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Testimony of David Z. Plavin
President
Airports Council International - North America (ACI-NA)
in conjunction with the
American Association of Airport Executives (AAAE)
before the
National Civil Aviation Review Commission
Public Hearing - May 28, 1997

I. WHAT ARE THE CAPITAL NEEDS OF AIRPORTS

We understand that this commission has been asked to solve all the problems of the world. As you can imagine, the Airports Council International (ACI) and the American Association of Airport Executives (AAAE) are at least as interested in the solution to the real and growing problem of funding airports and their infrastructure as they are in the issues surrounding airways solutions. And, unfortunately, the public discussions, press releases, "debates," etc. have only served to demonstrate that there is precious little understanding of airport investment, where the funds come from and where they go. So with your indulgence, I’ll try to focus the discussion in that direction.

First of all, every one agrees that the needs are great and most people accept that fact that they’re growing. The comprehensive estimates that ACI-NA and AAAE have put together set that figure at $10 billion each year. The Coopers & Lybrand review, and the GAO report validate numbers of that size. No matter whose set of numbers is your personal favorite, the uncontestable fact is that as great as the needs are, federal investment is falling further and further behind in meeting any sizable portion of them.

By now, you’ve heard that more than 550 million Americans boarded an airplane, in 1996. That record demand is producing the record profits the airlines are enjoying. There is the possibility that they will continue to enjoy such profits, if they look far enough ahead and run their businesses smartly and let airport operators run ours.

FAA projects a 3 to 5% annual growth in the number of enplanements. This is a HUGE number: at that rate, the number of passenger enplanements will exceed 800 million, shortly after the turn of the century. As we have noted in the past, that increment is, in itself, greater than the combined traffic of the 29 largest airports in the U.S. or, the equivalent of 10 new airports the size of Chicago O’Hare, DFW or Atlanta Hartsfield. I don’t have to tell you how many new airports we’ve built in this country in the last twenty years, and the next 20 will probably be the same. Larger aircraft will be used to accommodate growth. That means that constraints will come in terminals and on the landside, perhaps even more than the airside.

II. HOW ARE AIRPORT CAPITAL INVESTMENT NEEDS ADDRESSED, TODAY?

Because no one at the national level is in any position to evaluate the needs of individual airports, people here in Washington have attempted to look at aggregate estimates of need and funding. But this approach hides the reality of how investment decisions get made, airport by airport, in negotiation with airlines, including how the local airport chooses among varying financing mechanisms. In the process, some projects simply don’t happen.

One has only to travel through our nation’s airports to see that the current system is, at best, erratic, in dealing effectively with the needs of the people and shippers who rely on efficient, commodious facilities. Look at conditions for travelers: more congestion and more lines, not just at ticket counters, but also at restrooms, curb fronts, security check points, and so on. This reflects that fact that funding available to meet investment needs has rarely achieved $6 million in a given year. Significant pieces of work simply don’t get.

That shouldn’t come as a surprise to any one. The federal AIP program is now funded at a paltry $1.46 billion, compared to the $2.2 billion annual level Congress authorized to be spent. As the federal government moves towards balancing its budget and FAA finds its other sources of funding to be under pressure, we can certainly expect AIP to continue its decline.

Local airport PFCs, again restricted to only $3 per enplaning person, generate about $1 billion, today, with the only growth in sight coming from an increase in passengers. That’s not a lot if you measure it against any estimate of need. [It is interesting to note that $3.00 is the same amount that was in effect when the Congress banned such charges in the Anti-Head Tax Act, almost 25 years ago.

These funds are then supplemented by bonds and a small amount of operating income. The important point here is that these funding sources are fungible. It is especially not useful to look at how individual revenue sources get spent. They get used to fill in each other’s gaps because some sources can be used more easily than others for certain specific purposes.

AIP criteria limit how those funds can be spent; only certain types of projects are eligible under federal law and regulation. PFC’s are deemed local funds, not subject to some of the AIP’s "process requirements" and, under some circumstances, are available for projects that are slightly broader in scope than AIP. Bonds can be used for many projects that cannot be funded with AIP or PFC.

But, there are two subtle issues that are important to understanding the choice of funding: some projects look better on an airline department’s operating statement than others. Thus, airport and airlines often make a conscious choice that some investments would be better funded with AIP or PFC’s so their cost is excluded from that airport rate base and from a given department’s expense calculation. At the same time, at many airports and for many projects, airline/airport use and operating agreements mandate certain funding responsibilities and exclude others. At those airports, PFC’s are likely to be the only funding source for which airports don’t need airline approval.

