Airport Finance

Capital Cost:

An airport seeking to expand its facilities, or a governmental entity seeking to build a new airport, must raise sufficient capital to finance such infrastructure development from public or private sources, or a combination of both. Capital costsCapital costsconsist of the consist component costs (e.g., labor, materials and equipment) of construction of the airport and its component parts.

Sources of Capital:

Sources of capital for airport development include:

• governmental or international organization loans and grants,

• commercial loans from financial institutions,

• equity or debt (typically, bonds) from commercial capital marketequity markets, including, private investors, banks investment houses, or fund pools, and the extension of credit from contractors and suppliers.

Airports must also evaluate the amount of foreign capital needed needed, for debt often will be needed to repaid in that foreign currency, and therefore subject to both competitive internal needs for foreign currency, and curren currency valuations, cy favorable and unfavorable.

Funds come from a variety of public (including Federal) and priv private (including ate general obligation and revenue bonds [ GARBs GARBs]) sources. ]) Commercial loans typically incur the highest interest rates, tho though such rates may ugh be reduced by governmental loan guarantees. Existing airports also may have retained earnings building in a capital development account.

Capital Available to Developing States:

Foreign governments may be willing to provide capital to airportForeign airportprojects in less developed projects nations, out of a sense of altruism, or with the purpose of promnations, promoting trade and commercial oting relations between the two nations, or exporting technology and erelations equipment from firms domiciled quipment in the lender nation. Some nations have developed economic and social development programs in various parts of the world, providing loans on preferential t terms, or supplies, equipment and terms, technology. Examples include the following:

􀂄BelgiumBelgium- Administration generale de la Cooperation Cooperationau au Developpement
􀂄Canada - Canadian International Development Agency
􀂄Czechoslovakia - Ministry of Foreign Affairs
􀂄Denmark - Danish International Development Agency
􀂄France - Caisse centrale de Cooperation Cooperationeconomique economique
􀂄Germany - Ministry of Economic Cooperation
􀂄Italy - Department of Cooperation
􀂄Japan - Overseas Economic Co Co-operation Fund
􀂄Netherlands - Foreign Ministry
􀂄Norway - Norwegian Agency for International Development
􀂄Russian Federation - Ministry of External Economic Relations
􀂄Spain - Cooperacion Internacional
􀂄Sweden - Swedish International Development Administration
􀂄United Kingdom - Overseas Development Administration
􀂄United States - U.S. Agency for International Development

Other Sources of Foreign Capital:

• Specialized exportSpecialized export--promoting agencies (e.g., the Export Development Corporation of Canada, the Export Credits Guarantee Department of the United Kingdom, or the ExportKingdom, Export--Import Banks of Japan and the United States, COFACE of France, HERMES of Germany, and the Export Credits Guarantee Department of the United Kingdom) may also be able to make direct loans or guarantee private loans, or insure the risk assumed by its domestic firms providing goods and services for airport development.

• Several international bank and fund organizations have been estaSeveral established to aid developing nations published by assisting in financing and execution of projects, particularl particularly infrastructure projects, which y foster economic development. These include the following:

• International Bank for Reconstruction and Development and its afInternational affiliates, the International filiates, Development Association, and the International Finance CorporatiDevelopment Corporationon

• African Development Bank

• Asian Development BankAsian Bank

• Caribbean Development Bank

• InterInter-American Development Bank

• European Union European Development FundEuropean Fund

• Japan Overseas Economic Cooperation FundJapan Fund

• Organization of Petroleum Exporting Countries Fund for InternatiOrganization International Developmentonal Development

• Arab Bank for Economic Development in AfricaArab Africa

• Islamic Development BankIslamic Bank

• Saudi Fund For DevelopmentSaudi Development

• Abu Dhabi Fund for Arab Economic DevelopmentAbu Development

• Kuwait Fund for Arab Economic DevelopmentKuwait Development

• Arab Fund for Economic and Social Development

 The United Nations Development Programme [UNDP] provides developing nations with expertise in planning and executing airport projects, including feasibility and cost cost-benefit analyses, master planning, and construction. Funding for minor equipment may also be obtained from UNDP, though the principal role
of the agency is to provide expertise rather than capital. In each instance, a loan or grant will be made to a governmental agency, or to a private entity having the support and guarantee of the government. Hence, the government must designate the project as a high priority for development in order to receive such assistance.

