible      for AIP funds.          Thus, if the criteria              are too narrow,     they
could limit        the effectiveness           of the PFC as an alternative             source
of funding       by excluding        projects       that would promote competition             or
that would indirectly             affect     airport     capacity.        Based on our work
and the wide range of needs airports                   reported,    we believe        airports
should have a great deal of discretion                    in choosing   which        capital
projects to fund with PFCs, provided                   the projects    expand        airport
capacity and promote competition.

Consumers Will Need Information                About
the Number and Cost of PFCs

        Our work suggests    two consumer issues the authorizing
legislation     might address --the     number of times a passenger    can be
charged PFCs on a single        trip  and the way passengers    should be
informed    of PFCs when booking      flights.    Because of the development
of hub-and-spoke      systems,    many passengers   must make connections
between their        original   flight   and another    flight     at a connecting
hub airport.         If the passenger      is charged a PFC at each airport                      on
the route,    the      total  PFCs charged on a flight         could become
substantial.         Passengers     will also need to know the number,
location,    and     amount of PFCs included       in their     airfares.

        The Congress may wish to limit                 the number of times a PFC can
be levied     on any single         trip.      This will        necessitate       deciding
which airports        could collect         PFCs on flights            with multiple         stops.
Based on fourth        quarter       1989 data, at least             38 percent        of the trips
taken involved        either      connecting      flights       or stops in more than one
city.     This represents          at least      16 million        passengers.          While it
would be relatively           simple to determine              which airports          would have
the right     to collect         a PFC on one-way and round-trip                   flights,      some
flights    do not fall         into these categories.                Some formula would have
to be devised       to designate          which airports          and how many airports
could levy PFCs on "open jaw'! trips                    (i.e.,     trips     in which the
traveler     does not return          to the starting           point)      and trips       with
stops in numerous cites.                We have not done any analysis                    on this
complex issue and, therefore,                 are not prepared            to offer       any
specific     solutions       at this time.

        In addition,      authorizing      legislation       might address how
passengers      are to be informed         about the presence         and amount of PFC
charges for their         proposed trips.          One alternative      would be to
require    that PFC charges be included                in advertised    airline     fares.
Another    alternative       would be to allow the exclusion              of PFC charges
from advertised        fares but require         that consumers be informed            of
PFCs when they book tickets.               If consumers are informed            about the
presence     of PFCs, especially         those levied        at connecting      hub
airports,     they will      have better      information       to use in deciding
between competing         airlines    and routes.          Resolution    of this    issue
could be delegated         to the Secretary,           since the Department       of
Transportation         already   has the authority  to regulate      unfair     and
deceptive      airline     trade practices   and to resolve   airline       consumer
complaints.    A formal         rule-making process with opportunity                   for
public   comments could         help the Secretary  to sort through                 these
complex and contentious            issues.


         We believe       that PFCs would give airports               an important
alternative        to reliance       on airline       funding     or guarantees       to build
and expand airport            capacity.       The availability          of such an
alternative        is particularly          important     for those airports          having
severely      restrictive       MIIs or having most or all of their                   present
facilities       leased on long-term            exclusive-use       contracts.
Legislation        allowing      airports     to levy a PFC can be structured                to
protect     the interests         of the consumers paying the PFC, while still
affording       each airport        a maximum amount of flexibility                 in meeting
its particular          needs.      Our work suggests          that many of the current
problems with competition                in the airline        industry     are the result      of
agreements       and conditions          that existed       before    deregulation.        The
Congress has an opportunity        to include      safeguards      in the
authorizing    legislation     to prevent    pre-existing      agreements    between
airports    and airlines    from limiting     the effectiveness         of a PFC.
Thus, a PFC could help to shift           more control     over airport
development,     expansion,    and use decisions        to airports.

ATTACHMENT I                                                                   ATTACHMENT I


       We sunreyed       183 large,     medium-sized,        and small airports         in the
continental       United States.l         Using the Federal Aviation
Administration's         (FAA) size categories           for the communities         airports
serve,    our sample included          all 27 large airports           and all 39 medium-
sized airports.          The sample also included             117 of the 163 small
airports     reporting     routes with at least            20 passengers      per day.       The
small airports        surveyed    are end points         on a stratified       random
sample of routes         having 20 or more passengers             per day.        Thus, the
small airports        we surveyed are not themselves               a random sample of
airports,      since airports       with more routes          had a greater       chance of
being selected        than airports       with fewer qualifying           routes.
Therefore,       the data we received         from the large and medium-sized
airports     represent      a census of conditions            at those airports,        while
the data from the 117 small airports                  in our survey represent            only
conditions       at those particular         airports      and are not generalizable
to all small airports.            Nevertheless,         our survey included         72
percent     of the small airports          reporting       routes with at least 20
passengers       per day.


