Financial Management Chapter 09

Airport Financial Accounting

• Nature of Expenses

  • Varies by geographic location (e.g., Miami vs. Duluth, MN for snow removal).

  • Some municipalities may absorb expenses for:

    • Certain staff functions.

    • Legal services.

    • Public relations.

    • Planning.

• Absorbed Operating Services

  • Policing and firefighting services may be absorbed by parent organizations.

  • Other factors affecting capital improvement needs include:

    • Service characteristics of carriers.

    • Aircraft size and type.

    • Navigational aids and communications.

• Importance of Accounting Systems

  • Necessary for:

    • Financial statements needed to inform governmental authorities on operations.

    • Assisting airport management in:

      • Allocating resources,

      • Reducing costs,

      • Improving controls.

    • Negotiating facility use charges and influencing voter and legislative decisions.

Operating Expenses

• Airfield

  • Includes:

    • Runways, taxiways, aprons, parking areas.

    • Airfield lighting systems.

    • Maintenance of fire equipment and access roads.

• Terminal

  • Encompasses:

    • Buildings and grounds maintenance and custodial services.

    • Improvements to land and landscaping.

    • Maintenance of loading bridges and gates.

    • Concession facilities and services,

    • Utilities (electricity, heating, air conditioning, water).

    • Waste disposal and equipment maintenance (HVAC, baggage handling).

• Hangars/Cargo Facilities

  • Maintenance and custodial care.

  • Land improvements, employee parking, access roads, utilities, and waste disposal.

• Other Expenses

  • Covers administrative staff salaries and interest on outstanding debt.

  • Depreciation costs may vary.

Liability Insurance

• An increasingly large portion of airport expenses.

• Catastrophic potential from aircraft accident claims.

• Airports and tenants can be held liable when they fail to exercise reasonable care

• Liability can stem from:

  • Runway defects,

  • Failure to mark obstructions,

  • Inadequate closure notices.

• Litigation Areas

  • Aircraft operations,

  • Premises operations,

  • Sale of products.

  • Tenants purchase their own insurance.

Airport Liability Coverage

• Coverage includes:

  • Bodily injury and property damage.

  • Contractual liabilities related to various services and events

    • e.g., fuel suppliers, railroads, elevators, air shows, etc

  • Protection against damages while aircraft are in custody.

  • Sale of products (Such as fuels, or in the case of food poisoning)

• Court Rulings

  • Airport Operators held liable for the safety of aircraft and the public.

    • Also accountable for issuing proper hazard warnings.

Operating Revenues

• Major Groups

  • Airfield area revenue,

  • Terminal area concessions,

  • Airline leased areas,

  • Other leased areas,

  • Other revenues.

• Airfield Revenue Sources

  • Landing fees,

  • Hangar parking charges.

• Terminal Concessions

  • Revenue generated from:

    • Food and beverage services,

    • Specialty stores (e.g. gift shops),

    • Personal services (e.g., beauty shops).

    • Business services and display advertising.

• Outside Terminal Concessions

  • Includes parking services, car rentals, and hotel/motel partnerships.

• Airline Leased Areas

  • Revenue from ground equipment rentals, cargo handling, office space, ticket counters, hangars, and operations and maintenance facilities

• Other Leased Areas

  • Consists of freight forwarders, FBOs (Fixed Base Operators), and government units

• Non-Operating Revenue

  • Includes utility contracts (like electric and steam) and interest on investments (security & taxes) and the selling & leasing of other properties.

Planning & Administering an Airport Budget

• Short and Long-Term Decisions

  • Short term: Managing use of limited resources against competing uses.

  • Long term: Deciding rates for expansion and funding sources

• Planning Functions

  • Promotes coordinated thinking,

  • Develops performance standards,

  • Aids in management control and operational efficiency.

  • They are incorporated in a budget

  • Real expenses are a measure of actual performance

• Types of Budgets

  • Lump Sum Appropriation: Simplest and most flexible form of budget that provides a fixed amount of funding for a specific period, allowing managers to allocate resources as needed without detailed restrictions.

  • Appropriation by Activity: Planned according to work area and permits flexibility in responding to changing conditions and priorities, enabling managers to adjust funding based on the specific needs of each activity while still adhering to overall financial constraints.

