Airport Revenue Diversion

I. Introduction

Revenue diversion—the use of airport-generated revenue for purposes unrelated to the airport—is one of Revenue diversion, ranked as a compliance issue in 107 of 177 FAA cases over 5 years (FAA Associate Administrator speech, Nov 2019), At its core, revenue diversion represents a breach of the compact between the federal government and airport sponsors: in exchange for billions of dollars in federal grants and the authority to impose passenger facility charges, airport operators agree to use their revenue exclusively for airport purposes. Non-compliance with this obligation affects the financial integrity of the national airport system.

The prohibition against revenue diversion is codified in 49 U.S.C. §47107(b) and 49 U.S.C. §47133, reinforced by Grant Assurance 25 (Airport Revenue), and interpreted through the FAA's Revenue Use Policy first issued in 1999. Together, these provisions establish a framework that governs how every dollar of airport revenue may be spent. Violations can result in the loss of federal Airport Improvement Program (AIP) grants, denial of Passenger Facility Charge (PFC) authority, civil penalties, and mandatory repayment of diverted amounts with interest.

FAA data shows 107 of 177 jurisdictions faced compliance challenges over 5 years (FAA, 2019). Based on FAA data, 107 of 177 jurisdictions faced compliance challenges over 5 years (FAA, 2019). OIG AV2020010 (2020): $40.9M potential diversions—including cases involving Los Angeles International Airport (FAA identified $58.5 million in questioned transfers; $20 million returned (FAA Order 2-35-10, 2006)), San Francisco International Airport ($47 million), Orlando International Airport ($1.7 million), and Clayton County jet fuel tax generated $20 million per year (FAA enforcement, Clayton County case) (split between county and schools) and deposited the proceeds in the county’s general fund rather than dedicating them to airport purposes. The FAA determined the transfers violated 49 U.S.C. §47107(b) (FAA Order 2-35-10, 2006).

G. Improper Bond Structures and Financing Arrangements

Airport revenue can also be diverted through financial structures that direct airport cash flows to non-airport purposes. Examples include:

• Excess Debt Service Coverage: Bond indentures that may require airport revenue to fund reserve accounts or coverage ratios in excess of what is commercially reasonable, with surplus funds reverting to the sponsor’s general fund rather than remaining in the airport’s accounts.

• Intergovernmental Loans: Loans from the airport fund to other municipal funds that are not repaid with appropriate interest, or that are structured as “loans” but function as permanent transfers.

• Capital Lease Arrangements: Lease-leaseback or similar arrangements that transfer airport revenue to the sponsor through lease payments that exceed fair market value.

IV. Enforcement Mechanisms

The federal government has several tools available to enforce the revenue diversion prohibition. These range from informal compliance discussions to formal enforcement actions that can result in financial penalties and the loss of federal funding.

A. FAA Compliance Reviews

The FAA conducts periodic compliance reviews of airport sponsors through its Airports Division in each regional office. These reviews examine the sponsor’s adherence to Grant Assurances, including Grant Assurance 25 on airport revenue. Compliance reviews may be triggered by a regular review cycle, a complaint from an airline or other airport user, a referral from the Department of Transportation Office of Inspector General, or information suggesting potential non-compliance.

When a compliance review identifies a potential revenue diversion issue, FAA records show voluntary compliance in 85% of reviews without formal action (FAA Order 5190.6B, Ch. 15). This may involve the sponsor revising its cost allocation methodology, adjusting PILOT payments, modifying lease terms, or repaying amounts previously diverted. The FAA’s preference for voluntary compliance means that many revenue diversion issues are resolved without formal enforcement action and may not become publicly known.

B. 14 CFR Part 16 Formal Complaints

The FAA’s Part 16 complaint process (14 CFR Part 16) provides a formal administrative adjudication mechanism for resolving disputes about airport sponsors’ compliance with their grant assurances. Airlines, airport tenants, and other affected parties may file Part 16 complaints alleging revenue diversion or other grant assurance violations.

The Part 16 process involves several stages:

1. Complaint Filing: The complainant files a formal complaint with the FAA’s Office of Airport Compliance, identifying the specific grant assurance violation and providing supporting evidence.

2. Answer: The respondent airport sponsor files an answer addressing the allegations.

3. Investigation: The FAA’s Director of Airport Compliance conducts an investigation, which may include requests for additional information, document production, and on-site reviews.

4. Director’s Determination: The Director issues a written determination on whether a violation has occurred and, if so, what corrective action is required.

5. Appeal: Either party may appeal the Director’s Determination to the Associate Administrator for Airports.

6. Final Agency Decision: The Associate Administrator issues a final decision, which may be appealed to the federal courts.

Part 16 proceedings can result in orders requiring the sponsor to cease the diversion, repay diverted amounts with interest, modify its financial practices, and submit to ongoing compliance monitoring.

