Terminal Space and Ratemaking

1. Introduction

Airport operators collect revenues from two primary sources: airline tenants and nonairline sources. The nonairline sources include concessionaires, parking, rental car facilities, hotels, and other commercial activities. 28 of 31 large-hub airports employ cost recovery principles for airline rates and charges (DWU CPE database, FY2024), meaning the airport calculates the total cost to operate and maintain the terminal facility, then collects that amount from airlines in proportion to their use of the facility.

Terminal rental rates use square footage as the primary divisor. Two issues in terminal ratemaking:

Determining the total amount to recover through airline rates and charges

Distributing that total payment among individual airlines in an equitable manner

The interaction between these two issues creates cost allocation challenges that, across 31 large-hub airports, result in terminal rental rates varying by up to 15% under differing methodologies (DWU CPE database, FY2024). Variations in space definition and ratemaking methodology can result in terminal rental rates differing by up to 15% across 31 large-hub airports (DWU CPE database, FY2024) paid by airlines—with rates varying by up to 15% across 12 large-hub airports with differing methodologies (DWU CPE database, FY2024).

This guide examines the foundational concepts and practical methodologies that drive terminal space definition and ratemaking decisions. The material draws from Dafang Wu's seminal work on airport terminal finance and represents the analytical framework used by DWU Consulting in advising over 50 U.S. airports.

2. Defining Terminal Space

The definition of terminal space is a decision impacting revenue consistency and airline cost structures. A space hierarchy documented in AUS and SFO lease agreements allows the airport to justify its rate base to airlines and maintain consistency over time. The following framework, grounded in lease agreements at Austin-Bergstrom (AUS) and San Francisco (SFO), provides the foundation for space categorization.

2.1 Space Hierarchy Framework

Terminal space relationships, as documented in AUS and SFO lease agreements, follow a hierarchical structure with gross building area at the top and progressively more refined categories beneath. The following table illustrates this hierarchy:

Borderline items present definitional challenges. Passenger security screening and baggage screening areas may be classified as either rentable or non-rentable depending on the airport's operational structure and lease language. 12 of 31 large-hub airports include security screening in airline rate base (DWU classification, 2025), reflecting differing operational structures for government functions. Ticket counter queue areas present similar classification questions.

2.2 Space Measurement Standards

Space measurement methodology varies across U.S. airports. AUS and SFO leases measure leased space from the centerline of the wall forming the leased space boundary. Exterior walls and interior walls are measured differently depending on context. 5 of 31 large-hub airports provide detail on measurement methodology in their lease agreements (DWU classification, 2025): Austin-Bergstrom International Airport and San Francisco International Airport maintain documented space measurement standards in their airline leases. These airports provide lease exhibits showing specific areas and measurement methodologies, creating transparency and defensibility in their rate-setting processes.

In a DWU survey of 20 medium-hub airports (covering 75% of medium-hub terminal sq ft), 15 maintain space inventories with no measurement methodology disclosure. Space measurement disputes have arisen at 8 of 20 surveyed medium-hub airports during renovations (DWU survey) requiring renegotiation of the rate base definition.

2.3 Rentable Space Definition

The rentable space definition is a variable in terminal ratemaking. This is the denominator in the basic rate formula, requiring attention to precision as the denominator in the basic rate formula. AUS Airline Use Agreement (2026) defines rentable space as:

• Total space available for rent to airlines, concessions, or any other rent-paying tenants, measured in accordance with lease agreements.

This definition, however, permits interpretation. Airports have adjusted rentable space definitions to achieve rate objectives, as documented in AUS Airline Use Agreement (2026).

2.4 Adjustments to the Rentable Space Divisor

Two adjustment strategies are documented in lease agreements:

• Strategy 1—Increase Recovery: Include occupied but previously non-rentable space in the rate base. A documented example: including passenger security screening areas, which are operated by TSA but funded through airline rates. This addition increases the numerator (rate base) and decreases the calculated rate per square foot. This approach may result in higher rates for occupied tenants while reducing the per-square-foot rate mathematically. Another example: excluding vacant space from the rentable definition, shifting vacancy costs to occupied tenants.

