[Federal Register Volume 67, Number 229 (Wednesday, November 27, 2002)]
[Proposed Rules]
[Pages 70878-70889]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-30103]



[[Page 70878]]

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DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 158

[Docket No. FAA-2002-13918; Notice No. 02-19]
RIN 2120-AH43


Revisions to Passenger Facility Charge Rule for Compensation to 
Air Carriers

AGENCY: Federal Aviation Administration (FAA), DOT.

ACTION: Notice of proposed rulemaking (NPRM).

-----------------------------------------------------------------------

SUMMARY: FAA proposes to amend the passenger facility charge (PFC) 
regulation by changing the amount and unit of collection that a carrier 
may retain for collecting and handling (including remitting) PFC 
revenue. FAA proposes to allow carriers to keep $0.10 of each PFC they 
collect in calendar years 2002 through 2004. From 2005 forward, the 
amount will increase to $0.11 for each PFC collected. This action is 
necessary to implement the statutory requirement that the Secretary of 
Transportation (whose authority has been delegated to the Administrator 
of FAA) establish by regulation a uniform amount that carriers may 
retain that reflects the average necessary and reasonable expenses for 
collecting and handling PFCs.

DATES: Send comments by January 13, 2003.

ADDRESSES: Address your comments to the Docket Management System, U.S. 
Department of Transportation, Room Plaza 401, 400 Seventh Street, SW., 
Washington, DC 20590-0001. You must identify the docket number FAA-
2002-13918 at the beginning of your comments, and you should send two 
copies of your comments. If you wish to receive confirmation that FAA 
received your comments, include a self-addressed, stamped postcard.
    You may also file comments through the Internet at http://dms.dot.gov. You may review the public docket containing comments to 
this proposed rule in person in the Docket Office between 9 a.m. and 5 
p.m., Monday through Friday, except Federal holidays. You will find the 
Docket Office in Room Plaza 401 of the Nassif Building at the U.S. 
Department of Transportation at the address listed above. You may also 
review public dockets on the Internet at http://dms.dot.gov.

FOR FURTHER INFORMATION CONTACT: Joseph Hebert, Passenger Facility 
Charge Branch, APP-530, Federal Aviation Administration, 800 
Independence Avenue, SW., Washington, DC 20591; telephone (202) 267-
3845; facsimile (202) 267-5302.

SUPPLEMENTARY INFORMATION:

Comments Invited

    FAA invites interested people to take part in this proposed action 
by presenting written data, views, or arguments. We also invite 
comments about the environmental, energy, federalism, or economic 
impact that might result from adopting the proposals. Commenters should 
provide cost estimates for substantive comments. Commenters should send 
two copies of their remarks to the DOT Docket Office address mentioned 
above. Comments must identify the regulatory docket or notice number.
    We will file all comments, as well as a report summarizing each 
substantive public contact with FAA personnel about this proposed 
rulemaking, in the docket. The docket is available for public 
inspection before and after the comment closing date.
    FAA will consider all comments received by the closing date before 
acting on this proposed rulemaking. We will consider comments filed 
late if possible without incurring expense or delay. FAA may change the 
proposals in this document because of the comments received.
    Commenters wishing to receive confirmation that FAA received their 
comments must include a self-addressed, stamped postcard stating: 
``Comments to Docket No. FAA-2002-13918.'' We will date stamp and mail 
the postcard to the commenter.

Availability of Rulemaking Documents

    You can get an electronic copy of this notice using the Internet by 
taking the following steps:
    (1) Select the search button on the Department of Transportation's 
electronic Docket Management System (DMS) Web page (http://dms.dot.gov/search).
    (2) On the search page type in the last five digits of the Docket 
number shown at the beginning of this notice. Click on ``search.''
    (3) On the next page, which contains the Docket summary information 
for the Docket you selected, click on the document number of the item 
you wish to view.
    You can also get an electronic copy using the Internet through the 
Office of Rulemaking's Web page at http://www.faa.gov/avr/armhome.htm 
or the Government Printing Office's web page at http://www.access.gpo.gov/su_docs/aces/aces140.html.
    You can also get a copy by sending a letter to the Federal Aviation 
Administration, Office of Rulemaking, ARM-1, 800 Independence Avenue, 
SW., Washington, DC 20591, or by calling (202) 267-9680. Make sure to 
identify the docket number, notice number, or amendment number of this 
rulemaking.

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act (SBREFA) of 
1996 requires FAA to comply with small entity requests for information 
or advice about compliance with statutes and regulations within its 
jurisdiction. Therefore, any small entity that has a question regarding 
this document may contact its local FAA official. Internet users can 
find additional information on SBREFA on FAA's Web page at http://www.faa.gov/avr/arm/sbrefa.htm and may send electronic inquiries to the 
following Internet address: [email protected].

Background

Statement of the Problem

    The Aviation Safety and Capacity Expansion Act of 1990 (ASCE Act), 
codified at 49 U.S.C. 40117, authorized the passenger facility charge 
(PFC) program. On May 29, 1991, the Department of Transportation 
adopted regulations to establish the PFC program. The regulations are 
codified at 14 CFR part 158. The Secretary of Transportation 
(Secretary), by regulations codified at 49 CFR 1.48(r), delegated 
authority to the FAA Administrator to allow a public agency (as defined 
in 14 CFR 158.3) to impose a PFC of $1, $2, or $3 for each enplaned 
passenger at a commercial service airport the public agency controls. 
Public agencies may use the money from such PFC collections only to 
finance FAA-approved, eligible airport-related projects, as defined at 
49 U.S.C. 40117(a)(3). To approve a project, FAA must determine that 
the project (1) preserves or enhances safety, security, or capacity of 
the national air transportation system; (2) reduces noise from an 
airport that is part of such system; or (3) provides opportunities for 
increased competition between or among carriers.
    The ASCE Act directed the Secretary to issue regulations requiring 
air carriers, foreign air carriers, and their agents, collectively 
referred to as ``carriers,'' to collect PFCs and pay them promptly to 
public agencies. The regulations were also to establish a uniform 
amount, reflecting the average

[[Page 70879]]

