2025–2026 Update: Rate-setting represents the financial relationship between airports and airlines, governed by Airline Use Agreements and subject to FAA reasonableness review. All three major rating agencies (Moody's, S&P, and Fitch) include airport financial stability and credit quality as factors in their airport sector methodologies for assessing rate-setting sustainability (per 2025 sector outlooks). Historical data from 2019–2024 shows aviation demand sensitivity to economic cycles: enplanements declined 60% in 2020 during COVID-19 and recovered to pre-pandemic levels by Q3 2023, demonstrating the volatility that rate methodologies must address (FAA ACAIS data, 2024).
A. Introduction
Rate-setting represents the financial relationship between airports and airlines. This relationship is formalized through Airline Use Agreements (AUAs) and subject to Federal Aviation Administration (FAA) reasonableness review. Rate methodologies are governed by 49 USC §47107(a)(16), which requires airports to establish and maintain reasonable rates and charges, and are subject to the FAA Revenue Use Policy (78 FR 55330, 2013 consolidated restatement), which restricts airport revenues to aviation-related purposes and requires detailed cost accounting.
Four rate methodologies can be distinguished within the framework of airport financial analysis:
Residual methodology: Airlines bear all residual cost after non-airline revenues and credits are applied
Compensatory methodology: Airlines pay a pro-rata share of total costs regardless of non-airline performance
Hybrid Residual approach: Rate formula that may produce surplus for the airport in normal years, with an Extraordinary Coverage Protection (ECP) backstop ensuring airlines bear downside risk, as used by a majority of large and medium hub airports (29 of 58 classified airports per DWU, 2026)
Hybrid Compensatory approach: Compensatory airfield and terminal with partial revenue sharing provisions
These methodologies operate within the established framework governed by AUA provisions and subject to FAA reasonableness standards, incorporating three core dimensions of airport financial analysis: (1) cost allocation and base definition, (2) revenue structure and rate methodology, and (3) covenant compliance and debt service coverage.
DWU Four-Category Classification (58 large and medium hub airports, March 2026):
- Pure Residual (11): ANC, AUS, CLE, DTW, FAT, FLL, MDW, MIA, ORD, SFO, STL
- Hybrid Residual (29): ABQ, ALB, BDL, BWI, CHS, CLT, CMH, CVG, DCA, DEN, DFW, HNL, IAD, IND, LAS, LAX, MKE, MSY, ONT, PBI, PDX, PIT, RSW, SAN, SAT, SEA, SJC, SLC, SMF
- Hybrid Compensatory (10): ATL, BNA, DAL, GSO, IAH, JAX, MCO, MSP, PHL, TPA
- Pure Compensatory (8): BOS, DSM, OAK, PHX, RDU, SAV, SJU, SNA
PANYNJ airports (JFK, EWR, LGA) operate under a separate Port Authority framework and are excluded. Source: DWU dwu_data.db ratemaking_methodology table, verified through AUA and OS analysis.
B. Landing Fee Calculation
B.1 Cost Base
The cost base for landing fees comprises the airfield cost center. This includes:
Direct operations and maintenance (O&M) expenses
Allocated indirect costs (administration, utilities, insurance)
Debt service (or depreciation plus interest on capital projects)
Other airfield charges and assessments
Less: Non-airline airfield revenue (ground rentals, fuel sales, etc.)
The resulting net cost is the basis for both residual and compensatory rate calculations.
B.2 Residual Landing Fee
Under the residual methodology, airlines bear all remaining cost after non-airline revenues and credits reduce the requirement.
Formula: (Total Airfield Requirement − Non-Airline Airfield Revenue − Non-Airline Revenue Credit) ÷ Total Signatory Landed Weight
Key characteristics of residual methodology:
Airlines are directly exposed to revenue volatility; lower non-airline revenue leads to higher airline rates
Non-airline revenue credit is important—it represents projected revenues available to offset airline costs
Only signatory (AUA) aircraft weight is used in the denominator, creating higher rates per pound than compensatory methods
Residual approach encourages airline participation through AUA signature
B.3 Compensatory Landing Fee
Under the compensatory methodology, airlines pay a pro-rata share of total airfield cost, with the airport retaining any surplus or absorbing any deficit from non-airline performance.
