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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
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