reasonable and necessary expenses of collecting and handling the PFC, 
that carriers could retain from PFCs collected. This amount, referred 
to in 14 CFR part 158 as ``carrier compensation,'' as discussed below, 
is to be determined by the Secretary net of interest earned on PFC 
revenue between the time of collection and payment.
    FAA carried out this requirement in section 158.53 of the 
regulations, entitled ``collection compensation.'' Section 158.53 
allowed carriers initially to keep ``[a]s compensation for collecting, 
handling and remitting the PFC revenues'' $0.12 of each PFC remitted, 
in part to recover the expenses of setting up their systems to process 
and record charges under the PFC program. On June 28, 1994, under the 
terms of Sec.  158.53, compensation dropped from $0.12 to $0.08 for 
each PFC collected, reflecting completion of a recoupment period from 
program start-up costs. Currently, carriers may keep $0.08 of each PFC 
remitted. For convenience, we refer to this amount as the ``handling 
fee'' or ``PFC handling fee,'' as well as ``carrier compensation,'' in 
the remainder of this discussion. Section 158.53 (b) also authorizes 
carriers to keep any interest or other investment return earned on PFC 
revenue between the time the carrier collects and remits it to the 
airport public agency.
    On May 27, 1994, the Air Transport Association of America (ATA) 
petitioned FAA to amend Sec.  158.53 by extending the handling fee of 
$0.12 for three more years. ATA proposed to file comments after the 
three-year extension, showing whether the airline industry had fully 
recovered the cost necessary to run the PFC collection program. 
Further, ATA requested that FAA amend Sec.  158.53(a) to allow carriers 
to keep the handling fee for each refunded PFC, as well as each PFC 
remitted. FAA published in the Federal Register a summary of ATA's 
petition on June 24, 1994 (59 FR 32668). Recognizing that the standard 
for setting the level of the handling fee was ``average necessary and 
reasonable expenses,'' FAA asked carriers and public agencies to send 
specific data to enable the agency to determine this amount. FAA 
received twelve comments in response to the notice, but determined the 
comments did not contain enough information to enable FAA to decide on 
a rate of compensation that met this standard.
    On April 16, 1996, FAA issued an advance notice of proposed 
rulemaking (ANPRM) (61 FR 16678). In that notice, FAA provided guidance 
on the quantity and quality of information needed to decide ATA's 
petition. FAA requested detailed data from carriers that, in total, 
represented at least 75 percent of the enplanements at PFC-collecting 
airport locations. FAA needed enough information on current industry 
costs to decide if the authorized handling fee of $0.08 continued to 
reflect average necessary and reasonable expenses for collecting and 
handling and remitting PFCs. FAA determined that a smaller sample, if 
it included a disproportionate representation from carriers with higher 
PFC handling costs, would not provide an accurate average handling cost 
calculation for the industry. In the ANPRM, FAA also invited comments 
on other issues about PFC revenues and changes in part 158 to address 
new legislation and industry practices. FAA withdrew this ANPRM on 
April 10, 2000 (65 FR 18932), because carrier responses fell below the 
75 percent minimum response requested by FAA.
    The Wendell H. Ford Aviation Investment and Reform Act for the 21st 
Century (AIR-21) (Pub. L. 106-181), signed into law on April 5, 2000, 
changed the PFC program. Public agencies may now collect PFCs of $4 or 
$4.50. On May 30, 2000, FAA issued a final rule that amended part 158. 
The amendment incorporated administrative and statutory changes in the 
procedures to set up PFCs based on AIR-21 and other recent acts by 
Congress and records of decision by FAA. The rule became effective on 
June 29, 2000.
    The issue of carrier compensation arose again during the 
congressional deliberations leading up to the passage of AIR-21. In 
report language (House Report 106-513) which accompanied AIR-21, 
Congress noted that several carriers communicated to the conferees 
their views that carrier compensation at $.08 for each PFC remitted is 
too low. While the conferees did not evaluate the correctness of these 
claims, they noted that FAA should give carriers the opportunity to 
prove their correctness in a rulemaking action. The report, HR 106-513 
encouraged FAA to make its final decision within 189 days from the time 
carriers present the evidence necessary for evaluation of their claims.
    On April 27, 2000, the Office of the Inspector General (OIG) of the 
Department of Transportation issued a memorandum to FAA. In that 
memorandum, OIG provided recommendations on the conduct of the proposed 
rulemaking on PFC collection costs. To ensure that FAA receives the 
information necessary for evaluation, OIG suggested that cost data be--
    [sbull] ``[L]imited only to those incremental costs that are 
directly associated with PFC collection, handling, remittance, 
reporting, recordkeeping, or auditing. Though incremental cost 
compensation does not include an allocation for indirect costs such as 
utilities, officer salaries, and other administrative expense, it will 
compensate air carriers for the additional costs of handling and 
remitting PFC's;'' and
    [sbull] ``[A]ccompanied by an independent audit opinion stating the 
costs are supportable, presented in accordance with generally accepted 
accounting principles, and in compliance with the requirement of the 
proposed rulemaking.''
    A copy of this memorandum is included in the docket for this 
proceeding.

Request for Cost Data

    FAA adopted the OIG's recommendations in this rulemaking. 
Specifically, FAA determined that consideration of incremental costs 
would best implement the statutory standard that the handling fee 
reflect ``necessary costs.'' FAA also determined an independent audit 
opinion would ensure that the calculation of average expenses was based 
on reliable carrier cost data.
    Beginning in April 2000, FAA consulted with the carrier industry 
through ATA to identify cost categories compatible with carrier cost 
accounting practices that would meet the specifications of OIG. FAA 
gathered this information before starting this rulemaking to avoid the 
data collection problems experienced in its previous rulemaking effort. 
In addition, FAA consulted with independent accountants familiar with 
the accounting methods of carriers. FAA examined the extent to which 
independent accountants could determine if costs reported by carriers 
are justifiable. Based on these contacts, FAA was able to assemble cost 
categories and formats, as well as recommended accounting procedures, 
to ensure the data evaluated in this NPRM are comparable across 
carriers and conforms to OIG's recommendation.
    On October 19, 2000, FAA sent letters to the largest domestic ATA-
member carriers. FAA asked the carriers to voluntarily send their 1999 
PFC collection and handling cost data to FAA. These carriers account 
for most of the PFCs collected nationally. At the same time, FAA asked 
regional and foreign carriers through their trade associations 
(Regional Air Carriers Association and International Air Transport 
Association, respectively) if they would voluntarily send their cost 
data. None of the regional or foreign carriers provided data. The 
reporting

[[Page 70880]]

ATA carriers, however, included costs of their subsidiary regional 
carriers.
    The FAA's letter to the carriers suggested the cost categories and 
instructions for collecting incremental costs associated with PFC 
collection, handling, remittance, reporting, recordkeeping, or 
auditing. The cost categories were: Credit card fees; audit fees; PFC 
disclosure; reservations; passenger services; revenue accounting, data 
entry, accounts payable, tax and legal; corporate property department; 
training reservations, ticket agents, and other departments; carrier 
ongoing information systems; computer reservation system ongoing; PFC 
absorption; Airline Tariff Publishing Corporation; and Airline 
Reporting Corporation. The FAA letter also suggested categories for 
implementation costs, including carrier one-time information systems 
and one-time computer reservation costs. In addition, FAA requested 
data on interest income on unremitted PFC funds. An example of the 
letter is included in the docket of this proceeding.
    In its letter to the carriers, FAA emphasized that carriers will 
not receive compensation from PFC revenue for an item just because the 
item appeared on the list of cost definitions. FAA included some items 
because at least one carrier proposed the item as a collection or 
handling cost. FAA noted that not all interested parties will agree 
with the items included in cost definitions. FAA requested data on all 
cost items listed above, however, to avoid collecting more data later 
if FAA finds that each cost item qualifies as a ``necessary and 
reasonable expense of collecting, handling and remitting PFCs.''
    In the letter, FAA also said that it was not seeking cost data for 
years before 1999. FAA stated that if a carrier found evidence of 
additional costs exceeding the amount authorized for retention in years 
before 1999, the carrier could petition FAA for a separate rulemaking 
to address possible under compensation in those years.
    Initially, FAA considered asking carriers to have cost data audited 
before submission to insure its accuracy. Consultation with the 
independent accountants for the carrier industry, however, found the 
cost of getting an audit on such cost items would prohibit carriers 
from conducting such an audit. After consulting with OIG and the 
airline independent accountants, FAA decided the data could be used if 
carriers and their independent auditors followed certain procedures 
(referred to as ``agreed-upon procedures''). Therefore, the letter told 
each carrier to give its cost data to its independent accountant. In 
turn, the accountant would use the approved procedures to prepare a 
report similar to the agreed-upon procedures report in the docket of 
this proceeding.
    To ensure that carriers send data in a consistent format, FAA 
provided a sample spreadsheet that included cost categories. FAA asked 
carriers to estimate what 1999 costs would have been for items such as 
``credit card fees'' and ``interest revenue on float'' if the carrier 
had collected $4.50 PFCs at all airports that year. FAA also offered 
the carriers the opportunity to send out-year projections of costs. 
Carrier independent accountants could not, however, apply the agreed-
upon procedures to out-year projections that would be cost estimates.
    FAA invites comments on the categories and agreed-upon procedures. 
In addition, any carrier who has not already submitted data may submit 
their own data (that conforms to the agreed-upon procedures included in 
the docket of this proceeding) during the comment period. Any data 
submitted will be considered to the extent possible.

Receipt and Initial Processing of Cost Data

    Nine carriers provided cost data to FAA by the end of January 2001 
under the categories, formats, and procedures suggested by FAA. These 
carriers were Alaska Airlines, American Airlines, Continental Airlines, 
Delta Air Lines, Northwest Airlines, Southwest Airlines, TransWorld 
Airlines, United Airlines, and U.S. Airways. Each of these airlines 
sent its data to its independent accountant, who then provided its 
report using the agreed-upon procedures. The independent accountants 
sent these reports with the carrier data submissions to FAA.The nine 
responding carriers reported that in 1999 they remitted 436,659,521 
PFCs to airports, representing 84 percent of the calculated total of 
518,731,500 PFCs sent nationally in 1999. Thus, the cost data sent by 
the nine carriers significantly exceed the 75 percent threshold 
requested in the previous ANPRM data collection effort undertaken by 
FAA. FAA has no reason to believe that those collecting carriers not 
presenting data (including international and regional carriers) would 
have collection and remittance costs significantly different than those 
of the reporting carriers.
    People interested in reviewing the individual carrier data 
submissions and the procedures reports may inspect them at the U.S. 
Department of Transportation Dockets, Docket No. FAA-2002-13918, 400 
Seventh Street, SW., Room Plaza 401, Washington, DC 20590. In addition, 
individuals may access electronic copies through the Docket Management 
System Internet Web page located at http//dms.got.gov.
    FAA reviewed the carrier's cost data for consistent data categories 
and formats. Then, FAA consolidated all the information into a single 
summary table (Table 1). This table summarizes the raw actual cost data 
for 1999, with estimated costs of imposing the new $4.50 PFC level.

