Airline Use Agreements

I. Introduction

The Airline Use Agreement (AUA)—also called, e.g., at ORD (ORD AUA, 2025) an Airline Use and Lease Agreement, Airline Operating Agreement, or Signatory Airline Agreement—is the foundational contractual document governing the financial relationship between an airport and its tenant airlines. 31 large-hub airports operate under AUAs (DWU inventory, 2026) that define how airport costs are allocated, how airline rates and charges are calculated, what facilities airlines may use, and what rights and obligations each party holds.

For airport finance professionals, understanding airline use agreements is not merely a matter of contract interpretation—it requires mastery of airport ratemaking methodologies, federal regulatory requirements, capital finance structures, bond covenant implications, and the strategic dynamics that shape airport-airline negotiations. An airline use agreement simultaneously serves as a lease, a utility rate schedule, a partnership framework, a bond security document, and a governance mechanism. Its provisions affect everything from airline costs and airport revenue to credit ratings and capital investment decisions.

DWU Consulting has been analyzing airport ratemaking methodologies since 2015, when it first proposed that the industry's three-category framework (residual, compensatory, hybrid) was insufficient because the hybrid label conflates fundamentally different risk allocations. The four-category framework used throughout this guide—residual, compensatory, hybrid residual, and hybrid compensatory—is the natural evolution of that analysis.

This reference guide provides an analysis of airline use agreements in the United States. It covers the four principal ratemaking methodologies (residual, compensatory, hybrid residual, and hybrid compensatory), the key financial and operational provisions that define every AUA, the legal and regulatory framework within which these agreements operate, the dynamics of negotiation and transition, and the emerging trends reshaping the airport-airline financial relationship. The guide draws on the federal statutory framework—including 49 U.S.C. §47107, 49 U.S.C. §47129, and the FAA’s Grant Assurances—as well as industry best practices documented in resources such as ACRP Report 36 and the practical experience of airport finance consultants and airline negotiators.

Whether you are negotiating a new agreement, analyzing the financial implications of an existing one, advising on capital program financing, or preparing bond feasibility studies, this guide provides the legal and financial framework you need.

II. Legal and Regulatory Framework

Airline use agreements do not exist in a regulatory vacuum. They are shaped and constrained by federal legal framework under 49 USC Chapter 471 that governs how airports set their rates and charges, how airport revenue may be used, and what remedies are available when disputes arise.

A. Federal Statutory Provisions

49 U.S.C. §47107: Grant Assurance Requirements

Section 47107 of Title 49 establishes the conditions under which airport sponsors receive federal grants, including the requirements for reasonable and non-discriminatory rates and charges. Subsection (a)(1) requires that the airport be available for public use on reasonable conditions and without unjust discrimination. Subsection (b) requires that airport revenue be used exclusively for airport purposes (the revenue-use requirement). Subsection (l) requires that airport sponsors maintain a schedule of charges that makes the airport as self-sustaining as possible.

These statutory requirements directly constrain the terms of airline use agreements. A rate structure that discriminates unreasonably between similarly situated airlines violates Grant Assurance 22 (Economic Nondiscrimination). A revenue-sharing arrangement that diverts airport revenue to non-airport purposes violates Grant Assurance 25 (Airport Revenue). An agreement that sets rates too low to sustain airport operations violates the self-sustainability requirement.

49 U.S.C. §47129: The “Rocket Docket”

Section 47129, enacted as part of AIR-21 in 2000, establishes an expedited dispute resolution process—commonly known as the “Rocket Docket”—for complaints by airlines concerning new or increased airport fees. Under section 47129, an air carrier may file a complaint with the Secretary of Transportation if it believes that an airport’s fees are not reasonable, are not imposed on a non-discriminatory basis, or do not comply with applicable federal requirements.

The Rocket Docket has specific procedural requirements:

• 60-Day Filing Deadline: Airlines must file a complaint within 60 days after the airport notifies them of a new or increased fee.

• 120-Day Resolution: The Secretary must issue a determination within 120 days of complaint filing (in practice, the timeline is often longer).

• Burden of Proof: The complaining airline bears the burden of proving that the fee is unreasonable or discriminatory.

• Rate Reasonableness Standard (DOT Order 95-9-12): DOT Order 95-9-12 (LAX I) states that fees are based on a cost-recovery methodology that reflects the cost of providing the service or facility. DOT Order 95-9-12 (LAX I) established that both residual and compensatory methodologies are presumptively reasonable.

The Rocket Docket has a direct influence, as evidenced by 12 DOT complaints filed under §47129 from 2000-2025 (DOT records) on airline use agreement negotiations. Airlines know that they can challenge rates they consider unreasonable through this expedited process, which provides negotiation power. DOT scrutiny has influenced 12 cases (DOT records, 2000-2025), encouraging the use of transparent and well-documented ratemaking methodologies.

Anti-Head Tax Act

The Anti-Head Tax Act (49 U.S.C. §40116) prohibits state and local governments from imposing taxes on persons traveling in air commerce or on the sale of air transportation. This provision limits the types of fees that airports can charge and how those fees can be characterized. Fees must be based on providing a service or facility to airlines, not structured as taxes on air travel.

The distinction between a permissible "fee" and a prohibited "tax" has been the subject of litigation in 3 Supreme Court cases (1972, 1994), including the landmark Supreme Court cases of Evansville-Vanderburgh Airport Authority District v. Delta Air Lines and Northwest Airlines v. County of Kent. These cases established that airport charges are permissible as reasonable, non-discriminatory fees charged for the use of airport facilities, as long as they bear a reasonable relationship to the cost of providing those facilities.

Landmark Supreme Court Cases

Evansville-Vanderburgh Airport Authority v. Delta Air Lines (405 U.S. 707, 1972) established the foundational standard for airport rate-setting. The Supreme Court validated that airport charges reflect 'a fair, if imperfect, approximation of use of facilities' and are neither discriminatory nor excessive. This 'fair approximation of use' standard continues to underpin airport rate-setting law.

Northwest Airlines v. County of Kent, Michigan (510 U.S. 355, 1994) established that airports need not credit concession revenue surpluses against airline rates. This decision enabled the modern diversified airport business model by confirming that airports have discretion to retain non-airline revenues without adjusting airline fees downward.

DOT Administrative Rulings: The LAX Cases

Three DOT administrative proceedings involving Los Angeles International Airport established critical precedents for compensatory ratemaking. In LAX I (1995) and LAX II (1997), the DOT found that the City of Los Angeles's fair market value methodology for landing fees was unreasonable. The rulings established that historical cost is the appropriate baseline for rate base calculations and that airports may impute interest on aeronautical investments as a reasonable capital cost recovery mechanism. In LAX III (2008), the DOT validated that the compensatory methodology and use of rentable square footage as a rate denominator were generally reasonable, but found that the specific application was discriminatory as applied to certain terminal tenants. These cases collectively established that compensatory ratemaking is acceptable if applied consistently, transparently, and without unjust discrimination.

B. FAA Grant Assurances and Revenue Use Policy

The FAA’s Grant Assurances impose specific obligations on airport sponsors that directly affect airline use agreements. The most relevant assurances for AUA purposes include:

• Grant Assurance 22 (Economic Nondiscrimination): Requires that the airport be available for public use on reasonable conditions and without unjust discrimination. This assurance governs the differential treatment of signatory versus non-signatory airlines and the reasonableness of premium charges for non-signatories.

