Passenger Facility Charges: Program Implementation and the Potential
Effects of Proposed Changes (Chapter Report, 05/19/99, GAO/RCED-99-138).

Pursuant to a congressional request, GAO provided information on the
passenger facility charge program, focusing on: (1) how the program is
helping airports fund their capital development; and (2) the potential
impact of various proposals to change the program, including the option
of making no change.

GAO noted that: (1) passenger facility charges provided about 18 percent
of the funds available to commercial service airports to pay for capital
development in 1996, the most recent year for which data for all sources
are available; (2) 52 percent of the 529 eligible airports are levying
the fee; (3) the larger the airport, the more likely it is to
participate; (4) as of September 1998, the Federal Aviation
Administration had approved the collection of nearly $22 billion in
passenger facility charges overall; (5) because the amount of funds an
airport receives is based on the number of passengers, over 90 percent
of those collections will go to the large airports; (6) 44 percent of
the funds have been approved for projects such as the construction of
aircraft gates and access roads, while 29 percent have been approved to
pay the interest on bonds issued for eligible development projects; (7)
20 percent of the funds have been approved for projects related to areas
such as runways and aprons, while 7 percent have been approved to reduce
airport-related noise; (8) proposals to change the passenger facility
charge program fall into three main categories: (a) increasing the
maximum charge; (b) changing the types of projects eligible for funding;
or (c) adding project selection criteria; (9) airports' receipts total
about $1.4 billion a year, with all but one participating airport
charging the maximum $3 fee; (10) GAO's analysis indicates that with a
$1 increase, if all airports raise their fee, airports would receive
close to $500 million in additional revenues; (11) GAO developed a model
to estimate the potential impact of higher fees on passenger levels,
using historical data on the relationship between prices and passenger
levels; (12) GAO's model estimates the effect of changing the passenger
facility charge independently of other factors that may occur
simultaneously; (13) these and other factors could enhance or offset the
effect of changing the passenger facility charge, making the net effect
difficult to determine; and (14) increasing the maximum fee from $3 to
$7 would generate about $1.63 billion more for large airports charging
the fee, thereby eliminating an annual $1.5 billion funding difference,
on average, that GAO identified between large airports' future planned
development costs ($7.1 billion a year on average) and the funding they
had available in 1996.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-138
     TITLE:  Passenger Facility Charges: Program Implementation and the
	     Potential Effects of Proposed Changes
      DATE:  05/19/99
   SUBJECT:  Airports
	     Federal aid for transportation
	     Air transportation operations
	     Financial analysis
	     Fees
	     Future budget projections
	     Financial management
IDENTIFIER:  Denver International Airport (CO)
	     FAA Airport Improvement Program
	     FAA National Plan of Integrated Airport Systems
	     FAA Passenger Facility Charge Program

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Cover
================================================================ COVER

Report to Congressional Committees

May 1999

PASSENGER FACILITY CHARGES -
PROGRAM IMPLEMENTATION AND THE
POTENTIAL EFFECTS OF PROPOSED
CHANGES

GAO/RCED-99-138

Passenger Facility Charges

(348126)

Abbreviations
=============================================================== ABBREV

  AAAE - American Association of Airport Executives
  ACI-NA - Airports Council International - North America
  ADO - Airport District Office (FAA)
  AIP - Airport Improvement Program
  ATA - Air Transport Association
  FAA - Federal Aviation Administration
  GAO - General Accounting Office
  NASAO - National Association of State Aviation Officials
  NPIAS - National Plan of Integrated Airport Systems
  PFC - passenger facility charge

Letter
=============================================================== LETTER

B-281079

May 19, 1999

Congressional Committees

In response to your request, this report (1) describes how the
passenger facility charge program is helping airports fund their
capital development, and (2) discusses the potential impact of
various proposals to change the program, including the option of
making no change. 

We are also sending copies of this report to other congressional
committees; the Honorable Rodney E.  Slater, Secretary of
Transportation; and the Honorable Jane F.  Garvey, Administrator,
Federal Aviation Administration.  We will also make copies available
to others on request. 

If you or your staff have any questions, please contact me at (202)
512-3650 or Randy Williamson, Assistant Director, at (206) 287-4860. 
Major contributors to this report are listed in appendix III. 

Gerald L.  Dillingham
Associate Director, Transportation Issues

List of Committees: 

The Honorable John McCain
Chairman
The Honorable Ernest F.  Hollings
Ranking Minority Member
Committee on Commerce, Science, and Transportation
United States Senate

The Honorable Slade Gorton
Chairman
The Honorable John D.  Rockefeller, IV
Ranking Minority Member
Subcommittee on Aviation
Committee on Commerce, Science, and Transportation
United States Senate

The Honorable John J.  Duncan, Jr.
Chairman
The Honorable William O.  Lipinski
Ranking Democratic Member
Subcommittee on Aviation
Committee on Transportation and Infrastructure
House of Representatives

EXECUTIVE SUMMARY
============================================================ Chapter 0

   PURPOSE
---------------------------------------------------------- Chapter 0:1

Since the early 1990s, most of the nation's passenger service
airports have been able to charge passengers a boarding fee of $1,
$2, or $3, called a passenger facility charge, to help pay for their
capital development projects.  These charges now total about $1.4
billion a year.  The program is managed by the Federal Aviation
Administration, which approves an airport's application to
participate and the specific projects to be funded. 

Within the industry, there are different views about whether the
passenger facility charge program should be expanded, limited, or
left as is.  Airport associations support higher charges as a way to
finance additional airport development that they view as necessary. 
By contrast, airlines question the need for some of the proposed
development projects and have proposed requiring a more stringent
screening process for approving projects.  To provide information
that would assist congressional deliberations, the Chairmen and
Ranking Minority Members of the Senate Committee on Commerce,
Science, and Transportation, and its Subcommittee on Aviation, and
the Chairman and Ranking Democratic Member of the House Committee on
Transportation and Infrastructure's Subcommittee on Aviation asked
GAO to review the passenger facility charge program and, in doing so,
to address the following questions: 

  -- How are passenger facility charges helping airports fund their
     capital development, particularly in terms of the extent to
     which the charges fund development, the rate of airports'
     participation in the program, and airports' use of the funds
     collected? 

  -- What are the potential effects of proposals for changing the
     programï¿½particularly with regard to increasing the fee, changing
     project eligibility, and providing new project selection
     criteria--as well as the potential effects of making no change
     at all? 

   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Since the end of World War II, the federal government has been
involved in developing a national airport system for ensuring safe
air travel.\1 This system now comprises more than 3,300 airports, 529
of which are ï¿½commercial serviceï¿½ airports (that is, airports that
enplane at least 2,500 passengers a year and have scheduled airline
service).  Under the 1990 statute creating the passenger facility
charge program, the commercial service airports are the airports that
may levy the charges but they must apply to the Federal Aviation
Administration for approval to do so.  Airports may charge a maximum
of $3 per boarding passenger.  A passenger may be charged no more
than two fees on a one-way trip or four fees on a round trip, thus
bringing the maximum charge to $12.  Airlines collect the money when
tickets are purchased and forward the funds to the airports.  It may
take several years for an airport to receive enough funds from the
fee to pay for the approved projects.  The collection of passenger
facility charges began in 1992. 

The passenger facility charge program sets forth several broad
objectives for the use of these funds in furthering airport
development including (1) preserving or enhancing airports' safety,
security, or capacity; (2) reducing noise; or (3) enhancing airline
competition.  To meet these objectives, the statute authorizes the
use of the funds for a broad array of development projects.  Airports
have more flexibility in using these funds than they have using some
of the other major funding sources available to them--federal grants,
state grants, bonds, and airport revenues.  For example, passenger
facility charges may be used to build aircraft gates or pay interest
on bonds issued to pay for eligible projects, while federal grants
may not.  The Federal Aviation Administration must approve an
airport's request to levy the fee, including the total amount to be
collected and the projects to be funded. 