                     Table 1.--1999 Total Costs of PFC Handling, All Reporting Air Carriers
----------------------------------------------------------------------------------------------------------------
                                          1999 actual costs \1\      1999 pro-forma \2\      Implementation \3\
                                        ------------------------------------------------------------------------
     PFC collection cost categories                                                         Total cost
                                         Total cost ($)  % total  Total cost ($)  % total       ($)      % total
----------------------------------------------------------------------------------------------------------------
Credit Card Fees.......................     24,311,612      43.7     33,390,598      52.8  ............  .......
Audit Fees (External)..................        423,502       0.8        296,166       0.5        85,182      2.5
Disclosure Costs.......................      6,218,343      11.2      6,191,343       9.8  ............  .......
Reservations...........................      9,751,032      17.5      9,317,814      14.7  ............  .......
Passenger Services.....................      5,226,254       9.4      5,092,650       8.1  ............  .......
Data Entry:
    Internal...........................         43,609       0.1         29,605       0.0  ............  .......
    Other..............................  ..............      0.0  ..............      0.0  ............
Revenue Accounting.....................        857,925       1.5        728,507       1.2         6,875      0.2
Accounts Payable.......................        109,905       0.2         71,390       0.1  ............  .......
Tax & Legal............................         77,359       0.1         75,859       0.1  ............  .......
Corporate Property Department..........        323,570       0.6        282,195       0.4  ............  .......

[[Page 70881]]

 
Training:
    Reservations.......................         99,154       0.2         99,158       0.2        49,675      1.4
    Other..............................            413       0.0            413       0.0  ............  .......
    Ticket Agents......................        782,336       1.4        445,625       0.7        55,424      1.6
Internal On-Going IT...................        552,695       1.0        488,602       0.8  ............  .......
CRS On-Going fees......................      5,823,761      10.5      5,732,145       9.1  ............  .......
ATPCO..................................          5,407       0.0          4,643       0.0           135      0.0
ARC + BSP..............................        988,694       1.8        946,262       1.5        77,712      2.2
Internal One-Time IT update............  ..............      0.0  ..............      0.0     3,020,947     87.2
CRS One-Time update....................  ..............      0.0  ..............      0.0       168,870      4.9
Interest Revenue on Float..............     (7,070,099)      n/a     (9,969,952)      n/a  ............
                                        -----------------
      Total costs......................     55,595,572       100     63,192,975       100     3,464,820      100
                                        =================
      Total costs less interest........     48,525,473       n/a     53,223,024       n/a     3,464,820      n/a
                                        =================
Number of PFCs Remitted................    436,659,521   .......    406,526,509   .......   448,929,355
Number of PFCs Collected...............    485,238,737   .......    452,173,384   .......   505,223,269  .......
    Percentage of PFCs Refunded........          10.0%   .......          10.1%   .......         11.1%  .......
    Range of Refunded Rates............  5.4% to 20.2%   .......  5.4% to 20.2%   .......       5.4% to  .......
                                                                                                  20.2%
Cost Less Interest Per PFC Remitted....        $0.1111   .......        $0.1309   .......       $0.0077  .......
Cost Less Interest Per PFC Collected...         0.1000   .......         0.1177   .......        0.0069  .......
PFC Absorption.........................     30,495,212   .......  ..............  .......  ............
    Cost Per PFC Remitted..............         0.0698   .......  ..............  .......  ............
    Cost Per PFC Collected.............         0.0628   .......  ..............  .......  ............
----------------------------------------------------------------------------------------------------------------
\1\ Actual costs incurred. Agreed-upon procedures have been applied by the independent accountant to actual 1999
  costs. Enplanement data are for 1999.
\2\ Assumes the same volume as 1999, but with 100 of PFCs Collected at $4.50 for each PFC--this only impacts
  Credit Card Fees and Interest Revenue. One carrier did not submit data.
\3\ Costs associated with the implementation of the new $4.50 PFC rate in years 2000 and 2001. This column is
  not year specific. One carrier did not submit data. Enplanement data are for 2000.

    The same data, presented in terms of the average cost for each PFC 
collected and remitted, are presented in Tables 2 and 3.

                                    Table 2.--Average 1999 PFC Handling Costs
----------------------------------------------------------------------------------------------------------------
                                                               1999 actual costs--average cost per
                                                                          collected PFC                 Average
              PFC collection cost categories              --------------------------------------------  cost per
                                                                       Standard   Highest     Lowest    remitted
                                                            Average   deviation   reported   reported     PFC
----------------------------------------------------------------------------------------------------------------
Credit Card Fees.........................................   $0.0501    $0.0039    $0.0588    $0.0446    $0.0557
Audit Fees (External)....................................    0.0009     0.0012     0.0039     0.0002     0.0010
Disclosure Costs.........................................    0.0128     0.0286     0.0874     0.0002     0.0142
Reservations.............................................    0.0201     0.0131     0.0381     0.0000     0.0223
Passenger Services.......................................    0.0108     0.0101     0.0292     0.0000     0.0120
Data Entry:
    Internal.............................................    0.0001     0.0002     0.0004     0.0000     0.0001
    Other................................................    0.0000     0.0000     0.0000     0.0000     0.0000
Revenue Accounting.......................................    0.0018     0.0015     0.0041     0.0002     0.0020
Accounts Payable.........................................    0.0002     0.0007     0.0020     0.0000     0.0003
Tax & Legal..............................................    0.0002     0.0002     0.0005     0.0000     0.0002
Corporate Property Department............................    0.0007     0.0005     0.0014     0.0000     0.0007
Training:
    Reservations.........................................    0.0002     0.0004     0.0012     0.0000     0.0002
    Other................................................    0.0000     0.0000     0.0000     0.0000     0.0000
    Ticket Agents........................................    0.0016     0.0033     0.0102     0.0000     0.0018
Internal On-Going IT.....................................    0.0011     0.0015     0.0042     0.0000     0.0013
CRS On-Going fees........................................    0.0120     0.0073     0.0189     0.0000     0.0133
ATPCO....................................................    0.0000     0.0000     0.0000     0.0000     0.0000
ARC + BSP................................................    0.0020     0.0018     0.0057     0.0000     0.0023
Internal One-Time IT update..............................
CRS One-Time update......................................
Interest Revenue on Float................................   (0.0146)    0.0029    (0.0089)   (0.0185)   (0.0162)
                                                          ------------

[[Page 70882]]

 
      Total Average Costs................................    0.1146     0.0237     0.1594     0.0837     0.1273
                                                          ============
      Total Average Costs Less Interest..................    0.1000     0.0228     0.1439     0.0705     0.1111
                                                          ------------
Number of PFCs Remitted..................................                       436,659,521
Number of PFCs Collected.................................                       485,238,737
    % of PFCs Refunded...................................                          10.0%
    Range of Refunded Rates..............................                      5.4% to 20.2%
                                                          ------------
PFC Absorption...........................................    0.0628     0.1625     0.4457     0.0000     0.0698
----------------------------------------------------------------------------------------------------------------

    Values shown as $0.0000 on this table were either reported as zero, 
not reported (assumed to be zero for calculation purposes), or are a 
calculated figure determined to be statistically insignificant (i.e. 
less than $0.0001).

