Transportation Systems Casebook/Airport Passenger Facility Charges

Overview

The Federal Aviation Administration (FAA), as mandated by the Aviation Safety and Capacity Expansion Act, implemented a passenger facility charge (PFC) in 1990. Under this Act, airline tickets included a fee of $3 per flight, with a cap of $12 round trip. These funds in turn support FAA approved airport infrastructure projects. In 2000, Congress increased PFCs to $4.50 per flight, with a cap of $18 round trip, and the fee has since remained at these levels.

PFCs were initially established to help the country’s ailing airport infrastructure. At the time, both airports and airlines were in bad economic shape, and it is estimated that the airline industry was $35 billion in debt. In 1978, President Jimmy Carter deregulated the airline industry, which some believed attributed to decline of the airline industry. Others attribute the decline to the airlines overextending themselves and making significant fleet investments that did not provide a return on investment. Regardless, the Executive and Legislative branch both agreed that the airline industry could not be relied upon to provide funding to improve airport infrastructure. PFCs provided a way to raise revenue, while only charging the users of the system.

PFC funded projects fall into four broad categories: airside, landside, noise, and access. Nearly half of airside funding, supports runway investments and nearly all landside funding supports terminal improvements.

In addition to support from local and state authorities and the PFC program, there are two alternative ways airports receive funding from the U.S. government:

1. Airport Improvement Program (AIP) - A Federal grant program which targets aircraft operations, and airports planning and development.
2. Investors preferential income tax - Provides investors preferential treatment on income generated by airport improvement projects.

A benefit of the PFC program, in comparison to AIP and investor preferential income tax, is that the program allows for flexibility on how the funds are used. PFCs can fund FAA approved airport transit, noise mitigation, and terminal improvement projects. Airports have the discretion to use PFC funds to meet their needs; however, PFCs cannot be used for income generating projects (i.e. terminal food concession or airport parking garages). Overall, the PFC program is thought to be more flexible, in comparison to more prescriptive programs like AIP and investor preferential income tax.

In 1992, the first year PFC’s were first collected, over $85 million was collected . By 2017, the FAA collected $3.2 billion. The PFC program has significantly grown in the past two decades. Accounting for inflation, $85 million in 2017 dollars equates to over $161 million.

The below graph depicts air passengers carried in the United States, from 1990-2017, the same time period PFCs have been in effect. According to the International Civil Aviation Organization, in 1990 there were nearly 465 million air passengers in the United States. There are two significant downturns in the number of passenger. The first downturn followed the events from September 11, 2011. During this time, most Americans avoided air travel out of fear. The second downturn was during the 2008 Recession, as Americans avoided unnecessary expenses, such as air travel. By 2017, passenger traffic climbed to 849 million travelers in the United States.

Annotated List of Actors

Actors for the Increase in PFCs

American Association of Airport Executives - An association representing airport management personnel at public-use and general aviation airports.

Airports Council International North America - Pursues airports interest in international organizations, such as the International Civil Aviation Organization.

Senator Susan Collins - Republican from Maine, chairs the Transportation, Housing, and Urban Development Appropriations subcommittee.

Congressman Bill Shuster - Republican from Pennsylvania, chairs the House Transportation and Infrastructure Committee.

Senator John Thune - Republican from South Dakota, Chairman of the Senate Commerce, Science, and Transportation Committee.

Congressman Peter DeFazio - Democrat from Oregon, Ranking Member on the House Transportation and Infrastructure Committee.

Actors Against the Increase in PFCs

Airlines for America - An association comprised of the largest U.S. flagged carriers that advocate for America’s airlines as models of safety, customer service, and environmental responsibility.

Taxpayer Associations - Associations such as Americans for Tax Reform and National Taxpayers Union view an increase in PFCs as an additional tax.

Government Actors

Federal Aviation Administration - An operating administration of the U.S. Department of Transportation whose mission is to provide the safest, most efficient aerospace system in the world.

Timeline of Events

1990 - Aviation Safety and Capacity Expansion Act of 1990

• Established the PFC program, at a rate of $3 per flight.

1994 - Federal Aviation Administration Authorization Act of 1994

• Mandated the Secretary of Transportation to review the effectiveness of the PFC program.

1995 - GAO Report on Airport Improvement Program, Update of Allocation of Funds and Passenger Facility Charges, 1992-94

• Provides information on the funds collected by the airports from 1992 - 1994 and the projects funded with PFCs.