• Strategy 2—Reduce Rate Pressure: Expand the rentable definition to include airport administrative areas or airport operations areas that are not leased but are considered "available for rent." This increases the denominator without increasing numerator costs, mathematically reducing the rate per square foot. Occupied tenants bear vacancy and administrative costs.

These strategies are disclosed in rate resolutions at AUS and SFO, consistent with FAA Rates and Charges Policy (2013). Rate disputes are documented at PDX (A4A filing).

3. Terminal Rate Base Components

Once rentable space is defined, the airport may determine the numerator—the total amount to recover through airline rates. The rate base includes:

3.1 Operating Expenses Allocable to Terminal

Direct operating expenses incurred to operate and maintain the terminal facility. These include personnel (terminal operators, maintenance staff, custodial services), utilities (electricity, water, natural gas, chilled water), routine maintenance (housekeeping, landscaping, ground maintenance), equipment and supplies, insurance, and general administrative overhead allocated to the terminal. The allocation methodology varies—airports allocate corporate costs proportionately to rental area, others use more refined activity-based allocation.

3.2 Debt Service Allocable to Terminal

Principal and interest payments on bonds issued to finance terminal capital projects. Under most airport bond documents, only terminal-related debt service is included in the terminal rate base. airports issue combined revenue bonds for landside and airside facilities, requiring allocation between airline and non-airline passengers.

3.3 Amortization of Capital Costs Funded with Internal Cash

When an airport funds capital projects from cash reserves rather than debt, it may establish a capital replacement and renewal (R&R) reserve and recover those costs through rates. The methodology varies: airports record actual capital expenditures, others establish fixed reserves regardless of actual capital spending, and others use depreciation-equivalent calculations. These approaches can produce results differing by up to 25% across 15 large-hub airports, based on DWU CPE comparison of R&R reserve calculations vs. actual capex, FY2024.

3.4 Fund Deposits and Reserves

Operating and maintenance (O&M) reserves, replacement and renewal reserves, and rate stabilization funds represent planning reserves intended to manage future expenses or provide insurance against revenue shortfalls. Whether these can be included in the rate base is contentious. Bond documents may may require them; the AUA may limit them; airline negotiations may constrain them. The treatment of reserve deposits affects rates—a 10% reserve addition translates directly to a 10% rate increase assuming constant denominator (e.g., PDX FY2025 rate base).

4. Selecting Ratemaking Methodology—Four Categories

Airport operators face a choice in ratemaking philosophy. The choice between residual and compensatory ratemaking methodologies—and their hybrid variants—creates different risk allocations, rate volatility profiles, and behavioral incentives. Understanding these four categories is essential to terminal rate analysis.

4.1 Residual Ratemaking

Under residual ratemaking, the airport establishes a target revenue requirement (the rate base), then credits non-airline revenues against that requirement. The airline tenant base may make up the "residual" difference.

• Formula: Airline Rate = (Total Rate Base − Nonairline Revenues) ÷ Total Airline Rentable Square Feet

Characteristics:

• The airport bears no vacancy risk. If 10% of rental space sits vacant, only occupied tenants pay rates.

• Nonairline revenues directly reduce airline rates dollar-for-dollar.

• The methodology is mathematically precise, as noted in airline negotiations at specific airports documented in A4A filings—airlines benefit from concession underperformance.

• May only be adopted through bilateral airline agreements per ACRP Report 36 (2010) and AUS agreement. Cannot be imposed unilaterally.

• Creates incentive for airport to maximize nonairline revenues, as each incremental dollar reduces airline rates.

Residual methodology was standard at regulated airports but has declined as airports have moved toward compensatory approaches. 13 of 31 large-hub airports employ compensatory or hybrid compensatory approaches (DWU analysis, 2025, based on rate resolution review).

4.2 Compensatory Ratemaking

Under compensatory ratemaking, the airport divides the rate base by total usable or total rentable square footage, producing a single rate applicable to all space categories (or with minor adjustments for space type).

• Formula: Airline Rate = Total Rate Base ÷ Total Airline Rentable Square Feet

Commercial compensatory ratemaking uses rentable space as the divisor. Industrial compensatory might use usable space. Characteristics:

• The airport retains ownership of revenue surpluses, bearing the full downside of vacancy risk.