       Table 3.--1999 $4.50 PFC Pro-Forma and Implementation Costs
------------------------------------------------------------------------
                               1999 Pro-Forma \1\   Implementation costs
                             -------------------------------------------
All Airlines--PFC Collection   Average    Average    Average    Average
       Cost Categories         cost per   cost per   cost per   cost per
                              collected   remitted  collected   remitted
                                 PFC        PFC        PFC        PFC
------------------------------------------------------------------------
Credit Card Fees/Bad Debt...   $0.0738    $0.0821         N/A        N/A
Audit Fees (External).......       N/A        N/A     $0.0002    $0.0002
Disclosure Costs............       N/A        N/A         N/A        N/A
Reservations................       N/A        N/A         N/A        N/A
Passenger Services..........       N/A        N/A         N/A        N/A
Data Entry:
    Internal................       N/A        N/A         N/A        N/A
    Other...................       N/A        N/A         N/A        N/A
Revenue Accounting..........       N/A        N/A      0.0000     0.0000
Accounts Payable............       N/A        N/A         N/A        N/A
Tax & Legal.................       N/A        N/A         N/A        N/A
Corporate Property                 N/A        N/A         N/A        N/A
 Department.................
Training:
    Reservations............       N/A        N/A      0.0001     0.0000
    Other...................       N/A        N/A         N/A        N/A
    Ticket Agents...........       N/A        N/A      0.0001     0.0001
Internal On-Going IT........       N/A        N/A      0.0000     0.0001
CRS On-Going fees...........       N/A        N/A         N/A        N/A
ATPCO.......................       N/A        N/A      0.0000     0.0000
ARC + BSP...................       N/A        N/A      0.0002     0.0000
Internal One-Time IT update.       N/A        N/A      0.0060     0.0066
CRS One-Time update.........       N/A        N/A      0.0003     0.0006
      Interest Revenue on      (0.0220)   (0.0245)         NA         NA
       Float................
                             ------------
      Total Average Costs       0.1383     0.1537      0.0069     0.0077
       \1\..................
                             ============
Total Average Costs Less        0.1163     0.1292      0.0069     0.0077
 Interest...................
                             ------------
Number of PFCs Remitted.....       406,526,509
                                   448,929,355
Number of PFCs Collected....       452,173,384
                                   505,223,269
    % of PFCs Refunded......          10.1%
                                      11.1%
    Range of Refunded Rates.      5.4% to 20.2%
                                  5.4% to 20.2%
------------------------------------------------------------------------
Values shown as $0.0000 on this table are calculated figures determined
  to be statistically insignificant (i.e. less than $0.0001).
\1\ Includes actual 1999 costs for carriers reporting pro-forma data
  incurred for all categories except credit card fees and interest
  revenue. Agreed-upon procedures have been applied by the independent
  accountant to actual 1999 costs, but not to pro-forma $4.50 estimates.

Analysis of 1999 Cost Data

    The carriers gave data according to the formats requested. FAA 
examined the presented data and proposes to accept all cost categories 
suggested (either in whole or in part), except for the PFC absorption 
category, as valid incremental costs associated with PFC collection and 
handling, and thus valid average necessary and reasonable expenses of 
PFC collection and handling.
    Some carriers reported that, in some air service markets, they must 
``absorb'' the PFC from other carrier revenues because the markets are 
too price sensitive for the carrier to pass the PFC along to consumers. 
In this case, the carriers wish to treat such absorbed costs as 
administrative expenses

[[Page 70883]]

associated with PFC collection and handling.
    FAA allowed carriers to present estimates of ``absorbed'' PFC costs 
as part of this data collection effort, but noted that FAA may discount 
such data. In particular, it is unclear why the PFC should bear the 
burden of price sensitivity in a market. FAA asked carriers to show why 
``absorption'' is an incremental cost of collecting, handling, 
remitting, reporting, recordkeeping, and/or auditing the PFC. FAA also 
requested that carriers send detailed explanations of their method for 
determining markets where absorption occurs and for calculating 
absorption.
    Four carriers sent information on PFC absorption expenses. One of 
these carriers accounted for 63 percent of the $30.5 million of such 
charges identified. On average, for all carriers, these charges would 
add $0.063 to the cost of each PFC collected nationally. For the one 
carrier accounting for most of the absorption cost, the cost would 
amount $0.42 for each PFC collected by that carrier.
    The carriers presenting PFC absorption cost data did not provide 
information on how the absorption cost is related to the cost of 
collecting and handling the PFC. One carrier imputed an $0.08 charge 
for each PFC it refunded to passengers as an absorbed cost, in that it 
did not received the $0.08 handling fee for these collections. However, 
FAA notes that this imputed charge is not an actual cost of collecting 
and handling PFCs. Air carriers also have not shown why absorption 
costs should not be associated with some other cost center of the 
carrier. Further, the carriers did not explain their methods for 
determining markets where absorption occurs and or their methods for 
calculating absorption. FAA has determined there is no reason to 
classify the charge of a ticket price adjustment as an expense 
associated with PFC collection and handling (including remitting, 
reporting, recordkeeping, and/or auditing.) FAA finds it more suitable 
to classify such a charge as one associated with providing air service, 
such as company overhead, fuel, labor expense, or airport rates and 
charges.
    Based on the foregoing, FAA proposes to exclude PFC absorption from 
the calculation of average, reasonable, and necessary expenses of PFC 
collection and handling.
    FAA reviewed the non-absorption 1999 data reported by carriers and 
found that five cost categories account for 92.3 percent of PFC 
collection and handling expenses. These categories include credit card 
fees, disclosure costs, reservations, passenger services, and CRS fees.
    The credit card fee was the largest single cost item that FAA 
proposes to accept, accounting on average for 43.7 percent of PFC 
collection and handling costs. That amount equals just over $0.05 for 
each PFC collected or $.056 for each $3 PFC remitted to airport public 
agencies. FAA found a high degree of uniformity in the cost amounts the 
nine carriers allocated to this item.
    The next largest cost item is reservation services, at 17.5 percent 
of PFC collection and handling costs, accounting on average for $.02 
for each PFC collected and $0.022 for each PFC remitted. Reservations 
charges include the cost of increased telephone ``talk time'' with 
airline customers explaining PFCs to customers when they make airline 
reservations by telephone. Air carriers considered, in some degree, the 
following items: Total reservation calls handled; PFC calls handled; 
seconds for each normal call; difficult calls handled; seconds for each 
difficult call; call hours; and average wage rate per hour. FAA found 
significant variability among carriers in estimates of this cost item, 
ranging from $0.00 to $0.038 with a standard deviation of $.013 around 
the average.
    The third largest cost item in the raw data is disclosure costs, at 
11.2 percent of PFC collection and handling costs. That amount equals, 
on average, $.013 for each PFC collected and $0.014 for each PFC 
remitted. Disclosure costs are attributable to FAA requirement that 
carriers provide notice to the passenger that PFC fees may be 
applicable to the passenger. One carrier (Southwest Airlines) accounted 
for 91 percent of the total reported disclosure costs, but only 13 
percent of the total PFCs reported collected by the nine carriers.
    FAA notes that Southwest's independent accountant, using the 
agreed-upon procedures, accepted the carrier's claim of 
disproportionately high disclosure costs. Moreover, the reason provided 
for the high disclosure cost, that Southwest Airlines relies 
disproportionately on television fare advertising as causing the higher 
cost, is not implausible. Consequently, FAA proposes, on a preliminary 
basis, to set disclosure costs for this carrier at a level equal to the 
disclosure costs for all other carriers combined to calculate the 
handling fee. We have therefore reduced the estimate for total cost of 
disclosure for all nine carriers to $0.0024 for each PFC collected. 
That amount is equal to twice the combined $.0012 for each PFC 
collected charge for all carriers except Southwest Airlines. FAA's 
eventual acceptance of a significantly higher disclosure cost, as 
identified by Southwest Airlines, depends, in part, on that carrier's 
or other carriers' submission of data supporting this claim.
    The fourth largest cost item is the on-going CRS (Computer 
Reservation Systems) expense, at 10.5 percent of PFC collection and 
handling costs. This amount accounts, on average, for $.012 of each PFC 
collected and $0.013 of each PFC remitted. Air carriers incur on-going 
CRS costs, in the form of booking fees, for using the CRS. These costs 
do not include the one-time charges associated with reprogramming the 
CRS software to allow a $4.50 PFC or other changes associated with AIR-
21.
    The fifth and last major cost item is passenger services. This item 
represents 9.4 percent of PFC collection and handling costs, accounting 
on average for $.011 of each PFC collected and $0.012 of each PFC 
remitted. Passenger service costs are attributable to increased face-
to-face time with airline customers. FAA found significant variability 
in estimates of this cost item, ranging from $0.00 to $0.029 with a 
standard deviation of $.010 around the average.
    FAA notes that several carriers may have allocated cost items to 
the passenger services category that other carriers allocated to the 
reservations category. Combined, the reservations and passenger 
services categories vary less than they do independently among the nine 
carriers. The combined average cost has a standard deviation of $0.014 
compared to a mean of $0.025.
    The remaining 13 cost categories collectively account for less than 
8 percent of total cost of collecting and handling PFCs. No one 
category exceeds 2 percent.
    Table 4 shows FAA's proposed adjustments to Table 1, reflecting the 
exclusion of claimed ``PFC absorption'' expenses and the proposed 
reduction of PFC disclosure costs.

