Develop Strategies for New Airport-Generated Revenue

Airport revenue typically comes from rents and leases of property and facilities. This topic is currently being explored in ACRP 03-39, Generating Revenue from Commercial Development On or Adjacent to Airports (under development) but an overview is provided here. Additional revenue may come from user fees (such as facility charges), fuel flowage fees, and sales of goods and services provided by the airport such as food and beverage sales, aeronautical charts and deicing services. Historical financial performance can provide insight on areas where the airport generates revenues, and how sensitive these revenues are to fluctuations in aviation activity and economic conditions. Airports looking to increase revenue have several options to explore, including raising rates and charges, developing revenue-producing facilities, encouraging private development on vacant land, and attracting operators that will pay facility charges.

Airport Revenue Growth Strategies

An airport’s ability to grow revenue will depend on the location of the airport, available property, the economic climate, competition, and consumer demand and price sensitivity. Ideally, airports can meet their operating costs through revenues generated by aviation uses. If costs are higher than revenues, airports may consider conducting a rates and charges survey to see how their prices compare to other airports in the region. An overview of this process can be found in ACRP Report 36 Airport/Airline Agreements—Practices and Characteristics, Section 2.3, Types of Business Arrangements and Rate-Setting Methodologies. The process is regulated through rate-setting policy per the U.S. DOT’s Policy Regarding Airport Rates and Charges. Consideration must be given to keeping the airport price-competitive, and setting rates and charges proportionally to what level of service is offered. This is termed a “compensatory” approach. Airports with convenient access to surface transportation networks, near business centers, and with aviation facilities that support all-weather use and have room for hangar development can generally charge more than those without. Conversely, airports that set rates and charges too high risk losing tenants to more competitively priced airports. Commercial service airports may also risk legal challenge from airlines operating at the airport.

Airports experiencing high levels of aviation demand can develop hangars and market property to aviation service providers like FBOs. FAA funding may not be used for revenue-producing investments. Therefore, sponsors must first evaluate whether it makes more sense to proceed with a revenue-producing development and then decide whether to “self-fund” the development, or attract a private developer and lease the land. In the most general terms, airports face higher costs and risk with the self-fund and build option, but will keep all of the revenue produced. Cost and risk are lower when a private developer builds, but airports receive either a flat rate lease per square foot, or a fraction of the revenue.

In many instances, airports augment aviation-related revenues with non-aviation leases, such as warehouses, manufacturers, multi-modal transportation facilities and even oil wells on airport property. When airports recruit non-aviation tenants, they compete with other available properties in the region. The challenge with this type of competition is that other sites may have existing infrastructure and appropriate zoning, in the case of urbanized settings. However, in rural settings the opposite could true, especially from the infrastructure standpoint as many times airports have better access to utilities than surrounding under developed properties. Further, FAA grant assurances prohibit airports from charging less than fair market value for non-aviation uses on airport property and this must be factored in your competitive analysis of the situation.

Airports located in areas where developable land is scarce, or expensive, may be able to release airport property from aviation use and lease the land to developers. This is a complex proposal but information about land releases can be found on the FAA’s Release of Airport Property Website. In general, considerations for this process include:

• Does the airport have land that is not needed for aviation use?
• Will the FAA support the land release?
• Will future land uses be compatible with aviation activities from the perspective of height, wildlife attractiveness, noise exposure, emissions, and glare?

When considering opportunities to grow revenue, airport managers must be mindful of any FAA or state grant assurances that limit what they may do with and on airport property, and how fees may be assessed. Key federal grant assurances are listed below:

• FAA Grant Assurance 5, Preserving Rights and Powers requires FAA permission before a sponsor sells or leases property shown on the “Exhibit A” property map, which is typically part of an airport layout plan
• FAA Grant Assurance 22, Economic Nondiscrimination requires sponsors to treat parties doing business on the airport fairly, and not charge one party more or less for the same level of service
• FAA Grant Assurance 23, Exclusive Rights forbids sponsors from setting rates and charges so high that they prohibit new entry of a service provider in order to protect an existing one
• FAA Grant Assurance 24, Fee and Rental Structure requires sponsors to set rates and charges to make the airport as self-sustaining as possible
• FAA Grant Assurance 25, Airport Revenues prohibit use of airport revenues for non-aviation purposes by the sponsor
• FAA Grant Assurance 31, Disposal of Land requires that the sponsor reimburse the FAA when selling property that was originally bought with FAA grants

State grant assurances are often similar to those from the FAA, and may be identical in some states. Information about state grant assurances can be found through individual state aeronautics offices. While specifics will vary on a case-by-case basis, airports that rely on public money for capital improvements will be limited in terms of what they can recoup through fees and charges.

Revenue Growth Opportunities Specific to Commercial Service Airports

Airports with scheduled passenger and cargo service have additional revenue options available. Presence of commercial air service and/or air cargo service opens the airport up to revenues from the following activities:

• Passenger airline hangar and terminal facility rents and leases
• In-terminal concessions and rental car leases
• Parking revenues
• Cargo airline hangar and sorting facility rents and leases
• Advertising

While development of available airport property can be an economic opportunity to create revenue, the issues surrounding development on airport land are complex. The method employed for the development of airport land often varies by airport sponsor. The airport sponsor is tasked with finding the appropriate balance between revenue maximization through development, while meeting the demands of the airport users and surrounding community. Some tools that are advantageous to the planning process are an Airport Master Plan, Infrastructure Inventory Analysis, Land Use Plan, Airport Business Plan, and Target Industry Analysis. ACRP Report 47 Guidebook for Developing and Leasing Property provides guidance on this topic. Regardless of the approach, airport property development needs to be in compliance with federal obligations and grant assurances. Most importantly, it cannot compromise an airport’s safety, operational flexibility, or reliability.

Consideration should be given to how the investment will be paid for and the expected payback period since this type of development is not typically eligible for FAA AIP funding. If the airport is federally obligated, the sponsor must take into account that sponsor money invested into the improvement cannot be taken back out of the aviation system once the improvement begins producing revenue.

Consider, for example, a city as a sponsor of an airport that receives FAA grants. The city oversees many departments, including emergency services, public works, and the airport. One year, the airport receives part of the city’s annual capital budget to build new T-hangars, which in turn are leased and begin producing revenue for the airport. Although the city paid for the T-hangars, it cannot use the revenue produced by this investment to buy new police cars or fund a remodel of an elementary school. The T-hangars are not as valuable without the associated airport infrastructure (runways, taxiways), which were paid for by FAA grants. For this reason, the city must use this revenue to help cover or reduce the airport’s operational expenses, and help pay for other capital improvements at the airport.