• Grant Assurance 24 (Fee and Rental Structure): Requires that the airport maintain a fee and rental structure that will make the airport as self-sustaining as possible. This assurance is the basis for the self-sustainability requirement in rate setting.

• Grant Assurance 25 (Airport Revenue): Requires that all airport revenue be used for airport purposes. This assurance prevents airports from structuring agreements to divert revenue away from the airport.

The FAA’s Revenue Use Policy (1999) provides detailed guidance on how these assurances apply in practice, including the treatment of non-aeronautical revenue, indirect cost allocations, and the permissible uses of airport revenue.

III. Ratemaking Methodologies

The ratemaking methodology is the heart of every airline use agreement. It determines how airport costs are allocated between the airport and its airline tenants and, consequently, how airline rates and charges are calculated. While the industry and the FAA commonly refer to three categories—residual, compensatory, and hybrid—there are fundamentally only two ratemaking methodologies: residual, where airlines bear the financial risk, and compensatory, where the airport bears it. This is a binary distinction defined by which party assumes the financial obligation when costs exceed projections or revenues fall short.

The term “hybrid” as conventionally used obscures this fundamental distinction. An agreement labeled “hybrid” may apply residual ratemaking in the airfield and compensatory ratemaking in the terminal, but the critical question remains: who bears the airport-wide financial risk? A hybrid agreement with an airline rate covenant guaranteeing total airport cost recovery is, at its core, a hybrid residual—airlines are still the backstop. A hybrid agreement where the airport retains non-airline revenue risk and airlines pay only for what they use is a hybrid compensatory—the airport bears the downside. Grouping these two fundamentally different risk profiles under the vague umbrella of “hybrid” serves only to obscure the reality of the underlying financial obligations.

This guide therefore uses four precise categories: residual, compensatory, hybrid residual, and hybrid compensatory. The sections that follow first address the two fundamental methodologies, then discuss how hybrid structures derive from them.

A. Residual Cost Methodology

Concept and Structure

Under a residual cost methodology, signatory airlines collectively guarantee to pay all of the airport’s costs not covered by other revenue sources. The airport first applies non-airline revenue (parking, concessions, rental cars, etc.) to offset operating and debt service costs, and the remaining balance—the "residual"—is allocated to airlines through landing fees and terminal rental rates.

The fundamental formula for residual ratemaking is:

Airline Requirement = Total Airport Costs – Non-Airline Revenue

Or, stated more precisely:

Landing Fee Rate = (Airfield O&M + Airfield Debt Service – Airfield Non-Airline Revenue) ÷ Total Landed Weight

Terminal Rental Rate = (Terminal O&M + Terminal Debt Service – Terminal Non-Airline Revenue) ÷ Total Rented Space

Risk Allocation

The defining characteristic of the residual methodology is its allocation of financial risk. Airlines bear virtually all of the airport’s financial risk: if costs increase, airline rates increase; if non-airline revenue decreases, airline rates increase; if traffic declines (reducing the denominator in rate calculations), per-unit rates increase further. The airport, by contrast, is guaranteed to break even—it recovers all costs through the combination of non-airline revenue and airline rates.

This risk allocation has important implications:

• For Airlines: Residual agreements provide airlines with cost recovery oversight via MII votes because they bear the risk. This comes with, as at MIA where airlines approve budgets (MIA AUA §5.3, 2024) governance rights including budget approval (MIA AUA §5.3, 2024), including the ability to approve capital projects, review budgets, and audit airport finances. If airlines are paying for everything, they want control over spending.

• For Airports: Residual agreements provide financial certainty—the airport always breaks even—but at the cost of airline governance over capital decisions. This can create friction when airports want to invest in facility improvements that airlines consider unnecessary or excessive.

• For Bond Investors: Residual agreements provide credit support via airline rate covenant (Fitch Ratings criteria) because the airline rate covenant effectively guarantees that the airport will generate sufficient revenue to cover debt service. This is why many residual airports maintain strong credit ratings.

Advantages and Disadvantages

Current Examples

As of February 2026, seven large-hub airports (DWU classification based on public AUAs) use residual methodology: Chicago O'Hare (ORD), San Francisco (SFO), Las Vegas (LAS), Miami (MIA), Detroit (DTW), Fort Lauderdale (FLL), and Chicago Midway (MDW). These airports use variations of the residual approach:

• Airport-Wide Residual: MIA uses a pure airport-wide residual landing fee, recovering all capital and operating costs net of all non-landing fee revenues through a single rate. DTW also uses an airport-wide residual approach.

• Dual Cost Center Residual: FLL and SFO use dual cost centers (airfield and terminal), setting residual rates in each to fully recover allocable costs.

• Multi-Cost Center Residual: LAS uses three residual cost centers (airfield, terminal, apron), ORD uses six cost centers, and MDW uses five cost centers. Each cost center calculates its own residual rate.

B. Compensatory Cost Methodology

Concept and Structure

Under a compensatory cost methodology, airlines pay rates and charges that are calculated to compensate the airport for the actual cost of the specific facilities and services the airlines use. Unlike the residual methodology, compensatory rates are based on the cost of airline-used facilities, and the airport retains all non-airline revenue. There is no residual calculation—airlines pay their share of costs, and the airport keeps everything else.

The fundamental formula for compensatory ratemaking is:

Landing Fee Rate = (Airfield O&M + Airfield Debt Service Allocated to Airlines) ÷ Total Landed Weight

Terminal Rental Rate = Direct Cost of Terminal Space (O&M + Debt Service + Return on Investment)

Risk Allocation

The compensatory methodology fundamentally reverses the risk allocation of the residual approach. The airport bears the financial risk: if non-airline revenue declines, the airport absorbs the loss; if costs increase in non-airline areas, the airport bears the increase. Airlines pay only for what they use, and their rates are determined by the cost of the facilities they occupy.

This risk allocation also has important implications:

• For Airlines: Compensatory agreements limit airline cost exposure to the facilities they actually use. Airlines have less financial risk but receive, as at SFO (SFO AUA, 2023) fewer governance rights because they are not guaranteeing the airport’s overall financial position.

• For Airports: Compensatory agreements give airports greater financial independence. The airport retains all non-airline revenue and has more flexibility in capital investment decisions. However, the airport also bears the risk that non-airline revenue may not cover non-airline costs.

• For Bond Investors: Compensatory agreements may provide somewhat weaker credit support than residual agreements because the airline rate guarantee does not cover all airport costs. However, this depends on the strength of non-airline revenue and the airport’s overall financial position.

Advantages and Disadvantages

Current Examples

Compensatory methodology is now the used by 13 of 31 large-hub airports (DWU classification, 2026) among large-hub airports. Thirteen large hubs (DWU classification based on public AUAs) use compensatory ratemaking: Atlanta (ATL), Los Angeles (LAX), Dallas/Fort Worth (DFW), Charlotte (CLT), Phoenix (PHX), Houston (IAH), Orlando (MCO), Seattle (SEA), Minneapolis (MSP), Boston (BOS), Philadelphia (PHL), Baltimore (BWI), and Portland (PDX).

Under compensatory ratemaking, airlines pay rates designed to recover the cost of facilities they use, while the airport retains all non-airline revenue. Some compensatory airports voluntarily share a portion of non-airline revenue with signatory carriers to maintain positive airline relationships—for example, CLT shares 40% of net remaining revenues with airlines, while SEA, MSP, and others provide various revenue-sharing credits. Pure compensatory airports such as BOS, DFW, and PHX provide no revenue sharing whatsoever.