So, many of these projects depend on the judgment of airlines as to whether or not they get to proceed; too often, they don’t. Too often, airlines simply want to control the investment agenda and try very hard to avoid paying for needed improvements that would benefit air travelers, shippers and community air service, unless, first and foremost, they benefit airline balance sheets, their competitive position, or both. Very clearly, there is less interest in responding to the needs for additional capacity, renewed infrastructure, improved safety and security, fair access and competition, and a decent level of customer service if it is beyond the perimeter of the aircraft. And, it is very hard to image that an airline has any interest at all in an investment aimed at securing some real competition through new air service from some other carrier.

III. WHO IS RESPONSIBLE FOR INVESTING IN OUR NATION’S AIRPORTS

As we enter the second century of aviation, it is time to step back from business as usual; time to decide who is responsible for airport infrastructure -- for the essential terminals and runways, access roads and, in some cases, rails, circulation and parking, not to mention programs for airports to be better neighbors in their communities. Who is watching over the future?

Well, like it or not, the federal government has a role it will have to play. For reasons of global competition, delays and congestion at major facilities that have serious impacts at other airports throughout the system, the need for consistent and reliable aeronautical systems, security systems, and the air navigation network, the notion of an aviation system makes these clear federal responsibilities. The federal government ought to pay for them at airports of all sizes. And, most essentially, the federal role is deciding who bears the burden for the federal interest.

At the local level, it has to be the airport sponsor; it’s certainly not the airlines. Airlines planning horizons are very short. Airport operators have no choice but to think longer range. Unless it’s benefits are immediate, long lead time projects have little interest for airlines.

IV. SO, WHAT SHOULD BE DONE TO SOLVE THIS PROBLEM?

Let’s start by recognizing that there is no "one size fits all" solution; different airports should be looked at differently.

Some projects -- particularly for small airports and their communities -- need continuing federal participation. Airport survival may well depend on it: many of these airports may not be commercially viable without federal assistance. But, AIP is also important for larger airports: it serves to provide the equivalent of equity funding for on-going investments. The financial markets will demand some form of equity commitment to support the leveraging of revenue streams.

And there is some notion that PFC’s have failed their original purpose, not only because the Congress and the Administration have used PFC’s as an excuse to cut AIP even further. There is some notion that PFC’s have displaced bonds over the period since they were enacted in 1990. This is not supported by the facts and this reading shows a particular lack of understanding of how decisions are made. As I noted, before, airports and airlines, together, at the local project level, negotiate and make decisions on funding, based on availability, ease of use, local precedent, and other essentially local factors. And, there is, apparently, some sense that PFC’s allow airports to escape the discipline of the market. However, aside from the fact that there is an inherent discipline in effective management, reinforced by existing protections against revenue diversion, any such concern would disappear as PFC’s are, increasingly, being leveraged as simply one more source of local revenue.

So why are all the solutions being discussed in Washington simply a return, again and again, for more of the same? Why are we spending so much time, effort, and resource on an AIP program that is shrinking beyond recognition. Why are we devoting an inordinate amount of energy to less and less result.

Let’s remember, while we’re at it, to keep tax exempt financing for airports. Municipal tax exemption is an appropriate federal subsidy to airports and, therefore, to airlines, and therefore, to consumers. It’s also time to bring back airport bonds as "public purpose" bonds which would reduce costs even further.

But , the time has come to look for new and different ways to do business. For the larger airports that can function as independent economic entities, they ought to be permitted to do so. It’s time to re-consider de-regulating airports like we did for airlines almost 20 years ago. Let the necessary decisions get made at the local level by the people who understand their impact. Encourage new and innovative financing and governance techniques; reduce federal and local constraints on airport operations; lift the cap on PFC’s.

Now, inevitably, when one begins to "think outside the box" about airport funding, airlines always raise the specter of the need to protect the system -- they really mean airlines -- against the greedy and otherwise grand designs of the so-called "monopolistic" airports?

This is a way of thinking that dates back to the days of the Civil Aeronautics Board. But, it is an outdated canard, long since debunked. Airports today don’t behave like monopolies; they have no incentive to do so because they’re not allowed to divert revenue. They want to encourage new and better air service. Credit markets create their own discipline in deciding what gets financed and built; unneeded investments don’t get financed. And, to be sure, airline market power -- not to mention political power, is at least as powerful as airports. Airlines enter and leave local markets on a whim, except when they have invested heavily in creating a fortress hub to take full advantage of their own monopoly power in order to fully dominate that market. Why should anyone take seriously the call to protect the carriers against airport power?

Any solution for airports that depends on some arbitrary, aggregate assessment of airport investment needs will, inevitably, fail the airports, fail their customers — including the airlines, and fail their communities and the nation as a whole. There has to be a better way. Your recommendations need to help us move in that direction.