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5 Air & Space Law. 1 (1990-1991)

handle is hein.journals/airspaclaw5 and id is 1 raw text is: on _ _ _ _ ASa cition - THE- AIR AND SPACE LAWYER Volume 5, Number 1 Summer 1990 Potential Changes in Airport Finance BY JOHN M. RODGERS* When the federal government invests in airport ca- pacity, the obvious purpose is to increase the supply of airport services. This can be done by simply expanding or duplicating existing facilities-particularly runways and terminal buildings. However, there are many other actions, not measured by the number of dollars invested in airport construction, that can enhance airport capac- ity. In particular. technological advances such as ad- vanced radar and communications systems can allow aircraft to operate more closely in both time and space. This can increase effective airport capacity with no in- vestment in runways at all. Similarly, the use of larger aircraft, or the rescheduling of aircraft operations away from hours of peak congestion, may increase the number of passengers served per day with essentially no addi- tional investment in airport facilities. Airport finance, as reflected in investment flows, is only one of several methods of expanding airport services. Four topics are being covered in this article: (1) the current sources of capital for airport development, (2) long-term trends expected to change airport finance, (3) a list of possible new financing mechanisms, and (4) a proposal for a new authority for federal government ex- penditure on airport and airway facilities during the pe- riod 1991 through 1995. Current Sources of Capital Tile major source of funds for airport capital im- provements has remained the bond market. Airport bond issues averaged $2.1 billion per year over the 1983 through 1988 period. Thus, out of an average annual total of $2.9 billion in federal grants plus airport bonds raised over this period, only 28 percent was from federal sources. The balance, over 72 percent, came from airport bonds. In addition, there has been a significant contri- bution to airport capital improvements provided through the state governments. In 1988, this amounted to $0.3 billion. Over the past twenty years, Airport Improve- ment Programs (AIP) funds have resulted in federal par- 'Director, Aviation Policy and Planning, Federal Aviation Admin- istration. The opinions in this alticle are those of the author and may not necessarily be those of the FAA. ticipation in about 35 percent of eligible All projects. The importance of federal grants to overall capital spending varies significantly among airports. Recently, at large hub airports federal grants accounted for less than 20 percent of capital improvement expenditures but rose to over 60 percent for small hub airports. The current federal role in airport finance-aside from the provision of air traffic control and navigation facilities-has been predominantly one of providing grants that are intended to encourage further investment by state and local governments and the airports them- selves in order to create a national airport system. Thus, to initiate projects, federal grants are generally combined with funds provided by local governments. These local funds may either take the form of equity or locally ar- ranged debt financing through the sale of bonds in tile private financial markets. Long-term Trends That Can Be Expected to Cause Changes in Airport Financing There have been six events during the past ten years which may cause changes in the way we finance air- ports. They are listed below and discussed in detail. * Freedom of market entry/exit (deregulation); * Hubbing (capacity at individual airports); * Expected air travel growth; demand for system ca- pacity; * Uncertain responsiveness of existing contract re- lationships between airports and airlines (MII clauses); Possible shifts in local government support for air- ports; and * Developments with tax-exempt bonds. Freedom of Market Entry/ Exit (Deregulation) The recent major shifts in the structure of the U.S. air carrier industry started with the passage of the Airline Deregulation Act of 1978. This law essentially elimi- nated the long-standing system of franchises or quasi- monopoly rights to serve specific routes or city pairs. The (continted oi page 7)

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