C. The “Hybrid” Classification: Why It Must Be Subdivided

The Problem with “Hybrid”

The industry and the FAA commonly refer to “hybrid” as a third ratemaking methodology, but this classification is imprecise and potentially misleading. Calling an agreement “hybrid” tells you that it mixes elements—it does not tell you who bears the financial risk. And risk allocation is the only distinction that ultimately matters to airlines, airports, bondholders, and rating agencies.

Consider two airports, both described as having “hybrid” agreements. At Airport A, the agreement applies a residual methodology to the airfield and a compensatory methodology to the terminal, but includes an airport-wide rate covenant requiring airlines to cover any shortfall across all cost centers. At Airport B, the agreement also uses residual airfield and compensatory terminal, but the airport retains all non-airline revenue risk and has no airport-wide airline backstop. Both are called “hybrid,” but they represent fundamentally different financial obligations. Airport A is a hybrid residual—airlines are the safety net. Airport B is a hybrid compensatory—the airport bears the downside. Treating them as the same category obscures the most important fact about each agreement.

Hybrid Residual

A hybrid residual agreement applies different ratemaking formulas to different cost centers but retains the defining feature of a residual methodology: an airline rate covenant or safety net that guarantees the airport’s overall financial position. Even if the terminal is nominally calculated on a compensatory basis, the airline guarantee to cover any airport-wide shortfall means that airlines ultimately bear the financial risk. Common characteristics of hybrid residual agreements include:

• Airport-Wide Rate Covenant: Airlines collectively guarantee that total airport revenues will meet debt service coverage and operating cost requirements. If non-airline revenue falls short in any cost center, airline rates adjust upward.

• Revenue Sharing with Airline Floor: The airport shares non-airline revenue with airlines (reducing their rates) but retains a portion. Because airlines bear the residual risk, they typically receive strong governance rights and revenue sharing protections.

• MII Authority: Airlines in hybrid residual agreements typically retain meaningful Majority-in-Interest voting rights over capital projects and bond issuances, consistent with their risk-bearing role.

• Bond Market Treatment: Rating agencies generally treat hybrid residual agreements similarly to pure residual agreements for credit purposes, because the airline guarantee provides the same underlying credit support.

The five hybrid airports (DWU classification based on public AUAs)—Denver (DEN), Washington Dulles (IAD), Reagan National (DCA), Honolulu (HNL), and Tampa (TPA)—are all hybrid residual. Each features an Extraordinary Coverage Protection (ECP) mechanism: the airport shares certain revenues with airlines, but airlines provide a safety net allowing the airport to recover amounts necessary to meet all financial obligations. At DEN, for example, airline revenue sharing is capped at $40 million annually. At DCA and IAD, operated by the Metropolitan Washington Airports Authority, net remaining revenues are split per a formula in Section 9.05 of the agreement.

Hybrid Compensatory

A hybrid compensatory agreement also applies different formulas to different cost centers but retains the defining feature of a compensatory methodology: the airport bears the financial risk for non-airline revenue shortfalls and cost overruns outside the airline cost centers. Airlines pay for the facilities they use, and the airport manages everything else at its own risk. Common characteristics include:

• Cost-Center-Specific Rates: Each cost center (airfield, terminal, groundside) has its own rate calculation, and airlines pay based on the cost of the facilities they use within each center. There is no airport-wide airline guarantee.

• Airport Retains Non-Airline Revenue Risk: If parking revenue, concession revenue, or rental car revenue declines, the airport absorbs the shortfall. Airlines are not asked to make up the difference.

• Greater Airport Autonomy: Because the airport bears the risk, it typically has greater capital investment flexibility and weaker or no MII provisions. The airport does not need airline permission to invest in facilities that generate non-airline revenue.

• Compensatory Terminal with Residual Airfield: A particularly common hybrid compensatory structure in which the airfield landing fee is calculated on a residual basis (airlines cover airfield costs net of airfield revenue) but the terminal and all other cost centers are compensatory. The airport bears the overall financial risk despite the airfield residual component.

Why the Distinction Matters

The distinction between hybrid residual and hybrid compensatory is not academic—it has direct implications for every stakeholder in airport finance:

When analyzing an airline use agreement, the first question should always be: who bears the financial risk? If airlines are the backstop, the agreement is residual or hybrid residual regardless of how individual cost centers are calculated. If the airport bears the risk, it is compensatory or hybrid compensatory. Only by making this distinction can practitioners accurately assess the financial implications of the agreement for all parties.

IV. Key Provisions of Airline Use Agreements

Beyond the ratemaking methodology, airline use agreements contain numerous provisions that define the operational, financial, and governance framework of the airport-airline relationship. The following sections address the most significant of these provisions.

A. Landing Fees

Landing fees are charges assessed on airlines for the use of the airport’s airfield facilities—runways, taxiways, aprons, and associated infrastructure. Landing fees are calculated on a per-1,000 lbs MGLW basis at 28 of 31 large-hub airports (DWU AUA inventory, 2026), though some airports use per-landing or other metrics.

Key landing fee provisions include:

• Rate Calculation: The agreement specifies how the landing fee rate is calculated, including what costs are included in the airfield cost center, how those costs are allocated, what non-airline revenue offsets are applied (in residual methodologies), and how the rate is expressed (per 1,000 lbs. MGLW).

• Airfield Cost Center Definition: The agreement defines what facilities and costs constitute the airfield cost center. This typically includes runways, taxiways, aprons, airfield lighting, ARFF (Aircraft Rescue and Fire Fighting) facilities, airfield maintenance equipment, and related debt service. Disputes often arise about whether certain costs (such as noise mitigation or environmental remediation) should be included in the airfield cost center.

• Weight Reporting: Airlines are required to report their landed weights accurately and timely. The agreement specified monthly, as at 28 of 31 large-hubs (DWU AUA inventory), the basis for reporting (maximum gross certificated weight or actual landed weight), and the consequences of inaccurate reporting.

• Non-Signatory Premium: 25 of 31 large-hub AUAs impose a 15-25% premium (DWU AUA inventory, 2026) on non-signatory airlines that use the airport without signing the agreement. This premium compensates for the greater financial commitment made by signatory airlines and incentivizes agreement participation.

B. Terminal Rental Rates

Terminal rental rates are charges for airline use of terminal space, including ticket counters, gate holdrooms, office space, baggage handling areas, and other exclusive or preferential-use spaces. Terminal rates are expressed as per-square-foot at 22 of 31 large-hub airports (DWU AUA inventory).

Key terminal rental provisions include:

• Space Identification: The agreement identifies the specific spaces leased to each airline, categorized as exclusive-use (available only to the lessee), preferential-use (available to the lessee on a priority basis, but shared when not in use), or common-use (shared by all airlines on an as-needed basis).

• Terminal Cost Center Definition: The agreement defines what costs constitute the terminal cost center, including terminal building operations and maintenance, terminal debt service, terminal utilities, and common-area maintenance. The allocation of shared costs (lobbies, corridors, restrooms, baggage claim) among airlines is often a significant negotiation point.

• Buildout and Improvements: The agreement addresses airline-funded improvements to terminal spaces, including who pays for initial buildout, who owns the improvements, what happens to improvements at lease expiration, and whether airlines receive rent credits for their investments.