2000 - Wendell H. Ford Aviation Investment and Reform Act for the 21st Century

• President Clinton signed this Act that allows for modifications to the PFC program, allowing the FAA to increase the PFC to $4 or $4.50.

2007 - FAA Reauthorization Act of 2007

• Reduced some limitations on the use of PFC funds

2012 - FAA Modernization and Reform Act of 2012

• Authorized non-hub small airports to collect PFCs, and required GAO to study alternative ways PFCs could be collected.

2014 - GAO Releases Study “Raising Passenger Facility Charges Would Increase Airport Funding, but Other Effects Less Certain”

• GAO was asked to conduct study after airports wanted to raise the PFC ceiling to $8.50.

2018 - FAA Reauthorization Act of 2018

• Removes certain restrictions on the use of funds generated by PFC.

Origins

The Aviation Safety and Capacity Expansion Act of 1990 allowed the Secretary of Transportation to authorize public agencies that control commercial airports to impose a PFC charge on each paying passenger boarding an aircraft at their airports to supplement their AIP grants. The intent of the PFC program was to further airport development that preserves or enhances airports’ safety, security, capacity, reduces noise generated by airport activities, or enhances airline competition.

Continuous airport improvement projects are crucial to reducing airport congestion. Flight delays due to congestion have a significant economic and environmental impact. In 2007, the FAA reported that airport congestion, and the resulting delays, cost the airlines and passengers $40 billion. The FAA requires airlines to track their delays, which is defined as arriving 15 minutes later than the scheduled time. Using these statistics, the FAA compiles reports to analyze the root cause of delays. In 2015, 18.9% of total domestic flights were delayed. The third leading cause for these delays are due to the national aviation system, which includes runway closures and heavy traffic.

The below graph depicts total PFC collections from 1990 through 2017. This data, obtained from the FAA, shows one significant downturn in revenue during the 2008 Great Recession. Even after the events of September 11, 2001, airport PFC’s revenue modestly increased by $28 million. Taking into consideration the 2008 downturn, PFC collections have, on average, increased, reaching $3.2 billion in 2017.

Policy Issues

PFC Ceiling

Under current law, airport operators can impose a charge of up to $4.50 on each ticket. Most airports charge $4.50, although they must demonstrate to the FAA that the project they are funding will make significant improvements to air safety, increase competition, or reduce congestion or noise impact on the community.

Airlines have opposed any increase in the PFC ceiling, claiming that raising or eliminating the cap would decrease air travel, as the charge would make people less likely to fly with an increased cost. Airport operators and other supporters of PFC’s have favored raising the cap to $8.50, or in some cases, eliminating the cap altogether. They claim that airports are unable to undertake all the necessary upgrades to make flying a better experience for passengers, as $4.50 does not bring in enough revenue. The Senate FY19 Transportation, Housing, and Urban Development (THUD) legislation included a provision that would increase the PFC ceiling to $8.50, but this was not included in H.R. 302, the FAA Reauthorization Act of 2018.

Americans for Tax Reforms, a leading conservative U.S. taxpayer advocacy group, believe airports can finance construction and other improvement projects without raising the airport PFC limit. This organization highlights an $8.5 billion improvement project at Chicago O’Hare International Airport. O’Hare is not relying on PFC to finance the project. Instead, the project will be funded by the airlines. The airlines leases at O’Hare expired in May 2018, and O’Hare increased the cost of the leases in order to fund the expansion project. Americans for Tax Reform suggest the other airport can follow this example in order to complete airport improvement projects.

Other organizations, such as American Association of Airport Executives (AAAE) advocated before the Senate Transportation Appropriations Subcommittee to increase the PFC. AAAE President and CEO Todd Hauptli urged policymakers that increasing the PFC limit was the only way to assist airport with critical infrastructure projects, while also not impacting the federal budget.

Use of Revenue

There has been some debate between airport operators and airlines about the appropriate scope of PFC projects. Unlike other grant programs that the FAA operates, like the AIP grant, which are limited to airside projects, PFC money can go towards a broader scope of improvement projects. Airport operators would like to broaden the scope of PFC-eligible projects.

Airlines have strongly opposed this, as they feel that airports will use PFC funds on projects that deliver less value and have no direct benefit to the airlines. Airlines are especially concerned that while passengers get charged the additional $4.50, they often do not have any input on what projects are funded with PFC’s. Federal law requires airports consult with the airlines on projects, but it does not require their consent.