       Some airports       have agreements          with their    tenant  airlines,
called   majority-in-interest        (MII)         agreements,    that give the

lFAA defines      airport      size categories    based on the percentage          of
total    passengers      enplaned    in a city and its surrounding         standard
metropolitan      statistical       area.   A large hub enplanes       at least      1
percent    of the passengers,          a medium hub enplanes      0.25 percent      to
0.99 percent      of the passengers,         and a small/nonhub      enplanes    less
than 0.25 percent          of the passengers.      We applied     these criteria       to
individual     airports       (such as LaGuardia)     rather   than to communities
 (such as New York City).
ATTACHMENT I                                                                        ATTACHMENT I
airlines    some control    over airport    expansion.         (See table                1.1.)
Under these agreements,        an airport   may be required         to get               the
airlines'    approval    of the proposed project       itself,      or the               airlines
may have some control       over the airport's      ability      to issue
additional     bonds or raise    fees to pay for improvements.                          For
example, an agreement might require          approval      by airlines                  enplaning
51 percent     of the passengers     in the previous       year for any                  project
costing    over $50,000 whose costs would be recovered                from              fees
charged to the airlines.

Table 1.1: Number ti Xrcentaoe of Airnorts                With a Maioritv-in-Interest

                            airline       airline
Size of              of                                             airports          airports
aimo*     airrorts            blz           blockb       Unkna#     withHI            withMI1
Iarve            27                   6             7         2             15               56%
Medium           39                   3             9         9             21               54%
Small           117                   4             3        11             18               15%

aThis column shows the number of airports       where one airline    has a
sufficiently      large share of operations  to block approval    of airport
expansion    projects   under the terms of the MI1 agreement.
bThis column represents those                 airports     where no single   airline has
a large enough share to block                 approval     of projects  under the terms
of the MI1 agreement.
CIn these cases,          we did      not have enough information              to   determine
whether a single          airline      could block projects.

        We also asked       airports    with an MI1 whether the agreement
limited    or delayed       their    expansion efforts.    (See table 1.2.)                      One
large airport     with      an MI1 did not answer this      question.

  ATTACHMENT I                                                                                            ATTACHMENT I
  Table       1.2:        Number of           AirDOrtS        Where MI1 Limits             Or Delavs         Exnansion
                                                   Number of airDOrtS
                                      Effect    of MI1 on exnansion
                           Greatly       Moderately      Somewhat                      Does not
                            limits            limits        limits                        limit                   Total
  Size of                          or                or                                                       airports
  airnort                   delavs           delavs        dela;:                             dell:          with MIIs
  Largea                             2                         3                3                     6              14
  Medium                             4                         5                9                     3              21
  Small                              1                         2               12                     3              18

  aOne large airport   with                      an MI1 that did         not        respond      to this
  question  is not included                       in this table.


         The airports     in our survey were asked if                                 they had undertaken
  any capacity     expansion       or improvement    projects                           since 1980 costing
  over $10 million.         Fifty-six     of the large and                            medium-sized    airports
  and 48 of the small airports            we surveyed had                            such major projects.
  These airports      were then asked how important                                  several   types of
  funding   were in financing         major expansion      and                        improvement    projects.
  (See table    1.3.)

Table 1.3:       sauroes of mMim                  for Maior Cawcitv      Exransion and Imbrovement
Pmiects      Undertaken      Since       1980

Ft.&s franairline
   seeking facilities:
     Lazqe                                7              I2          3                19                   86%
     Medium                               4              10        I.2                14                   54%
     Small                                3              14        22                 17                   44%

AlTA(XiMR?TI                                             ATI!A(XMENTI
                              Numberofaimorts                         Fercentage
                                                     Airports        ofairports
Z%ZeY?                Major        Minor     not         -ins               us'
aimmrt                         -            used                          2

Airport nsenue
      Large              13            2         9          15               62%
      Mdium              17            1        11          18               62%
      small               6            2        28           8               22%

Airport  revenue
     Large                6            2        15           8               35%
     Medium               7            2        20           9               31%
    small                16           11        14          27               66%

    Large                10           13         0          23              100%
    Medium               18           11         2          29               94%
    small                40            4         2          44               96%

Airport operator's
   awn revenues:
     Large               10           11         3          21               88%
     I%ldiuIn             8           14         7          22               76%
     SlMll               18           25         3          43               93%

  germal obligation
     Iarge                2            1        21               3           12%
    Msdiurn               5            0        23               5           18%
     Small               14            6        20              20           50%

ATTAm1                                                         ATIACHMEWTI
                                   Nuzberofairoorts                      -I=*
m-                                                        Airports      ofairports
ard size of              Major          Minor     not         -w                us'
aimo*                                                                         2
                                    -            used
  revenue bards:
     Larve                    3             0        20             3             13%
     Medium                   3             1        25             4             14%
     Small                    7             3        29            10             26%
apercentagesarebasedonthetotalnu&erofaiqo~~                                   toeach
-of         this question.