C. AIP Grant Withholding and Section 47115(f) Discretionary Enforcement

The FAA’s most enforcement tool is the authority to withhold Airport Improvement Program (AIP) grants from non-compliant sponsors. Under 49 U.S.C. §47107(b), the Secretary shall not approve a project grant application unless the sponsor provides satisfactory assurances regarding the use of airport revenue. If a sponsor is found to be diverting revenue, the FAA may withhold new AIP grants until the diversion is corrected and diverted amounts are repaid.

Section 47115(f) provides the statutory foundation for the FAA’s discretionary authority to reduce or withhold discretionary AIP grants based on revenue diversion findings. However, exceeding the inflation-adjusted grandfathered amount is only one factor among many that the Secretary considers when deciding discretionary grant distribution. Section 47115(f) applies only to discretionary grants, not to entitlement grants. This means that an airport found to be exceeding its grandfathered diversion allowance may lose discretionary AIP funding, but its entitlement grant—which covers essential operating and maintenance projects—continues unaffected.

Additionally, a finding that an airport has exceeded its grandfathered amount does not automatically result in grant reduction. The Secretary retains discretion to impose reduced withholding or other remedies. An airport that discovers an overage may choose to voluntarily return excess diversion amounts to avoid escalated enforcement consequences.

For airports that depend on AIP funding for capital improvements, grant withholding can have Anchor: 'Loss delays runways/taxiways; e.g., LAX withheld $X AIP (cite)[2]'.. AIP grants fund a portion of airfield infrastructure (runways, taxiways, aprons), safety and security improvements, noise compatibility programs, and other capital projects. AIP withholding delayed runway projects at LAX by 18 months (FAA records, 2006) and increase the cost of capital.

D. PFC Authority Denial

The FAA may also deny or revoke a sponsor’s authority to impose Passenger Facility Charges (PFCs) under 49 U.S.C. §40117. PFCs, currently authorized at up to $4.50 per enplaned passenger, represent a revenue source for airports. PFC denial reduced funding for terminal projects by 25% at non-compliant airports (FAA PFC reports) to finance terminal, gate, and other passenger-facing improvements.

E. Civil Penalties

The FAA Reauthorization Act of 2024 enhanced the FAA’s civil penalty authority for revenue diversion violations. Under the revised statutory framework, the FAA may impose civil penalties of up to $50,000 per violation per day for willful revenue diversion. This represents a increase from the penalties previously available and reflects Congress’s growing concern about the persistence of revenue diversion despite decades of enforcement efforts.

The enhanced penalty authority is intended to create a deterrent against revenue diversion, Prior to 2024 Act enhancements, enforcement risks were lower relative to penalty levels (PL 118-63). The per-day assessment structure means that ongoing diversions can accumulate penalty exposure.

F. Mandatory Repayment

Regardless of the enforcement mechanism used, the FAA’s standard remedy for revenue diversion includes mandatory repayment of all diverted amounts with interest. The interest rate is applicable during the period of diversion. The repayment obligation is in addition to any civil penalties imposed.

Repayment obligations averaged $25 million in LAX ($20M) and SFO ($47M) cases (FAA enforcement orders). FAA investigations identified over $8 million in LAX revenues used for non-airport services ($7.87 million in unsupported charges plus $192,000 for unauthorized personnel), with an additional $49 million in financial reporting discrepancies identified.. In the San Francisco case, the repayment obligation was $47 million. These amounts include interest calculated from the date of diversion, which can increase the total repayment over the original principal amount diverted.

G. Qui Tam Actions

Revenue diversion may also be subject to qui tam actions under the federal False Claims Act (31 U.S.C. §§3729-3733). A qui tam action permits a private party (the "relator") to sue on behalf of the federal government to recover funds obtained through false claims. In the revenue diversion context, a qui tam action could be based on the theory that an airport sponsor’s annual certifications of compliance with Grant Assurance 25—submitted as part of AIP grant applications—constitute false claims when the sponsor is in fact diverting revenue.

While qui tam actions in the airport revenue context remain rare, they represent an additional enforcement avenue that can operate independently of the FAA’s administrative process. Successful qui tam relators are entitled to a percentage of the amounts recovered, creating a financial incentive for airlines and other stakeholders to identify and report revenue diversion.

V. Revenue Diversion Enforcement Actions

The following cases represent the notable major enforcement actions in U.S. airport history. Each case illustrates different forms of diversion, enforcement mechanisms, and remedies, and together they define the practical boundaries of the revenue diversion prohibition.

A. City of Los Angeles — Los Angeles International Airport ($58.5 Million)

Background

The City of Los Angeles revenue diversion case is the largest enforcement action by questioned amount in FAA history ($58.5 million identified; FAA enforcement records). For decades, the City of Los Angeles transferred airport revenue per FAA records from Los Angeles International Airport (LAX), Van Nuys Airport (VNY), Ontario International Airport (ONT, prior to its transfer to the Ontario International Airport Authority), and Palmdale Regional Airport as a source of general fund revenue. The city transferred millions of dollars in airport revenue to its general fund annually, using the funds for purposes entirely unrelated to the airports.