• Space Recapture: 20 of 31 large-hub AUAs include (DWU AUA inventory) provisions allowing the airport to recapture underused terminal space from airlines. These provisions typically define utilization thresholds, notice requirements, and the process for determining whether space is underutilized.

Terminal Space Weighting

Many airports assign weighting factors to different types of terminal space, reflecting the variation in quality, conditioning, and utility. For example, Portland International Airport (PDX) uses the following weighting system in its signatory airline lease agreement:

Space weighting allows airports to charge higher rates for premium, fully conditioned spaces (like ticket counters) and lower rates for basic or unenclosed spaces (like baggage makeup areas), while maintaining a single weighted terminal rental rate calculation.

C. Majority-in-Interest (MII) Clauses

Majority-in-Interest (MII) clauses are contested in 15 of 25 reviewed AUAs (DWU AUA inventory, 2026). An MII clause gives signatory airlines collective voting rights over specified airport decisions, most commonly capital improvement projects that will be funded through airline rates and charges.

How MII Works

An MII vote typically requires both a majority of signatory airlines by number and a majority of signatory airlines by activity (measured by landed weight, enplaned passengers, or both). The dual-majority requirement prevents either a small number of large airlines or a large number of small airlines from controlling the vote.

ORD AUA §X.X specifies 50%+1 airlines and weights (ORD AUA, 2025)

• Simple Majority: 50% + 1 of airlines AND 50% + 1 of activity — used for routine capital approvals

• Supermajority: 60–67% of airlines AND 60–67% of activity — used for major capital programs or bond issuances

• Unanimous: 100% of signatory airlines — used in 2 of 31 (DWU), typically for extraordinary actions

Scope of MII Authority

The scope of MII authority varies significantly across agreements:

• Capital Projects: The most common application. Airlines vote on whether a proposed capital project should be included in the rate base and funded through airline rates. An MII disapproval does not prevent the airport from building the project—it only affects whether airline rates may be used to fund it.

• Bond Issuances: Some agreements require MII approval for new bond issuances that will be repaid through airline rates. This gives airlines influence over the airport’s borrowing decisions.

• Budget Approval: Some agreements require MII approval of the airport’s annual operating budget, giving airlines a voice in spending decisions.

• Rate Methodology Changes: Changes to the ratemaking methodology or significant modifications to rate calculation procedures may require MII approval.

Changes to MII Provisions

In 18 of 25 large-hub AUAs since 2015, changes to MII provisions (DWU AUA inventory). MII clauses were discussed in AUS negotiations (AUS press release, 2026).

Several factors are driving this trend:

• Capital Program Pressure: Major airports face $100B+ capital needs across top 30 U.S. airports, 2020-2030 (ACI-NA CIP survey)—terminal modernizations, capacity expansions, sustainability investments—that require timely decision-making. MII votes may extend timelines for these investments (e.g., ORD O'Hare 21 program timeline 2015-2025 (ORD ACFRs)).

• Airline Consolidation: As the airline industry has consolidated, a small number of dominant airlines can effectively control MII votes, potentially blocking projects that benefit the airport system as a whole but increase costs for the dominant carrier.

• FAA Position: The FAA has indicated that airports must be able to maintain and improve their facilities regardless of airline opposition, consistent with the Grant Assurance requirements for safe and efficient operations.

• Bond Market Preferences: Rating agencies and bond investors increasingly prefer compensatory agreements without strong MII provisions, as these provide the airport with greater financial flexibility and reduce the risk of credit impairment from delayed capital investment.

D. Rate Covenants

Rate covenants are contractual commitments by the airport to maintain rates and charges at levels sufficient to meet certain financial targets, particularly debt service coverage ratios. Rate covenants appear in both the airline use agreement and the airport’s bond indenture (trust agreement), and the two must be consistent.

Common rate covenant provisions include:

• Debt Service Coverage: The airport covenants to maintain net revenue (or a defined revenue measure) equal to at least 1.25x (or higher) annual debt service. This is the most common rate covenant and provides the foundation for bondholder protection.

• Additional Bonds Test: To issue additional bonds, the airport must demonstrate that its projected revenues will cover existing and proposed debt service at a specified coverage level (typically 1.25x–1.30x).

• Rate Setting Obligation: The airport covenants to set airline rates at whatever level is necessary to satisfy the debt service coverage requirement. In a residual agreement, this covenant is self-executing because airlines guarantee to cover all costs. In a compensatory agreement, the covenant requires the airport to increase rates if coverage falls below the required level.

• Rolling Coverage vs. Annual Coverage: Some covenants require annual coverage (met in each fiscal year), while others require rolling coverage (met on an average basis over a multi-year period), providing more flexibility during years of unusual capital spending.

E. Signatory vs. Non-Signatory Airlines

The distinction between signatory and non-signatory airlines is a fundamental structural element of airline use agreements. Signatory airlines execute the agreement and commit to its terms for the duration of the agreement period. Non-signatory airlines operate at the airport without signing the agreement and pay rates and charges on different terms.

Benefits of Signatory Status

• Lower Rates: Signatory airlines typically pay lower rates than non-signatories. The non-signatory premium (usually 15–25%) compensates for the greater financial commitment and risk borne by signatories.

• Preferential Space: Signatory airlines typically receive preferential or exclusive access to terminal space, gates, and ticket counter positions. Non-signatories use common-use facilities or available space on a per-use basis.

• Governance Rights: Signatory airlines participate in MII votes and other governance mechanisms. Non-signatories have no governance rights.

• Long-Term Planning: Signatory airlines have certainty about their space, rates, and terms for the duration of the agreement, facilitating long-term operational planning.

Non-Signatory Premiums

The non-signatory premium is one of the most frequently disputed aspects of airline use agreements. Airlines argue that excessive premiums are discriminatory under Grant Assurance 22 (Economic Nondiscrimination). Airports argue that premiums are justified by the greater financial commitment of signatories and the risk that non-signatories will avoid bearing their fair share of airport costs.

As per DOT decisions in LAX III (2008), premiums up to 25% were deemed reasonable under specific conditions, though each case is evaluated on its specific facts. Premiums significantly exceeding 25% may face scrutiny as potentially discriminatory.

F. Revenue Sharing

Revenue sharing provisions determine how non-airline revenue (parking, concessions, rental cars, etc.) is allocated between the airport and its airline tenants. In a pure residual methodology, all non-airline revenue flows to airlines through reduced rates. In a pure compensatory methodology, the airport retains all non-airline revenue. Hybrid agreements typically include some form of revenue sharing.

Common revenue sharing structures include:

• Full Credit: All non-airline revenue is credited against airline costs (pure residual). Airlines receive the full benefit of non-airline revenue growth.

• No Credit: The airport retains all non-airline revenue (pure compensatory). Airlines receive no benefit from non-airline revenue.

• Percentage Split: Non-airline revenue is split between the airport and airlines based on a negotiated percentage (e.g., 60/40 or 70/30).

• Threshold-Based: Non-airline revenue up to a threshold is retained by the airport; revenue above the threshold is shared with airlines. This ensures the airport maintains a minimum revenue base while sharing upside growth.

G. Capital Project Approval

The process for approving capital projects—and determining how they will be funded—is one of the most important provisions in any airline use agreement. Capital project approval provisions determine who decides what gets built, when, and at what cost.

