Conservative Criticisms of Passenger Facility Charge Again Miss Mark
Our friends at the National Taxpayers Union (NTU) recently sent a letter to the House Committee on Transportation and Infrastructure in advance of a hearing on the future of infrastructure investment titled, “The Cost of Doing Nothing: Why Investing in Our Nation’s Infrastructure Cannot Wait.” NTU’s letter raises a number of bulleted criticisms against the passenger facility charge (PFC). This post will examine each of their bolded claims.
The federal cap on the PFC—currently $4.50 per passenger enplanement or $18 total per itinerary—has not been increased since 2000, despite a doubling of revenue generated from the charge. This rise in revenue, without a rise in the rate, has remained ahead of inflation plus passenger enplanements at primary U.S. airports.
This is true, but it ignores the larger airport revenue picture: the composition of total airport revenue and how that revenue can be used, depending on the source. This will be explored in the responses that follow.
Rather than increasing the PFC, the 2018 FAA Reauthorization Act required a study of airport diversion of PFC revenues—a sign of at least some concern on Congress’s part that proceeds from the charge may be suffering from inefficient or ineffective utilization. It would be premature to expand the PFC in such an environment, without considering other systemic reforms.
This criticism is entirely untethered from the law. Section 143 of the FAA Reauthorization Act of 2018 requires the Government Accountability Office to study airport revenue diversion permitted under an exemption at 49 U.S.C. § 47107(b)(2) and the fiscal and legal challenges of possibly eliminating that exemption. Section 47107(b)(2) grandfathered in some local airport revenue arrangements at 13 airports made prior to September 2, 1982, nearly a decade before the PFC even existed. To emphasize, this study has absolutely nothing to do with PFCs.
There is another required Department of Transportation study on the future of aviation infrastructure financing at Section 122 of the 2018 reauthorization where PFCs play a significant role, but the prescribed study parameters do not include PFC revenue diversions—likely because annual PFC audits of collecting airlines and airports are already required under 49 U.S.C. § 40117(h) and 14 C.F.R. §§ 158.67 & 158.69.
Unlike the chronically anemic Highway Trust Fund, which faces serious shortages absent major structural changes in financing and expenditures, the Airport Trust Fund is in a strong fiscal position with uncommitted resources that could exceed $7.5 billion this year. In recent years airport capital expenditures have been rising dramatically, a trend that is likely to be encouraged since the passage of the Tax Cuts and Jobs Act (TCJA). That law wisely avoided detrimental changes in private activity bond tax rules that could have harmed airports, while also repealing the corporate Alternative Minimum Tax that plagued the treatment of airport-related debt instruments. These features, combined with more robust concession revenues, privately-financed terminal improvements, and other positive developments will likely be more effective than PFCs in providing dependable revenue streams going forward.
There’s a lot going on in this paragraph, but the key points to examine are the uncommitted balance of the Airport and Airway Trust Fund, airport concession revenues, and private financing.
The Airport and Airway Trust Fund funds airports via federal Airport Improvement Program (AIP) grants. AIP is generally used to fund airside construction projects (e.g., runways, taxiways, aprons, land acquisition). In contrast to AIP’s heavy airside project use, PFCs are generally used to finance landside improvements such as passenger terminals that usually aren’t eligible for AIP funding. This is because AIP-eligible projects are PFC-eligible projects, but not vice versa. The table below provides a comparative breakdown on the use of these complementary programs.
While these funding streams complement one another, they are not interchangeable pots of money—and unlike the PFC, AIP funds cannot be used in debt financing—so claiming that using unobligated funds in the Airport and Airway Trust Fund in lieu of PFCs is a simple fix is wrong. It would require major changes in decades-old federal law even if AIP was to serve as the funding channel rather than a new federal grant or financing program. Such changes would be even more controversial than a PFC cap increase and they are highly unlikely to occur. This would also dramatically increase federal funding of airports, something fiscal conservatives ought to oppose.
On airport concession revenue, it is unclear to what specifically what NTU is referring. While retail and food and beverage are growth markets for airports, they account for only around 7 percent of airport operating revenue. Real estate is the largest constraint and neither AIP nor PFC revenue can be used to expand revenue-generating concession areas at airports. Much more important than retail and restaurants are parking, rental car, and ground transportation revenues, which account for around 60 percent of non-aeronautical airport revenue and more than a quarter of total revenue. The chart below breaks down these revenue streams.
These dominant sources of non-aeronautical revenue are declining and their future prospects are uncertain due to the rise of Uber and Lyft. According to a recent study from the Airport Cooperative Research Program, which is jointly sponsored by the FAA and the National Academies’ Transportation Research Board, found that the introduction of Uber and Lyft has led to an 18 to 30 percent decline in the use of shared-ride vans, a 4 to 13 percent decline in rental car transactions, and a 5 to 10 percent decline in parking transactions.
While these estimates are based on a limited sample and research is ongoing, the data suggest that these declines in revenue exceed any new airport fee revenue generated from Uber and Lyft, meaning that as Uber and Lyft continue to grow in popularity, this decline will steepen in airports’ most important non-aeronautical revenue sources. NTU’s recommendation that airports should focus more on “concession revenues,” whatever they mean, is simply not a sustainable solution.
Finally, on “privately-financed terminal improvements,” we welcome more private-sector provision of aviation infrastructure—from airports to air traffic control. However, under current law, private investments in commercial airports are likely to be tiny compared to the revenue potential of an uncapped PFC.
