Obama FY 2015 Budget: Aviation Funding Recommendation Not Great, But a Step in the Right Direction

President Obama released his Fy 2015 budget today. Like his past budgets, as I noted in a previous post discussing the highway and transit budget, continuing congressional gridlock means this package will almost certainly go nowhere. I’ll leave more sophisticated and comprehensive commentary to the budget analysts, but I will highlight one additional transportation provision: airport funding. Exactly like the FY 2014 budget from the White House, the FY 2015 budget calls for cutting Airport Improvement Program funding to $2.9 billion and increasing the cap on the Passenger Facility Charge (PFC) from $4.50 to $8.

AIP currently provides major airport infrastructure grants. These funds come from a variety of taxes and segment fees. However, while user-based to an extent, AIP funding is complex and less transparent, features that are generally undesirable in user fee frameworks — in addition to relying on some non-user revenue (see page 20 of the AIP Handbook for a breakdown of revenue sources). AIP funds are also not segregated by facility, leading to wasteful grants to low-value airports.

In contrast, the PFC is a direct and transparent user charge. The money collected from passengers goes directly to the facility. Ideally, as the president suggests, AIP should be phased out with PFCs picking up the slack. Unfortunately, the federal government currently caps PFCs at $4.50 per enplanement. The president’s proposed PFC increase to $8 is better than nothing, but it still fails to restore the PFC purchasing power to the level when it was last raised to $4.50 in 2000. As the American Association of Airport Executives notes, the PFC should at a minimum be raised to $8.50 in order to restore its previous buying power.

Rather than endless fights over the “appropriate” PFC level, Congress should eliminate the PFC cap all together. Federal policies force airports to be heavily reliant on airlines for funding. The effect of these policies is that airports have little leverage in negotiations with airlines over gate access, the result being a proliferation of long-term exclusive- and preferential-use gate leases. The impact on competitiveness and air fares is large. Exclusive- and preferential-use gate leases (as opposed to common use open entry) result in gate under-utilization by allowing incumbent airlines to essentially prohibit most new entry from outside carriers. It is estimated that air fares are more than $5 billion higher annually (in 2013 dollars) because of artificial barriers to airport access.

Hopefully, the president and Congress will move ahead with reforming the PFC system. Ideally, this would mean eliminating the cap, but restoring the PFC purchasing power to 2000 levels should be a bare minimum no-brainer.