--------------------
\1 Of the more than 18,000 landing facilities in the United States,
3,344 airports are currently part of the national airport system. 
There are two types of airports in the national systemï¿½commercial
service airports, which enplane at least 2,500 passengers a year, and
general aviation airports.  Commercial service airports are divided
into primary airportsï¿½those that enplane 10,000 or more passengers a
year--and other commercial service airports that enplane fewer than
10,000 but at least 2,500 passengers a year.  Primary airports are
divided into classes of hub airportsï¿½large hub, medium hub, small
hub, and nonhub--on the basis of the number of passengers enplaning
each year. 

   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Passenger facility charges provided about 18 percent of the funds
available to commercial service airports to pay for capital
development in 1996, the most recent year for which data for all
sources are available.  Fifty-two percent of the 529 eligible
airports are levying the fee.  The larger the airport, however, the
more likely it is to participate:  80 percent of the nation's 70
large commercial airports (those categorized as large and medium hub
airports) levy the charges, compared with less than half of the 459
small airports eligible to participate (those categorized as small
hub, nonhub, and other commercial service airports).  As of September
1998, the Federal Aviation Administration had approved the collection
of nearly $22 billion in passenger facility charges overall.  Because
the amount of funds an airport receives is based on the number of
passengers, over 90 percent of those collections will go to the large
airports.  Forty-four percent of the funds have been approved for
projects such as the construction of aircraft gates and access roads,
while 29 percent have been approved to pay the interest on bonds
issued for eligible development projects.  Twenty percent of the
funds have been approved for projects related to areas such as
runways and aprons, while 7 percent have been approved to reduce
airport-related noise. 

Proposals to change the passenger facility charge program fall into
three main categories:  increasing the maximum charge, changing the
types of projects eligible for funding, or adding project selection
criteria.  Airports' current receipts total about $1.4 billion a
year, with all but one participating airport charging the maximum $3
fee.  GAO's analysis indicates that with a $1 increase, if all
airports raise their fee, airports would receive close to one-half
billion dollars in additional revenues, even after accounting for
estimated passenger reductions that result from raising the fee.  GAO
developed a model to estimate the potential impact of higher fees on
passenger levels, using historical data on the relationship between
prices and passenger levels.  GAO's model estimates the effect of
changing the passenger facility charge independently of other factors
that may occur simultaneously.  These other factors could enhance or
offset the effect of changing the passenger facility charge, making
the net effect difficult to determine.  For example, data on
enplanement levels at individual airports indicate that enplanements
have both increased and decreased following the initial imposition of
passenger facility charges by airports.  GAO's analysis based on its
model suggests that raising the fee by $1, if applied by all
participating airports, would reduce passenger levels by 0.5 to 1.8
percent, with a midrange estimate of 0.85 percent.  Based on the
midrange estimate, less than one passenger in one hundred would be
affected by a $1 increase in the passenger facility charge.  In the
short term, forecast growth in passengers would overcome the midrange
estimate of losses unless the fee exceeded $7.  On the other hand, in
the long term, any improvements in passenger safety and comfort that
may result from airport improvements could stimulate the demand for
air travel. 

Increasing the current maximum fee from $3 to $7 at all participating
large airports would generate about $1.63 billion more for large
airports charging the fee, thereby eliminating an annual $1.5 billion
funding difference, on average, that GAO identified between large
airports' future planned development costs ($7.1 billion a year on
average) and the funding they had available in 1996 ($5.6 billion).\2
While a $12 feeï¿½the largest increase GAO examinedï¿½would generate
about $376 million more for small airports eligible to levy the
charge, that would not eliminate the $655 million difference between
their planned development ($1,490.2 million) and funding that was
available in 1996 ($835.7 million).  Proposals to change the types of
projects eligible for fundingï¿½whether they expand or narrow the
coverageï¿½are likely to produce little change.  Changing the types of
projects eligible, without increasing the fee, would have little
effect on participating airports because their collectionsï¿½for
several years, on average--are earmarked for specific projects. 
Also, eligibility changes alone would provide little new incentive to
entice more airports to participate.  Among the last category of
proposed changes to the programï¿½those affecting how projects are
selectedï¿½there are three main proposals:  applying a priority system,
requiring that projects pass a cost-benefit test, and requiring
airline approval.  Requiring these kinds of new selection criteria is
likely to reduce the flexibility that airports currently have in
applying the funds to specific projects.  Under more stringent
selection criteria, some of the projects currently funded might not
have been approved.  If the program remains unchanged, the
distribution of the funds among project types and the participation
rates of airports are unlikely to change very much. 

--------------------
\2 Airport Financing:  Funding Sources for Airport Development
(GAO/RCED-98-71, Mar.  12, 1998). 

   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4

      THE PASSENGER FACILITY
      CHARGE PROGRAM IS MAKING A
      SIGNIFICANT CONTRIBUTION TO
      AIRPORT DEVELOPMENT
-------------------------------------------------------- Chapter 0:4.1

Passenger facility charges provided about 18 percent of the funds
available to commercial service airports to pay for capital
development in 1996ï¿½the most recent year for which data on all
funding sources are available.  Passenger facility charges provided a
greater share of large airports' available fundsï¿½18 percentï¿½than they
provided for small airports, whose receipts from passenger facility
charges accounted for about 13 percent of their available funds. 

Fifty-two percent of the 529 airports eligible to levy passenger
facility charges are participating in the program.  The larger the
airport, the more likely it is to participate.  Local factors, such
as high rates of travel within a state, may influence the decisions
of the 14 large airports that have not yet chosen to levy the fee;\3
for small airports, the limited earnings may not provide much
incentive, given, among other things, the costs associated with
preparing the applications and administering the program. 

As of September 1998, the Federal Aviation Administration had
approved the collection of nearly $22 billion in passenger facility
charges.  The length of time that the agency has approved for
airports to levy the fees ranges from 6 months to more than 40 years,
with half of the collection periods lasting less than 6.6 years and
half longer.  From 1992, when collections first started, through
1998, $6.25 billion had actually been collected.  As figure 1 shows,
the largest share of the $22 billion has been approved for ï¿½landsideï¿½
projects such as terminals and access roads, with less than half as
much approved for ï¿½airsideï¿½ projects such as runways and taxiways. 
Large and small airports differ in the use of their funds, with large
airports spending over twice as much on landside projects as on
airside projects, while small airports are spending more comparable
amounts on the two categories.  Nearly one-third of the approved
collections will be used to pay interest on bonds issued to pay for
development projects that are eligible for funding with passenger
facility charges. 

   Figure 1:  Approved Passenger
   Facility Charges by Major
   Project Category, Fiscal Years
   1992 Through 1998

   (See figure in printed
   edition.)

Note:  Amounts do not include $2.3 billion in collections approved
for the Denver International Airport over a period of about 33 1/2
years because those funds are not separated by different project
categories in the Federal Aviation Administration's information
systems.  Thus, percentages in the pie chart are based on collections
of $21.9 billion which have been approved by the Federal Aviation
Administration minus the $2.3 billion approved for the Denver
airport. 

Under the law, small airports with little or no ability to raise
funds through passenger facility charges can indirectly benefit from
the program.  Large airports that levy the charges must return to the
Federal Aviation Administration up to half of the federal funds they
receive from the Airport Improvement Program on the basis of their
passenger levels.  Most of the returned fundsï¿½87.5 percent--must be
redistributed as project grants under the Airport Improvement Program
to small airports including general aviation airports which, under
the law, are not authorized to charge the fee.  Between fiscal years
1993ï¿½the first year that large airports returned some of their
federal grant fundsï¿½and 1999, this provision has targeted to small
airports, including general aviation airports, about $710 million. 
Under the statute, small airports were not expected to lose other
federal grants they receive through the Airport Improvement Program
just because these additional funds were being targeted for their
use. 

