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AIRPORT FINANCIAL MANAGEMENT

CHAPTER-8

• Large amount of financial resources are required to operate,

maintain, and improve A/Ps property, infrastructure, and labor

• Such resources are arranged through a number of strategies

available to airport management

• With each source of funding available to A/Ps, come rules and

policies that determine which strategy A/P mgt may employ to

cover a portion of the A/P’s cost burdens

AIRPORT FINANCIAL MANAGEMENT

AIRPORT EXPENSES

A/P expenses fall into two types

Operation and Maintenance Costs. costs consist of those expenses that occur

on a regular basis and are required to maintain the current ops at the A/P. Such

expenses typically include wages and salary of A/P employees, costs of utilities

such as power, water, and telecommunications, and a broad range of

regularly needed suppliesCapital Improvement Expenses. are very large, periodic expenses which

contribute to A/P infrastructure improvement or expansion. Capital

improvement expenses include the costs of major construction projects such as

airfield and terminal expansion, the acquisition of major utilities such as air

rescue and fire fighting vehicles, and the purchase of land for future expansion

• Revenues from ops of the A/P are used to cover the A/P’s O&M expenses

• Financial accounting is employed to manage the balance of operating

revenues and expenses

• A/P accounting involves the accumulation, communication, and interpretation

of economic data relating to the financial position of an A/P and the results of its

ops for decision-making purposes

• A/P accounting differs from accounting procedures found in business firms

because A/P differ considerably in terms of goals, size, and operational

characteristics. As such, it is difficult to derive a unified accounting system that

can be used by all A/Ps

• System tailored to the needs of a large commercial A/P might be impractical for

a small GA A/P or vice versa as A/Ps have different definitions of what elements

constitute operating and non-operating revenues and expenses and sources of

funds for A/P development

AIRPORT FINANCIAL ACCOUNTING

OPERATING EXPENSES

Operating expenses can be divided into four major groupings

AIRFIELD AREA

TERMINAL

HANGARS/CARGO/OTHER

BUILDINGS & GROUNDS

GENERAL AND

ADMINISTRATIVE

EXPENSESS

OPERATING EXPENSES

O&M expenses associated with the airfield area include: i. R/Ws, T/Ws, apron areas, A/C parking areas, & A/F light sys maintii. Service on airport equipmentiii. Maintenance on fire equipment and airport service roadsiv. Utilities (electricity) for the airfield.

AIRFIELD AREA EXPENSES

O&M expenses associated with the terminal include: i. Buildings and grounds—maintenance and custodial servicesii. Improvements to the land and landscapingiii. Loading bridges and gates—maintenance and custodial servicesiv. Concession facilities and servicesv. Observation facilities—maintenance and custodial servicesvi. Passenger, employee, and tenant parking facilitiesvii. Utilities (electricity, air-conditioning and heating, and water)viii. Waste disposal —maintenance.ix. Equipment (air-conditioning, heating, baggage handling)—maint

TERMINAL EXPENSES

OPERATING EXPENSES

General and administrative expenses include:-

 i. Payroll expenses for the maint, ops, and admin staff of the A/P

ii. Other operating expenses for materials and supplies

iii. Non-operating expenses including the payment of interest on

outstanding debt, contributions to govt bodies, and other

miscellaneous expenses

GENERAL & ADMINISTRATIVE EXPENSES

O&M expenses include:

 i. Buildings and grounds—maintenance and custodial services

ii. Improvements to the land and landscaping

iii. Employee parking—maintenance

iv. Access roadways—maintenance

v. Utilities (electricity, air-conditioning and heating, and water)

vi. Waste disposal —maintenance

HANGARS, CARGO FACILITIES, OTHER BUILDINGS, & GROUNDS EXPENSES

• Large % of A/P expenses are derived from insurance to cover

various areas of liability• A/Ps and their tenants have the same general type & degree of

liability exposure as the operator of most public premises• People sustain injuries from obstructions, automobiles are damaged

when struck by A/P service vehicles on the A/P premises. Claims from

such accidents can be for large amounts• But claims from A/C accidents are huge. The passangers might be

killed or severely injured and expensive A/C damaged or destroyed,

not to mention injury to other persons or other types of property at or

near an A/P• Liability in such instances can stem from

• Defect in the surface of the R/W• Failure of A/P mgt to mark obstructions properly• Failure to send out the necessary warnings and to close the A/P

when it is not in usable condition

LIABILITY INSURANCE

• A/P operators require that all tenants purchase their own insurance as appropriate for their particular circumstances and with certain min limits of liability• Generally, A/P operator is included as an additional insured under the tenant’s insurance coverage; however, this does not relieve the A/P operator from securing its own liability protection under a separate policy