[[Page 70884]]



                     Table 4.--1999 Total Costs of PFC Handling, All Reporting Air Carriers
----------------------------------------------------------------------------------------------------------------
                                               1999 actual costs        1999 Pro-Forma         Implementation
                                            --------------------------------------------------------------------
       PFC collection cost categories         Total cost             Total cost             Total cost
                                                  ($)      % total       ($)      % total       ($)      % total
----------------------------------------------------------------------------------------------------------------
Credit Card Fees/Bad Debt Exp..............    24,311,612     48.1    33,390,598     57.5  ............  .......
Audit Fees (External)......................       423,502      0.8       296,166      0.5        85,182      2.5
Disclosure Costs \1\.......................     1,159,495      2.3     1,105,495      1.9  ............  .......
Reservations...............................     9,751,032     19.3     9,317,814     16.0  ............  .......
Passenger Services.........................     5,226,254     10.3     5,092,650      8.8  ............  .......
Data Entry:
    Internal...............................        43,609      0.1        29,605      0.1  ............  .......
    Other..................................  ............      0.0  ............      0.0  ............  .......
Revenue Accounting.........................       857,925      1.7       728,507      1.3         6,875      0.2
Accounts Payable...........................       109,905      0.2        71,390      0.1  ............  .......
Tax & Legal................................        77,359      0.2        75,859      0.1  ............  .......
Corporate Property Department..............       323,570      0.6       282,195      0.5  ............  .......
Training:
    Reservations...........................        99,154      0.2        99,158      0.2        49,675      1.4
    Other..................................           413      0.0           413      0.0  ............  .......
    Ticket Agents..........................       782,336      1.5       445,625      0.8        55,424      1.6
Internal On-Going IT.......................       552,695      1.1       488,602      0.8  ............  .......
CRS On-Going fees..........................     5,823,761     11.5     5,732,145      9.9  ............  .......
ATPCO......................................         5,407      0.0         4,643      0.0           135      0.0
ARC + BSP..................................       988,694      2.0       946,262      1.6        77,712      2.2
Internal One-Time IT update................  ............      0.0  ............      0.0     3,020,947     87.2
CRS One-Time update........................  ............      0.0  ............      0.0       168,870      4.9
Interest Revenue on Float..................   (7,070,099)      n/a   (9,969,952)      n/a  ............  .......
                                            ---------------
    Total Costs \2\........................    50,536,723      100    58,107,127      100     3,464,820      100
                                            ---------------
    Total Costs Less Interest..............    43,466,624      n/a    48,137,175      n/a     3,464,820      n/a
                                            ===============
Number of PFCs Remitted....................   436,659,521  .......   406,526,509  .......   448,929,355  .......
Number of PFCs Collected...................   485,238,737  .......   452,173,384  .......   505,223,269  .......
    Percentage of PFCs Refunded............          10.0  .......          10.1  .......          11.1  .......
    Range of Refunded Rates................   5.4 to 20.2  .......   5.4 to 20.2  .......   5.4 to 20.2  .......
Cost Less Interest Per PFC Remitted........       $0.0995  .......       $0.1184  .......       $0.0077  .......
Cost Less Interest Per PFC Collected.......        0.0896  .......        0.1065  .......        0.0069  .......
----------------------------------------------------------------------------------------------------------------
\1\ Disclosure costs adjusted to equal two times the reported disclosure costs of all reporting carriers except
  for Southwest Airlines. See discussion on disclosure costs.
\2\ Total costs do not include PFC absorption costs reported by some carriers. See discussion on PFC absorption
  costs.

Analysis of 1999 Interest Income

    Interest earned on the PFC revenue collected by the carrier but not 
yet remitted to the airport public agencies forms a portion of the 
collection compensation carriers are entitled to under section 158.53. 
As part of the analysis of the total collection compensation for the 
carriers, FAA also requested information on the amount of interest 
earned by the carriers on unremitted PFC revenue. FAA determined that 
this interest amounted to $0.0146 for each $3 PFC in 1999. This amount 
is roughly equivalent to what FAA had estimated based on an assumed 
retention period of 45 to 50 days and a 4 percent annual interest rate. 
The variability around this average is low. The highest reported 
interest is $0.0185 at a 5 percent interest rate. The lowest reported 
interest rate was $0.0089 at a 2.5 percent interest rate.
    Total adjusted average cost for each PFC collected, minus interest 
earned on the PFC while held by the carrier, was $0.0896 for each PFC 
collected and $0.0995 for each PFC remitted in 1999. We base this 
amount on the adjusted values in Table 4. This amount compares to the 
$0.08 for each PFC remitted currently allowed under the PFC regulation 
for each PFC remitted. This information provided a reference point for 
the next step in FAA's process.

Analysis of ``Pro Forma'' $4.50 Costs and Interest Income

    FAA sought information on projected or ``pro forma'' costs that 
would be associated with handling $4.50 PFC levels. FAA specifically 
asked about the effect of the $4.50 level on credit card fees and 
interest earned on higher PFC balances. We expected that all other 
costs would not vary significantly between PFC levels.
    To simplify presentation of the ``pro forma'' costs, the carriers 
included their estimates for credit card fees and interest income with 
actual 1999 data for the other cost items. One of the nine carriers 
reporting 1999 actual data did not report the pro forma estimate for 
the $4.50 PFC level. FAA found that, if it excluded the data from the 
non-reporting carrier, all data other than credit card fees and 
interest income are identical between 1999 actual and the $4.50 pro 
forma data for the remaining eight carriers.
    The credit card fee expense becomes a significantly larger item in 
PFC handling costs at the $4.50 PFC level allowed by AIR-21. This is 
because the fee paid by the carriers to the credit card company is a 
percentage of the amount charged. The credit card and bad debt expense 
items for the $4.50 PFC level would cost carriers, on average, just 
over $0.074 for each PFC collected or $0.082 for each PFC remitted. We 
have based these amounts on the pro forma estimates provided by eight 
of the nine reporting carriers. FAA notes the independent accountants 
did not evaluate these amounts. These amounts compare to an average 
credit card fee of $0.0501 for each PFC collected and $0.0557 for each 
PFC remitted at the $3 PFC level. The estimates at the two PFC levels 
appear consistent. The actual fee

[[Page 70885]]

in 1999 equates to about 1.67 percent of the $3 PFC, whereas the 
estimated pro forma fee equates to 1.64 percent of the $4.50 PFC. The 
slight difference compared to the $3 PFC amount may be attributable to 
the one carrier not reporting. It is significant to note that at the 
$4.50 level, the credit card fee alone would exceed the $0.08 
compensation for each PFC remitted currently allowed under Sec.  
158.53.
    FAA estimated interest earned on the PFC revenue collected by the 
carrier but not yet remitted to the airport public agencies to be, on 
average, $0.0220 for each collected $4.50 PFC and $0.0245 for each 
remitted $4.50 PFC. This amount is about 52 percent more than estimated 
for a $3 PFC level. FAA notes that one carrier did not report a pro 
forma estimate of interest.
    In summary, collection and handling costs minus interest income for 
a $4.50 PFC level would yield a cost of $0.1065 for each PFC collected 
and $0.1184 for each PFC remitted.

Analysis of $4.50 Implementation Costs

    FAA requested data from the carriers on the total cost of setting 
up the $4.50 PFC allowed by AIR-21. Specifically, FAA asked how much it 
cost the carriers to change their computer systems and other systems 
such as the CRS providers, the Airline Tariff Publishing Company 
(ATPCO), and the Airline Reporting Corporation (ARC). Air carriers and 
other data providers had to change programming codes and terminal 
screen formats to allow for four data columns. Previously, the systems 
only needed a single column for the $1, $2, and $3 PFC levels. Now, 
computer systems need columns for three numbers and a decimal point for 
the $4.50 PFC charge. Air carriers and other data providers completed 
reprogramming by April 1, 2001; however, carriers presented their 
handling cost data to FAA in December 2000 and January 2001 while 
efforts were still underway. FAA, therefore, did not require the 
independent accountants to apply the agreed-upon procedures to these 
cost items.
    Cost items claimed by the carriers for setting up the increased PFC 
levels included charges for revenue accounting, training of 
reservations and ticket agents, fees to ATPCO, ARC, and CRS vendors, 
one-time information technology updates, and audit fees. One of these 
cost items, one-time information technology updates, accounted for 87 
percent of the set-up costs. After analyzing the carrier data, FAA 
found the total set up cost for carriers was only $.0077 for each PFC 
collected. That means that carriers could recover the total cost of 
implementation with a one-year handling fee surcharge of less than one 
cent.
    Although the independent accountants did not review the set up 
costs, the low cost claimed, particularly for reimbursement of computer 
service providers, was below FAA's expectations given the size of the 
reprogramming effort.