--------------------
\3 Some are considering and/or preparing their first application. 

      THE EFFECTS OF PROGRAM
      CHANGES DEPEND LARGELY ON
      ACCOMPANYING CONDITIONS
-------------------------------------------------------- Chapter 0:4.2

Proposed changes to the passenger facility charge program fall into
three broad categoriesï¿½increasing the maximum fee that airports may
charge passengers, changing the types of airport projects eligible
for funding, and adding new requirements that must be met before
eligible projects can be approved.  The potential effects of such
changes depend largely on the specific conditions that accompany
their authorization or implementation. 

         INCREASES IN THE MAXIMUM
         PASSENGER FACILITY CHARGE
------------------------------------------------------ Chapter 0:4.2.1

All but one airport levying the fee charges the maximum $3 allowed;
their receipts now total about $1.4 billion a year.  If passenger
levels were unaffected by a higher fee, then each $1 increase would
add about $479 million to total collections each year if all
participating airports raised their fee.  However, according to GAO's
model, increasing the charge would reduce passenger levels, thereby
reducing the additional revenues generated by a higher fee.  GAO
estimates that, after accounting for estimated passenger reductions,
a $1 increase would generate about $463 million and a $2 increase
would generate about $917 million more than the current $3 fee.  If
large airports lost all of the federal grants they receive on the
basis of their passenger levels,\4 as a condition for levying a
higher fee, they would have a net gain of about $255 million from the
added revenues of a $1 increase and about $666 million from the added
revenues of a $2 increase, after accounting for estimated passenger
losses that would result from higher fees. 

Higher fees would provide a greater benefit for large airports than
for small airports.  GAO found in its 1998 study on funding sources
for airport development that all airports in the national system were
planning to spend, on average, $10 billion a year in fiscal years
1997 through 2001 for capital development.  They had about $7 billion
available for capital development expenditures in 1996, leaving a
funding difference of about $3 billion a year.  Large airports would
need to charge a $7 fee to eliminate their $1.5 billion share of that
$3 billion difference.  By contrast, a $12 feeï¿½the largest potential
fee increase that GAO examined--would not eliminate the $655 million
shortfall for small airports.\5 Changes in airports' development
plans and funding could alter these results. 

Increased charges are likely to affect some passengers' decisions
about whether to fly.  The extent of passenger reductions is
difficult to estimate, however, because of the need to estimate
measures of certain kinds of behavior, such as passengers'
sensitivity to changes in ticket prices and the extent to which
airlines may choose to absorb the cost of the increase.  Using a
model that GAO developed, GAO examined three scenarios that were
based on different combinations of assumptions about these behaviors
to produce high, midrange, and low estimates of the reduction in
passengers from higher passenger facility charges.  (See app.  I.)
GAO's model estimates the effect of changing the passenger facility
charge independently of other factors that may occur simultaneously. 
These other factors could enhance or offset the effect of changing
the passenger facility charge, making the net effect difficult to
determine.  For example, data on enplanement levels at individual
airports indicate that enplanements have both increased and decreased
following the initial imposition of passenger facility charges by
airports. 

On the basis of the model that GAO developed, GAO's analysis suggests
that each $1 increase would reduce passenger levels by about 0.5 to
1.8 percent, and that the midrange estimate would be 0.85 percent.\6
On the basis of the midrange estimate, less than one passenger in one
hundred would be affected by a $1 increase in the passenger facility
charge.  GAO's analysis also suggests that the effects would be
proportionally greater for nonbusiness passengers, low-fare airlines,
large airports, and passengers on relatively short flights.  On the
basis of GAO's midrange estimate, forecast growth in passenger
enplanements (about 3.4 percent a year from fiscal year 1999 through
fiscal year 2010) would overcome losses in passengers resulting from
higher fees unless the higher fee exceeds $7.  On the other hand, in
the long term, any improvements in passenger safety and comfort that
may result from airport improvements could stimulate the demand for
air travel. 

On the basis of GAO's midrange estimate, airlines would receive about
1.3 percent less in gross revenues if the fee were increased by $1.\7
A little more than half of this loss would come from the estimated
decline in passengers, while the rest of the reduction is
attributable to estimates of the airlines' absorption of the increase
in the fee.  A decline in the airlines' gross revenues could be
accompanied by a decline in their costs, so that the net effect on
the airlines' profits will depend on the extent to which costs
decline along with revenues. 

--------------------
\4 For fiscal year 1998, those funds totaled about $163 million for
large airports charging the fee. 

\5 The funding difference for small airports that are eligible to
charge the fee is about $655 million; when the general aviation
airports are included, the funding difference for small airports
rises to about $1.4 billion.  In either case, the $12 fee would not
eliminate the funding difference.  Also, while the funding difference
may disappear for the large airports as a group, individual
airportsï¿½especially those not levying the passenger facility
chargeï¿½may still experience a funding difference.  Some individual
airports, whether large or small, may not have a funding difference
to start with. 

\6 GAO's analysis was made on the basis of a database of 338 million
one-way passenger trips.  The three scenarios GAO examined using that
database resulted in a loss of 1.6 million to 6.1 million one-way
passenger trips, with the midrange scenario producing an estimated
loss of 2.9 million one-way passenger trips. 

\7 On the basis of the 338 million one-way passenger trips and the
estimated fares used for travelers, GAO's midrange scenario analysis
produced a loss of about $614 million out of a possible $45.8 billion
in gross revenues that those trips would have generated at the fare
estimates used in the analysis. 

         CHANGING ELIGIBILITY
------------------------------------------------------ Chapter 0:4.2.2

Adding or eliminating types of projects that may be funded with
passenger facility charges would expand or narrow the scope of the
program accordingly.  The current scope of project eligibility makes
at least 57 percent, and possibly more, of the costs of planned
development at commercial service airports eligible for funding with
passenger facility charges, on the basis of the most recently
available data.\8 For participating airports, changing the scope of
eligible projects may have little near-term effect largely because
fees being collected are generally committed to specific projects
over a number of years.  Expanding the eligibility of projects may
provide little new incentive to entice nonparticipating airports to
start charging the fee.  Most of the nonparticipating airports have
relatively few passengers so these airports are more likely to be
motivated by how much they may charge than by which types of projects
are eligible.  If the range of eligible projects were narrowed, in
the long run airports would need to find other funding sources for
excluded projects or forgo some development. 

--------------------
\8 See Airport Financing:  Funding Sources for Airport Development
(GAO/RCED-98-71, Mar.  12, 1998). 

         ADDING PROJECT SELECTION
         CRITERIA
------------------------------------------------------ Chapter 0:4.2.3

There are three main types of proposals that would add new selection
criteria for projects:  prioritizing projects, requiring projects to
meet cost-benefit analysis tests, or requiring that airlines agree
that a project should be funded with passenger facility charges.  The
specific effects of any of these kinds of changes depend largely on
how the change is structured.  Adding more stringent selection
criteria will reduce some of the flexibility that airports currently
have under the program.  Key issues to consider when reviewing these
kinds of proposals include what prioritization criteria to use,
whether to require cost-benefit analyses for all projects, and how
the approval of airlines serving an airport would be determined. 

         MAKING NO PROGRAM CHANGES
------------------------------------------------------ Chapter 0:4.2.4

If the program remains unchanged, there is unlikely to be much change
in how many airports are charging the fee or in how they are applying
those funds.  The extent to which passenger facility charges would
continue to contribute to airport development will depend on the
changing demands placed on the aviation system and the other
resources available to respond to those demands. 