          The airports        responding      to our survey reported         whether or not
  they lease ticket           counters,      passenger    hold rooms or waiting       rooms,
  and baggage claim facilities                for the exclusive        use of the leasing
  airlines.         (See table     1.4.)      An exclusive-use       lease gives the
  tenant    airline      sole right       to the facilities       leased,    even if the
  airline    chooses to leave the facilities                 unused.     Only the airports
  leasing    these facilities           for exclusive       use answered further
  questions       giving    the total       number of each type of facility,          the
  number leased,         and the number unused (unused facilities                 may or may
  not be leased).

ATTACHMENT I                                                                       ATTACHMENT I
Table   1.4:    Airnorts    With     All     of    a Facility     Leased     for   Exclusive

                                                      Percentaae    of airoorts
                                            With some                  With
                                                or all                    all              With
                          Number           exclusive-          exclusive-                   all
Size of                         of                   use                  use   facilities
airoort                airoorts                 leases              leases               useda
      Large                    27                      85%                 30%                 26%
      Medium                   39                      97%                 51%                 34%
      Small                   117                      93%                 56%                 54%
  hold rooms:
     Large                     27                      85%                 30%                 65%
     Medium                    39                      74%                 26%                 59%
     Small                    117                      36%                 16%                 67%
Baggage claim
     Large                     27                      56%                 11%              67%
     Medium                    39                      28%                  5%              55%
     Small                    117                       3%                  2%             100%
aThis column is based on the number of airports       leasing   each type
of facility     for exclusive  use.  It shows the percentage    of airports
leasing     some or all of each type of facility  for exclusive     use that
have all of that type of facility       used.


        We asked airport   officials     to tell     us how many domestic         gates
they lease to each airline,          the terms of the leases,           and how the
airlines     actually  use the gates they lease.             Airport    officials
filled    out a separate   form for each airline           leasing     gates,
detailing     the number of gates leased,          whether the airline
subleased     any of those gates to other airlines,              how the gates were
being used in 1988, and the terms under which the gates were
leased.      Two of the medium-sized       airports     reported     that they do not

ATTACHMENT I                                                                          ATTACHMENT I
have gate leases,    as did 43 of the small                     airports       we surveyed.          All
of the large airports    have gate leases.

Gate Leasinq

         Airport      facilities         are leased on two major types of leases--
exclusive        and preferential.              (See table     1.5.)       An exclusive        lease
gives the tenant              airline     the sole right       to use the leased
facilities        during       the term of the lease,            even if the tenant            airline
chooses to leave the facilities                     unused.      A preferential          lease gives
the tenant        airline         the primary     or first     right     to use the leased
facilities        whenever it has operations                 scheduled.       However, under a
preferential          lease,        the airport     operator     can also lease the
facilities        to a "secondary"            user when the primary           tenant       does not
have operations             scheduled.        Either    exclusive       or preferential          leases
may be modified            by a use-or-lose          provision       that allows       the airport
operator       to assign use of the leased facility                      to other airlines            if
the tenant        airline's           use does not meet a specified             criterion         (e.g.,
gates may be repossessed                   if the tenant      airline      has no scheduled
flights       for a period            of 6 months).

Table 1.5:  Number and Percentaae                      of Gates     Leased     bv   TYDe    and
Lenath of Lease
                                                            Number                     Percentage
TYDe    Of     Lease                                      of aates                       of uates

  With use-or-lose                                                389                             12%
  Without     use-or-lose                                      2,195                              68%

  With use-or-lose
  Without      use-or-lose                                                                        1::

       Total                                                                                      100%

ATTACHMENT I                                                             ATTACHMENT I

       We also calculated       the time remaining          on gate leases from the
date of our survey        (March 1988) until      the lease was due to expire.
 (See table    1.6.)     Gates on leases with an expiration              date of 1987
or before     are counted in the "expired"          category.        Gates on leases
expiring    in 1988 and gates on month-to-month               leases    are counted in
the "less than 1 year"         category.     However,       some leases include       a
renewal option       term, giving     the leasing     airline     the right    to renew
the lease for a stated         number of years.        The calculation        of time
remaining  on gate      leases     does not include      any renewal option
periods,  although      the    options  may significantly       extend the length
of the lease.