Analysis of Ticket Refund Rates

    The data we received from the carriers reveals an overall average 
ticket refund rate of 10 percent. Because a carrier must handle 
refunded tickets twice, a higher volume of refunded tickets means 
higher costs for the carrier. The data format specified by FAA did not 
specifically ask the carriers to send data on the costs associated with 
refunded tickets because gathering the data would burden the carriers. 
Rather, the carriers included the costs associated with refunds in 
their overall cost data.
    FAA notes that compensating carriers for each PFC collected 
compared to compensating them for each PFC remitted are equally valid 
means of compensation. Suppose total industry costs, minus interest 
earned, for handling PFCs were $50 million where carriers collected 500 
million PFCs and remitted 416 million PFCs. In this example, carriers 
refunded 84 million PFCs after collections. The carriers collectively 
would receive the same compensation, $50 million, from collecting 
airports if the handling fee were set at $0.10 for each PFC collected 
or $0.12 for each PFC remitted. If all carriers had equivalent refund 
rates, all would receive equal compensation for the expenses associated 
with PFC refunds under either method.
    FAA notes that selection of a standard fee for each PFC collected 
or for each PFC remitted may yield different amounts of compensation to 
individual carriers. In particular, a compensation standard for each 
PFC remitted, calculated from total industry handling costs and PFC 
remittances, assumes all carriers have the same PFC refund rates. Air 
carriers with higher ticket refund rates and higher PFC refund-related 
handling costs would receive less overall compensation relative to 
their actual costs than would carriers with low refund rates if 
compensated for each PFC remitted. This assumes everything else is 
equal. The data received from the carriers show that refund rates vary 
significantly among carriers. One large carrier reported a refund rate 
of only 5.4 percent, whereas another large carrier had a refund rate of 
20.2 percent.
    Section 40117 of title 49 of the U.S. Code requires FAA to set up a 
compensation fee that is uniform and reflects the average necessary and 
reasonable expenses incurred in collecting and handling the PFC, minus 
interest accrued before remittance. Therefore, FAA cannot set two or 
more compensation rates based on the different needs of each carrier. 
FAA does, however, have the choice of setting one fee to compensate 
carriers either for each PFC collected or each PFC remitted. If FAA 
elects to compensate carriers for each PFC collected, carriers with 
high refund rates would not be penalized, and carriers with low refund 
rates would not receive a windfall.

Calculation of PFC Handling Fee

    The average PFC handling fee reported by the carriers was $0.0896 
for each $3 PFC collected in 1999 and $0.0995 for each $3 PFC remitted 
in 1999. (See the 1999 actual costs at the bottom of Table 4). We 
propose to subtract interest earned on collected PFCs from this amount 
and excluded ``PFC absorption'' expenses. The amount also includes a 
downward adjustment for disclosure costs. Had a $4.50 PFC been in place 
that year at all airports where PFCs are collected, the carriers 
estimate the increase in their costs, minus interest, would have raised 
their overall cost to $0.1065 for each $4.50 PFC collected and $0.1184 
for each $4.50 PFC remitted. (See the 1999 pro forma costs at the 
bottom of Table 4). A surcharge would be necessary to compensate 
carriers for the one-time cost of setting up the $4.50 PFC level.
    Selecting the right compensation level clearly depends on the 
assumption made about what mix of $4.50 and $3 PFCs carriers will 
collect. FAA estimates that nearly 50 percent of all collected PFCs 
will be at $4.50 in 2002, 75 percent will be at $4.50 in 2003, and 90 
percent will be at the $4.50 level in 2004, and almost 100 percent 
thereafter. Therefore, FAA proposes to phase in a new collection fee 
based on the estimated mix of $3 and $4.50 collections over the next 
several years. Table 5 summarizes FAA's proposal for compensating 
carriers for each PFC collected or each PFC remitted.

[[Page 70886]]



                                    Table 5.--Actual Costs and Proposed Fees
----------------------------------------------------------------------------------------------------------------
                                                                   Year 2002   Year 2003   Year 2004   Year 2005
                                                                      \1\         \2\         \3\         \4\
----------------------------------------------------------------------------------------------------------------
Compensation Based on PFCs Collected:
    1999 Cost Per PFC Collected at $3 (Actual)..................     $0.0896    $0.0896     $0.0896      $0.0896
    1999 Cost Per PFC Collected at $4.50 (Pro-Forma)............      0.1065     0.1065      0.1065       0.1065
    Weighted Cost Per PFC Collected (Actual)....................      0.0981     0.1023      0.1048       0.1065
Proposed Fee Per PFC Collected..................................      0.1000     0.1000      0.1000       0.1100
    Over/Under Collection Per PFC...............................       00019    (0.0023)    (0.0048)      0.0035
Compensation Based on PFCs Remitted:
    1999 Cost Per PFC Remitted at $3 (Actual)...................      0.0995     0.0995      0.0995       0.0995
    1999 Cost Per PFC Remitted at $4.50 (Pro-Forma).............       01184     01.184      0.1184       0.1184
    Weighted Cost Per PFC Remitted (Actual).....................      0.1090     0.1137      0.1165        01184
Proposed Fee Per PFC Remitted...................................      0.1100     0.1100      0.1200       0.1200
    Over/Under Collection Per PFC...............................      0.0010    (0.0037)     0.0035      0.0016
----------------------------------------------------------------------------------------------------------------
\1\ (Assumes 50% at $3 and 50% at $4.50)
\2\ (Assumes 25% at $3 and 75% at $4.50)
\3\ (Assumes 10% at $3 and 90% at $4.50)
\4\ (Assumes 0% at $3 and 100% at $4.50).

    FAA considered using fees involving fractional cents but opted to 
use whole cent units for ease of explanation and to prevent possible 
reprogramming expenses for carriers and airports. Table 5 shows that if 
carriers receive compensation for each PFC collected, the proposed rate 
would be $0.10 for each PFC collected, through calendar year (CY) 2004. 
In CY 2005 and beyond, the rate would increase to $0.11 and remain at 
that level. If carriers received compensation for each PFC remitted, 
the proposal would set the fee at $0.11 for each PFC remitted through 
CY 2003. Then, the rate would go to $0.12 for each PFC remitted in CY 
2004 and beyond.
    Based on data reported by the nine carriers for 1999, Table 6 shows 
that either method yields about the same compensation over a ten year 
period, measured by net present value using a 7 percent discount rate. 
FAA finds the discounted compensation over a 10-year period exceeds 
ongoing PFC handling expenses by roughly the amount needed to recover 
the one-time set up costs (adjusted to 2002 present value) for the 
$4.50 PFC. Excess compensation would be less than half of one percent 
of estimated carrier costs over the 10-year period. Air carriers would 
receive more compensation if the rate is set for each PFC collected 
instead of each PFC remitted, but the difference between the two 
methods is not significant.


                      Table 6.--Comparison of Compensation Streams, Collected vs. Remitted
----------------------------------------------------------------------------------------------------------------
                                                                                 Per collected PFC
                                                                 -----------------------------------------------
                                                                     Weighted
                                                                      actual         Proposed       Difference
                                                                   handling cost   compensation
----------------------------------------------------------------------------------------------------------------
                             PFCs Collected by Carriers Reporting Data--485,238,737
----------------------------------------------------------------------------------------------------------------
Calendar Year:
    2002........................................................     $47,577,658     $48,523,874       $946,216
    2003........................................................      49,627,792      48,523,874     (1,103,918)
    2004........................................................      50,857,872      48,523,874     (2,333,998)
    2005........................................................      51,677,925      53,376,261      1,698,336
    2006........................................................      51,677,925      53,376,261      1,698,336
    2007........................................................      51,677,925      53,376,261      1,698,336
    2008........................................................      51,677,925      53,376,261      1,698,336
    2009........................................................      51,677,925      53,376,261      1,698,336
    2010........................................................      51,677,925      53,376,261      1,698,336
    2011........................................................      51,677,925      53,376,261      1,698,336
Present Value 2002-11 (2002)....................................     356,672,024     362,158,324      5,486,300
Present Value of One-Time $4.50 PFC Implementation Costs (2002).  ..............  ..............      3,707,357
Present Value of Net Compensation (Difference Less                ..............  ..............      1,778,943
 Implementation)................................................
Percent Net Compensation of Total Weighted Actual Handling Costs  ..............  ..............           0.5%
----------------------------------------------------------------------------------------------------------------


 
----------------------------------------------------------------------------------------------------------------
                                                                                 Per remitted PFC
                                                                 -----------------------------------------------
                                                                     Weighted
                                                                      actual         Proposed
                                                                   handling cost   compensation     Difference
                                                                        \1\
----------------------------------------------------------------------------------------------------------------
                              PFCs Remitted by Carriers Reporting Data--436,659,521
----------------------------------------------------------------------------------------------------------------
Calendar Year:
    2002........................................................     $47,574,055     $48,032,547       $458,492
    2003........................................................      49,637,271      48,032,547     (1,604,724)