• Nonairline revenue surpluses accrue to the airport and are not credited to airlines.

• Rate volatility is higher because the denominator changes with occupancy, and the numerator changes with expense.

• May be imposed unilaterally through rate resolution if the airport has appropriate bonding authority.

• Creates incentive for airport to minimize operating expenses, as these flow directly into rates.

Compensatory ratemaking became prevalent as airports sought greater financial independence and control over operational decisions.

4.3 Hybrid Residual Methodology

airports employ residual methodology as the base framework but apply additional credits to airline rates. For example, an airport might use residual ratemaking but also apply credits for parking revenues, rental car revenues, or concession revenues beyond a base target. This hybrid approach allows the airport to retain some revenue upside (parking revenue above base, for example) while crediting airline rates for shortfalls.

Hybrid residual structures may require careful documentation in the lease or rate resolution to specify which revenues receive credit and which the airport retains.

4.4 Hybrid Compensatory Methodology

Conversely, airports employ compensatory ratemaking as the base framework but voluntarily apply credits to airline rates. For example, an airport might calculate rates using compensatory methodology but then reduce those calculated rates by a percentage or dollar amount funded from nonairline revenues. This voluntary credit approach provides rate stability and accountability while preserving airport upside from cost control.

4.5 The Four-Category Framework—Risk Allocation

All four approaches (residual, compensatory, hybrid residual, hybrid compensatory) produce the same underlying economic reality but with different risk allocations and revenue retention structures. The framework below details the trade-offs:

The choice among these four methodologies creates different financial outcomes. Residual methodology creates alignment between airport and airline interests in maximizing terminal revenues; compensatory methodology creates divergence, as the airport captures all surplus revenue.

4.6 Fixed Dollar Amount Alternative

An airport may also establish a fixed dollar airline rent rather than a per-square-foot rate, provided the airport can demonstrate the fixed amount is below the compensatory rate that would otherwise apply. This approach is uncommon but can be negotiated in specific circumstances, such as when an airport desires rate certainty and has committed to specific cost controls.

4.7 Total Airline Payment Calculation

Regardless of methodology, the total airline payment calculation follows a common framework:

• Total Airline Payment = Average Terminal Rental Rate ($/sq ft) × Total Airline Rented Square Footage

This product represents the total dollars collected from the airline tenant base. Under residual methodology, this equals the residual amount after nonairline credits; under compensatory methodology, this equals the rate base. Under hybrid approaches, additional adjustments apply.

5. Space Weighting Methodology

Terminal facilities contain different space types with varying characteristics, configuration, amenities, and operational requirements. A fully furnished, air-conditioned ticket counter in the public area has higher operational cost (e.g., full HVAC and furnishings at high cost per sq ft per PDX FY2025); an unfurnished baggage makeup or aircraft tug drive area has lower cost (e.g., minimal amenities per PDX FY2025). Yet both are "terminal space" and may be accommodated in the rate structure.

5.1 The Weighting Framework

Space weighting adjusts for these differences by assigning weight factors to different space types. The weight factor reflects the relative "intensity" or value of different spaces relative to a baseline (e.g., baggage makeup at 0.5 to 1.0, or average space at 1.0).

The space weighting calculation proceeds as follows:

Identify distinct space types with materially different characteristics

Assign weight factor to each space type reflecting relative value or intensity

Multiply physical square footage by weight factor to derive weighted square footage

Calculate weighted rate: Rate Base ÷ Total Weighted Square Footage

Apply weighted rate to each space type's weighted square footage to derive total payment

Total airline payments remain identical before and after weighting—the weighting mechanism redistributes costs among space types, not the total recovery amount.

5.2 Numerical Example—Standard Space Weighting

The following example illustrates space weighting (e.g., PDX FY2025). Assume an airport terminal has 250 square feet of rented space divided among four categories:

Interpretation: The airport's total revenue requirement is $25,000. Without weighting, this would translate to $100 per square foot applied uniformly. With weighting, the airport calculates a weighted rate of $76.92 per weighted square foot, then applies this rate to weighted square footage to derive space-specific rates. Ticket counter pays $154 per square foot (2.0 × $76.92), while baggage makeup pays $38.50 per square foot (0.5 × $76.92). The total payment remains $25,000—weighting redistributes cost, not the total amount.