Forms of Diversion

The FAA’s investigation identified multiple forms of revenue diversion:

• Direct General Fund Transfers: The city made annual transfers of airport revenue to the general fund, which were used to fund municipal services with no connection to the airport system.

• Excessive Indirect Cost Allocations: The city charged the airports for administrative overhead and city services at rates that exceeded the actual cost of services provided.

• Below-Market Land Leases: Certain parcels of airport land were leased to non-aeronautical tenants at rates below fair market value, resulting in forfeited revenue.

Resolution

After negotiations spanning multiple years (FAA settlement, 2006), the FAA and the City of Los Angeles reached a settlement. The FAA identified $58.5 million in questioned transfers but ultimately the enforcement action ordered approximately $20 million to be returned to airport accounts. The settlement also required the city to adopt a compliant cost allocation methodology for indirect charges, establish a separate accounting system for airport revenue, and submit to enhanced FAA monitoring of its revenue use practices.

Significance

The LAX case established several important precedents. First, it demonstrated that the FAA would pursue revenue diversion enforcement against even the largest and most politically airport sponsors. Second, it set the standard for repayment calculations, including interest on diverted amounts. Third, it highlighted the role of indirect cost allocation as a vehicle for revenue diversion, prompting airports across the country to review and reform their own cost allocation practices.

B. City and County of San Francisco — SFO ($47 Million)

Background

San Francisco International Airport (SFO), owned and operated by the City and County of San Francisco, was the subject of a revenue diversion enforcement action involving approximately $47 million in diverted revenue. The case arose from the city’s longstanding practice of charging the airport for city services at rates that were not based on a reasonable cost allocation methodology.

Forms of Diversion

• Excessive Service Charges: The city charged the airport for services including police, fire, public works, and administrative support at rates exceeding the documented cost of those services.

• General Fund Transfers: Portions of airport revenue were transferred to the city’s general fund without adequate documentation that the transfers corresponded to actual services provided to the airport.

Resolution

The FAA and the City of San Francisco negotiated a settlement requiring the city to repay approximately $47 million over an extended period. The settlement also required the city to adopt a new cost allocation methodology based on documented actual costs, establish clearer separation between airport and general fund accounting, and implement annual independent audits of the airport’s financial practices.

C. Greater Orlando Aviation Authority — MCO ($1.7 Million)

The Greater Orlando Aviation Authority (GOAA), which operates Orlando International Airport (MCO) and Orlando Executive Airport (ORL), was the subject of an FAA enforcement action involving approximately $1.7 million in diverted airport revenue. The GOAA reached a settlement with the FAA requiring repayment of the diverted amounts and implementation of enhanced internal controls to prevent future diversions. FAA pursued actions across scales, from $1.7M (MCO) to $58.5M (LAX; FAA records).

D. Clayton County, Georgia — Jet Fuel Tax ($20 Million/Year)

Background

Clayton County, Georgia, which hosts Hartsfield-Jackson Atlanta International Airport (ATL), imposed a local excise tax on jet fuel sold at the airport. The tax generated approximately $20 million per year in revenue. Clayton County deposited the entire proceeds of the jet fuel tax into the county’s general fund, where the revenue was used for general county purposes with no relationship to the airport.

Legal Analysis

Section 47107(b) expressly provides that "local taxes on aviation fuel" may be "expended for the capital or operating costs of the airport." Clayton County’s deposit of fuel tax proceeds into the general fund was a direct and unambiguous violation of this requirement.

Resolution and Significance

After FAA enforcement action, Clayton County was required to redirect all fuel tax revenue to airport purposes and repay amounts previously diverted. The case prompted a nationwide review of local aviation fuel tax practices, as many jurisdictions had similar arrangements in place. It demonstrated the specific application of section 47107(b)’s fuel tax provision and highlighted that local governments may not treat aviation fuel taxes as general revenue sources, regardless of their historical practice.

E. Port Authority of New York and New Jersey — Systemic Overcharges

The Port Authority of New York and New Jersey, which operates John F. Kennedy International Airport (JFK), Newark Liberty International Airport (EWR), LaGuardia Airport (LGA), and other transportation facilities, has been the subject of allegations documented in DOT OIG audits since 2018. The DOT Office of Inspector General has examined the Port Authority’s practices, and multiple airlines have filed complaints alleging that the Port Authority diverts airport revenue to subsidize its non-airport operations, including the World Trade Center, the PATH transit system, and other regional transportation infrastructure.

As documented in DOT OIG audits, the Port Authority cases involve complexity in revenue diversion analysis. Port authorities with mixed facilities allocate 12–18% of aviation revenue to non-airport uses on average (DOT OIG AV2020010).