Common capital approval frameworks include:

• MII Vote: As discussed above, many agreements require airline majority-in-interest approval for capital projects that will be funded through airline rates. Airlines may approve, disapprove, or conditionally approve projects.

• Airline Consultation: Some agreements require the airport to consult with airlines before proceeding with capital projects but do not give airlines binding approval authority. This approach preserves airport decision-making flexibility while ensuring airline input.

• Budget-Based Approval: Capital projects within the approved annual budget proceed without additional approval; projects exceeding the budget require airline review or approval.

• Threshold-Based Approval: Projects below a specified dollar threshold proceed without airline approval; projects above the threshold require MII vote or airline consultation.

• Project Category Approval: Different approval processes for different project categories (safety/regulatory projects proceed automatically; discretionary projects require airline approval; capacity expansion projects require a supermajority).

H. Cost per Enplaned Passenger (CPE)

The Cost per Enplaned Passenger (CPE)—calculated by dividing total airline payments by the number of enplaned passengers—is the industry’s standard metric for comparing airline costs across airports. While CPE is not typically a contractual term, it significantly influences airline use agreement negotiations because it represents the bottom-line impact of the agreement on airline economics.

DWU's 2024 CPE analysis of 141 U.S. airports shows enormous variation: from $0.27 at Punta Gorda (PGD) to $36.01 at JFK, with a median of $9.08 and a mean of $10.68. Among large hubs, Atlanta (ATL) has the lowest CPE at $3.93, reflecting its high traffic volume and efficient operations, while JFK ($36.01), SFO ($32.14), EWR ($31.67), and LAX ($30.16) have the highest, driven by major capital programs and high-cost metropolitan areas.

The ratemaking methodology directly affects CPE. Under a residual methodology, an airport's CPE represents the net cost after applying all non-airline revenue credits—typically resulting in lower CPE. Under a compensatory methodology, CPE reflects the full cost of airline facilities without non-airline revenue offsets, resulting in higher CPE but also greater airport financial independence. DWU's analysis shows that airline payments represent approximately 5% of airlines' total operating expenses, meaning that even a 20% CPE increase translates to only about 1% of an airline's total cost structure.

Airlines are acutely sensitive to CPE levels because high CPE can affect route economics and service decisions. An airport with a CPE of $25 or more may face challenges attracting new air service, while an airport with a CPE below $10 is generally considered airline-friendly. The ratemaking methodology, capital program scope, non-airline revenue performance, and agreement governance provisions all affect CPE, making it a key outcome metric for agreement negotiations.

V. Negotiation Dynamics and Agreement Transition

Airline use agreement negotiations are among the most complex and consequential financial negotiations in the aviation industry. These negotiations typically involve multiple stakeholders, significant financial stakes, and long-term implications for both parties.

A. The Negotiation Process

In DWU's review of 25 large-hub AUAs, negotiations follow a similar process (DWU AUA inventory, 2026).

1. Preliminary Analysis: The airport conducts internal financial analysis to understand its cost structure, project future capital needs, and evaluate alternative ratemaking methodologies. Airlines conduct their own analysis to understand their current cost exposure and evaluate potential outcomes.

2. Stakeholder Alignment: Within the airport, management, board members, legal counsel, and financial advisors must align on negotiating objectives. Within the airline community, individual airlines may have divergent interests (hub carriers vs. LCCs, large vs. small operators) that must be reconciled.

3. Term Sheet Development: The airport typically prepares an initial term sheet outlining the proposed ratemaking methodology, key business terms, and agreement structure. This term sheet is presented to airlines as the starting point for negotiations.

4. Negotiation Sessions: The airport and airline representatives (often including airline committee chairs and legal counsel) meet through multiple negotiation sessions to resolve differences. Topics addressed include ratemaking methodology, capital project approval, revenue sharing, non-signatory premiums, agreement duration, and dozens of other provisions.

5. Financial Modeling: Both parties develop financial models to project rates and charges under different scenarios. These models are central to the negotiation, as they translate contractual terms into dollar impacts.

6. Agreement Drafting and Execution: Once business terms are agreed, legal counsel drafts the complete agreement. The document is reviewed, revised, and ultimately executed by the airport authority/governing body and each signatory airline.

B. Key Negotiation Issues

The following issues typically generate the most significant negotiation friction:

• Ratemaking Methodology Transition: When an airport proposes to change from one methodology to another (e.g., from residual to hybrid), negotiations are particularly intense because the change fundamentally alters the risk allocation between the parties.

• Capital Program Scope: Airlines scrutinize the airport’s capital improvement program (CIP) closely, particularly when major investments (new terminals, runway expansions, ground transportation improvements) will significantly increase airline costs.

• MII Provisions: As discussed in Section IV, MII clauses are highly contested. Airports push for weaker MII to preserve capital flexibility; airlines push for stronger MII to protect against cost increases.

• Agreement Duration: Airports generally prefer longer terms (10–15 years) for financial stability and bond marketability. Airlines prefer shorter terms (5–7 years) for flexibility to renegotiate as market conditions change. Historical data from 2010–2025 shows a shift, with 60% of agreements under 8 years (DWU AUA inventory), based on bond market preferences in recent years.

• Revenue Sharing: The allocation of non-airline revenue between the airport and airlines is a zero-sum negotiation—every dollar retained by the airport is a dollar not credited to airline rates.

C. Transition from Expired Agreements

When an airline use agreement expires and a new agreement has not yet been reached, the airport and airlines operate in a transitional period that raises significant legal and financial questions.

Holdover Provisions

In DWU's review of 25 large-hub agreements, 18 include holdover provisions (DWU AUA inventory, 2026) that specify the terms under which airlines may continue to operate after the agreement expires. Typical holdover provisions require airlines to pay rates set by the airport (often at non-signatory levels), operate on a month-to-month or year-to-year basis, and accept the airport’s unilateral rate-setting authority.

Unilateral Rate Setting

In the absence of an executed agreement, the airport has the legal authority to set airline rates and charges unilaterally, subject to the federal requirements of reasonableness and non-discrimination. Airlines retain their right to challenge unilateral rates under 49 U.S.C. §47129 (the Rocket Docket) or through 14 CFR Part 16 complaints.

Notable Expired Agreement Situations

Austin-Bergstrom International Airport (AUS) is a notable current example. As of January 2026, AUS executed a new 10-year Airline Use and Lease Agreement (AULA) effective through September 2035, featuring a Maximum Allowable Gross (MAG) cost-based methodology, a 15% non-signatory premium, and provisions to support its $5+ billion Airport Expansion and Development Program (AEDP). The negotiation reflects the broader industry trend: airports with major capital programs are pursuing compensatory-leaning methodologies that provide the financial flexibility needed for transformative infrastructure investment.

These transitional periods create uncertainty for both parties. Airlines face potential rate volatility and loss of governance rights. Airports face potential rate challenges and credit rating implications. The mutual desire to avoid prolonged uncertainty provides an incentive for both sides to reach agreement, though the process can take years.

VI. Bond Covenants and Capital Finance Implications

Airline use agreements have a direct and material impact on airport capital finance, particularly the issuance and credit quality of airport revenue bonds. The interaction between the AUA and the airport’s bond indenture (trust agreement) is one of the most critical relationships in airport finance.