[[Page 70887]]

 
    2004........................................................      50,875,201      52,399,143      1,523,942
    2005........................................................      51,700,487      52,399,143        698,655
    2006........................................................      51,700,487      52,399,143        698,655
    2007........................................................      51,700,487      52,399,143        698,655
    2008........................................................      51,700,487      52,399,143        698,655
    2009........................................................      51,700,487      52,399,143        698,655
    2010........................................................      51,700,487      52,399,143        698,655
    2011........................................................      51,700,487      52,399,143        698,655
Present Value 2002-11 (2002)....................................     356,790,337     360,134,767      3,344,430
Present Value of One-Time $4.50 PFC Implementation Costs (2002).  ..............  ..............      3,707,357
Present Value of Net Compensation (Difference Less                ..............  ..............       (362,927)
 Implementation)................................................
Percent Net Compensation of Total Weighted Actual Handling Costs  ..............  ..............          (0.1%)
----------------------------------------------------------------------------------------------------------------
\1\ Weighted actual costs for total remitted PFCs vary slightly from these shown for total collected PFCs (by
  0.03) due to slightly different refund rates between the actual and pro-forma cost estimates.

    Table 7 shows the proposed rates of compensation compared with the 
existing $0.08 rate of compensation for each PFC remitted over a ten-
year period, from 2002 to 2011. Table 7 is calculated based on 
compensation for each remitted PFC because that is the method for the 
current $0.08 compensation level. However, the amount of increase in 
total compensation to carriers shown in Table 7 for the remitted PFC 
methodology is comparable to what would result from the collected PFC 
methodology. Under the proposed rates of compensation, the reporting 
carriers would receive $13 million more in compensation each year 
through 2003 than they would under the $0.08 rate of compensation. 
Then, they would receive more than $17 million in added compensation in 
2004 and beyond.
    FAA notes the data presented by the nine carriers represented 84 
percent of the estimated total PFCs collected in 1999. When we 
estimated the total impact on the entire PFC program, including all PFC 
collections and remittances, we found that air carries would receive 
$16 million more in compensation in 2002 and 2003, and $21 million more 
in the years after. These estimates are based on 1999 enplanement 
levels.
    By 2005, this added compensation would constitute less than 1 
percent (0.89 percent) of the total PFC collection stream realized by 
the airports. The total compensation amount, including the $0.08 level 
existing, would constitute 2.67 percent of collections. Over a ten-year 
period, increased collection as measured in present value terms would 
be 0.87 percent of total PFCs collected.

                      Table 7--Compensation Comparison: Proposed Fee vs. $0.08 Handling Fee
----------------------------------------------------------------------------------------------------------------
                                          Proposed fee per    $0.08 fee per                       Value of PFCs
                                            remitted PFC      remitted PFC       Difference         collected
----------------------------------------------------------------------------------------------------------------
                              PFCs Remitted by Carriers Reporting Data--436,659,521
----------------------------------------------------------------------------------------------------------------
Calendar Year:
    2002................................       $48,032,547       $34,932,762     ($13,099,786)    $1,637,473,204
    2003................................        48,032,547        34,932,762      (13,099,786)     1,801,220,524
    2004................................        52,399,143        34,932,762      (17,466,381)     1,899,468,916
    2005................................        52,399,143        34,932,762      (17,466,381)     1,964,967,845
    2006................................        52,399,143        34,932,762      (17,466,381)     1,964,967,845
    2007................................        52,399,143        34,932,762      (17,466,381)     1,964,967,845
    2008................................        52,399,143        34,932,762      (17,466,381)     1,964,967,845
    2009................................        52,399,143        34,932,762      (17,466,381)     1,964,967,845
    2010................................        52,399,143        34,932,762      (17,466,381)     1,964,967,845
    2011................................        52,399,143        34,932,762      (17,466,381)     1,964,967,845
Present Value (2002)....................       360,134,767       245,353,100     (114,781,667)    13,298,552,236
Increase as Percent of PV of PFCs         ................  ................  ................           0.8631%
 Collected..............................
Undiscounted Value......................       515,258,235       349,327,617     (165,930,618)    19,092,937,556
Increase as Percent of PFCs Collected...  ................  ................  ................           0.8691%
----------------------------------------------------------------------------------------------------------------
Note: This table does not compare fees based on PFC collections because the existing compensation fee ($0.08) is
  paid per remitted PFC. However, the two proposed compensation methodologies yield approximately the same level
  of new compensation.

Treatment of Inflation

    Most of the nine carriers reporting handling costs also asserted 
that inflation affects costs. FAA has found, however, that the use of 
an inflation factor for handling fees is problematic for several 
reasons. First, the largest cost item, the credit card transaction fee, 
is not necessarily linked to inflation in the economy. Second, the 
long-term link between prevailing rates of wage compensation for 
reservations agents and other airline personnel, and productivity, such 
as the ability to handle ticket transactions more efficiently through 
e-ticketing from internet sites, is difficult to forecast. Should 
handling fees for each PFC rise significantly because of inflation, FAA 
notes that airlines should document this

[[Page 70888]]

increase and provide the information to FAA in a petition to amend part 
158.

Conclusion

    Currently, FAA bases PFC handling fees on remitted PFCs rather than 
collected PFCs. However, as noted above, data show that refund rates 
vary significantly among carriers. Therefore, FAA proposes to 
compensate carriers for PFCs collected. Specifically, FAA proposes that 
carriers receive $0.10 for each PFC collected through CY 2004. From CY 
2005 and beyond carriers will receive $0.11 for each PFC collected. FAA 
reminds all parties the current requirements of Sec.  158.53 remain in 
effect unless FAA issues a final rule changing the PFC rule. Until 
changed through a final rule, carriers remain entitled to receive $0.08 
for each PFC remitted. New fees, if any, set up in a final rule will 
not be retroactive from the date of that final rule, nor will a change 
in the basis for compensation be retroactive.

Paperwork Reduction Act

    Information collection requirements in the amendment to part 158 
previously have been approved by the Office of Management and Budget 
(OMB) under the provisions of the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)), and have been assigned OMB Control Number 2120-0557. 
Note that nine carriers voluntarily presented data to FAA for analysis 
before FAA began this rulemaking action.

International Compatibility With ICAO Standards

    In keeping with U.S. obligations under the Convention on 
International Civil Aviation, it is FAA policy to comply with 
International Civil Aviation Organization (ICAO) Standards and 
Recommended Practices to the maximum extent practicable. FAA determined 
there are no ICAO Standards and Recommended Practices that correspond 
to these proposed compensation adjustments.

Economic Evaluation Summary

    Proposed changes to Federal regulations must undergo several 
economic analyses. First, Executive Order 12866 directs that each 
Federal agency propose or adopt a regulation only upon a determination 
that the benefits of the intended regulation justify its costs. Second, 
the Regulatory Flexibility Act of 1980 requires agencies to analyze the 
economic impact of regulatory changes on small entities. Third, the 
Trade Agreements Act (19 U.S.C. section 2531-2533) prohibits agencies 
from setting standards that create unnecessary obstacles to the foreign 
commerce of the United States. In developing U.S. standards, this Trade 
Act also requires agencies to consider international standards and, 
where appropriate, use them as the basis of U.S. standards. And fourth, 
the Unfunded Mandates Reform Act of 1995 (Public Law 104-4) requires 
agencies to prepare a written assessment of the costs, benefits, and 
other effects of proposed or final rules that include a Federal mandate 
likely to result in the expenditure by State, local, or tribal 
governments, in the aggregate, or by private sector, of $100 million or 
more annually (adjusted for inflation).
    In conducting these analyses, FAA has determined this rule (1) has 
benefits which do justify its costs, is a ``significant regulatory 
action'' as defined in section 3(f) of Executive Order 12866 and is 
``significant'' as defined in DOT's Regulatory Policies and Procedures; 
(2) will not have a significant impact on a substantial number of small 
entities; (3) will not reduce barriers to international trade; and (4) 
does not impose an unfunded mandate on state, local, or tribal 
governments, or on the private sector. These analyses are available in 
the docket.