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OPERATING REVENUES

A/P operating revenues can be divided into five major groupings

AIRFIELD AREA

TERMINAL AREA

CONCESSIONS

AIRLINE LEASED AREAS

OTHER LEASED AREAS

OTHER OPERATI

NG REVENUE

OPERATING REVENUES

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OPERATING REVENUE

Terminal concessions include all of the nonairline users of the terminal area: i. Food & beverage concessions (restaurants, snack bars, lounges)ii. Travel services & facilities (lockers, flight insurance, restrooms, car rentals, and telephones)iii. Specialty stores & shops (boutiques, newsstands, banks, gift shops, clothing stores, duty-free shops)iv. Personal services (beauty and barber shops, shoeshine stands)v. Amusements (video arcades, movie and TV rooms)vi. Display advertising vii. Outside terminal concessions (parking, ground transport, hotels)

TERMINAL AERA CONCESSIONS

A/F or airside of the A/P produces revenues from sources that are directly related to the operation of A/C: i. Landing fees for scheduled and unscheduled airlines, itinerant A/C, military or govt A/Cii. A/C parking charges in hangars, paved and unpaved areas iii. Fuel flowage fees from fuel suppliers

AIRFIELD AREA

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OPERATING REVENUE

All of the remaining leased areas at A/P that produce revenue are brought together under other leased areas such as

• Freight forwarders• Fixed-base operators• Governmental units• Businesses in the A/P industrial area

OTHER LEASED AREAS

include revenue derived from the air carriers for • Ground equipment rentals• Cargo terminals• Office rentals• Ticket counters• Hangars• Operations• Maintenance facilities

AIRLINE LEASED AREAS

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OPERATING REVENUE

• includes revenues from • Operation of distribution systems for public utilities, such as

electricity • Contract work performed for tenants

• A/Ps also generate non-operating revenues, including• Interest earned on investments in governmental securities• Local taxes• Subsidies or grants-in-aid• Selling or leasing of properties owned by A/P but not related to

A/P ops• Magnitude of non-operating income can differ considerably between A/P

OTHER OPERATING REVENUE

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Planning and Administering an Operating Budget

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Planning and Administering an Operating Budget

• Planning an operating budget is an integral part of A/P financial

management

• Every A/P must make short-term decisions about the allocation

and scheduling of its limited resources over many competing uses

• It must make long-term decisions about rates of expansion of

capital improvements and funding sources

• Both short-term and long-term decisions require planning

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PLANNING & ADMINISTERING OPERATING BUDGET

• Once A/P decide a plan of action for the future, these plans are

incorporated into a written financial budget

• Budgets are simply the planned amounts needed to operate

and maintain the A/P during a definite period of time such as a

year

• Budgets cover major capital expenditures such as R/W

resurfacing, R/W construction and for operating expenses during

the planning period

• Real expenses incurred during the year are a measure of the

actual performance

• Difference between actual expenses and the budgeted amount

is called a variance

• Variance measures the efficiency of the department

BUDGET APPROPRIATION

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PLANNING & ADMINISTERING OPERATING BUDGET

BUDGET APPROPRIATION

A/Ps operate under one of three different forms of budget appropriation

LUMP SUM APPROPRIATIO

NS

APPROPRIATION BY ACTIVITY

LINE-ITEM BUDGETING

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PLANNING & ADMINISTERING OPERATING BUDGET

• is the simplest form of budget and generally only utilized by small

GA A/Ps• No specific restrictions as to how money should be spent• Only the total expenditure for the period is fixed• This is the most flexible form of budgeting

BUDGET APPROPRIATIONLump Sum Appropriation

• Appropriated expenses are planned according to major work area

or activity with no further detailed breakdown• Appropriation by activity enables mgt to establish capital and

operating expense budgets for particular areas such as airside

facilities, terminal building area, and so forth• It also permits flexibility in responding to changing conditions

Appropriation by Activity

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PLANNING & ADMINISTERING OPERATING BUDGET

• Line-item budget is the most detailed form of budgeting, used

quite extensively at the large commercial airports

• Numerical codes are established for each operating and capital

expense item

• Budgets are established for each item and often adjusted to take

into consideration changes in volume of activity

• For example, as the number of passenger enplanements

changes, budgets for the terminal building maintenance can be

adjusted accordingly

BUDGET APPROPRIATIONLine-Item Budget

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PLANNING & ADMINISTERING OPERATING BUDGET• In drawing up a budget, the first step involve an estimate of