Table 1.6:   Number and Percentaue             of Gates   Leased   bv Lenuth    of
Time Remaininu on Lease
                                             Number         Percentage
Time remaininu      on lease               of uates           of uates
Expired                                            66                 2%
Less than 1 year                                  100                 3%
l-2 years                                         421                13%
3-5 years                                         405                12%
6-10 years                                        536                17%
11-20 years                                       740                23%
Over 20 years                                     961               30%
     Total                                      3.229               100%


   We combined the airports'           answers to questions      concerning    the
availability         of land for expansion,     the extent    their   MI1 limits    or
delays expansion,          the effect   of community opposition       to increased
airport      noise and other effects        of airport   expansion,     the ability
of the air traffic           control  system to handle expansion,         and other
concerns      listed    by the airports     to determine   the number of airports

ATTACHMENT I                                                                    ATTACHMENT I
where one or more of these factors    could greatly                   limit     or delay
expansion in the next 5 years.     (See table  1.7.)

Table 1.7: W           of Wrts           Where One Or More Factors md
Greatlv Limit or Delav -ion            in the Next 5 Years
                                            lhmber of factors
Size of              of                               Four or       At least
airbort     &oorts                     n!GIi3llEe         mom            one
Liuve              27       33%        15%        15%       11%               74%
Medium             39       31%        10%         5%        0%               46%
S&L1              117       21%         6%         5%        2%               34%

        Airport   representatives      checked boxes showing the extent                  to
which the community opposition            to increased        noise,   community
opposition      to other consequences        of airport       expansion,      and the
ability     of the air traffic      control     system to handle expansion               could
limit    or delay expansion       in the next 5 years at their              airports.
They were also given an opportunity               to write      in additional       factors
of particular       concern for their       airport,     which are tabulated           in
table    I.8 in the column headed "other             factors.11

ATTACHMENT I                                                                     ATTACHMENT I
Table 1.8:   Factors     That   Could   Affect         Airoort    Exoansion           in the
Next 5 Years
                                  Number of airports             Citing      each factor
                           Communitv onnosition                                Air
                                  To       To other                    traffic
Effect   on             increased        aspects    of                 control              Other
exoansion                    noise        exoansion                   caoacitv           factorsa
      Greatly  limit             18                          6                   6                    7
      Somewhat limit              4                          9                   9
     Would not limit              4                         11                  10                    ;f
      No response                 1                          1                   2                   18

     Greatly  limit               6                          3                   4                    6
     Somewhat limit              23                          9                   8
     Would not limit              9                         26                  25                    2
     No response                  1                          1                   2                   31

      Greatly  limit             13                         10                    7                  25c
      Somewhat limit             32                         15                   14
                                 69                         89                   91                   g
      Would not limit
      No response                 3                          3                    5                  88

aData in this column reflect            the number of additional      constraints      on
expansion    written     in by airports.      Some airports     cited  more than one
such factor:      other airports       did not respond.     Factors   cited    include
lack of funding,       airline    opposition   to expansion,      and concern over the
impact of expansion          on wetlands.
bThe "would    not limit 1V category    is       not     applicable       for    these     factors
that airport    representatives     wrote        in.
%ack of funding    was the leading "other    factor'1 cited                       by small
airports.   Eleven said lack of funding    would greatly                        limit  expansion,
while 3 said it would somewhat limit     expansion.

ATTACHMENT II                                                                               ATTACHMENT II
                                        ON AIRLINE          COMPETITION

Dereuulation:              Increased       Competition Is Makinu Airlines                        More
Efficient     and         ReSDOnSiVe       to Consumers (GAO/RCED-86-26,                     Nov.        6,
2 i line 0 etit'on:                                                                                     stems
(GAO/RCED-86-74,    May 9,                1986).
g irline  Takeoff            and Landin                                                             tation's
Slot Allocation              Rule (GAO/RCED-86-92,              Jan.      31,   1986).
(GAO/T-RCED-88-62,               Sept.     14,     1988).
A irline      Corn etit'on:
the                                    (GAO/RCED-88-217BR,             Sept.    21,    1988).
z ir Fares and Se                                                               (GAO/T-RCED-89-37,
June 7, 1989).
Barriers                                                          ndustrv        (GAO/T-RCED-89-65,
Sept.       20,   1989,      and GAO/T-RCED-89-66,              Sept. 21,        1989).
girline       Corn  et'tion:                                                          ine                t
Authority         (GAO/RCED-89-93,           June     28,     1989).
J          Service:                                                        'rnorts       Since
Dereuulation      (GAO/RCED-89-141FS,                      May 24,     1989).
Airline   Comnetition:                 Hiuher Fares and Reduced Comnetition                             at
Concentrated   Airnorts                  (GAO/RCED-90-102, July 11, 1990).

Airline   Comnetition:               Industry  Oneratinu               and Marketinu        Practices
Limit   Market Entry              (GAO/RCED-90-147).