   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

GAO is making no recommendations in this report. 

   AGENCY COMMENTS AND GAO'S
   EVALUATION
---------------------------------------------------------- Chapter 0:6

GAO provided the Department of Transportation, the Federal Aviation
Administration, a panel of two experts, the Airports Council
International-North America, the Air Transport Association, and the
National Association of State Aviation Officials with a copy of the
draft report, or portions thereof, for review and comment.  GAO spoke
with the Deputy Director of the Federal Aviation Administration's
Office of Airport Planning and Programming, the Air Transport
Association's Director of Airport Planning and Development, and the
Vice President of the National Association of State Aviation
Officials and received comments from the panel of experts, all of
whom generally agreed with the facts presented and thought the report
was both thorough and balanced in its discussion of the issues.  They
provided some suggestions for clarification and additional
information that were incorporated in the report as appropriate.  GAO
met with the President, the Senior Vice President for Economic and
Associate Affairs, and the Vice President for Government Affairs of
the Airports Council International-North America, who questioned
whether a reduction in passengers would actually occur if passenger
facility charges were increased.  They questioned whether passengers
would actually see an increase in ticket fares if passenger facility
charges were raised, noting that many factors, not only higher
passenger facility charges, affect the pricing decisions of airlines. 
They also noted that elasticity analysis is theoretical and suggested
that it would be more useful to use historical analysis instead. 

GAO believes that it has appropriately applied generally accepted
economic analysis methods to estimate how higher passenger facility
charges may affect ticket fares and how increases in those fares
could affect passenger levels, including acknowledging the
uncertainty associated with such an estimate.  Although many factors
influence air fares simultaneously, in analyzing the impact of one
factor, such as higher passenger facility charges, it is necessary to
hold constant the effect of all other factors.  Furthermore, the
elasticities used in GAO's analysis were based on statistically
significant historical relationships between prices and passenger
levels and have been previously used by the Department of
Transportation.  Nevertheless, discussion of the uncertainties
associated with analysis of the potential effect of higher fees on
passenger levels was clarified, particularly in the executive
summary, to assure a clear understanding of GAO's methodology. 

INTRODUCTION
============================================================ Chapter 1

With more than 18,000 aviation landing facilitiesï¿½including over
13,000 airports--the United States has the most extensive aviation
system in the world.  U.S.  airports range from large commercial
transportation centers enplaning more than 30 million passengers a
year, such as Chicago's O'Hare International Airport, to small grass
strips serving only a few aircraft each year.  More than 3,300 of
these airports are part of a national system designed to ensure that
every part of the country has an effective aviation infrastructure. 

The concept of a national airport system was envisioned more than 50
years ago and has been developed and nurtured by close cooperation
among federal, state, and local agencies.  The federal interest in
aviation has focused on several objectives, most notably to ensure
the safe operation of an airport and airway system, to preserve and
enlarge the nation's aviation capacity, to help small airports, to
reduce aviation noise, and to protect the environment. 

The federal role in airport development began in 1946 with passage of
the Federal Airport Act establishing the first federal airport grant
program, which was designed to promote the development of a civil
system of airports nationwide.  Although it has gone through various
revisions over time, a federal grant program supporting airport
capital development continues to this day through the Airport
Improvement Program (AIP).  The AIP provides funding for airport
planning and capital development projects at airports that are part
of the national system--those airports in the National Plan of
Integrated Airport Systems (NPIAS).  The funds are appropriated by
the Congress from the Airport and Airway Trust Fund, which is
financed by taxes on domestic and international travel, domestic
cargo transported by air, and noncommercial aviation fuel. 

The national airport system is comprised of two types of airports: 
commercial service airports and general aviation airports. 
Commercial service airports, which, as of January 1999, number 529,
are those that enplane 2,500 or more passengers a year and have
scheduled airline service.  The Federal Aviation Administration
(FAA), which oversees the federal government's involvement in
aviation, including airport issues, divides commercial service
airports further into various categories on the basis of the number
of passengers they enplane.  (See fig.  1.1.) General aviation
airports, of which there are currently 2,815 in the national system,
have at least 10 aircraft based at their locations and fewer than
2,500 scheduled enplanements a year. 

   Figure 1.1:  Categories of U.S. 
   Airports

   (See figure in printed
   edition.)

   Note:  There are 3,344 airports
   in the 1998 database for the
   NPIAS, which covers fiscal
   years 1998 through 2002.  These
   are the airports referred to in
   this report as the national
   system of airports.  The number
   of airports in each category of
   commercial service airports is
   based on enplanements for
   calendar year 1997, which
   totaled 641,561,881.

   (See figure in printed
   edition.)

All airports in the NPIAS are eligible for federal airport
development grants, which are provided today through the AIP.  For
fiscal year 1998, the Congress appropriated $1.7 billion for the AIP. 
Airports also have other sources of funding that they draw on to help
pay for their capital development, including bonds, state grants, and
airport revenues.\1

With the passage of the Aviation Safety and Capacity Expansion Act of
1990,\2 some airports have also benefited from a major federally
authorized funding program designed to help pay for airport capital
development.  The act authorized commercial service airports to seek
FAA's approval to impose boarding feesï¿½called a passenger facility
charge (PFC)ï¿½on passengers boarding aircraft at their facilities. 
While only commercial service airports are authorized to charge the
PFC, no airport is required to impose the fee.  Airports wishing to
participate in the program must apply to FAA for approval to charge
the fee and for approval of the projects that will be funded with the
money collected.  Because only commercial service airports may charge
PFCs, the data in this report covers only those airports unless
otherwise stated.  Throughout this report, the grouping referred to
as ï¿½largeï¿½ airports comprises large and medium hub airports, while
the grouping referred to as ï¿½smallï¿½ airports comprises small hub,
nonhub, and other commercial service airports. 

Under the PFC program, commercial service airports may charge
boarding passengers a $1, $2, or $3 fee.  No more than two fees, or a
maximum of $6, may be charged to a passenger on a one-way trip, and
no more than four fees, or a maximum of $12, may be charged to a
passenger on a round trip.  If an airport decides to levy a PFC,
however, not all passengers may have to pay it.  For example,
passengers using frequent flyer programs to purchase their tickets
are exempt.  Also, an airport may request that a class of airlines
carrying no more than 1 percent of the airport's passengers be
exempted from collecting the fee.  Thus, total airport collections
are based on the number of boarding passengers required to pay the
fee. 

--------------------
\1 See Airport Financing:  Funding Sources for Airport Development
(GAO/RCED-98-71, Mar.  12, 1998) for a discussion of airport funding
sources for development. 

\2 49 U.S.C.  Section 40117. 

   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:1

Within the industry, there are different views about whether the PFC
program should be expanded, limited, or left as is.  For example,
airport associations view expansion of this program as a way to help
bridge the difference between the cost of planned development
projects and the funds available to pay for that development.  As we
described in our March 1998 report on funding sources for airport
development, about a $3 billion difference existed between the annual
average cost of airports' planned capital development for fiscal
years 1997 through 2001 and the funds that were available to airports
in 1996 to pay for their capital development.  Airlines have
frequently questioned the need for, or eligibility of, some of the
development that airports propose to fund through PFCs and have
suggested some changes to the program, such as a more stringent
screening process for project selection.  Because of interest in
changing the program, the Chairmen and Ranking Minority Members of
the Senate Committee on Commerce, Science, and Transportation and its
Subcommittee on Aviation, and the Chairman and Ranking Democratic
Member of the House Committee on Transportation and Infrastructure's
Subcommittee on Aviation, asked us to review the program,
specifically to address the following questions: 

  -- How are passenger facility charges helping airports fund their
     capital development, particularly in terms of the extent to
     which the charges fund development, the rate of airports'
     participation in the program, and airports' use of the funds
     collected? 