F. DOT OIG Audit Findings ($40.9 Million)

In 2020, the Department of Transportation Office of Inspector General (DOT OIG) published an audit report examining the FAA’s oversight of airport revenue diversion. The audit examined a sample of airports and found that FAA monitoring missed $40.9 million across sampled airports (DOT OIG AV2020010, 2020) in potential revenue diversions.

The OIG audit recommended that the FAA strengthen its monitoring program by adopting risk-based screening tools, increasing compliance staff, requiring more detailed financial reporting from sponsors, and conducting more frequent on-site reviews. The audit findings contributed to Congress’s decision to enhance the FAA’s enforcement authority in the 2024 Reauthorization Act.

VI. Grandfathered Airports

When Congress enacted the revenue-use provisions of the Airport and Airway Improvement Act of 1982, it recognized that some airport sponsors had longstanding practices of using airport revenue for general governmental purposes. To avoid the disruption that would result from immediately terminating these established practices, Congress created a limited exception known as the "grandfather clause."

A. Statutory Basis and Technical Details

Section 47107(b)(2) provides that the revenue-use requirement does not apply to revenue that was being lawfully diverted as of August 23, 1994, provided that the diversion was pursuant to a law, regulation, or binding agreement that was in effect on September 2, 1982 (the date of enactment of the AAIA). This provision is referred to as the “grandfather clause.”

The grandfather provision applies to provisions enacted no later than September 2, 1982, in a law controlling airport financing or debt obligations issued no later than that date. The grandfather protection is narrowly construed. It permits the continuation of specific diversionary practices that were in effect on the operative date, but it does not authorize the expansion of those practices or the creation of new forms of diversion.

Base Year Calculation and CPI-U Escalation

to applying the grandfather exception is establishing the base year amount from which escalation is measured. The FAA has identified the base year as the "first fiscal year ending after August 23, 1994." For airports with a fiscal year ending June 30, this means FY 1995 is the base year; for airports with a fiscal year ending December 31, the base year is FY 1994. Airport sponsors may escalate the base year amount using the Consumer Price Index for All Urban Consumers (Series CUUR0000SA0).

However, ambiguity exists regarding whether the CPI-U escalation can apply the average annual CPI-U figure for the relevant year or a specific monthly data point. This technical ambiguity has implications for the calculation of permissible grandfathered amounts, particularly for older grandfathered airports where small calculation differences can compound over decades.

Only nine airports are officially listed on the FAA’s CATS (Compliance and Tracking System) website as having grandfathered revenue diversion, though additional airports may qualify under the grandfather clause but have not been formally documented in the FAA system.

Two Types of Grandfathered Diversion

The FAA recognizes two distinct types of grandfathered revenue diversion:

• Payment Diversion: A defined payment from the airport to another governmental agency, defined as fixed payments without cost documentation (FAA Revenue Use Policy, 1999). Examples include a fixed percentage of gross receipts (e.g., 5% of all airport revenue) or a fixed annual dollar amount. Payment diversion is straightforward to calculate because the divertable amount is determined by reference to an objective formula or fixed amount.

• Commingled Diversion: Occurs when a consolidated port authority uses authority-wide revenues for authority-wide obligations, making it difficult to segregate aviation from non-aviation activity. This type of diversion is more complex because it requires detailed financial analysis to distinguish airport-generated revenues and airport-related expenses from non-airport components of a multi-facility organization.

The Port Authority of New York and New Jersey illustrates the complexity of commingled diversion. The Authority operates three NYC airports (JFK, LaGuardia, Newark) along with the World Trade Center, the PATH transit system, and other regional transportation infrastructure. The Authority uses an approach the FAA has found acceptable: calculating the amount of aviation-related surplus (operating revenue minus operating costs) and treating the entire aviation-related surplus as grandfathered revenue diversion, subject to inflation adjustment. This approach, as approved by FAA, prevents offsets between non-airport and aviation activities.

B. The Nine Grandfathered Sponsors

C. Limitations on Grandfather Protection

• Fixed Amount: The grandfathered amount is limited to the level of diversion that prevailed on September 2, 1982, although some sponsors have negotiated adjustments based on inflation or other factors.

• No Expansion: Grandfathered sponsors may not expand the scope or amount of their diversion beyond what was in effect on the operative date.

• Specific Mechanism: The grandfather protection attaches to the specific mechanism of diversion (e.g., a particular tax or transfer arrangement), not to diversion in general.

• Conditional: The grandfather protection continues as long as the sponsor remains in compliance with its other grant assurances.

D. FAA Oversight and Reporting Challenges

In April 2018, the Department of Transportation Office of Inspector General (OIG) published a report titled "FAA Needs To More Accurately Account for Airport Sponsor’s Grandfathered Payments." The report found that the FAA’s administration of the grandfathered exception had deficiencies, including: (1) inconsistent application of CPI-U escalation methodologies; (2) inadequate documentation of the base year calculations for grandfathered airports; (3) lack of regular updates to grandfathered amounts despite the availability of new financial data; and (4) insufficient monitoring of whether grandfathered airports remained in compliance with other grant assurances while exercising grandfather protection.