Public-private partnerships in the form of long-term lease agreements were greatly restricted under the Airport Privatization Pilot Program. This program only allowed one large hub to participate (St. Louis Lambert International Airport submitted a preliminary application in 2017 and last year hired consultants to assess private financing and management feasibility) and required 65 percent approval of incumbent airlines. CEI has supported uncapping the number of large-hub pilot program slots and lowering the airline approval threshold to a simple majority for the last few Congresses.
The 2018 FAA reauthorization (Sec. 160) retitled the program as the Airport Investment Partnership Program, uncapped the participant slots, and allowed for partial airport public-private partnerships. Unfortunately, the 65-percent carrier approval supermajority requirement remains in place and will likely continue to result in underutilization of the program. Until we see evidence this program works better than its predecessor program, we should not bet heavily on its future success.
Short of airport privatization, airports can tap into private-sector investment via private activity bonds (PABs). While the IRS currently treats many public issue airport bonds as PABs because they primarily benefit private parties (e.g., airlines) and/or receive debt service payments from private parties, use of surface transportation–style PABs with long-term concessionaire airport operators is largely constrained by the aforementioned restrictions on the Airport Investment Partnership Program. Again, we would like to Congress get out of the way and see more of this type of private-sector involvement in the provision of public-purpose airports, but this is not an argument against PFCs.
The PFC has been historically linked to Airport Improvement Program (AIP) grants, which were funded at a stable five-year amount in the FAA Reauthorization Act of 2018. Currently, large and medium sized airports lose part of their AIP funding if they are recipients of a PFC above a certain level. Unfortunately, taxpayers do not benefit from this exchange—the “lost” AIP grants for these hubs have often been reprogrammed to other FAA funds that can be used for airport projects. NTU has yet to see a viable plan that would phase out other forms of federal support for airports and truly offset the rise in current PFC revenues—let alone offset a legislated PFC hike. Again, the net result is a loss for taxpayers.
As was noted above with respect to varying project eligibility requirements of PFC and AIP funds, the PFC and AIP are complements for most airports, not substitutes. However, for large hub airports, the PFC and AIP are viewed as substitutes and a number of these major airports are willing to forgo 100 percent of their AIP funds in exchange for an uncapped PFC. While it is true that under current law, AIP funds returned by airports in exchange for charging PFCs does not reduce total AIP spending, a reform idea to do precisely what NTU wishes to see was floated in the previous Congress.
Introduced by Reps. Peter DeFazio (D-OR), who is now the chairman of the House Transportation and Infrastructure Committee, and Thomas Massie (R-KY), the Investing in America: Rebuilding America’s Airport Infrastructure Act (H.R. 1265) would have eliminated the federal PFC cap. Those airports wishing to charge more than $4.50 (at 75 percent AIP turn-back) would be required to return 100 percent of their AIP funds. In keeping with NTU’s stated desire for a corresponding reduction in federal airport grants, the bill would have reduced AIP program spending by $400 million annually.
This approach has been endorsed by large hub airports for the past decade. Several free-market groups, including CEI, FreedomWorks, and Citizens Against Government Waste, supported this bill as a win for federal taxpayers. This appears to be precisely the legislation NTU is seeking and we hope they join free-market groups when this bill is re-introduced.
Typically, taxes and fees can account for more than 20 percent (or more than $60) of a typical $300 round-trip ticket. A $4 PFC increase, as some proposed in the previous Congress, could result in a middle class family of four paying $100 or more in PFCs alone—a significant expense for many Americans. While it is important that Americans have access to modernized airports, such access will be of little consequence if government-imposed burdens on air travel such as these make the purchase of tickets prohibitive for travelers in the first place.
Under the law, PFCs cannot be used to create some sort of airport slush fund. PFC revenues are tied to specific project funding or financing that must meet eligibility requirements. The impact of realistically higher PFCs on passenger travel demand is uncertain, but the Government Accountability Office estimates the impact to be minimal—and even lower if the airlines’ own baggage and other ancillary fees were to be considered in the total fare price faced by consumers.
Moreover, the Reagan administration first developed the PFC concept as a pro-competitive mechanism. In a nutshell, when airports are constrained in funding and financing their own improvements, they would often turn to their airline customers for help. In exchange for backing their airport projects, airlines would often demand long-term exclusive-use gate leases, thereby keeping out lower-cost competitors and increasing average airfares. Transportation economists Steven Morrison of Northeastern University and Clifford Winston of the Brookings Institution estimated that limited gate availability at large and medium hubs resulted in consumers paying $4.4 billion (2005 dollars) more for airfares, which significantly exceeds annual nationwide PFC collections of $3.3 billion in 2017.
Conclusion
In its closing, the NTU letter argues that “common kiosks where [passengers] can check in and purchase services from any airline [would] would not be terribly difficult to adapt […] to PFCs.” However, federal law prohibits such non-ticket collections, as 49 U.S.C. § 40117(i)(2) requires that airlines collect the charges and that any PFC charges be displayed on airline tickets.
But even if that prohibition were to be eliminated by Congress, the Government Accountability Office examined alternative PFC collection methods in 2018. They concluded that while kiosk and other alternative methods are feasible from a technology standpoint, aviation stakeholders worldwide are concerned this would negatively impact customer experience and that it would be less efficient than ticket-based charges. GAO could find no airport in the world that was moving away from a ticket-based passenger charge in favor of such alternatives.