  -- What are the potential effects of proposals for changing the
     programï¿½particularly with regard to increasing the fee, changing
     project eligibility, and providing new project selection
     criteria--as well as the potential effects of making no change
     at all? 

To address the first question, we (1) reviewed data in our 1998
report on airport funding sources to identify the extent to which
PFCs contribute to airport development in the context of the major
funding sources available (Airport Financing:  Funding Sources for
Airport Development [GAO/RCED-98-71, Mar.  12, 1998]); (2) reviewed
the original statute for the passenger facility charge program, its
legislative history and amendments, and FAA regulations and
requirements implementing the statutory directive; (3) obtained FAA
data to identify the PFC collections approved by FAA and the
distribution of approved PFC collections by airport size and project
types; (4) reviewed statutory provisions and related federal grant
data to determine if we could identify whether small airports
received a net gain in certain federal grant funds targeted for their
use from the return of some federal grant funds by large airports
under the PFC statute, and (5) reviewed airports' use of PFCs as sole
backing for bonds under new FAA provisions that help ensure the
payment of bonds when an airport may face termination of its
collections because of program violations.  We interviewed officials
from FAA headquarters in Washington, D.C.; the Airports Council
International-North America (ACI-NA); the Air Transport Association
(ATA); the National Association of State Aviation Officials (NASAO);
and bond raters and underwriters to obtain their views on these
issues.  We tested the validity of FAA's database on approved PFC
applications by randomly selecting four applications from each year
of the program's operation (1992 through 1998) and tracing all of the
data entries to their sources.  We found FAA's database to have a
very high reliability (a 0.3-percent error rate). 

To address the second question, we identified a variety of proposals
for changes to the PFC program by reviewing (1) testimonies on FAA
reauthorization issues before the Senate and the House of
Representatives that were presented during 1998 by representatives of
FAA, ACI-NA, ATA, the American Association of Airport Executives
(AAAE), and NASAO; (2) legislative proposals regarding FAA's
reauthorization for fiscal year 1999; and (3) other related
documentation, such as analyses presented by experts at conferences. 
We also discussed the issues with congressional staff and officials
from FAA, ACI-NA, ATA, and NASAO, as well as other experts to obtain
their ideas on the kinds of proposals that the Congress might be
asked to consider in its review of FAA's next reauthorization.  As a
result of our documentary review and discussions, we focused our
review and analysis on the kinds of proposals that generated the most
attention during the hearings and that representatives of aviation
organizations and other experts thought were the most important for
consideration.  Those proposals were to (1) increase the maximum PFC
that airports could charge passengers, (2) change the eligibility of
projects, and (3) add new project selection criteria.  Because the
Congress may modify the PFC program when it considers the next
reauthorization for FAA, we analyzed the potential impacts of these
changes on the amount of funds that would be collected, management of
the program, passenger traffic, airports, and airlines.  However,
because analyses of the potential effects of changes to the program
are prospectiveï¿½or ï¿½future impactï¿½ï¿½analyses, we cannot say with
certainty what the outcomes of any changes will, in fact, be.  As a
result, we can only estimate what the potential outcomes may be. 

To review the potential impact of proposals that would raise the fee
that passengers may be charged, we reviewed the effect of increases
from $1 to $9 to assess the potential gains from higher fees in the
range of $4 to $12.  This range was chosen to consider the most
common proposals for increasing the charge, which focus on a $1, $2,
or $3 increase in the maximum allowable fee, and to consider the
potential impact of proposals that would give airports more freedom
in setting fee levels.  We also interviewed officials and obtained
comments on the potential effects of proposals to increase the PFC
from FAA, ACI-NA, ATA, and NASAO. 

We developed a model that used data on the number of one-way
passenger trips and the fares paid during the 12-month period ending
June 30, 1998, to estimate the potential impact of increases in the
PFC on passenger levels.  We took into account differences between
business and nonbusiness passengers, long and short trips,
regular-fare and low-fare airlines, and trips that involve large
versus small airports.  We purchased data showing the one-way trips
in various trip categories and the fares paid for those trips from a
firm that produced these data from a Department of Transportation
database of ticket information, and, hence, we did not verify the
data provided.  The analysis we performed required us to make
assumptions about several key parameters.  Those assumptions pertain
to (1) the degree to which passengers are likely to reduce their
travel as ticket prices increase, (2) the extent to which airlines
may absorb the increase in the PFC, (3) the split of passengers
between business and nonbusiness travel, and (4) the way in which
separate average fares for business and nonbusiness passengers are
estimated.  In our analysis, we used the model to develop three
scenarios that are based on different combinations of assumptions for
the first two factors that were selected in order to produce high,
midrange, and low estimates of the potential reduction in passengers
due to increases in the PFC.  (See app.  I for a detailed discussion
of this methodology and the results.)

Statutorily, large and medium hub airports are designated as large
primary airports and must contribute a larger share to projects
funded under the federal grant program as well as forgo a portion of
their federal grant funds if they collect PFCs.  This report follows
that convention in grouping large and medium hub airports together as
ï¿½largeï¿½ airports and grouping the small hub, nonhub, and other
commercial service airports eligible to charge a PFC as ï¿½smallï¿½
airports.  Except where specifically noted, data for small airports
do not include data for general aviation airports. 

A panel of two experts reviewed our design and methodology for
conducting our work and our draft report.  These experts were
selected because of their work on aviation and airport issues; they
have expertise over a broad range of airport issues, including
airport finance, airport administration, and engineering.  (See app. 
II.)

We provided the Department of Transportation, FAA, ACI-NA, ATA,
NASAO, and the two members of our advisory panel of experts with a
copy of a draft of this report, or portions thereof, for review and
comment.  Their comments are discussed at the end of chapter 4. 

We conducted our review from August 1998 through April 1999 in
accordance with generally accepted government auditing standards. 

THE PFC PROGRAM GIVES AIRPORTS THE
ABILITY TO FUND A BROAD ARRAY OF
AIRPORT DEVELOPMENT PROJECTS
============================================================ Chapter 2

The PFC program sets forth several broad objectives to further
airport development, such as enhancing airport safety, security, and
airline competition.  The types of projects eligible for
funding--within the context of those objectives--is broader than the
scope of projects eligible for federal AIP grants.  For example,
while all projects eligible for AIP grants may be funded with PFCs,
PFCs can also fund projects not covered by the federal grant program,
such as the construction of gates and the payment of interest on debt
for eligible projects.  PFC funds are also a less constrained source
of money than some of the other major funding sources that support
airport development.  For example, projects are not prioritized for
funding, as is the case with certain AIP grants.  While airline
agreement is sometimes needed for an airport to issue bonds,\1 it is
not required for participation in the PFC program.  Moreover, while
airports must apply to FAA for approval of both the collection of the
fees and the specific projects that the money will pay for, FAA
officials note that as long as a project is eligible, meets a program
objective, and is adequately justified, they do not have the
authority to reject an airport's proposal for the collection or use
of PFC funds. 

--------------------
\1 At some airports, airlines have agreements that give them the
opportunity to review and approve capital projects. 

   PROGRAM OBJECTIVES AND PROJECT
   ELIGIBILITY ARE BROAD IN SCOPE
---------------------------------------------------------- Chapter 2:1

The Congress established broad overall objectives for the PFC program
and expanded the specific kinds of projects that federally authorized
funding could support.  The Congress authorized the PFC program to
help airports pay for capital development that would further several
main objectives.  As provided for in the PFC statute, projects funded
with PFCs should

  -- contribute to the preservation or enhancement of an airport's
     safety, security, or capacity,

  -- reduce noise generated by airport activities, or

  -- enhance competition among the airlines. 

