ch=8 Airport Financial Management

 AIRPORT FINANCIAL MANAGEMENT
 

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 management may employ to cover a portion of the A/P’s cost burdens. 
In this chapter we discuss about.

1. AIRPORT EXPENSES
2. AIRPORT FINANCIAL ACCOUNTING
3. Operating Expenses
4. OPERATING REVENUES
5. Planning and Administering  an Operating Budget
6. BUDGET APPROPRIATION
7. PRIVATE INVESTMENT

                 1-AIRPORT EXPENSES

A/P expenses fall into two types

(a) Operation and Maintenance Costs 
     

 Operation and Maintenance  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 supplies.

(b) Capital Improvement Expenses 
         

 Capital 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 

 

   2-AIRPORT FINANCIAL ACCOUNTING
 

•   Revenues from operations of the Airport are used to cover the airport 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.

            3-Operating Expenses 

Operating expenses can be divided into four major groupings

1. AIRFIELD AREA
2. TERMINAL
3. HANGARS/CARGO/OTHER BUILDINGS & GROUNDS
4. GENERAL AND ADMINISTRATIVE EXPENSES

1-AIRFIELD AREA EXPENSES 

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

2-TERMINAL EXPENSES

• O&M expenses associated with the terminal include:
• Buildings and grounds—maintenance and custodial services
• Improvements to the land and landscaping
• Loading bridges and gates—maintenance and custodial services
• Concession facilities and services
• Observation facilities—maintenance and custodial services
• Passenger, employee, and tenant parking facilities
• Utilities (electricity, air-conditioning and heating, and water)
• Waste disposal —maintenance.
• Equipment (air-conditioning, heating, baggage handling)—maint

3-HANGARS, CARGO FACILITIES,  OTHER BUILDINGS, & GROUNDS EXPENSES 

• O&M expenses include:
• Buildings and grounds—maintenance and custodial services
• Improvements to the land and landscaping
• Employee parking—maintenance
• Access roadways—maintenance
• Utilities (electricity, air-conditioning and heating, and water)
• Waste disposal —maintenance

4-GENERAL & ADMINISTRATIVE EXPENSES

• General and administrative expenses include:-
• Payroll expenses for the maint, ops, and admin staff of the A/P
• Other operating expenses for materials and supplies
• Non-operating expenses including the payment of interest on outstanding debt, contributions to govt bodies, and other miscellaneous expenses

LIABILITY INSURANCE

•   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 Runway
•        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

• 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

               4-OPERATING REVENUES
 

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

1. AIRFIELD AREA
2. TERMINAL AREA CONCESSIONS
3. AIRLINE LEASED AREAS
4. OTHER LEASED AREAS
5. OTHER OPERATING REVENUE

1-AIRFIELD AREA

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

2-TERMINAL AERA CONCESSIONS

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

3-AIRLINE LEASED AREAS 

include revenue derived from the air carriers for

• Ground equipment rentals
• Cargo terminals
• Office rentals
• Ticket counters
• Hangars
• Operations
• Maintenance facilities

4-OTHER LEASED AREAS

  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

5-OTHER  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

5-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

           BUDGET APPROPRIATION

• 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.

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

1. LUMP SUM APPROPRIATIONS
2. APPROPRIATION BY ACTIVITY
3. LINE-ITEM BUDGETING

1-Lump Sum Appropriation

• 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

2-Appropriation by Activity
 

• 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.

3-Line-Item 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.

6-ADMINISTERING AN 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.
•   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.
•   Contracts known 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

• 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
• Contracts known 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.

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.

AIRPORT FUNDING
 

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.

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

1. FEDERAL AND STATE GRANT PROGRAMS
2. BOND ISSUES
3. PRIVATE INVESTMENT

1-GRANT PROGRAM 

 

• 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.

2-STATE GRANT PROGRAMS

• 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 program.

AIRPORT FINANCING

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

PRIVATE INVESTMENT
 

• 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.

PRIVATE INVESTMENT

Privatization can be structured in a number of ways

1. Build, Operate, and Transfer (BOT) Contracts
2. Lease, build, and operate (LBO) agreements
3. Full Privatization

1-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.

2-Lease, 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.

3-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.    

In this chapter

                     A/P=    Airport

                    Ops=   Operation

                    O/M=   Operation & maintenance

                    R/w=    Runway