  • Line-Item Budget: Most detailed budget and can be adjusted based on volume of activity, providing a clear breakdown of expenditures by category, which helps in monitoring and controlling costs effectively.

  • Zero-Based Budget: Cost must be newly developed, prepared from the ground up, and programs ranked in importance to ensure that all expenses are justified for each new period, rather than based on previous budgets, promoting a more efficient allocation of resources.

Revenue Strategies at Commercial Airports

• Airport Use Agreements

  • Legally binding financial and operational agreements.

  • Involves use rates and fees.

  • Some use rates and fees are set by local ordinance

• Cost Approaches

  • Residual Cost Approach: Airlines cover an airport’s excess costs (“residual” after revenue minus expenses), with surplus revenue credited to the airlines against following year expenses

    • Airlines assume significant financial risk by agreeing to keep the airport financially self-sustaining

    • Usually run for longer terms to provide security for revenue bond issues (20 to 30 years or longer longer are not common)

      • Only half of compensatory airports have agreements that span greater than 20 years.

  • Compensatory Cost Approach: Carriers pay their proportional share of used facilities.

    • Airport operator assumes the financial risk of airport operations

    • Carriers pay rent for space in proportion to activity hosted at the airport

    • Lacks the built-in security of residual approach; however, compensatory airports may earn and retain substantial surplus

    • Airports are freer to undertake capital development projects without the consent of the carriers

      • However, operators usually still consult with the carrier before proceeding

• Net Income Handling

  • Airports generally rely on issuance of debt to finance major capital development projects and utilize various funding sources such as grants, bonds, and public-private partnerships to support their financial management strategies.

  • Availability of substantial revenues generated in excess of expenses can improve performance of an airport in a municipal bond market

  • Residual contracts ensure breaking even without local taxpayers' support.

Majority-In-Interest Clauses**

• Carriers exercise a significant amount of control over airport investment decisions and related pricing policy

• Carriers can review, approve, or veto capital projects that could make significant increases in rates and fees they pay to use facilities

• Provides protection for financial risk-induced carriers under residual contract agreements by ensuring that their interests are prioritized in decision-making processes, thereby minimizing potential financial burdens associated with unforeseen capital expenditures.

• Compensatory approaches allow more independent capital developments.

Pricing Structures**

• Pricing of Facilities

  • Influenced by airport size and revenue needs.

    • Many smaller airports do not generate sufficient revenue to cover their operating expenses, which often leads them to implement higher fees for services or seek alternative funding sources such as grants or partnerships.

    • Pricing of facilities and services are usually based on cost recovery

• Airfield Pricing

  • Major fees are landing or flight fees, with some charging for ramp or apron parking or fuel flow fees

  • If non-aeronautical revenues are high then landing fees may be reduced

  • At some airports, landing fees are budget balancers for the airfield cost center

  • Landing fee calculations are established in residual cost agreements and are normally adjusted every 6 months to 3 years

  • Most landing fees are assessed on basis of certified gross landing weight, which takes into account the total weight of the aircraft upon landing, ensuring that heavier planes contribute more to the maintenance and operation of the airport facilities.

  • GA landing fees range from equal to carriers to nothing

Terminal Area Concessions

• Concessions typically provide guaranteed annual minimum payment (based on rental rate of leased space and/or gross revenue’s or both)

• Concession contracts are often bid competitively

  • Duration of which may be month to month or up to 15 years

• Market Pricing: Concessions should operate on a competitive basis catering to demand of airport users rather than considering them a captive market.

  • This approach ensures that pricing remains fair and reflective of the current market conditions

  • Resulted in significant revenue increases in terminal concessions

Landside and Ground Transportation Facilities

• Landside and ground transportation makes up the largest portion of airports non-airfield revenue

Airport Funding**

• Funding sources include federal, state grants, bonding, and private investments.

• Airports cannot use AIP funds for specific improvements.

• Airport Improvement Program (AIP)

  • Funding for planning and development initiated in 1982 with various tax and fee mechanisms.

  • Categories include apportionments, set-asides, and discretionary grants for enhancing safety and capacity.

Federal Revenue Streams**

• Inclusion of user fees, taxes, capital improvements funding sources, and FAA operations budget allocations as revenue streams.