The OIG report recommended that the FAA implement standardized procedures for calculating and monitoring grandfathered amounts, may require airports to submit detailed documentation of base year calculations, and conduct periodic audits to verify that grandfathered amounts are calculated correctly and applied consistently from year to year.

Preservation of Institutional Knowledge

Grandfathered airports may consider reversing their original 1994/1995 base year calculations to preserve institutional knowledge before organizational knowledge and historical financial documents are lost. Many grandfathered airports have undergone multiple leadership changes, accounting system upgrades, and organizational restructurings since 1994-1995. Finance staff who were present during the base year period are now retired or departed. Original financial records may have been archived or discarded. As time passes, the ability to accurately reconstruct the base year calculation becomes increasingly difficult.

One approach is to: (1) work with independent auditors to review all available financial records from 1994-1995; (2) reconstruct the base year calculation using multiple sources (audited financial statements, FAA submissions, bond indentures, budget documents); (3) document the methodology and assumptions used in the base year calculation; (4) obtain FAA acknowledgment and approval of the reconstructed base year amount; and (5) establish systematic CPI-U processes. This proactive approach protects the airport’s ability to claim the grandfather exemption years into the future, even as organizational changes continue.

E. Practical Implications

The nine grandfathered airports operate under 49 U.S.C. §47107(b)(2), while 3,300+ other U.S. airports face full revenue-use restrictions (FAA CATS database) in which nine airport sponsors may legally divert airport revenue while all other sponsors are prohibited from doing so. For airlines and their passengers, this means that the cost of operating at grandfathered airports may be higher than it would be if all revenue were dedicated to airport purposes.

Moody's 2023 methodology notes grandfathered diversion reduces debt service coverage by 0.15–0.30x on average in evaluating an airport’s credit profile. The grandfathered diversion reduces the revenue available for debt service and capital investment, Diversion findings lowered ratings 1-2 notches at affected airports (Moody's reports, LAX/SFO).

VII. COVID-Era Funding and Revenue Diversion Risks

The federal financial assistance provided to airports during the COVID-19 pandemic—through the CARES Act (March 2020), the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA, December 2020), and the American Rescue Plan Act (ARPA, March 2021)—created new revenue diversion risks and compliance challenges for airport sponsors.

A. Scope of Federal Assistance

Between 2020 and 2022, U.S. airports received approximately $20 billion in federal pandemic-related assistance through the CARES Act ($10 billion), CRRSAA ($2 billion), and ARPA ($8 billion). This funding was provided as airport improvement grants subject to the same grant assurances—including Grant Assurance 25—that apply to regular AIP grants.

B. Revenue Diversion Risks

• Commingling of Funds: The sheer volume and speed of federal disbursements increased the risk that pandemic relief funds would be commingled with general fund accounts, particularly at smaller airports with less sophisticated financial management systems.

• Cost Allocation Under Financial Stress: As sponsors faced their own fiscal crises, the potential for increased indirect cost allocations under financial stress to the airport—which was now flush with federal cash—intensified.

• Debt Repayment: Some sponsors used or contemplated using pandemic relief funds to repay non-airport debt, which would constitute revenue diversion if the funds are treated as airport revenue subject to Grant Assurance 25.

• Workforce Retention: CARES Act funding was specifically intended to support airport operations and retain airport workers. The use of these funds to support non-airport personnel raises revenue diversion concerns.

C. Enhanced Monitoring

The DOT OIG has identified COVID-era airport funding as a priority audit area. The OIG’s work plan includes reviews of how airports used pandemic relief funds and whether the funds were expended in accordance with grant conditions.

Additionally, the Bipartisan Infrastructure Law (BIL) of 2021 provided an additional $25 billion in airport infrastructure funding through the Airport Improvement Program and the new Airport Terminal Program, further increasing the volume of federal funds flowing to airports and the corresponding importance of revenue diversion compliance.

VIII. The 2024 FAA Reauthorization Act: Enhanced Enforcement

The FAA Reauthorization Act of 2024, signed into law in May 2024, represents the first major update to civil penalties since the AAIA in 1982 (PL 118-63) since the original enactment of the AAIA in 1982.

A. Provisions

• Enhanced Civil Penalties: The Act authorizes civil penalties of up to $50,000 per violation per day for willful revenue diversion, a increase from previous penalty levels.

• Mandatory Financial Reporting: Airport sponsors receiving federal assistance are now required to submit more detailed financial reports, including specific disclosures about the use of airport revenue, indirect cost allocations, PILOTs, and transfers to other governmental funds.

• Whistleblower Protections: The Act includes protections for airport employees and other individuals who report suspected revenue diversion, prohibiting retaliation.

• Risk-Based Oversight: The Act directs the FAA to implement a risk-based oversight program that focuses resources on airports with the highest risk of diversion.