Transparency of Spending

Stakeholders have also raised concerns about the transparency of PFC collections. Under the current systems, airlines are required to have audits of their PFC collections and the FAA provides audit guidance to help provide assurances that collections are accurate. Airports have raised the concern that there is no transparent way for airports to track exactly how many passengers travel through an airport each day, resulting on their reliance on the audits and data that is published by the airlines. FAA regulations require that all airlines that process more than 50,000 PFC collections produce an annual independent audit of their accounts and processes.

According to the most recent GAO report, the FAA has reported that they do not know how many airports are receiving these audits, and they do not know how many airlines’ auditors follow the audit guidelines. While the FAA has stated that it is a rare occurrence that airlines do not follow their audit guidelines, it is difficult to know if this is the case, since the audits are rarely reviewed.

While airport stakeholders have expressed an interest in increasing transparency, it is not clear what that would involve. Currently, PFC charges are collected when passengers pay for their airline tickets, along with the other fees and charges that must be collected, such as TSA fees and state and local taxes. One proposal from the airports would be a separate payment screen for passengers when they purchase a ticket. For example, passengers who buy a ticket at the counter or kiosk, there would be an additional screen at the kiosk to pay the PFC. Passengers who purchase tickets online, there would be an additional screen before checkout.

Further, the FAA publicly provides monthly data on the type of investment projects (i.e. airside, landside, noise, and access) but it does not provide any further details on these projects or categorize projects by airport. Information on specific PFC airport projects can only be obtained from the media, which likely obtains their information through Freedom of Information Act (FOIA) requests. After extensive research for examples of current PFC projects, media recently reported that Bangor International Airport is using the funds to build a new terminal, and Seattle-Tacoma International Airport and Missoula International Airport are working to improve their terminals and runways.

Funding Airport Infrastructure

A 2016 report found that of the 100 “top” airports in the world, only 13 were U.S. airports. The top two airports (Singapore and Incheon) are both private airports. Many airports around the world have increased airport efficiency and competitiveness by privatizing. According to Cato, more than 100 countries have taken steps to partly or fully privatize their airports. Privatized airports and airlines estimated to be valued at $3.3 billion. An early proponent of airport privatization was the United Kingdom, under the leadership of Prime Minister Margaret Thatcher. Following this model, Europe has become a leader in airport privatization. In 2016, the Airports Council International found that 47% of airports in the European Union are private, an increase of 5% from 2010. These airports are providing long term leases, sometimes upwards of 60 years, for an airport’s operations to be run by a company.

Airport privatization has been a much discussed subject in the U.S. In 1996, Congress took steps to allow for airport privatization through the Airport Privatization Pilot Program, but since only two airports have successfully privatized - Branson, Missouri and San Juan, Puerto Rico. Since 2001, twelve airports have submitted applications for consideration into the Airport Privatization Pilot Program, but many have withdrawn their applications. The main reasons

these airports withdrawal is that airports are unable to meet the conditions required by the program to solicit bids for privatization.

Discussion Questions

• Should the PFC rate remain at the current level or increase? If it should increase, what level should it increase to?
• Do you believe PFC should be described as a tax?
• Should the airlines bear more financial responsibility in maintaining airport infrastructure?
• Are PFCs an effective way to increase capital for airports?
• Should there be increased oversight of the PFC program?
• Should U.S. airport privatize?

Conclusion

The PFC program has allowed airports to conduct land-side projects by charging passengers a surcharge of $4.50 on airplane tickets. Since 2000, this charge has remained at the same level. The airline industry has lobbied to keep PFCs at this level, as they feel an increase in the fee would decrease airport passengers. Alternatively, the airport industry has lobbied to increase the PFC charge, as a way to increase revenue for infrastructure projects.

Further Reading

GAO Report on Raising Passenger Facility Charges Would Increase Airport Funding, but Other Effects Less Certain.

Resources

https://www.faa.gov/airports/pfc/

https://www.faa.gov/airports/pfc/monthly_reports/

http://airlines.org/blog/even-airports-struggle-to-make-the-case-for-a-pfc-increase/

http://airlines.org/blog/airports-are-hoping-to-gobble-up-your-cash/

http://www.stopairtaxnow.com/

https://www.enotrans.org/etl-material/federal-government-invest-heavily-expanding-american-airports-relieve-congestion/

https://www.gao.gov/products/GAO-15-107

https://www.cato.org/publications/tax-budget-bulletin/privatizing-us-airports