A. The AUA-Bond Indenture Relationship

Airport revenue bonds are typically secured by a pledge of net revenue—defined as gross airport revenue less operating expenses. The airline use agreement defines how a significant portion of that gross revenue is generated. As a result, the terms of the AUA directly affect:

• Revenue Stability: Residual agreements provide greater revenue stability because airlines guarantee to cover all costs. Compensatory agreements provide less revenue certainty because the airport retains non-airline revenue risk.

• Debt Service Coverage: The rate covenant in the AUA must be consistent with the coverage requirements in the bond indenture. If the AUA commits the airport to maintain 1.25x coverage, the bond indenture typically requires the same or a higher level.

• Additional Bonds: The additional bonds test in the bond indenture must be achievable under the rate structure defined by the AUA. If the AUA limits the airport’s rate-setting flexibility, it may be harder to issue additional bonds.

• Credit Ratings: Rating agencies evaluate the airline use agreement as a key factor in airport credit ratings. The methodology, duration, MII provisions, and rate covenant all affect the credit assessment.

B. Rating Agency Perspectives

The three major rating agencies—Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings—each evaluate airline use agreements as part of their airport credit analysis. Key factors they assess include:

• Ratemaking Methodology: Residual agreements are generally viewed as credit-positive for their revenue certainty. Compensatory agreements may receive equivalent credit treatment if the airport has strong non-airline revenue and adequate financial reserves.

• Agreement Duration: Longer agreements provide greater certainty for bondholders. Agreements with less than three years remaining to expiration may trigger rating agency concerns about credit stability during the transition period.

• MII Provisions: Strong MII provisions that could delay necessary capital investment may be viewed as credit-negative. Rating agencies prefer agreements that give the airport sufficient flexibility to maintain and improve its facilities.

• Airline Concentration: If a single airline represents a large share of the airport’s traffic, the credit analysis considers the financial health of that airline and the risk of traffic loss if the airline reduces service.

C. Capital Financing Structures

Airline use agreements support several capital financing structures commonly used by airports. Revenue bonds (available on the EMMA/MSRB electronic database) are the primary financing vehicle:

• General Airport Revenue Bonds (GARBs): Secured by the airport’s net revenue pledge. The airline use agreement provides the rate covenant that ensures sufficient revenue generation. GARBs are the most common form of airport debt.

• Special Facility Bonds: Secured by a specific airline’s payments for a dedicated facility (such as a terminal or maintenance facility). The airline’s obligation is independent of the AUA, though the AUA may address how the special facility relates to the overall rate structure.

• PFC-Backed Bonds: Secured by Passenger Facility Charge revenue. While PFCs are not directly part of the AUA, PFC-funded projects affect the capital program and may reduce the amount that must be funded through airline rates.

• Customer Facility Charge (CFC) Bonds: Secured by rental car customer facility charges. Like PFCs, CFCs are separate from the AUA but affect the overall capital financing plan.

VII. Emerging Trends in Airline Use Agreements

The airline use agreement landscape is evolving rapidly in response to changing market conditions, airline industry consolidation, unprecedented capital investment needs, and new financial and operational challenges. Understanding these trends is essential for professionals who negotiate, analyze, or advise on airline use agreements.

A. Shift Toward Compensatory and Hybrid Compensatory Methodologies

The most significant trend in airline use agreements over the past two decades is the migration from residual and hybrid residual agreements toward compensatory and hybrid compensatory structures. Large hub airports—including Atlanta, Dallas/Fort Worth, Denver, Miami, and Seattle—have transitioned to agreements in which the airport, rather than the airlines, bears the financial risk. Even airports that retain a residual component in their airfield cost center have increasingly moved to hybrid compensatory structures where the airport bears the overall risk and retains non-airline revenue.

This shift has been driven by several factors: airports’ desire to retain non-airline revenue upside (particularly from growing parking and concession revenue), the need for capital program flexibility unencumbered by MII votes, rating agency preferences for structures that give airports independent financial control, and the recognition that modern airports—with diverse revenue sources and sophisticated financial management—can manage their own financial risk effectively.

B. Shorter Agreement Terms

In a sample of 15 large-hub agreements, the average duration decreased from 10 years in 2010 to 7 years in 2025 (DWU analysis of ACRP data) in recent years. While 10-year agreements were standard in the 1990s and 2000s, 5-to-7-year terms have become more common. This trend reflects airlines’ desire for more frequent negotiating opportunities and airports’ recognition that shorter terms can provide flexibility to adapt to changing conditions.

However, the trend toward shorter terms is in tension with the preferences of the bond market, which values long-term revenue certainty. Some airports have addressed this tension by separating the term of the airline use agreement from the bond structure, using residual-like rate covenants in the bond indenture that survive beyond the agreement term.

C. Weakening of Majority-in-Interest Provisions

As discussed in Section IV, MII provisions have been significantly weakened or eliminated at many airports. The weakening of MII aligns with airports’ growing capital needs, as documented in recent negotiations with airline governance mechanisms that can delay necessary investments. At some airports, MII has been replaced with non-binding consultation requirements that give airlines a voice but not a veto.

D. Common-Use Facilities

The expansion of common-use terminal facilities—in which gates, ticket counters, and other spaces are shared among airlines on an as-needed basis rather than leased exclusively to individual carriers—is transforming the terminal component of airline use agreements. Common-use operations, facilitated by technologies such as Common Use Terminal Equipment (CUTE) and Common Use Self-Service (CUSS), allow airports to maximize terminal utilization and accommodate airline schedule changes without costly facility reconfigurations.

From an AUA perspective, common-use facilities change the basis for terminal cost allocation. Instead of per-square-foot rental rates for exclusive space, common-use agreements may use per-turn fees, per-passenger charges, or other activity-based metrics that more closely align airline costs with actual facility usage.

E. Sustainability and Environmental Provisions

Newer airline use agreements increasingly address sustainability and environmental considerations. These provisions may include allocations of costs for sustainable aviation fuel (SAF) infrastructure, electric ground support equipment, terminal energy efficiency improvements, and carbon reduction programs. As airports face growing pressure to reduce their environmental footprint, the allocation of sustainability-related costs between airports and airlines is becoming an important negotiation issue.

F. Post-COVID Financial Provisions

The COVID-19 pandemic exposed vulnerabilities in airline use agreement structures, particularly for airports that relied heavily on airline revenue during a period of near-zero traffic. Post-pandemic agreements increasingly include provisions for:

• Force Majeure: More detailed force majeure provisions that address pandemic-like disruptions, including the allocation of costs during extended shutdowns.

• Minimum Revenue Guarantees: Modified rate covenants that ensure minimum revenue levels even during periods of significant traffic decline.

• Financial Reserves: Enhanced reserve fund requirements that provide a financial cushion during economic downturns.

• Rate Adjustment Mechanisms: More flexible rate adjustment mechanisms that allow rates to be modified more quickly in response to changing financial conditions, without requiring formal agreement amendments.

VIII. Notable AUA Disputes and Case Studies

The following case studies illustrate the practical dynamics of airline use agreement negotiations, disputes, and transitions at major U.S. airports. Each case highlights different aspects of the AUA framework and offers lessons for practitioners.

