As an airport manager, and on behalf of airport management all over the country, I wanted to take a moment and say thank you! If you have flown commercially recently, then this message of gratitude is specifically for you.
Well, because you are directly contributing to the financial well-being of the airport. And no, I am not talking about supporting the airlines, who in turn pay the airport to offer their services. And I am not referring to your purchase of concessions in the terminal before your flight, or the fee you paid to park, or for gazing at the advertising that companies pay the airport top dollar for.
Rather, I am talking about a nominal fee that is applied to your ticket that goes directly into the airport’s coffers. This fee is the “Passenger Facility Charge” or PFC, and it’s a huge lever in commercial airport infrastructure investment.
It is also a white-hot topic nationally for airports and airlines, as the Federal Aviation Administration (FAA) approaches the end of its temporary authorization in March of 2016.
The PFC is a fee that is automatically applied to the purchase of airfare that airlines collect on behalf of the airport where the flight is originating. The airlines, in turn, transfer this money over to the airport, minus a small collection fee. The current fee is $1, $2, $3, $4, or $4.50 per flight segment, not to exceed $9 for a one-way trip or $18 for round-trip travel.
Not all commercial airports have a PFC fee established, but most do. Ninety-six of the top 100 airports enplaning passengers have established this fee, and a total of 359 U.S. airports are currently participating in the program.
The Aviation Safety and Capacity Expansion Act of 1990 established the program and PFCs have been collected since 1991. The FAA reports that total PFC collections have surpassed $43.3 billion since the program’s inception. Collections have been steadily increasing over the years, with over $2.88 billion collected in 2014 alone. The FAA forecasts that PFC fee collection will top $3 billion in 2016.
PFC revenue is treated differently than other revenue an airport earns; airports can’t spend PFC dollars on just anything. Eligible projects will preserve or enhance safety, security, and capacity of the national air transportation system, reduce noise from an airport that is part of the system, or provide opportunities for enhanced competition between or among air carriers.
As mentioned earlier, the PFC program is a hot topic right now in the aviation industry. The issue of PFC collections has come up with the FAA reauthorization debate that took place this past fall, and will likely come up again as the temporary FAA authorization approaches its end in March of 2016. Organizations like the American Association of Airport Executives (AAAE) and the Airports Council International – North American (ACI-NA) have been actively lobbying congress to get the PFC cap immediately adjusted up to $8.50 per segment from its current $4.50 limit, and then index that rate to inflation in subsequent years.
The airport community says the reason for this increase is clear. The PFC rate was last adjusted in 2000 to its current $4.50 limit. With the costs of goods and services ever increasing, the purchasing power of $4.50 now is about 2/3 of what it was in 2000. Think of it this way – for $4.50 you could have bought a venti Starbucks coffee back then, and now you’re only getting a tall cup. Or, more directly, the same construction project an airport could have fully funded back in 2000 can only be partially funded today using the same amount of money.
The argument has merit. A 2013 report card by the American Society of Civil Engineers gave a grade of “D” for the conditions at America’s airports, and AirportsUnited reports that there is $75.7 billion dollar need for essential projects at both commercial and general aviation airports. Raising the PFC limit is one robust way airports could continue to construct the essential infrastructure improvements necessary to meet the growing passenger demand. An FAA-estimated one billion U.S. passenger enplanements per year by 2030 necessitates adequate infrastructure.
The airlines have a different take. “Raising the PFC cap will increase the overall cost of air travel for Americans, set back job growth, negatively impact travel and tourism through decreased demand, and could limit air service to small and rural communities,” said Sharon Pinkerton, Senior Vice President, Legislative and Regulatory Policy at Airlines 4 America (A4A) (article here).
The airlines’ argument is essentially that demand for air travel is price elastic. Price elasticity is an economic concept that assumes higher prices hurt demand and lower prices encourage demand. In this case, by increasing the PFC rate – increasing the cost to fly – congress would depress the public’s demand for air travel.
The economic concept of price elasticity is a fair argument. When the total ticket price reaches a certain point a consumer may look to substitute air travel with another mode of travel, or she might cancel the trip altogether. To be fair, though, we must zoom out when applying that concept, since it’s not the individual fee she is evaluating, rather it’s the overall cost to fly.
The AAAE reports that airlines collected $3.5 billion in “bag fees” in 2014 alone. AAAE ads that the airlines collected an additional $3 billion in reservation changes and cancellation fees in 2014. If we apply the same price elasticity argument to these fees, it would be fair to say that if the airlines lower these fees they will spark increased ticket sales. So, in light of that argument, why aren’t these fees being adjusted?
The reason is that the airlines are earning record profits in this booming economy, regardless of their fee structure. Right now, there is no demand problem, so there is no reason to give air travelers an economic incentive to fly. As we are all seeing, ticket sales are up, load factors are up, and the future looks bright. Airlines experienced a decade of beatings on their balance sheets, and are finally realizing some profitability.
But, as we all know, futures are subject to change. So, what does the future hold for this issue?
We are right in the middle of the public debate about whether to raise the PFC rate. The issue was not resolved when the FAA received its last federal authorization, but it is expected to be decided when this authorization runs out in March of 2016 and the FAA seeks its next authorization. The President is proposing an $8 rate, just shy of the $8.50 that the airport associations are lobbying for.
Airports support this position, but the airlines and their associations are pushing back and they have the financial and political backing to get an audience in congress. Time will tell what level we are able to invest in our airport infrastructure. Stay tuned.
This story was written by Jonathan Wilson for AirlineReporter. Jonathan is the Airport Manager for the Renton Municipal Airport in Renton, Washington and he also hosts The Terminal Podcast, an aviation industry podcast.