Formula: Total Airfield Cost ÷ Total Landed Weight (all users)
Key characteristics of compensatory methodology:
Airlines are insulated from non-airline revenue performance; the rate is stable regardless of other income
Airport retains concession revenues and non-airline income
Total landed weight (both signatory and non-signatory) is used, lowering the per-pound rate
Airport bears revenue risk; airport retains upside from stronger non-airline performance
B.4 Worked Example: Landing Fee Calculation
The following example uses hypothetical data for illustrative purposes to demonstrate calculation mechanics. Actual rates, cost bases, and non-airline revenues vary by airport.
The following example illustrates the difference between residual and compensatory methodologies:
Given Data:
Airfield Operating & Maintenance Costs: $50,000,000
Airfield Debt Service: $30,000,000
Non-Airline Airfield Revenue: $2,000,000
Non-Airline Revenue Credit (residual approach): $40,000,000
Total Signatory Landed Weight: 8,000,000,000 lbs
Total Non-Signatory Landed Weight: 2,000,000,000 lbs
Non-Signatory Premium Multiplier: 125%
Residual Landing Fee Calculation:
Total Airfield Requirement = $50M + $30M = $80M
Residual Base = $80M − $2M − $40M = $38M
Residual Rate = $38M ÷ 8,000M lbs = $4.75 per 1,000 lbs
Non-Signatory Rate = $4.75 × 125% = $5.94 per 1,000 lbs
Compensatory Landing Fee Calculation:
Total Cost = $80M
Total Landed Weight = 8B + 2B = 10,000M lbs
Compensatory Rate = $80M ÷ 10,000M lbs = $8.00 per 1,000 lbs
Non-Signatory Rate = $8.00 × 125% = $10.00 per 1,000 lbs
Analysis:
The residual method yields a lower signatory rate ($4.75) because the $40M non-airline revenue credit reduces airline responsibility. Airlines bear non-airline revenue risk; if actual revenues fall short, rates increase in the subsequent true-up, as outlined in standard AUA provisions (e.g., FAA Policy Regarding Airport Rates and Charges, 2013). The compensatory method yields a higher rate ($8.00) because airlines fund all airfield costs regardless of non-airline performance; the airport retains non-airline revenues and bears the revenue risk. Non-signatory premiums (25% in this example) are applied equally under either method, encouraging AUA participation.
C. Terminal Rental Rate Calculation
C.1 Cost Base
The cost base for terminal rental rates comprises the terminal cost center:
Direct operations and maintenance (terminal building, cleaning, utilities)
Allocated indirect costs (corporate office, IT, security)
Debt service (or depreciation plus interest on terminal capital)
Less: Non-airline terminal revenue (retail concessions, food & beverage, advertising, etc.)
Terminal rates are calculated on a per-square-foot basis at 25 of 31 large-hub airports (DWU analysis of publicly filed AUAs, 2025), rather than per-pound for landing fees or per-passenger for gates.
C.2 Residual Terminal Rate
Under residual methodology for terminal space, airlines bear costs after non-airline revenues offset expenses.
Formula: (Total Terminal Requirement − Non-Airline Terminal Revenue − Revenue Credits) ÷ Total Rentable Square Footage
Residual terminal methodology exposes airlines to concession revenue variability. Higher concession performance reduces airline rent; weaker concession performance increases airline rent.
C.3 Compensatory Terminal Rate
Under compensatory methodology, airlines pay a pro-rata share of terminal cost based on rentable space.
Formula: Total Terminal Cost ÷ Total Rentable Square Footage
Compensatory methodology allows the airport to retain concession revenue as upside. Airlines are not penalized if concessions perform poorly, but they also do not benefit if concessions exceed projections.
