Session 1
Public Funding and Financing
Speakers
Lois Kramer, CEO, Kramer Aerotek, Inc., Moderator
Ken Warriner, Chief Financial Officer, Naples Airport Authority
Michael Landguth, President and CEO, Raleigh–Durham International Airport
Tatiana Starostina, Chief Financial Officer, Los Angeles World Airports
Overview
This session featured a discussion on the important role of public funding and finance for U.S. airports; for example, how the role of FAA and federal funding could change in the future, trends in the bond market, and differences in approaches to financing and funding models for commercial service and general aviation airports.
Detailed Summary of the Panel Discussion
Lois Kramer referenced Harrah’s presentation by saying that there are layers of complexity to the economy and to where it is headed, but that we as airport practitioners are optimistic about its course.
She indicated that this panel is about how airports are considering their capital infrastructure programs today and for the next 5–10 years. She reviewed the existing funding programs, which include federal support for some states, airport-based aeronautical and nonaeronautical revenues, passenger facility charges, and the use of bond proceeds to finance large projects.
Kramer introduced the three airport representatives on the panel:
- Ken Warriner, chief financial officer, Naples Airport Authority, a fast-growing general aviation airport, especially for business jets. Most of the money Naples Airport makes is generated from fuel sales through its service as a fixed-based operator (FBO).
- Michael Landguth, president and CEO, Raleigh–Durham International Airport (RDU), a medium-hub airport that experienced fast growth before the pandemic and is now strongly recovering. RDU is served by 14 airlines that together fly to 64 nonstop markets.
- Tatiana Starostina, chief financial officer, Los Angeles World Airports, which operates Los Angeles International Airport (LAX), one of the world’s largest airports, as well as Van Nuys Airport, a general aviation airport. Los Angeles World Airports is in the midst of billion-dollar development programs that require a different level of financial strategy.
Warriner spoke first about the fast growth of Naples Airport and the airport team’s operation of the FBO. With the FBO, rental car sales, and other nonaeronautical revenues, the airport is self-sufficient.
Landguth described RDU’s recent runway replacement program, in which work on the runway is being done at night without impairing the service to the airport. For RDU, FAA grants alone cannot cover the cost of the runway replacement program. If the airport used only FAA grants, it would take 150 years to complete all the runway work. Landguth stated that passenger facility charge (PFC) revenues are already committed to other airport projects through 2032, so management had to think creatively about how to fund new capacity. One step it took was to work with other commercial service airports to approach the State of North Carolina about creating a funding program. Given that aviation generates upwards of $3.7 billion in state and local taxes, RDU was able to get a new program established that provides funding to North Carolina airports, with RDU receiving $24.5 million a year [in contrast to the approximately $3 million it receives from FAA through the Airport Improvement Program (AIP)].
Starostina indicated that it was important to continue pushing for a PFC increase. Today’s ceiling of $4.50 has not been adjusted for inflation for more than 20 years. She said that would help pay for their massive programs, including a $15 billion program announced in 2018 that was successfully delivered by public–private partnerships (PPPs). Now, the airport must start a new $15 billion investment program, but she feels as though it is out of tools. Starostina noted that the money to back these investments, for the capacity and service the airlines need, will have to come from significant increases in airline rates and charges.
Starostina stated the newest project would use PFCs, but, if her current application goes through, it will encumber PFC authority through 2055. An increase in the ceiling would move that collection date up several years, resulting in less debt. She asserted that the industry needs to modernize the PFC to figure out how to expand its use.
Kramer asked Starostina about the use of alternative minimum tax (AMT) bonds. These bonds require a premium to be paid to bondholders, which raises the costs of projects and debt as well as charges to the airlines to cover the bonds. Starostina said that Los Angeles World Airports has advocated for tax policies that would remove the AMT bond premium.
Kramer asked Landguth about the amount of debt RDU can take on, given it is a smaller airport than LAX. Landguth indicated that the airport is limited in the amount of bonding capacity it has, as it does not have an unlimited ability to raise airline rates and charges. That is a problem, as he has to respond to population and economic growth and provide aviation services to his community. Landguth noted that some recent developments in the growth of leisure travel (e.g., Delta Airlines indicated to him that there had been a 130-percent increase) are allowing airlines to raise fares. With increased demand comes the need for additional facilities and incremental airline revenues to help pay for them.
Kramer noted that many airports do have cash reserves that can be used when airport revenues decline or stop, as happened during the pandemic. Warriner said that Naples Airport invests its reserves in Treasury bonds since changing its investment policy 2 years ago. Kramer applauded the Naples Airport Authority for charging users what it costs for it to run the airport, something she held that many general aviation airports do not do.
Kramer asked the panelists if they had reevaluated their capital programs with the increase in inflation and the associated rise in project costs. Warriner indicated that the Naples Airport Authority had made an inflationary adjustment in its rates and charges a year ago, but that it proved to be insufficient. When a parking project bid came in higher than expected, Warriner said Naples Airport had to delay the project, as it was above what had been budgeted. Starostina said that Los Angeles World Airports had finished with contracting on its recent project and that, on the next phase, there was a planning and design cap of $15 billion. While it has large contingency fees built into the projects, Los Angeles World Airports will have to watch spending closely and adjust as needed.
Kramer asked whether the panelists were using alternative project delivery models. Landguth said RDU is using alternative methods and is trying a lot of different strategies, including an operator model for concessions. RDU provides the capital, builds out the space, and hires someone to operate it. Landguth noted that RDU is making 28 percent as opposed to 12 percent and gets capital back at the end of the day. Warriner observed that Naples Airport rental car revenues, which come not just from the airport, but from other users in the wider area, are providing much-needed revenue. Starostina indicated that Los Angeles World Airports is using PPPs as referenced but is also partnering with airlines so it can deliver improvements in the terminals it operates. Delta, for example, took advantage of the drop in pandemic traffic to accelerate its terminal project and deliver the project 18 months early. A similar program for air cargo facilities is also underway.
Landguth was asked by Kramer whether he had any ideas for ACRP research on innovative revenue strategies. He said one idea might be to charge a toll for the use of airport roadways. Today people who drop off passengers at the curb do not pay for the use of the airport’s infrastructure. These types of strategies are not easy to implement, but it is important to consider them. Lance Lyttle of the Port of Seattle, operator of Seattle–Tacoma International Airport, said it is considering similar access fees. The Port of Seattle is testing what impact the fees would have on behaviors and sustainability. It wants to encourage high-occupancy vehicles at the airport. Today, similar to almost every other airport in the United States, privately operated cars are not paying to access the airport.
An audience member asked how important contingency planning was and how airports were extending their safety nets in the event there was another situation in which airports were not supported as much by the federal government. Starostina said Los Angeles World Airports had a policy of keeping a minimum of 365 days of operating expenses on hand, which it had just extended to 550 days. Airlines are pushing back, but it is needed. When asked how Los Angeles came up with that number, Starostina said more than 12 months was necessary, as adjusting rates and charges takes 3 to 4
months, and at least 6 months is needed to start seeing the money from the increases come in. Warriner indicated that Naples Airport has the equivalent of 1 year of fixed operating expenses. Landguth noted that RDU has more than 2,000 days (almost 6 years) but has $800 million in debt and a $2 billion capital program. RDU is concerned with its ability to weather a recession and is careful to have enough reserves.