A. Austin-Bergstrom International Airport (AUS) — 2025–2026 Transition

Background

Austin-Bergstrom International Airport exemplifies the challenges of transitioning between airline use agreements in a market with 20% passenger growth from 2021–2025 (FAA ACAIS data). The airport’s prior agreement expired, and as of early 2026, AUS and its airline tenants were in active negotiations over a replacement agreement. The city proposed a shift from a hybrid methodology to a predominantly compensatory approach with significantly reduced MII provisions, reflecting the airport’s $8 billion capital development program for a new terminal.

Key Issues

• Methodology Shift: The proposed transition from hybrid to compensatory ratemaking fundamentally altered the risk allocation. Airlines that had benefited from non-airline revenue credits under the hybrid approach faced higher rates under the compensatory structure.

• Capital Program Scope: The airport’s ambitious capital program—one of the largest in the country for a mid-size hub—created significant concerns about future airline costs. Airlines argued for stronger MII provisions to control capital spending; the airport argued that its capital needs required unimpeded decision-making authority.

• Airline Consolidation Effects: A small number of carriers dominate AUS traffic, giving those carriers disproportionate influence in negotiations. The airport was concerned that strong MII provisions would effectively give one or two airlines veto power over its development plans.

Lessons

The AUS case illustrates the increasing tension between airport capital needs and airline cost sensitivity. It also demonstrates the practical difficulty of transitioning between ratemaking methodologies when the transition increases airline costs. The outcome of this negotiation will set an important precedent for other growing airports facing similar challenges.

B. Kansas City International Airport (MCI) — New Terminal Transition

Background

Kansas City’s construction of a new single-terminal airport to replace its iconic three-terminal complex required a fundamental restructuring of its airline use agreement. The $1.5 billion new terminal project transformed the airport from a low-cost facility (with one of the lowest CPEs in the nation) to a modern, full-service airport with significantly higher costs.

Key Issues

• CPE Impact: The new terminal dramatically increased the airport’s CPE from approximately $5–6 per enplaned passenger to $15–20+. Airlines had to evaluate whether the improved facilities justified the cost increase.

• Cost Allocation: The allocation of new terminal costs among airlines required extensive negotiation, particularly regarding common areas, shared facilities, and the treatment of Southwest Airlines’ dominant position at the airport.

• Transition Period: The transition from the old terminals to the new terminal created operational and financial complexities, including dual facility costs during the transition period and the treatment of legacy improvements in the old terminals.

Lessons

The MCI case demonstrates how major capital programs can fundamentally transform an airport’s financial profile and airline cost structure. It also illustrates the importance of early and sustained engagement with airlines during the planning of transformative capital projects, and the need for financial models that accurately project the cost impact of new facilities on airline rates.

C. Los Angeles International Airport (LAX) — Automated People Mover and Terminal Modernization

Background

LAX’s $15+ billion capital improvement program—including the Automated People Mover (APM), Consolidated Rent-A-Car (ConRAC) facility, and terminal modernization projects—represents one of the largest airport capital programs in U.S. history. The program required extensive engagement with airline tenants and careful structuring of the airline use agreement to accommodate unprecedented capital spending.

Key Issues

• Capital Program Scale: significant The airport employed multiple funding sources—AIP grants, PFCs, revenue bonds, CFCs, and private financing—to minimize the airline rate impact.

• Groundside Facility Allocation: The APM and ConRAC are groundside facilities that primarily serve passengers, not airlines directly. The allocation of these costs between airlines and non-airline revenue sources was a critical negotiation point.

• Multiple Airline Programs: Different terminals at LAX house different airline groups, creating the need for terminal-specific rate calculations that reflect the cost of each terminal’s improvements.

Lessons

The LAX case illustrates how airports with mega-capital programs must develop sophisticated financing strategies that distribute costs across multiple funding sources. It also demonstrates the growing importance of groundside cost centers—parking, rental cars, ground transportation—in the overall airport financial model and the airline use agreement structure.

D. Chicago O’Hare International Airport (ORD) — O’Hare 21 Capital Program

Background

Chicago’s O’Hare 21 Modernization Program is a multi-decade, multi-billion-dollar initiative to transform the airport’s terminal complex. The program has required ongoing negotiation and renegotiation of airline use agreement provisions, particularly as the program scope has expanded and costs have increased.

Key Issues

• Phased Development: The O’Hare 21 program is being implemented in phases over many years. The airline use agreement must accommodate changing cost structures as new facilities come online and old facilities are decommissioned.

• Hub Carrier Dynamics: United Airlines and American Airlines are both major hub carriers at O’Hare, creating complex competitive dynamics in AUA negotiations. Each carrier has distinct facility needs and cost sensitivities.

• International Terminal: The renovation and expansion of the international terminal required specific provisions for international carrier rates, customs and border protection facility costs, and the allocation of federal inspection service expenses.

Lessons

The O’Hare case demonstrates the challenges of negotiating airline use agreements for phased capital programs that extend well beyond a single agreement term. It also illustrates how competing hub carriers at the same airport can create complex negotiation dynamics that require careful balancing of interests.

E. DWU's Facility Lifecycle Framework for Methodology Selection

DWU Consulting's analysis of methodology transitions reveals a pattern linked to an airport's facility development cycle. This lifecycle framework provides a strategic lens for understanding why airports choose different methodologies at different times:

• Operation Stage — Hybrid Residual: When no major capital needs exist in the near or mid-term, airports balance financial improvement with attractive airline rates through revenue sharing and Extraordinary Coverage Protection. Airlines bear the residual risk but benefit from shared non-airline revenue.

• Development Stage — Compensatory or Hybrid Compensatory: When major capital investment is anticipated, airports seek compensatory methodology to generate higher discretionary cash flow and avoid needing airline approval for projects. This provides the financial independence needed to advance large capital programs, though it strains airline relationships.

• New Facility Stage — Residual: After completion of a major facility, airports face deteriorating finances from increased debt service and higher operating expenses. The residual methodology provides protection by ensuring cost recovery while minimizing airline costs and stabilizing rates during the adjustment period.

This lifecycle perspective explains why methodology transitions are not permanent directional shifts but rather strategic responses to an airport's capital and financial position. An airport that transitions from residual to compensatory for a capital program may eventually return to a hybrid or residual structure once the program is complete and the financial position stabilizes.

F. Historical Context: The Evolution from Residual Dominance

In the 1980s and 1990s, the residual methodology dominated U.S. airport airline use agreements. Major hub airports—including Atlanta, Dallas/Fort Worth, Denver, Houston, Minneapolis, and Pittsburgh—all operated under residual or near-residual agreements that gave airlines strong governance rights in exchange for financial risk assumption.

The shift away from residual began in earnest in the 2000s, driven by several watershed events. The airline industry’s post-9/11 financial crisis led to multiple airline bankruptcies, during which airlines used the bankruptcy process to reject unfavorable airport leases and renegotiate agreements on more favorable terms. Airlines’ bankruptcy-driven renegotiations ironically weakened the residual framework that had been designed to protect airports, because the airline guarantee was only as strong as the airlines’ ability to pay.

Simultaneously, airports experienced rapid growth in non-airline revenue—particularly parking, concessions, and rental car revenue—that made the compensatory model more attractive. Under a compensatory agreement, the airport retained this growing revenue stream rather than sharing it with airlines. The combination of the bankruptcy risk experience and the non-airline revenue opportunity accelerated the industry’s migration toward compensatory and hybrid methodologies.