Within the context of these objectives, the statute authorizes the
use of PFC collections for specific projects, including all of those
that are eligible, by statute, for AIP funds, such as projects
involving runways, airfield lighting, and aprons.\2 The PFC statute
also authorizes the use of PFCs for some activities that are not
eligible for AIP grantsï¿½such as the construction of new gates and the
payment of interest on debt for eligible development projects. 
Projects ineligible for either PFCs or AIP grants, such as
revenue-producing parking areas and terminal concession areas, must
be paid for with funds from other sources.  Table 2.1 shows the
eligibility of projects for the various funding sources. 

                                        Table 2.1
                         
                          Funding Options for Different Kinds of
                               Airport Capital Development

Projects eligible for funding  Projects eligible for         Projects eligible for
with AIP, PFC, and other       funding with PFC and other    funding with other sources
sources\a                      sources only\a                only
-----------------------------  ----------------------------  ----------------------------
Development type               Construction of gates and    Construction, alteration, or
Safety and security           related areas where           repair of
Reconstruction of landing     passengers en/deplane, if     Revenue-producing parking
area                           not long-term exclusive use   Hangars
Meeting standards             lease                         Buildings not eligible for
Upgrade                       Airline ticketing areas, if  AIP or PFC funds
Capacity                      not long-term exclusive use
New airport                   lease                         Other costs relating to
Noise and environment         Interest payments for debt   Obtaining liability
Planning                      service                       insurance
                               PFC administrative           Purchasing nonexpendable
Within each development type,  expenses                      machinery, tools, and
projects can be for            Certain noise mitigation     materials already purchased
Runway                                                      by airport
Taxiway                                                     Raising airport funds
Apron                                                       Tuition, travel, and
Lighting                                                    subsistence for airport
Approach aids                                               personnel
Terminal, if not leased                                     Operations and maintenance
Access                                                      work
Planning                                                    Those aspects of projects
Equipment                                                   involving restaurants,
                                                             concessions, and any other
Other eligible project                                       revenue-producing public use
categories                                                   areas, that are not eligible
Parking for passengers if at                                for AIP or PFC funding
a small hub or nonhub airport                                Airline ticketing, gate,
and if not revenue-                                          and/or baggage areas that
producing                                                    are long-term exclusive use
Certain aspects of projects                                 lease
involving restaurants,                                       Advertising
concessions, and any other                                   Public convenience
revenue-producing public use                                 amenities
areas at nonhub airports                                     Decorative landscaping and
                                                             the purchase of art
-----------------------------------------------------------------------------------------
\a Projects eligible for PFC funding must also meet at least one of
the following statutory objectives:  preserve or enhance airport
safety, security, or capacity; reduce noise; or enhance competition
among airlines. 

Another objective of the program is to channel additional federal
grant funds to the small airports that do not generate much money
from PFCs because of low passenger levels and to airports that are
not eligible to collect the fees.  Because the large airports will
receive the greatest portion of revenues from PFCs (91 percent), the
statute includes a provision that requires large airports charging
PFCs to forgo part of the money they would normally receive from the
AIP grants.  Most of this money must be redistributed to the small
commercial service airports and to the general aviation airports
within the national system.\3 This provision and the degree that
small airports are benefiting from it are discussed in chapter 3. 

--------------------
\2 Projects eligible for federal AIP grants are designated in the
Airport and Airway Improvement Act of 1982 (49 U.S.C.  47102). 

\3 While general aviation airports are not eligible to collect PFCs,
airports that collect PFCs may use the funds on any airports they
control, including general aviation airports. 

   PFCS OFFER AIRPORTS SOME
   FUNDING FLEXIBILITY
---------------------------------------------------------- Chapter 2:2

The PFC program offers airports greater decision-making control over
the use of the funds than some of the other major funding sources
available for airport development.  And, while FAA manages the
program, FAA officials consider their authority over the use of PFCs
limited to a determination of whether a project is eligible, meets a
program objective, and is adequately justified. 

      PFCS ARE LESS CONSTRAINED
      THAN SOME OTHER DEVELOPMENT
      FUNDING SOURCES
-------------------------------------------------------- Chapter 2:2.1

The PFC program offers airports more flexibility in some ways than
some of the other major funding sources available to pay for
airports' development costs.  First, the PFC program provides more
flexibility in project selection than does the AIP grant program by
allowing a broader array of projects to be funded.  Also, airports
have more control over the types of projects they undertake because
under the PFC program, projects are not subject to an FAA priority
process to establish a ranking order for selecting projects for
funding, as is the case with certain AIP grants.  Second, while
airports must consult with airlines when considering participation in
the PFC program and the selection of projects to be funded, airports
do not need airlines' agreement on the use of PFCs or on project
selection.  In contrast, with general airport revenue bonds, airports
that have agreements with airlines that give airlines the right to
approve capital projects must obtain airline agreement for the use of
the bonds.  Third, while airports may have the greatest flexibility
when using available airport revenues to pay for capital development,
available revenues are an extremely limited funding source--only 2
percent of total funding for development in 1996 (the most recent
data available)ï¿½thereby contributing little to unconstrained funding
opportunities. 

      FAA IMPLEMENTS THE PROGRAM
      BUT CONSIDERS ITS AUTHORITY
      LIMITED
-------------------------------------------------------- Chapter 2:2.2

Airports must seek FAA's approval both to levy PFCs and to use PFC
revenues for specified projects.  When seeking FAA approval, airports
specify whether they want to charge a $1, $2, or $3 fee, the projects
they want to fund with the collections, how much those projects are
going to cost, and how long it will take to collect enough money
through PFCs to pay for the proposed projects.  Under the statute,
airports cannot receive more money in PFC collections than they need
to pay for the approved projects.  When FAA approves an airport's
request, it approves, among other things, the amount of the PFC to be
charged to a boarding passenger, the maximum amount of funds that may
be collected from PFCs, and how long the airport will be collecting
the PFC.  Approved collection periods for airports range from as
little as 6 months to more than 40 years, with half of the airports
collecting for less than 6.6 years and half for longer. 

According to FAA officials, FAA considers its authority to control
airports' use of PFC funds limited since, under the statute, airports
need only demonstrate that projects are eligible, meet at least one
of the program's objectives, and are adequately justified.  According
to FAA officials, while there are no standardized criteria for
determining if a project is adequately justified, a project's
justification is generally assessed in the context of how well a
proposed project meets the program's objectives.  FAA officials
explained that they use established project review guidance, such as
AIP screening criteria, where relevant, when determining whether a
project is adequately justified.  They also noted that if an airline
challenges a project, that challenge will trigger a more in-depth
review. 

FAA has developed an application and review process to implement its
management and oversight responsibilities for the PFC program. 
According to FAA officials, many airports begin the application
process by discussing their proposals with one of FAA's regional
Airport District Offices.  An airport must notify all airlines that
operate at its facility that it plans to submit an application to FAA
to charge PFCs so that the airlines may comment on the proposed
collection and use of the PFCs.  The airport may have a draft
application at that time, but one is not required.  The airlines have
30 days to acknowledge receipt of the notice from the airport in
writing.  The airport then has up to 45 days from the day it provided
notice to meet and discuss the proposed application with airline
officials.  At the conclusion of this meeting, the airlines have 30
days to provide a written statement informing airport officials of
their agreement or disagreement with the proposal to collect PFCs, in
whole or in part.  The airport may construe the failure of an airline
to provide written comments as certification of agreement, but
airlines' agreement is not required.  After this consultation process
is completed, the airport finalizes the application and submits it to
FAA.  The application must include airlines' comments, and if any
airlines raised objections, the airport must address those objections
in its application. 