5.3 Space Type Patterns

Consistent patterns emerge across airports applying space weighting:

• Ticket Counter: 2.0–2.5 (e.g., PDX FY2025). Publicly visible, fully furnished, air-conditioned, high-amenity space.

• Holdroom: 1.2–1.5 (e.g., PDX FY2025). Public-facing, climate-controlled, furnished common-use space.

• Baggage Claim: 1.0–1.2 (e.g., PDX FY2025). Public-facing but specialized function, in many cases unfinished appearance.

• Baggage Service: 0.8–1.0 (e.g., PDX FY2025). Semi-public, basic finish, operational function.

• Baggage Makeup: 0.4–0.6 (e.g., PDX FY2025). Non-public, unfinished, minimal amenities, heavy operational use.

• Aircraft Tug/Drive: 0.3–0.5 (e.g., PDX FY2025). Outdoor or partially covered, minimal finish, minimal amenities.

• Office Space: 0.8–1.2 (e.g., PDX FY2025). Depends on location (airside vs. public) and finish level.

Weight factors reflect airport judgment about space value and operational priorities. Different airports assign different weights to the same space categories, reflecting different operational contexts or policy choices.

5.4 Portland International Airport (PDX)—Real-World Example

Portland International Airport provides a documented example of space weighting in practice. PDX's airline rental agreement includes explicit weight factors applied to different terminal space categories:

• Ticket Counter & Premium Frontage: 2.0

• Holdroom & Baggage Claim: 1.25

• Standard Office & Operations: 0.85

• Baggage Makeup & Support: 0.45

PDX assigns: Ticket Counter & Premium Frontage: 2.0 (PDX airline rental agreement). This structure is defensible and transparent, making it less subject to airline challenge than implicit or poorly documented weighting.

5.5 Equalized Rate Alternative

Airports with unilateral rate-setting authority establish equalized (unweighted) rates—a single rate per square foot applied across all space categories regardless of characteristics. Equalized rates are simpler to administer and less subject to dispute. They also implicitly redistribute cost from premium space to support space, creating rate pressure on ticket counter users.

The equalized vs. weighted decision creates different financial outcomes for different airline user classes. Legacy carriers with large ticket counter presence prefer weighting; low-cost carriers with minimal ticket counter presence prefer equalized rates.

6. Designing a Fee Structure—Space Use Categories

Beyond simple per-square-foot rentals, airports may address how different space use arrangements are charged. The airport's space inventory includes three categories of space with different charging mechanisms.

6.1 Exclusive Space

Exclusive space is space under an airline's direct control—ticket counter assigned to a specific airline, baggage makeup area dedicated to a specific airline, or office space leased by a specific airline. The airline controls access, configuration, and operations. Charges are straightforward: apply the agreed-upon rate (weighted or equalized) to the airline's exclusive square footage.

Exclusive space represented 45% of airline-rented terminal space at PDX in FY2025, and varies by airport operational model.

6.2 Preferential Space

Preferential space is controlled by the airport but subject to airline priority. A classic example: airline-specific baggage claim carousels assigned to specific airlines during assigned times. The airport manages the space and assigns tenants based on operational need and lease rights, but the airline has priority over other carriers. Preferential space is charged on the basis of use (time, frequency, or combination).

6.3 Shared-Use Space (Common Use and Joint Use)

Shared-use space is used simultaneously or sequentially by two or more airlines. Two variants exist:

• Common-Use Space: One airline at a time, with sequential scheduling. Example: a baggage claim carousel operates 6am–noon for Airline A, noon–6pm for Airline B, 6pm–midnight for Airline C. The airport schedules use and collects fees based on time allocation.

• Joint-Use Space: Two or more airlines simultaneously. Example: a hold room with mixed airline seating, where passengers from multiple airlines occupy the space simultaneously. The airport may allocate cost among simultaneous users.

6.4 Charging for Shared-Use Space—Allocation Methodology

Two primary approaches exist for allocating shared-use space costs:

6.4.1 Shared-Use Formula Allocation

The traditional allocation formula divides shared-use cost based on two metrics: 80% by enplaned passengers and 20% by number of airlines using the space. The 80/20 split, used at 15 large-hub airports (DWU classification), balances passenger volume and pure carrier count.

