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Three Dimensions of Airport Finance

(Written by Dafang Wu on January 22, 2016; PDF version)

This article introduces three dimensions of airport finance – accounting, rates and charges, and trust, and provides examples of how three dimensions vary from airport to airport.

Airport finance for a given airport is quite straightforward. For an experienced airport consultant, understanding the existing financial framework and key issues for any given airport may take only days, if not hours.  On the other hand, airport finance on an industry level is complicated because each airport is unique.  An airport consultant may need to understand how most airports work in order to serve a specific airport.

Financial operations at most U.S. airports are recorded according to three different sets of rules:
1. Accounting: Generally Accepted Accounting Principles (GAAP), which generally apply equally to all airports
2. Rates and Charges: airline use agreement or rate resolution, which is unique for each airport
3. Trust: bond document (indenture/resolution/trust agreement, etc.), which is unique for each airport

Key terms of airport finance are viewed and defined differently under the three sets of rules. For example, counting a portion of last year’s revenues in the current year is at least accounting manipulation under GAAP.  It may be required by an airline use agreement; it may be acceptable under a bond document.  Terms defined in bond documents are typically capitalized to indicate that they are defined terms, such as Revenues, Operating Expenses, or Annual Debt Service Requirements.

Because the financial framework is unique at each airport and affects the financial results differently, an airport consultant must study the airline use agreement and the bond document for the specific airport before providing comments.

In addition, due to each airport’s unique framework, most accounting ratios, such as current ratio, return on asset or profit margin, may be only useful when applied to the airport over time or to a subset of U.S. airports, and are meaningless on an industry level. This topic is discussed in a separate article.

Revenues

The following revenue components may be recorded differently under a bond document or an airline use agreement:

Surplus Revenues from Prior Year

There are two types of surplus revenues at the end of every fiscal year:

  1. The planned surplus revenues, which are anticipated or budgeted at the beginning of a fiscal year
    1. For airports with residual ratemaking methodologies (Residual Airports), the surplus revenues are mostly the rolling coverage (typically 25 percent) of debt service. Those revenues are generally the assets of the airlines if initially funded by the airlines, counted as Revenues for the ensuing fiscal year on a trust basis, and as a credit to the calculation of rates and charges in the ensuing fiscal year.
    2. For an airport with compensatory ratemaking methodologies (Compensatory Airports), the surplus revenues are net revenues after meeting all obligations, which are assets of the airport, and are not recognized as Revenues in the following years
  2. The unexpected surplus revenues, which are the differences between collected rates and charges and recalculated rates and charges. At the end of every year, an airport may recalculate rates and charges based on actual traffic volume, expenses, revenues and debt service, which is referred to as the settlement calculation or true-up. Those revenues are the assets of the airlines, but are treated differently at each airport according to their specific airline use agreements:
    1. Returned in the same year: those amounts are generally deducted under GAAP and trust
    2. Returned in the second year:
      1. For Residual Airports, those revenues are treated as a credit to the second year’s calculation of rates and charges, and are counted as Revenues on a trust basis
      2. For Compensatory Airports:
        1. If those revenues are returned to the airlines as a check from the airport’s non-Revenue Fund, it may not affect Revenues under trust
        2. If those revenues are returned to the airlines as a credit
          1. The second year’s Revenues would be reduced
          2. If the airport elects to transfer the corresponding amount from its cash balance to the Revenue Fund, the same amount may be recognized as Revenues under Trust. 

            For example, an airport may give the airlines a credit of $1 million in FY 2015 due to FY 2014 over-collection, and transfer $1 million from the airport’s cash account to the Revenue Fund to cover such credit. If the bond indenture recognizes the transfer as a portion of Revenues, the airport can add $1 million on top of the revenues generated in FY 2015.

Passenger Facility Charge (PFC) Revenues

If a portion of PFC revenues are used to pay PFC-eligible debt service, an airport may record the PFC revenues differently depending on its airline use agreement and bond document.

  PFC Revenues
  as Revenues as an Offset
Other Revenues  $          100  $         100
  Add PFC Revenues               20                 -
Revenues  $          120  $         100
  Less: Operating Expenses              (70)             (70)
Net Revenues  $           50  $          30
     
Debt Service  $           40  $          40
  Less: PFC Revenues                  -             (20)
Net Debt Service  $           40  $          20
     
Coverage            1.25           1.50

 

Other Differences

There could be other differences between the revenues under GAAP and the Revenues recognized under the bond document:

Operating Expenses

There are three broad categories of operating expenses that may be recorded differently according to the bond document:

Non-Cash Expenses

Several types of expenses are recognized as operating expenses under GAAP, but are non-cash transactions. Those expenses are generally excluded from the calculation of airline rates and charges, and, hopefully, excluded from the definition of Operating Expenses under the bond document as well:

Expenses Paid from Non-Revenue Fund

Under some bond documents, expenses paid from sources other than the Revenue Fund are excluded from the definition of Operating Expenses. Those expenses are typically the expenditures that must be expensed under GAAP but that have a capital nature. For example, environmental remediation expenses must be expensed in the year they were incurred, although an airport may view it as a capital project. The connection fee to a public water/sewer system is another example.

The airport may still elect to recover those expenses through rates and charges, but typically over several years instead of one year.

Other Differences

A bond document may include many other types of expenses as Operating Expenses, which are paid as the first priority out of Revenues. For example, small capital outlay and vehicle expenses may be viewed as essential to an airport’s operations, and included as Operating Expenses under a bond document. Some bond documents developed in earlier years may also include repayments of the general obligation bonds as Operating Expenses.

Debt Service

A bond document defines debt service on a cash basis or a deposit basis, which is unrelated to the interest expenses recognized under GAAP.

In addition, the bond document may recognize PFC revenues or CFC revenues differently, as discussed above.