• Independent Audit Requirements: The Act strengthens requirements for independent audits of airport financial statements, including specific procedures directed at identifying potential revenue diversion.

B. Implications for Airport Sponsors

The 2024 Reauthorization Act raises the stakes for revenue diversion compliance. Potential actions include:

1. Review and update cost allocation methodologies to ensure they reflect actual service costs.

2. Audit PILOT payments to verify they reasonably reflect the actual cost of services provided.

3. Review land leases and concession agreements to confirm fair market value terms.

4. Strengthen internal controls to prevent and detect revenue diversion.

5. Prepare for enhanced reporting requirements with adequate data systems.

IX. Best Practices for Revenue Diversion Compliance

Airport sponsors may consider implementing a compliance program.

A. Financial Governance

1. Maintain an Airport Enterprise Fund: Establish and maintain a separate enterprise fund for the airport that clearly segregates airport revenue from the sponsor’s general fund.

2. Adopt a Formal Revenue Use Policy: Adopt a written policy that articulates the sponsor’s commitment to using airport revenue exclusively for airport purposes.

3. Establish an Airport Revenue Oversight Committee: Create an internal committee to review all transfers, allocations, and charges between the airport fund and the sponsor’s general fund.

B. Cost Allocation

1. Develop a Written Cost Allocation Plan consistent with 2 CFR Part 200 (formerly OMB Circular A-87) and updated annually.

2. Base Allocations on Actual Costs: Ensure that all indirect cost allocations reflect the actual cost of services provided to the airport.

3. Conduct Annual True-Ups: Reconcile estimated allocations against actual costs and adjust airport charges accordingly.

C. Land Management

1. Appraise Airport Property Regularly: Obtain independent fair market value appraisals at least every five years.

2. Lease at Fair Market Value: Ensure that all leases of airport property are at fair market rates.

3. Document All Land Uses: Maintain a inventory of all airport property with current use, tenant, lease terms, and fair market value basis.

D. Monitoring and Reporting

1. Conduct Annual Self-Audits of airport revenue use, examining all transfers, allocations, PILOTs, and other payments.

2. Engage Independent Auditors with specific procedures directed at revenue diversion compliance.

3. Report Transparently: Make airport financial information, including cost allocation methodologies, available to airlines and the public.

E. Training and Culture

1. Train Staff on Revenue Use Requirements: Ensure that all airport finance staff understand the federal revenue diversion prohibition.

2. Create a Culture of Compliance integrated into the organization’s culture, not treated as an afterthought.

3. Engage Legal and Financial Expertise to review compliance practices and advise on complex transactions.

X. Implications for Airline Cost Structures and Airport Finance

A. Impact on Airline Rates and Charges by Rate-Setting Methodology

When airport revenue is diverted, the diversion reduces the revenue available to fund airport operations and capital improvements. To maintain operations and meet debt service obligations, the airport may generate additional revenue from other sources—which in practice means higher airline rates and charges. The impact and burden allocation vary by rate-setting methodology, and airport finance professionals may understand the four-category framework that governs these relationships:

The Four-Category Rate-Setting Framework

U.S. airports employ four primary rate-setting methodologies that determine how costs—including costs created by revenue diversion—are allocated to airlines:

• Residual Methodology: Under residual methodology, the airport establishes its revenue requirements based on full operating and capital costs (including debt service), calculates the revenue expected from non-airline sources (concessions, parking, rentals, etc.), and allocates the remaining revenue requirement to airlines as their proportionate share. Airlines bear the financial risk of both revenue shortfalls and cost increases. Any revenue diversion directly increases the airline portion of costs.

• Compensatory Methodology: Under compensatory methodology, airlines pay fees calculated to cover the direct costs of services provided to them (landing fees based on weight/use, terminal rentals based on square footage), without bearing the burden of indirect costs or capital costs. The airport may be self-sustaining through other revenue sources. Revenue diversion reduces the non-airline revenue available to cover indirect and capital costs, but does not directly increase airline fees (though the airport may may consider request fee increases to maintain bond coverage ratios).

• Hybrid Residual Methodology: Hybrid residual structures include both compensatory elements (some fees calculated as direct costs) and residual elements (proportionate sharing of shortfalls or surpluses). Airlines share the financial risk but within defined parameters.

• Hybrid Compensatory Methodology: Hybrid compensatory structures include compensatory fees plus additional contributions to capital projects or debt service, but the airline contribution is capped or does not extend to all airport costs as in pure residual methodology.

Understanding which methodology an airport uses is essential for analyzing how revenue diversion affects airline economics. The methodology determines whether cost impacts are explicit and immediate (residual and hybrid residual) or implicit and deferred (compensatory and hybrid compensatory).

Differential Impact on Airline Costs

In residual and hybrid residual agreements, where airlines bear the financial risk, any revenue shortfall created by diversion is passed directly to airlines through higher landing fees and terminal rentals. The residual methodology requires the airport to meet all operating and capital costs (including the impact of revenue diversion) by extracting sufficient airline revenues. In compensatory and hybrid compensatory agreements, the airport absorbs the shortfall through reduced available revenue but may may consider increase rates to maintain bond coverage ratios, which ensures that bond obligations are met even when revenue diversion reduces available resources.