Once an application is formally received, FAA has 120 days to review
it and decide whether to approve it.  The first 30 days are used to
check the application for completeness to ensure that all of the
information that FAA needs to evaluate the application is included. 
For example, an application must include information on the proposed
project or projects to be paid for with PFCs and the results of the
airport's consultation with the airlines.  (See fig.  2.1.) If the
information in the application is incomplete for one or more
projects, FAA notifies the airport, which then has 15 days to inform
FAA of whether it intends to provide a supplement to the
application.\4

Once an application is complete, FAA publishes a notice in the
Federal Register to solicit comments from the public over a 30-day
period.  After the 30-day comment period, FAA reviews the comments
and prepares a decision paper--called a record of decision.  Notice
of FAA's decision is published in the Federal Register.  Airports may
not begin collecting PFCs until the first day of a month that occurs
at least 60 days after the application has been approved.  The
implementation of projects that have been approved for funding with
PFCs must be initiated within 2 years.  Once FAA has approved the
collection of PFCs by an airport, the airlines are required by the
statute to collect the fees from passengers and transmit the funds to
the airport.  FAA sometimes approves the collection of PFCs before
giving final approval of the projects that the PFCs will fund.  In
these cases, an airport must seek authority to use the collected
funds on the projects within 3 years.  Figure 2.1 illustrates the
application and approval process. 

   Figure 2.1:  FAA's Review and
   Approval Process for
   Applications to Charge and Use
   PFCs

   (See figure in printed
   edition.)

\a FAA headquarters has retained decision-making authority, according
to FAA officials, over those PFC applications that are controversial
or involve issues such as major policy or legal issues.  FAA has
delegated decision-making authority over all other applications to
FAA's regional Airports Division managers. 

\b The 120-day time frame starts over upon receipt of the supplement. 

In practice, according to FAA officials, FAA tries to provide
informal technical review and comments on prospective applications to
facilitate processing within the required 120-day time frame,
particularly since applications can contain as many as 30 to 40
projects or more.  FAA's informal review allows many technical issues
to be resolved before an application is formally submitted.  Partly
as a result of this informal technical review, FAA has rejected only
one airport application for the collection of PFCs in its entirety;
the reason for the rejection was inadequate justification for the
proposed projects.  Nevertheless, FAA does not necessarily approve
all of the projects that may be included in a single application. 
FAA has formally rejected over 200 projects since 1992 generally
because of ineligibility. 

Once FAA approves an airport's application, airlines have the
responsibility under the statute for collecting the fee, which they
do along with the passenger's ticket fare.  Airlines must remit the
fees to the appropriate airports on a monthly basis.  To help cover
their costs for the administration of this part of the program,
airlines may retain 8 cents of each fee as well as any interest
earned on the money prior to its transmission to the airports. 

Airports must maintain separate accounting records on the funds
received for each of their PFC applications that have been approved. 
They must submit copies to FAA of quarterly reports on the
collection, use, and holdings of their PFC funds as well as report
annually to FAA on expected PFC revenues for the ensuing fiscal year. 
Airports must also contract with a private auditing firm for an
annual independent audit of their PFC records. 

--------------------
\4 FAA's 120-day countdown stops when an airport is working on an
application supplement; the count starts over at the beginning once
FAA receives the supplement. 

THE PFC PROGRAM IS MAKING A
SIGNIFICANT CONTRIBUTION TO
AIRPORT DEVELOPMENT
============================================================ Chapter 3

PFCs provided about 18 percent of the total funds available to
commercial service airports to pay for their capital development in
1996, the most recent year for which data could be obtained on all of
the major funding sources.  With nearly $22 billion in collections
approved by FAA at the request of airports, and with about $6.25
billion of that already collected, the PFC program is making a
significant contribution to funding airport development, especially
for the nation's largest airports.  As of October 1, 1998, 273
airports were participating in the program, including most of the
nation's 70 large airports, which will receive 91 percent of the
collections that FAA has approved.  Airports are using PFCs to pay
for a broad range of projects that include terminals, new gates,
access roads, runways, land acquisition, interest on bonds issued to
pay for eligible projects, and noise reduction.  Large and small
airports participating in the PFC program are using their funds
somewhat differently.  Large airports are spending twice as much for
landside projects, such as terminals and access, as for airside
projects, such as runways and taxiways, while small airports are
spending comparable amounts on both. 

Small airports also benefit indirectly even if they do not collect
PFCs.  Under the PFC program, large airports that levy PFCs must
return some of their federal AIP grants to FAA for redistribution,
primarily to the small airports to supplement their other AIP
receipts.  This provision has targeted about $710 million to small
airports from fiscal year 1993, the first year large airports
returned AIP funds, through fiscal year 1999.  Under the statute,
small airports were not expected to lose other federal grants because
these additional funds were being targeted for their use.  However,
we cannot determine whether small airports have gained from these
funds as the statute intended because a required minimum level of AIP
funding is not clearly established; furthermore, the amount of AIP
funds that small airports would have received without this
redistribution is unknown.  FAA officials note, however, that small
airports have always received greater benefits from the AIP overall
because their share of total AIP funds has always been greater than
the share that large airports have received. 

In addition to the benefits provided by the statutory objectives of
the PFC program, some airports have used PFC revenues as the sole
source of financial backing for bonds issued to pay for eligible
projects.  But the use of PFCs as the sole financing source for such
bonds has been slow to develop because bond raters and underwriters
have been concerned about the Department of Transportation's ability
to terminate the collection of PFCs if it finds that an airport has
violated the program's requirements. 

   PFCS ARE A MAJOR FUNDING SOURCE
   FOR COMMERCIAL SERVICE AIRPORTS
---------------------------------------------------------- Chapter 3:1

Airports pay for their capital development primarily through five
major funding sources:  federal grants, PFCs, tax-exempt bonds, state
grants, and airport revenues.\1 Tax-exempt bonds are the single
largest source of funding (about 61 percent) for airport capital
development, providing commercial service airports in the national
system with $3.84 billion in 1996ï¿½the most recent year for which data
for all of the major funding sources are available.\2

PFCs were the second largest funding source for those airports,
providing $1.11 billion, or about 18 percent, of their available
funds, while AIP provided another $1.05 billion, or about 17 percent,
of their funds, and states provided $155 million in grants, or 2.5
percent.  Airports also had available to them about $152 million (2.4
percent) in airport revenues in 1996 that could be used to pay for
capital development projects. 

The availability of the five major funding sources differs for large
commercial service airports versus small commercial service airports. 
As figure 3.1 shows, in 1996 bonds were the largest single source (65
percent) of development funding for the large airports, whereas about
55 percent of the small airports' funds came from AIP funds. 

   Figure 3.1:  Distribution of
   1996 Funding Sources for Large
   and Small Airports

   (See figure in printed
   edition.)

--------------------
\1 See Airport Financing:  Funding Sources for Airport Development
(GAO/RCED-98-71, Mar.  12, 1998). 

\2 These percentages do not include data for general aviation
airports that are not allowed to impose PFCs. 

   273 AIRPORTS ARE COLLECTING
   NEARLY $22 BILLION IN APPROVED
   PFCS
---------------------------------------------------------- Chapter 3:2

Of the 529 airports eligible to participate in the PFC program, 273
(52 percent) were collecting PFCs as of October 1, 1998.  The larger
the airport is, the more likely it is to participate.  Overall
participation for large airports is 80 percent, while among small
airports it is 47 percent.  For large and medium hub airports
separately, the participation rates are 83 and 78 percent,
respectively.  While small hub airports are participating at a
similarly high rate (77 percent), the rate drops to 54 percent for
nonhubs and only 12 percent for other commercial service airports. 
According to FAA officials, there are various reasons why an airport
may not participate.  Local factors, such as high rates of travel
within a state, may influence the decisions of the 14 large airports
that have not yet chosen to levy the fee.\3 For small airports, for
example, revenues from PFCs may be too low to provide them with
sufficient incentive to charge the fee. 