C.4 Space Classification
Terminal space is classified into five categories at 25 of 31 large-hub airports (DWU analysis of AUAs, 2025):
Exclusive Use —airline-controlled gates, ticket counters, baggage claim, airline offices; charged fully to that airline
Preferential Use —gates with priority access to a specific airline but available to other carriers; allocated prorata
Joint Use / Common Use —shared facilities (gates, hold rooms); allocated among users based on usage or square footage
Support Space —flight information systems, baggage systems, ground equipment; allocated to airlines based on activity
Public Space —lobbies, corridors, restrooms, common circulation; not charged directly to airlines at 25 of 31 large-hub airports (DWU analysis of AUAs, 2025) (borne by airport)
Space classification aligns rate allocation with actual facility use and FAA guidance on reasonableness (FAA Policy Regarding Airport Rates and Charges, 2013), ensuring compliance with AUA provisions.
C.5 Worked Example: Terminal Rental Rate Calculation
The following example illustrates terminal rate methodology:
Given Data:
Terminal Operating & Maintenance: $80,000,000
Terminal Debt Service: $50,000,000
Non-Airline Terminal Revenue (concessions): $60,000,000
Total Rentable Space (exclusive + preferential + common): 2,000,000 sq ft
Residual Terminal Rate Calculation:
Total Terminal Requirement = $80M + $50M = $130M
Residual Base = $130M − $60M = $70M
Residual Rate = $70M ÷ 2M sq ft = $35.00 per sq ft per year
If an airline occupies 50,000 sq ft of exclusive space: Annual charge = 50,000 × $35.00 = $1,750,000
Compensatory Terminal Rate Calculation:
Total Terminal Cost = $80M + $50M = $130M
Compensatory Rate = $130M ÷ 2M sq ft = $65.00 per sq ft per year
Same airline with 50,000 sq ft: Annual charge = 50,000 × $65.00 = $3,250,000
Airport retains $60M concession revenue as operating margin.
Analysis:
The residual approach ($35/sq ft) assumes concessions offset $60M of terminal costs. The compensatory approach ($65/sq ft) requires airlines to fund all operating costs; the airport benefits from concession upside. 18 of 31 large-hub airports use a hybrid of residual airfield and compensatory terminal rates (DWU classification, 2025), reflecting the capital intensity and revenue-generating potential of retail/concession space within the terminal.
D. Hybrid Methodologies
D.1 Hybrid Residual
A hybrid structure used by a majority of large and medium hub airports (29 of 58 classified airports per DWU, 2026) combines:
Residual Airfield Fees —airlines bear landing fee risk after non-airline airfield revenue credits
Compensatory Terminal Rates —airlines pay a stable per-square-foot rate; airport retains concession revenues
This hybrid structure reflects the different characteristics of each facility type: airfield costs are primarily fixed and utility-driven, while terminal facilities generate non-airline concession revenues that airports wish to retain as operating margin. The defining feature of hybrid residual under DWU's classification is the Extraordinary Coverage Protection (ECP) — a backstop mechanism ensuring airlines bear downside cost risk even when the rate formula may produce surplus in normal years. The ECP distinguishes hybrid residual from hybrid compensatory, where no such backstop exists.
D.2 Hybrid Compensatory
A structure used in fewer cases (10 of 58 classified airports per DWU, 2026), combines:
Compensatory Airfield Fees —airlines pay a stable per-pound rate regardless of non-airline airfield revenue performance
Compensatory Terminal Rates with potential revenue sharing on concession overages
This structure is employed at airports with non-airline revenue streams where the airport benefits from retaining upside, but wants airlines to have cost certainty for planning purposes.
D.3 Revenue Sharing Variations
Hybrid structures often incorporate revenue sharing mechanisms to balance risk between airport and airlines:
Sliding Scales: Rate adjustments based on concession revenue performance (e.g., if concessions exceed projections by 10%, airlines receive a 2% credit)
Caps and Floors: Maximum and minimum rates to limit volatility in residual methodologies
Percentage Sharing Above Threshold: Airlines share in concession revenues exceeding a specified threshold (e.g., airlines receive 25% of concession revenue above budget)
Revenue Sharing Credit: Explicit credit to residual calculations when non-airline revenue exceeds projections
E. Rate by Resolution
Not all airports set rates through bilateral airline use agreements. Some airports exercise unilateral rate-setting authority through board resolutions or ordinances, with no AUA governing rates. This is known as rate by resolution (Type A rate authority in DWU's classification framework).