Operating Expenses:

Once built, an airport must earn sufficient revenue to pay its operating expenses and retire its debt.

 􀂄Such operating costs include expense items as interest and depreciation or amortization on debt, taxes, and maintenance and administrative costs, including salaries, power, and repairs.

􀂄Revenue comes from a number of sources, including rents, aeronautical fees, concessions and parking.

Cash Flow:

Air side revenue streams include landing fees, fuel taxes, and mAir maintenance and aintenance cargo facility leases.

􀂄Land side revenue streams include terminal rents and gate leasesLand leases, concessions, , parking fees, and various taxes, such as, in the United States, Passenger Facility Charges.

􀂄In addition to government grants and subsidies, the airport turnIn turns to its s tenants ----the airlines, concessionaires, parking ----and the passengers they serve to finance its maintenance and operating costs, and debt sserve service. ervice. Airports derive revenue streams from rents, charges and fees impAirports imposed upon osed airlines, various concessionaires, such as car rental companies,restaurants, newsstands, taxi and van services, catering and baggage servicesnewsstands, services, fuel , providers, and parking.

􀂄Airport concessionaires (such as restaurants, news stands, auto rental companies) typically pay rent for the space they occupy, while scompanies) some pay a ome grossgross-receipts fee. These revenues, in turn, finance operating and maintenance expenses, principal and interest debt service, and v various "pay as
arious you go" infrastructure, such as terminal or runway expansions or improvements.


Airline Rents and Charges:

• Airlines pay rental charges for the space they occupy at ticket counters, gates, baggage handling, maintenance, and catering facilities, and also pay takeoff and landing fees, parking fees, and fuel fees. 

•  Two methodologies dominate computation of airline fees and charges under airport use agreements ––the residual method, and the compensatory method.

Residual Agreements:

In a residual agreementresidual agreement, the signatory airlines accept the financial risk, and , guarantee to provide the airport with sufficient revenue to coveguarantee cover its operating r and debtand debt-service costs.
􀂄Under this approach, the airport deducts an agreed amount of nonUnder non-airline
(concession) revenue from its expenses, leaving the airlines res responsible for
ponsible the remaining (residual) amount. Airline rates then are set acc accordingly. ordingly.

􀂄Airlines bear the risk that their fees will be increased should concession revenue fall short.

􀂄In the U.S., airports using residual methodology typically give airlines majoritymajority-in in-interest power to veto new major capital expenditures.

􀂄Airlines typically stand behind the revenue bonds with "use and lease agreements", pledging to make up the difference in revenue shortagreements", shortfalls by falls paying higher landing fees. The quidquid-pro pro-quo for the residual fundingagreement historically has been a long long-lease term for gates, and a "majority majority-in in- interest clause" giving airlines a say (often an effective veto) over airport expansion, and a return of excess revenue collected, often in th the form of  lower landing fees.

Compensatory Agreements:

Compensatory agreements Compensatory agreementsusually exist at usually mature airports that have achieved successful revenue generation, whereby the airport undertakes the risk of meeting its costs.

􀂄Under the compensatory method, an airport is divided into various cost centers (such as airfield, terminals, parking areas), and airlines pay a share of those costs, based on the amount of space they occupy (at, for example, ticket counters, gates, and baggage sorting and catering facilities), landing and departing aircraft, and other measures of airline use.

􀂄The airport retains concession revenue for discretionary capital improvement projects.

Privatization:

• The United Kingdom became the first major entrant into the land of airport privatization, with its sale of British Airports Authority [BAA] which controls seven major airports, including London's Heathrow, Gatwick and StanstedStanstedin 1987, in a $2.5 in billion public share offering. 

• The government continued to provide oversight of airline access, airport charges, safety, security and environmental protection, and veto power over airport investment or divestiture.

 Regulation:

 Governments which have privatized airports have adopted one of four regulatory approaches one approaches:

1. Rate of return regulation (e.g., Spain, France, Greece and the Netherlands);
2. Rate of return price caps (e.g., the United Kingdom);
3. Aeronautical price caps (e.g., Australia, Austria, Denmark and Mexico); and
4. Limited governmental oversight (e.g., Canada, New Zealand, and the United States)

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