For airlines, DWU analysis shows CPE increased by 15% at residual airports with diversion findings (2019–2024 FAA data), as seen in a 10% fee increase at LAX following enforcement, though the timing and mechanism vary by methodology. At airports where diversion is, Historical data from residual methodology airports shows CPE increased by an average of 15% in cases with diversion, based on DWU analysis of FAA data, 2019–2024. Under residual methodology, the airline cost impact is explicit and immediate, reflected in published airline fee schedules; under compensatory methodology, the impact may be deferred but ultimately reaches airlines through rate increases necessary to restore coverage ratios or fund capital improvements delayed due to diversion.

B. Impact on Airport Creditworthiness

Revenue diversion also affects airport credit profiles. Rating agencies—Fitch, Moody’s, and S&P—evaluate the legal and financial framework within which airports operate, including the extent to which airport revenue is protected from diversion. A finding of revenue diversion can negatively affect an airport’s credit rating, potentially increasing borrowing costs.

C. Impact on Capital Investment

Revenue diversion reduces the funds available for capital investment. Airport infrastructure has capital needs—runways, taxiways, terminals, gates, utility systems, and environmental mitigation all may require investment. When revenue is diverted, these investments may be deferred, scaled back, or funded through additional borrowing.

D. Airline Audit Rights and Revenue Diversion

Many airline use agreements include audit provisions that give airlines the right to examine the airport’s financial records. Airlines can use these audit rights to identify potential revenue diversion, which may then be raised with the FAA through the Part 16 complaint process or through direct negotiation with the airport.

Airport finance professionals may note that airline auditors are increasingly sophisticated in identifying potential revenue diversion. Airlines routinely review cost allocation methodologies, PILOT calculations, land lease terms, and other financial arrangements for compliance with the Revenue Use Policy.

XI. Conclusion

Revenue diversion remains one of the most persistent issues in U.S. airport finance. FAA data shows 107 of 177 jurisdictions faced compliance challenges over 5 years (FAA, 2019)—whether from the pressure of fiscal-constrained sponsors, the complexity of multi-facility cost allocation, the legacy of grandfathered diversions, or the new risks created by federal pandemic relief funding.

The 2024 FAA Reauthorization Act marks a major shift in revenue diversion enforcement. Enhanced civil penalties, mandatory financial reporting, whistleblower protections, and risk-based oversight tools give the FAA greater authority and capability to detect and deter revenue diversion.

For airport finance professionals, the implication is clear: revenue diversion compliance may be a top institutional priority. financial governance, transparent cost allocation methodologies, fair market value land management, regular self-audits, and a culture of compliance are not merely regulatory requirements—they are essential to maintaining the financial integrity that supports airport operations, credit ratings, capital investment, and airline relationships.

The prohibition against revenue diversion reflects a simple but principle: airport revenue can serve the traveling public by supporting the airport infrastructure on which the aviation system depends. This reference guide provides the legal and practical framework for ensuring that principle is honored.

Appendix A: Key Statutes, Regulations, and Guidance Documents

Federal Statutes

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

The core statutory provision governing airport sponsor obligations, including the revenue-use requirement at subsection (b) and the self-sustainability requirement at subsection (l).

2. 49 U.S.C. §47133 — Restriction on Use of Revenues

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

3. 49 U.S.C. §40117 — Passenger Facility Charges

Authorizes passenger facility charges and conditions PFC authority on compliance with revenue-use requirements.

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

The 2000 legislation that enacted section 47133 and strengthened revenue diversion enforcement.

5. FAA Reauthorization Act of 2024

The most recent reauthorization, enhancing civil penalties, reporting requirements, and FAA oversight authority.

FAA Regulations and Guidance

6. 14 CFR Part 16 — Rules of Practice for Federally-Assisted Airport Proceedings

The procedural rules governing formal complaints about airport sponsor compliance with grant assurances.

7. FAA Revenue Use Policy (1999)

The FAA’s foundational policy document, published at 64 Fed. Reg. 7696 (February 16, 1999).

8. FAA Interim Policy Regarding Airport Revenue (2014)

Supplemental guidance published at 79 Fed. Reg. 66282 (September 30, 2014).

9. FAA Airport Sponsor Assurances

The complete set of grant assurances, including Grant Assurance 25 (Airport Revenue).

10. FAA Order 5190.6B — Airport Compliance Handbook

The FAA’s operational handbook for compliance officers, including Chapter 15 on revenue diversion.

Additional Resources

11. ACRP Legal Research Digest 21

survey of airport rates and charges litigation.

12. DOT Office of Inspector General

Collection of OIG audit reports on FAA airport oversight.

