Airport business is thriving

There are small “cities” all over America where business is booming 24/7, money is available for capital projects, and local politicians of both stripes actually support growing businesses: Airports. Airports have experienced dips in emplaned passengers (i.e., a ticketed passengers on a “revenue” flight subject to landing fees) as a result of the economic slow down, but the long-term aviation forecasts show growth. Whether you support the administration’s policy to invest in infrastructure, or you believe ultimately in the ability of private industry to drive our economy, in the current political environment airports will be a growth industry. For example, in Florida alone, where there are 21 commercial service airports and 71 general aviation airports, traffic at Miami International and Jacksonville International in 2009 exceeded counts at those airports in 2006, and Orlando and Fort Lauderdale are nearly back to their 2006 levels. Airport facility projects have such a long lead-time that airport operators are generally continuing with development programs. Airports are 24-hour-per-day consumers of a long list of products and services including:

  • food service
  • retail sales
  • personal services
  • communication and entertainment services
  • parking management
  • limousines, taxis and rental cars
  • architecture and engineering
  • financial services
  • construction
  • insurance advisory services
  • building and equipment maintenance
  • fuel system management
  • commercial and industrial land development

 Airport facilities are growing — but cost matters

The projected growth in airport traffic is driving demand for new facilities. Consider the country’s busiest airport, Hartsfield-Jackson Atlanta International, which recently issued $600 million in bonds for continued development of its $1.5 billion capital program. Another indicator of continued airport facility development is the continued expansion of “passenger facility charge” (PFC) programs. PFCs are a per ticket charge that can be collected by an airport only if authorized by the FAA and can be expended only on specifically-identified airport projects: 98 of the top 100 airports are collecting PFCs. Estimated PFC collections to date in 2010 exceed $2 billion. These funds can be spent only on the FAA-approved capital projects.

In the constant competition to attract new and expanded airline service for their communities, airport managers need to deliver bigger and better facilities at a reasonable cost per emplaned passenger. Since the 1970s, airline committees (often called “signatory” or “majority-in-interest” airlines or “MII” committees) have had a contractual right at most large airports to review and approve capital programs. The measure used by MII committees to review capital projects is the impact of the project on cost per emplaned passenger (CPE).  Airlines have recently begun to again report profitability, but the margin is small (think “bag-check fees”). Airlines have been known to reduce their schedules at one airport and move service to a neighboring airport for a significantly lower CPE. There is a constant tension between the desire for more efficient facilities and the cost of acquiring them.

 Airports operate in a very complex regulatory environment

The regulatory do’s and don’ts of doing business at an airport usually start with a set of post-World War II era surplus property deed restrictions and continue through a web of federal grant assurances and regulations governing everything from the design and construction of airfields and air traffic control facilities, to airport security plans, to restrictions on the collection and use of airport revenue, to procurement of design, construction and concession contracts. The former chairman of the House Transportation and infrastructure Committee, James L. Oberstar of Minnesota, long perceived as the most knowledgeable member of Congress on aviation issues, lost his seat in the midterm election, causing a cascade of changes to transportation committee leadership. State governments can also affect airport siting, development and funding. Finally, the local government that owns and operates the airport (called a “Sponsor” in FAA regulations) typically enacts local ordinances that both protect the airport and constrain it. It is essential that airport businesses understand and appreciate these competing regulatory systems.

 Airports are extremely political

Federal law dictates that, once an airport has accepted federal grants, all airport revenue must be spent on the airport. Special purpose airport authorities don’t typically struggle with this prohibition on revenue diversion, but general purpose local government Sponsors, i.e., cities and counties, sometimes find that airport money to be very tempting. However, Sponsors can not divert airport revenue to other local government purposes or they risk loss of future federal grants and, theoretically, loss of the airport property.  Tne might think that the prohibition on revenue diversion would cause local elected officials to lose interest in the airport, but the opposite is true. The quality and reputation of the local airport is very important to local elected officials. Also, local elected officials can influence the selection of contractors and concessionaires for airport contracts worth many millions of dollars every year, which makes airports very politically charged environments. Noise sensitivity in neighborhoods near airports, usually triggered by airport development proposals, can also become political battles for Sponsors. Noise litigation can drag on for many years and cause delay and uncertainty for airport businesses. Sensitivity to the local political issues are critical for airport businesses.

Airports have a unique language and culture

 This Alert includes at least 10 airport-specific terms. The alphabet soup of aviation acronyms is long and confusing. Although the prevalence of ex-military personnel in aviation management has dropped off in the last 15 years, that military culture and language is still a significant factor in dealings with airports and the FAA. The airport industry is a close-knit community, and most airport managers entered the field because they love aviation and consider it a high calling. Airport businesses need to understand the language and, more importantly, the culture of airports.