Benefit--Cost Analysis

    This proposed rule will amend part 158 to bring compensation for 
PFC collection and handling to levels necessary to meet cost increases 
resulting in part from the new statutory rules set up under AIR-21. 
AIR-21 allows airport authorities to increase the PFC level to $4 or 
$4.50 to collect more funds. Airport authorities will use these funds 
to (1) enhance the safety, security and capacity of their facilities; 
(3) reduce noise in nearby communities; and (3) enhance airline 
competition to the benefit of air travelers. The PFC statute requires 
that the Secretary of Transportation (whose authority has been 
delegated to FAA) establish by regulation a uniform amount that 
carriers may retain that reflects the average necessary and reasonable 
expenses for collecting and handling PFCs. This amount, referred to in 
14 CFR part 158 as ``carrier compensation,'' is to be determined net of 
interest earned on PFC revenue between the time of collection and 
payment. The current compensation amount allowed by Sec.  158.53 is 
$0.08 for each PFC remitted. However, the increase in the PFC level to 
$4 or $4.50 from the earlier $3 cap introduced new costs to carriers 
for which carriers do not receive compensation under the prevailing 
rate of $0.08 for each PFC remitted. In addition, some carriers and 
their trade organizations have argued that the $0.08 compensation 
amount is not enough even at the $3 for each PFC remitted level. FAA 
proposes a new amount of compensation at $0.10 for each PFC collected 
through calendar year 2004. In 2005 and beyond carriers would receive 
$0.11 for each PFC collected. Based on 1999 PFC collections, FAA 
estimates the change would increase carrier compensation by $21 million 
yearly in PFC funds. Otherwise, airports would have received this added 
compensation instead of the carriers. Once airports widely adopt the 
$4.50 PFC, this higher compensation amount would be less than one 
percent of estimated airport PFC receipts. This proposed amount would 
not erode airport authorized PFC collection amounts. Rather, airports 
would be able to recover this slightly higher compensation amount by 
minimal extensions of PFC collection periods. In addition, any impact 
on airport revenue streams caused by the higher compensation amount is 
an unavoidable result of providing a uniform amount that carriers may 
retain that reflects the average necessary and reasonable expenses for 
collecting and handling PFCs, as required by the PFC statute. Air 
travelers will not incur an increase in the cost of their tickets 
because of this adjustment. Air carriers may incur some minor costs (if 
any) of setting up the change of compensation amounts in their 
accounting programs, but the benefits of the higher compensation 
amounts would outweigh this cost.

Regulatory Flexibility Act

    The Regulatory Flexibility Act of 1980 establishes ``as a principle 
of regulatory issuance that agencies shall endeavor, consistent with 
the objective of the rule and of applicable statutes, to fit regulatory 
and informational requirements to the scale of the business, 
organizations, and governmental jurisdictions subject to regulation.'' 
To achieve that principle, the Act requires agencies to solicit and 
consider flexible regulatory proposals and to explain the rationale for 
their actions. The Act covers a wide-range of small entities, including 
small businesses, not-for-profit organizations and small governmental 
jurisdictions.
    Agencies must perform a review to determine whether a proposed or 
final rule will have a significant economic impact on a substantial 
number of small entities. If the determination is that it will, the 
agency must prepare a regulatory flexibility analysis (RFA) as 
described in the Act.

[[Page 70889]]

    If an agency determines that a proposed or final rule is not 
expected to have a significant economic impact on a substantial number 
of small entities, section 605(b) of the 1980 act provides that the 
head of the agency may so certify and an RFA is not required. The 
certification must include a statement providing the factual basis for 
this determination, and the reasoning should be clear.
    The change to the compensation amount is necessary to conform with 
the PFC statute, which requires the Secretary to establish by 
regulation a uniform amount that carriers may retain that reflects the 
average necessary and reasonable expenses for collecting and handling 
PFCs (net of interest accruing to the carrier and agent after PFC 
collection and before remittance of the PFC to the airport public 
agency). Moreover, all costs to the small entity are fully recoverable 
through the PFC, if approved. Accordingly, pursuant to the Regulatory 
Flexibility Act, 5 U.S.C. 605(b), FAA certifies this rule will not have 
a significant impact on a substantial number of small entities.

International Trade

    The Trade Agreement Act of 1979 prohibits Federal agencies from 
engaging in any standards or related activities that create unnecessary 
obstacles to the foreign commerce of the United States. Legitimate 
domestic objectives, such as safety, are not considered unnecessary 
obstacles. The statute also requires consideration of international 
standards and where appropriate, that they be the basis for U.S. 
standards.
    In accordance with the above statute, FAA has assessed the 
potential effect of this proposed rule and has determined that it will 
impose the same costs on domestic and international entities for 
comparable services and thus has a neutral trade impact.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (the Act), 
codified at 2 U.S.C. 1501-1571, requires each Federal agency, to the 
extent permitted by law, to prepare a written assessment of the effects 
of any Federal mandate in a proposed or final agency rule that may 
result in the expenditure by State, local, and tribal governments, in 
the aggregate, or by the private sector, of $100 million or more 
(adjusted annually for inflation) in any one year. Section 204(a) of 
the Act, 2 U.S.C. 1534(a), requires the Federal agency to develop an 
effective process to permit timely input by elected officers (or their 
designees) of State, local, and tribal governments on a proposed 
``significant intergovernmental mandate.'' A ``significant 
intergovernmental mandate'' under the Act is any provision in a Federal 
agency regulation that would impose an enforceable duty upon State, 
local, and tribal governments, in the aggregate, of $100 million 
(adjusted annually for inflation) in any one year. Section 203 of the 
Act, 2 U.S.C. 1533, which supplements section 204(a), provides that 
before establishing any regulatory requirements that might 
significantly or uniquely affect small governments, the agency shall 
have developed a plan that, among other things, provides for notice to 
potentially affected small governments, if any, and for a meaningful 
and timely opportunity to provide input in the development of 
regulatory proposals.
    This proposed rule does not contain a Federal intergovernmental or 
private sector mandate that exceeds $100 million a year.

Executive Order 13132, Federalism

    FAA has analyzed this proposed rule under the principles and 
criteria of Executive Order 13132, Federalism. We determined that this 
action would not have a substantial direct effect on the States, on the 
relationship between the national Government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government. Therefore, we determined this notice of proposed rulemaking 
would not have federalism implications.

Plain Language

    In response to the June 1, 1998, Presidential memorandum regarding 
the use of plain language, FAA re-examined the writing style currently 
used in the development of regulations. The memorandum requires federal 
agencies to communicate clearly with the public. We are interested in 
your comments on whether the style of this document is clear, and in 
any other suggestions you might have to improve the clarity of FAA 
communications that affect you. You can get more information about the 
Presidential memorandum and the plain language initiative at http://www.plainlanguage.gov.

Environmental Analysis

    FAA concludes that issuance of this proposed rule would not be a 
major Federal action significantly affecting the quality of the human 
environment within the meaning of the National Environmental Policy Act 
of 1969. The potential environmental effects of any project funded with 
PFC revenues are already addressed under Sec.  158.29(b)(1)(iv), which 
requires all applicable requirements pertaining to the National 
Environmental Policy Act of 1969 (NEPA) to be satisfied before the 
Administrator may approve the project to use PFC funds. A copy of this 
assessment has been placed in the docket.

Energy Impact

    We have assessed the energy impact of the proposed notice in 
accordance with the Energy Policy and Conservation Act (EPCA) Pub. L. 
94-163, as amended (43 U.S.C. 6362) and FAA Order 1053.1. We have 
determined the rule is not a major regulatory action under the 
provisions of the EPCA.

List of Subjects in 14 CFR Part 158

    Air carriers, Airports.

The Proposed Amendment

    In consideration of the foregoing, the Federal Aviation 
Administration proposes to amend part 158 of title 14 of the Code of 
Federal Regulations as follows:

PART 158--PASSENGER FACILITY CHARGES (PFC'S)

    1. The authority citation for part 158 continues to read as 
follows:

    Authority: 49 U.S.C. 106(g), 40116-40117, 47106, 47111, 47114-
47116, 47524, 47526.

    2. Amend Sec.  158.53 by revising the introductory text and 
paragraph (a) to read as follows:


Sec.  158.53  Collection compensation.

    As compensation for collecting, handling, and remitting the PFC 
revenue, the collecting carrier is entitled to:
    (a) Retain $0.10 of each PFC collected on or after (the effective 
date of the final rule) and before January 1, 2005, after which 
carriers are entitled to $0.11 of each PFC collected;
* * * * *

    Issued in Washington, DC, on November 20, 2002.
Benito DeLeon,
Acting Director, Office of Airport Planning and Programming.
[FR Doc. 02-30103 Filed 11-26-02; 8:45 am]
BILLING CODE 4910-13-P