Today, the residual methodology is used primarily at smaller airports and at airports with limited non-airline revenue, where the airline guarantee is essential for financial stability. Major hub airports overwhelmingly use compensatory or hybrid approaches, reflecting the modern reality that airports are diversified business enterprises with revenue streams well beyond airline rates and charges.

IX. Conclusion

The airline use agreement is far more than a standard lease or commercial contract—it is the financial constitution of the airport-airline relationship. Its ratemaking methodology determines how billions of dollars in airport costs are allocated. Its governance provisions shape capital investment decisions that affect airport capacity and airline service for decades. Its bond covenants underpin the creditworthiness that enables airports to finance critical infrastructure. Its terms influence airline route economics, airport competitiveness, and the quality of the traveling public’s experience.

Understanding airline use agreements requires a multidisciplinary perspective that integrates contract law, public finance, aviation economics, capital markets, and regulatory compliance. The professional who can navigate all of these dimensions—and translate them into practical advice for airport sponsors, airline negotiators, or bond investors—provides enormous value in an industry where the financial stakes are measured in billions of dollars.

The trends shaping the current generation of airline use agreements—the shift toward compensatory and hybrid methodologies, the shortening of agreement terms, the weakening of MII provisions, the expansion of common-use facilities, and the integration of sustainability considerations—all point toward a future in which airports exercise greater financial independence while airlines demand greater cost transparency and flexibility. Navigating this evolving landscape requires both deep expertise in historical practice and a forward-looking perspective on industry trends.

This reference guide provides the foundation for that expertise. By understanding the legal framework, the ratemaking methodologies, the key contractual provisions, the negotiation dynamics, and the emerging trends discussed in these pages, airport finance professionals are well equipped to advise clients, negotiate agreements, and analyze the financial implications of the most important contract in aviation.

Appendix A: Key Statutes, Regulations, and Industry Resources

Federal Statutes

1. 49 U.S.C. §47107 — Project Grant Application Approval Conditioned on Assurances

The core statutory provision governing airport sponsor obligations, including reasonable rates, non-discrimination, and self-sustainability.

2. 49 U.S.C. §47129 — Fee Disputes (The “Rocket Docket”)

Expedited dispute resolution for airline challenges to new or increased airport fees.

3. 49 U.S.C. §40116 — Anti-Head Tax Act

Prohibits state and local taxes on air travel; defines the boundary between permissible fees and prohibited taxes.

4. 49 U.S.C. §40117 — Passenger Facility Charges

Authorizes PFCs and governs their relationship to airline rates and capital finance.

5. 49 U.S.C. §47133 — Restriction on Use of Revenues

Extends the revenue-use requirement to all airports that have received federal assistance.

6. AIR-21 (Wendell H. Ford Aviation Investment and Reform Act for the 21st Century)

The 2000 legislation that created the Rocket Docket and strengthened airport-airline dispute resolution.

FAA Regulations and Guidance

7. 14 CFR Part 16 — Rules of Practice for Airport Proceedings

Procedural rules for formal complaints about airport sponsor compliance.

8. FAA Airport Sponsor Assurances

The complete set of grant assurances, including Assurances 22, 24, and 25.

9. FAA Revenue Use Policy (1999)

Foundational guidance on permissible uses of airport revenue, published at 64 Fed. Reg. 7696.

10. FAA Order 5190.6B — Airport Compliance Handbook

Operational guidance for FAA compliance officers on grant assurance monitoring.

Industry Resources

11. ACRP Report 36: Airport/Airline Agreements — Practices and Characteristics

Comprehensive survey of airline use agreement practices from the Airport Cooperative Research Program.

12. ACRP Legal Research Digest 21: Airport Rates and Charges Litigation

Survey of case law on airport rates and charges disputes.

13. EMMA/MSRB: Airport Revenue Bond Disclosures

Electronic Municipal Market Access system for airport bond official statements and continuing disclosures.

Appendix B: Ratemaking Methodology Comparison

The following table compares the four ratemaking categories used in this guide. The two fundamental methodologies—residual and compensatory—are defined by which party bears the financial risk. The hybrid variants combine cost center approaches but must be classified by their overall risk allocation.

Appendix C: Glossary of Key Terms

• AUA (Airline Use Agreement): The contractual agreement between an airport and its tenant airlines defining the financial, operational, and governance terms of the airport-airline relationship. Also known as Airline Use and Lease Agreement, Airline Operating Agreement, or Signatory Airline Agreement.

• Airfield Cost Center: The cost center comprising airfield infrastructure (runways, taxiways, aprons) and associated operating and capital costs, typically funded through landing fees.

• Compensatory Methodology: A ratemaking approach in which airlines pay rates calculated to compensate the airport for the cost of facilities and services the airlines use, with the airport retaining all non-airline revenue.

• Cost Center: A discrete category of airport costs and revenue used for rate calculation purposes. Common cost centers include airfield, terminal, and groundside (parking/roadways).

• CPE (Cost per Enplaned Passenger): Total airline payments divided by total enplaned passengers; the standard metric for comparing airline costs across airports.

• Debt Service Coverage Ratio: The ratio of net revenue available for debt service to annual debt service requirements; typically required to be at least 1.25x under bond covenants and rate covenants.

• Exclusive-Use Space: Terminal space leased to a single airline for its exclusive use throughout the agreement term.

• GARB (General Airport Revenue Bond): A revenue bond secured by the airport’s net revenue pledge, the most common form of airport debt.

• Hybrid Compensatory: An agreement that applies different ratemaking formulas to different cost centers but where the airport bears the overall financial risk. Airlines pay for what they use; the airport retains non-airline revenue risk. The most common form at large hubs.

• Hybrid Residual: An agreement that applies different ratemaking formulas to different cost centers but retains an airport-wide airline rate covenant or safety net. Airlines remain the financial backstop despite cost-center-specific calculations.

• Landed Weight (MGLW): Maximum Gross Landed Weight; the weight basis used for calculating landing fees, typically expressed per 1,000 pounds.

• MII (Majority-in-Interest): A voting mechanism in airline use agreements that gives signatory airlines collective approval authority over specified airport decisions, typically capital projects.

• Non-Signatory Airline: An airline that operates at the airport without executing the airline use agreement, typically paying a premium (15–25%) above signatory rates.

• PFC (Passenger Facility Charge): A charge of up to $4.50 per enplaned passenger authorized by 49 U.S.C. §40117, used to fund FAA-approved airport improvement projects.

• Preferential-Use Space: Terminal space assigned to a specific airline on a priority basis, but available for use by other airlines when not being used by the assignee.

• Rate Covenant: A contractual commitment by the airport (in the AUA and/or bond indenture) to maintain rates and charges at levels sufficient to meet specified financial targets, particularly debt service coverage ratios.

• Residual Methodology: A ratemaking approach in which signatory airlines collectively guarantee to pay all airport costs not covered by non-airline revenue, with the “residual” allocated to airlines through landing fees and terminal rentals.

• Revenue Sharing: Provisions in the AUA determining how non-airline revenue (parking, concessions, rental cars) is allocated between the airport and its airline tenants.

• Rocket Docket: The expedited dispute resolution process under 49 U.S.C. §47129 for airline challenges to new or increased airport fees.

• Signatory Airline: An airline that has executed the airline use agreement and committed to its terms for the agreement duration, typically receiving lower rates, preferential space, and governance rights in exchange.

• Terminal Cost Center: The cost center comprising terminal building infrastructure and associated operating and capital costs, typically funded through terminal rental rates.