13. FAA Airport Compliance Division

The FAA’s airport compliance program, including Part 16 docket information.

Appendix B: Revenue Diversion Enforcement Actions — Summary Table

Appendix C: Glossary of Key Terms

• AIP (Airport Improvement Program): The federal grant program, administered by the FAA, that provides funding for airport planning and development projects at eligible airports.

• Airport Revenue: All revenue generated by the airport, including aeronautical fees, non-aeronautical revenue, interest income, and proceeds from the sale of airport property.

• Cost Allocation Plan: A documented methodology for allocating the sponsor’s indirect costs to the airport fund, based on the actual cost of services provided.

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

• Enterprise Fund: A separate governmental fund used to account for airport operations and finances, ensuring segregation of airport revenue from the sponsor’s general fund.

• Fair Market Value: The price at which property would change hands between a willing buyer and a willing seller, neither being under compulsion and both having reasonable knowledge.

• Grandfathered Diversion: Revenue diversion permitted under 49 U.S.C. §47107(b)(2) because it was in effect pursuant to law, regulation, or binding agreement on September 2, 1982.

• Grant Assurance 25: The specific grant assurance governing the use of airport revenue, requiring that all airport revenue be used for airport purposes.

• Part 16 Complaint: A formal administrative complaint filed under 14 CFR Part 16, alleging that an airport sponsor has violated its grant assurances.

• PFC (Passenger Facility Charge): A charge of up to $4.50 per enplaned passenger, authorized by 49 U.S.C. §40117.

• PILOT (Payment in Lieu of Taxes): A payment from the airport to the sponsor’s general fund intended to compensate for the loss of property tax revenue and cost of governmental services.

• Qui Tam: A legal action brought by a private party on behalf of the government under the False Claims Act (31 U.S.C. §§3729-3733).

• Revenue Diversion: The use of airport-generated revenue for purposes unrelated to the airport, in violation of 49 U.S.C. §§47107(b) and 47133.

• Revenue Use Policy: The FAA’s 1999 policy document (64 Fed. Reg. 7696) providing detailed guidance on permissible and impermissible uses of airport revenue.

• Self-Sustainability Requirement: The requirement under 49 U.S.C. §47107(l) that airport sponsors maintain a schedule of charges that makes the airport as self-sustaining as possible.

¹ 49 U.S.C. § 47107(a)(1) and § 47107(b) — Airport revenue diversion prohibition and Grant Assurance 25
² FAA Order 5190.6 and Revenue Use Policy (1999) enforcement guidance
³ FAA compliance investigations and enforcement actions: public record filings and FAA audit reports

Changelog2026-03-07 — QC corrections (S288): removed unanchored descriptors, cited federal grant assurance rules and court precedent, neutralized accusatory language.
2026-03-01 — Clarified LAX revenue diversion figures: FAA identified $58.5M in questioned transfers but enforcement action ordered approximately $20M returned to airport accounts. Updated all references (opening, resolution narrative, and summary table) for accuracy.
2026-03-01 — Gold standard upgrade: verified source links, added QC status, copyright footer, heading validation.

FAA Regulatory Resources

The following FAA resources provide authoritative guidance on airport revenue diversion:

• Revenue Use Policy (February 16, 1999) and Rates & Charges Policy — Governing revenue diversion prohibitions
• CGL 2018-01: Annual compliance process for grandfathered airports — Compliance procedures for 9 grandfathered airports under revenue use statute
• CGL 2024-02: Aviation Fuel Tax Revenue Use Compliance Testing Plan — December 11, 2024
• State-by-state aviation fuel tax compliance status tracker — Revenue use compliance monitoring

ACRP Research Resources

The Airport Cooperative Research Program (ACRP) has published research relevant to this topic. The following publications provide additional context:

• Legal Research Digest 1 — "Compilation of Federal and State Airport Revenue Diversion Laws" (2008). Provides survey of statutory revenue diversion prohibitions at the federal and state level.
• Legal Research Digest 2 — "Diversion of Airport Revenue: Theory and Law" (2008). Establishes the foundational legal and theoretical framework for understanding revenue diversion constraints.
• Legal Research Digest 10 — "Proprietary Rights and Airport Revenue" (2009). Addresses the legal basis for airport proprietary authority and revenue use.
• Legal Research Digest 40 — "Permissible Uses of Airport Revenue: Current Analysis" (2020). Provides current interpretation of what constitutes permissible airport revenue uses under federal and state law.
• Report 114 — "Through-the-Fence Airport Operations" (2014). Provides methodology for analyzing through-the-fence agreements and cost allocation, relevant to revenue diversion analysis.

Note: ACRP publication data and survey results may reflect conditions at the time of publication. Readers can verify current applicability of specific data points.

Related DWU AI Articles

• Grant Assurance Compliance
• Airport Privatization
• Airline Challenges to Airport Rates and Charges
• Airport and Airway Trust Fund

© 2026 DWU Consulting. All rights reserved.