revenues from all sources for the coming year

• Next step is to establish budgets for the various areas of

responsibility

• When budgets are being investigated, predetermined, and

integrated, the department managers who must live within the

budgets are consulted about the amount of money available and

help draw up budgets for their departments for the coming period

• Actual expenses are then checked against budgeted expenses

during the period that the budgets are in effect

• Managers are supplied with figures of actual expenses so that

they can compare them with budgeted expenses and investigate

variances

ADMINISTERING AN OPERATING BUDGET

• Financial and operational relationship between A/P operator and the

air carriers is defined in legally binding agreements that specify how the

risks and responsibilities of running the A/P are to be shared

• Contractsknown as A/P use agreements, establish the terms and

conditions governing the air carriers’ use of the A/P

• Term airport use agreement is used commonly to include both legal

contracts for the air carriers’ use of A/F facilities and leases for use of

terminal facilities. At many A/Ps, both are combined in a single

document

• Airport use agreements also specify the methods for calculating rates

air carriers must pay for use of A/P facilities and services; and they

identify the air carriers’ rights and privileges, sometimes including the

right to approve or disapprove any major proposed A/P capital

development projects

REVENUE STRATEGIES AT COMMERCIAL AIRPORTS

REVENUE STRATEGIES AT COMMERCIAL A/P

Although financial management practices differ greatly among commercial A/P, the A/P-airline relationship at major A/Ps takes one of two very different forms, with important implications for A/P pricing and investment

Residual Cost Approach. under which one or more air carriers collectively assume significant

financial risk by agreeing to pay any costs of running the A/P that are not allocated to other

users or covered by all other sources of revenue

Compensatory Cost Approach. under which the A/P operator assumes the major financial risk

of running the A/P and charges the air carriers fees and rental rates set so as to recover the actual costs of the facilities and services that they use

Although the burdens of managing A/P finances to cover the costs of an A/P’s operating and maintenance budget have increased in recent years, the significantly greater costs associated with moderate to major construction and technology improvements that define capital improvement projects have historically been far beyond that of any revenues generated

AIRPORT FUNDING

As a result, A/Ps have relied on three alternative sources of funding to cover capital improvement costs

FEDERAL AND STATE GRANT PROGRAMS

BOND ISSUESPRIVATE

INVESTMENT

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• Since the post–World War II, federal govt has provided grant

programs from which owners of public-use A/Ps could acquire funds

for A/P development• These funds were provided without responsibility for paying any

monies back to the govt, and thus have been known as grant-in-aid

programs

AIRPORT FUNDING

• In addition to federal funding, many individual states in the nation

offer grant programs for A/P capital improvements• These sources are found within state Departments of

Transportation, funded from the general tax base of the state, state

user fees on highway tolls, automobile and other vehicle registrations,

and fuel taxes• State and local funding is offered either as supplemental funding to

federal grants, or as primary funding for A/P and/or A/P projects not

eligible for funding through other funding programs

STATE GRANT PROGRAMS

GRANT PROGRAM

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• Largest source of funding for capital improvements at A/Ps has

been through bond financing

• Role of bond financing in overall investment differs greatly

according to an A/P’s size and type of air traffic served

• In terms of total dollar volume of bond sales, large and medium

A/Ps are most prominent in the bond market

• Of the total amount of municipal debt sold for A/P purposes during

the last two decades, 90% was for large and medium A/Ps, in contrast

to only 9% for small commercial A/Ps

• GA A/Ps accounted for a little more than 1% of total A/P bond sales

AIRPORT FUNDING

AIRPORT FINANCING

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• In many instances, particularly internationally, A/P capital projects

have been funded by private investment

• Many of these investments are focused on the construction of

terminal and ground access facilities such as passenger and cargo

terminal buildings, rental car facilities, and aircraft service facilities

• Fewer private investments have been made on the construction of

airfield facilities

• Many such investments are made either through public-private

partnerships or complete privatization. Privatization can be structured

in a number of ways.

AIRPORT FUNDING

PRIVATE INVESTMENT

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AIRPORT FUNDINGPRIVATE INVESTMENT

Build, Operate, and Transfer (BOT) Contracts• Under a build, operate, and transfer (BOT) contract, private

investment is used to construct and operate a facility for a period

defined in the terms of the contract• At the end of the contract period, the ownership of the facility is

transferred to the airport owner

Privatization can be structured in a number of waysBuild, Operate,

and Transfer (BOT) Contracts

Lease, build, and operate

(LBO) agreements

Full Privatization

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AIRPORT FUNDING PRIVATE INVESTMENTLease, build, and operate (LBO) agreements• Lease arrangement allows a govt entity to get benefits associated with

complete privatization without losing control over the A/P assets• In a long-term lease (20 to 40 years), govt allows the private sector

company to build and manage an A/P facility, while leasing the property

and facility from the A/P• Private builder/operator has much of the authority over the facility,

including operations, strategic decisions, and development• In addition to a lease payment, the govt is able to capture the

efficiencies and innovation of the private sector

Full Privatization• Final form of A/P privatization is the sale of the entire A/P or partial

interest in the A/P• This form of privatization is prominent• Under the terms of complete sale, govt gives up all rights of ownership

to private entity; however, govt maintains its regulatory authority