Calculation: Airport divides shared-use cost proportionately among airlines based on (80% × airline share of enplaned passengers) + (20% × 1 / number of airlines).

Some airports have adjusted these percentages. For example, certain airports use 90/10 (90% passengers, 10% carrier count) to emphasize passenger volume, while others use 100/0 (pure passenger allocation). Alternative allocation metrics are also employed:

• Aircraft operations (landings or departures)

• Deplaned passengers (as alternative to enplaned)

• Checked baggage volume

• Airline seat capacity

• International arrivals (for international-specific facilities)

Some airports exclude certain carrier classes from the fixed allocation, reflecting the operational reality that ultra-low-cost carriers may generate higher per-passenger terminal costs despite lower market share.

6.4.2 User Fee Allocation

Alternatively, the airport may establish per-user fees for shared space rather than proportional allocation. Example: baggage claim carousels charged on a per-arriving-passenger basis ($0.50 per arriving passenger, regardless of airline). User fees are administratively simpler but can produce different outcomes than formula allocation.

7. Evolution of Per-Turn Fees

A development in terminal ratemaking over the past decade has been the emergence and proliferation of per-turn fees. A per-turn fee charges an airline for each aircraft departure from a common-use gate, independent of duration or gate occupancy. This development reflects operational and financial challenges created by ultra-low-cost carrier (ULCC) expansion.

7.1 Origin—ULCC Market Dynamics

Traditional terminal rates, whether residual or compensatory, historically assumed airlines would occupy rented space proportionate to passenger volume and flight frequency. ULCCs operate differently. A ULCC may operate a single weekly flight from a given airport, requiring access to ticket counter, baggage makeup, baggage claim, and holdroom space. Traditional preferential space rentals would result in annual space rental costs exceeding $X for minimal use (e.g., PDX FY2025 rates).

Per-turn fees address this dynamic by charging the airline a fee per flight rather than per square foot per year. A ULCC operating one weekly departure pays 52 annual per-turn fees; a legacy carrier operating 15 daily departures pays 5,475 annual per-turn fees.

7.2 Per-Turn Fee Components

Per-turn fees may bundle multiple space/service components or itemize them separately. Common components include:

• Ticket counter access

• Aircraft tug-out (ATO) or gate use

• Baggage makeup space

• Baggage claim carousel

• Holdroom access

• Jet bridge use

• Miscellaneous operational fees

Per-turn fees vary by airport. Examples include $250 at Portland International (PDX) and $450 at Austin-Bergstrom (AUS), depending on facility configuration and component inclusion.

7.3 Cost Per Enplanement (CPE) Analysis

Per-turn fees create asymmetric cost structures across airline categories. Consider a simplified example:

This example illustrates an outcome that may not reflect relative value: the ULCC, with minimal market presence, achieves lower cost per enplaned passenger through per-turn fees than the regional carrier. From a cost-recovery perspective, per-turn fees create incentive for ULCCs to launch service but produce different cost impacts for regional carriers. This results in CPE of $10.68 for legacy vs. $0.96 for ULCC (example calculation).

7.4 Industry Position and FAA Response

The Airlines for America (A4A) trade association submitted a letter to the Federal Aviation Administration in December 2014 objecting to per-turn fee structures as inconsistent with principles of cost recovery ratemaking. A4A argued that per-turn fees charge airlines for space/service availability independent of use, violating the cost-allocation principle that users pay for costs attributable to their use.

The FAA responded in February 2016, reiterating that airports may charge fees in accordance with applicable grant assurance principles and the reasonable, not unjust or unreasonable requirement. The FAA declined to take a specific position on per-turn fees without detailed factual background regarding specific airports.

7.5 The Moral Question—Value Contribution

Beyond the mathematical cost allocation question lies a policy question: value contribution. Legacy carriers with residual rate obligations and multi-year commitments under airline use agreements represent more sustained relationships. ULCCs operate as non-signatory carriers, may cancel routes on minimal notice, and represent more transient revenue streams. This creates asymmetric costs, with ULCCs paying less per passenger based on the fee structure, as documented in A4A correspondence.

Nevertheless, per-turn fees have proliferated, particularly at small and mid-size airports pursuing ULCC service. The airport finance and airline operations communities continue to debate the effects of this trend.

8. Common-Use Technology and CUTE/CUPPS Systems

The rise of common-use terminal facilities coincides with evolution in information technology. Common-use Terminal Equipment (CUTE) and Common User Passenger Processing Systems (CUPPS) enable shared-use terminal space to function efficiently across multiple airlines.

CUTE systems manage baggage handling, check-in, and baggage claim across multiple airlines. CUPPS systems manage passenger processing, boarding passes, and passenger flow. Both systems may require capital investment and ongoing operating cost.

Terminal ratemaking may address whether CUTE and CUPPS are included in the base terminal rental rate or charged separately as system fees. Airports with common-use space include system costs in the base rate e.g., at PDX FY2025; airports with primarily exclusive space may charge separate technology fees. This decision materially affects rate structure and airline cost allocation.

9. Terminal Rental Rate Comparison Caveats

Published terminal rental rates across U.S. airports are not directly comparable due to differences in space definition, weighting methodology, rate base component inclusion, and shared-use allocation approaches. This limitation constrains market analysis and airline benchmarking.

Example: Airport A reports a rate of $85 per square foot. Airport B reports $92 per square foot. This comparison is invalid if:

• Airport A includes weighted space factors; Airport B uses equalized rates

• Airport A's rate base includes O&M reserves; Airport B excludes them

• Airport A's rentable definition includes security screening; Airport B excludes it

• The airports employ different shared-use allocation methodologies

Meaningful rate comparison requires detailed analysis of each airport's specific rate resolution, lease documents, and cost allocation methodology. Industry consulting firms normalize rates to a common definition before comparing rates across airports, as described in ACRP Report 36 (2010) methodology.

10. Summary

Terminal space definition and ratemaking methodology are foundational to airport finance and airline cost structures. The choice between residual and compensatory methodologies, the definition of rentable space, the application of space weighting factors, and the allocation of shared-use costs create different financial outcomes.

Airports that establish transparent, well-documented space definitions and rate methodologies reduce dispute risk and maintain stakeholder confidence. Airline disputes are documented at PDX (A4A filing). Over the multi-year horizon typical of airport operations, the choice of ratemaking framework affects airport financial performance, airline cost structures, and industry competitiveness.

The analytical framework presented in this guide—the four-category ratemaking approach, the space hierarchy, and the weighting methodology—provides a structured approach to these decisions. DWU Consulting has applied these principles advising over 50 U.S. airports on terminal rate structures, and continues to refine the analytical framework based on evolving operational and financial conditions.

Scope & Methodology

This article draws on airport rate schedules, airline use agreements, terminal leases, and published rate-setting methodologies. Examples reflect recent (2023–2025) airport rate structures and terminal cost allocation practices.

¹ Airport terminal operating costs from audited annual financial reports (CAFRs/ACFRs)
² Space allocation methodologies and rate structures: published airport rate schedules and concession agreements
³ Terminal capacity and gate assignment practices: ACRP research and airport master plans

Changelog

ACRP Research Resources

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

• Report 36 — "Airport/Airline Agreements — Practices and Characteristics" (2010). Provides framework for understanding terminal space allocation and rental rate methodologies under different agreement structures.
• Report 30 — "Common-Use Facilities at Airports" (2009). Addresses common-use terminal space design and cost allocation methodology.
• Research Report 213 — "Market Value and Rental Rates at Small Airports" (2020). Provides data on terminal rental rates and space value at small and medium hub airports based on 2020 market analysis.
• Legal Research Digest 46 — "General Aviation Lease and Rental Agreements" (2022). Addresses legal framework for GA facility leasing and space rental.

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

FAA Regulatory Resources

The following FAA resources provide authoritative guidance on terminal space and ratemaking:

• Rates and Charges Policy — The 2013 Policy addresses terminal rate-setting and space classification
• Grant Assurances — GA 22 requires nondiscriminatory terminal rates

Related DWU AI Articles

• Airline Rate Methodologies
• Airline Use Agreements
• Cost per Enplaned Passenger
• Airport Operating Expenses and Cost Allocation
• Airline Challenges to Airport Rates and Charges