As table 3.1 shows, large airports will receive most of the PFC
collections that FAA has approved.  From June 1992, when the
collections first began, through September 1998, FAA approved the
collection of $21.9 billion in PFCs.  Large airports will receive
$19.9 billion of this amount (91 percent), reflecting their high
participation rate in the PFC program and their passenger traffic (90
percent of all 1997 enplanements were at the large participating
airports).  Small airports will receive about $2 billion (9 percent). 
All but one of the participating airports are currently charging the
$3 maximum allowed by law.\4 Only about $6.25 billion, or 29 percent
of approved PFCs, had actually been collected as of December 31,
1998, because FAA has approved additional applications during each
year of the program since 1992, and collection periods approved for
airports range from 6 months to over 40 years.\5

                               Table 3.1
                
                   Use of PFCs at Commercial Service
                        Airports, September 1998

                                                    PFCs approved
                                                ----------------------
                         Number of   Number of
                          airports    airports
                                in  collecting     Dollars
Airport category          category        PFCs  (millions)  Percentage
----------------------  ----------  ----------  ----------  ----------
Large hub                       30          25   $16,157.6        73.7
Medium hub                      40          31     3,714.2        16.9
Small hub                       71          55     1,480.9         6.8
Nonhub                         276         149       433.6           2
Other commercial               112          13       130.5         0.6
 service
======================================================================
Total                          529         273   $21,916.7         100
----------------------------------------------------------------------

--------------------
\3 Some are considering and/or preparing their first application. 

\4 The airport at Morgantown, West Virginia, charges a $2 PFC. 

\5 As of October 1, 1998, the longest collection period was 40 years
and 2 months at the Palm Springs, California, airport for $81.9
million in collections.  One of the shortest approved periods was for
6 months at Bradley International Airport in Windsor Locks,
Connecticut, for $3.3 million in collections.  In anticipation of the
commercial service classification of a new airport in Bentonville,
Arkansas, FAA has also approved a period of 50 years and 3 months for
$125 million in collections. 

   PFCS FUND MANY TYPES OF
   PROJECTS, WITH LARGE AND SMALL
   AIRPORTS MAKING DIFFERENT
   CHOICES
---------------------------------------------------------- Chapter 3:3

The $22 billion in approved projects encompasses a wide variety of
projects as well as the payment of interest on bonds issued to pay
for eligible projects.  As figure 3.2 shows, excluding the $2.3
billion in PFCs approved for the Denver International Airport,\6 the
funding is distributed into major categories as follows: 

  -- 44 percent is for landside \7 projects, such as gates and
     certain access roads;

  -- 29 percent is being used to pay interest on debt incurred for
     development eligible for PFCs (FAA's database does not break
     down this debt in terms of whether it is for airside, landside,
     or other categories);

  -- 20 percent is for airside projects, such as runways and
     taxiways;\8

  -- 7 percent is for noise reduction projects; and

  -- 0.02 percent is for administration of the program. 

   Figure 3.2:  Approved PFC Funds
   by Major Project Category,
   Fiscal Years 1992 Through 1998
   (Dollars in millions)

   (See figure in printed
   edition.)

Note:  Amounts in this figure do not include $2.3 billion in PFC
collections approved by FAA for a period of about 33 1/2 years for
the Denver International Airport, which is a single ï¿½new airportï¿½
listing in FAA's information systems.  Total approved collections for
all participating airports are $21.9 billion. 

\a Does not add to 100 because of rounding. 

Nearly two-thirds of the funds for landside projects are for terminal
projects, while the single largest category of airside projects is
for runways (39 percent).  Although the largest portion of funds will
be spent on landside projects, only 23 percent of the number of
approved projects are landside, while 66 percent of the number of
approved projects are airside projects. 

The overall expenditure patterns vary somewhat for large and small
airports.  (See fig.  3.3.) Large airports are using about 46 percent
of their funds for landside projects, 29 percent for interest
payments, and 19 percent for airside projects.  Large airports will
spend nearly two-thirds of their landside funds on terminal projects
and about one-third on access projects.  Small airports are using
about 38 percent for landside projects, just under one-third for
airside projects (32 percent), and about 27 percent for interest
payments.  About 89 percent of small airports' landside funds will be
spent on terminal projects. 

   Figure 3.3:  Approved PFC Funds
   for Large and Small Airports by
   Major Project Category, Fiscal
   Years 1992 Through 1998

   (See figure in printed
   edition.)

Note:  Amounts in this figure do not include $2.3 billion in PFC
collections approved by FAA for a period of about 33 1/2 years for
Denver International Airport because the approved funds are not
separated by project type in FAA's information systems.  The
percentage for PFC administration for large airports is too low to
show on the graph.  For large airports, PFC administration amounted
to about $1.03 million (0.01 percent). 

\a Does not add to 100 because of rounding. 

--------------------
\6 FAA's information systems do not separate the $2.3 billion in
approved PFC collections for the Denver International Airport by
project type; instead, it is categorized in FAA's data bank for a
period of about 33 1/2 years as a ï¿½new airportï¿½ project. 

\7 The landside portion of an airport encompasses the airport from
its boundary, where the general public enters airport property, to
the point where passengers leave the terminal to board the aircraft. 
According to FAA officials, landside projects include projects such
as access, security, and terminal projects. 

\8 According to FAA officials, the airside portion of an airport
encompasses areas such as the runway, taxiway, and apron.  In
addition, projects such as purchasing land for airfield expansion as
well as purchasing equipment to be used in the airfield are
considered airside projects.  Lastly, projects for airfield lighting,
planning, and security are also considered airside. 

   SMALL AIRPORTS BENEFIT FROM THE
   PFC PROGRAM EVEN IF THEY DO NOT
   OR CANNOT COLLECT PFCS
---------------------------------------------------------- Chapter 3:4

The 1990 law authorizing PFCs contains a provision designed to
benefit small airports that have little or no ability to raise
revenue by collecting the fees.  Under this provision, large airports
that choose to charge PFCs must return part of their AIP funds to FAA
for redistribution to small airports.  This provision applies to AIP
ï¿½apportionmentï¿½ fundsï¿½those AIP funds distributed by formula to
commercial service airports on the basis of their enplanement levels. 
Large airports must return 50 cents of AIP apportionment funds for
every dollar of projected revenues from PFCs, up to a maximum of 50
percent of each year's AIP apportionment funds.  The apportionment
funds returned by large airports must be redistributed as AIP
discretionary grants to other airports.\9 Of the total amount
returned, 87.5 percent is targeted to small airports--50 percent is
targeted to nonhub and other commercial service airports, 25 percent
to general aviation airports that are not eligible to levy PFCs, and
12.5 percent to small hub airports.  The remaining 12.5 percent of
the returned funds may be redistributed by FAA to any category of
airport in the national system.  Table 3.2 shows the amount of funds
targeted to each airport category, on the basis of these distribution
requirements, for fiscal years 1993 through 1999.\10

                               Table 3.2
                
                 Amount of Returned AIP Funds Targeted
                 for Redistribution to Small Airports,
                     Fiscal Years 1993 Through 1999

                         (Dollars in millions)

                                Targeted funds by fiscal year
                        ----------------------------------------------
                                                                  Tota
Airport category        1993  1994  1995  1996  1997  1998  1999     l
----------------------  ----  ----  ----  ----  ----  ----  ----  ----
Small hub               $7.0  $12.  $12.  $14.  $15.  $18.  $20.  $101
                                 9     6     5     6     5     2    .4
Nonhub and other        28.0  51.7  50.3  58.2  62.4  74.2  80.8  405.
 commercial service                                                  6
General aviation        14.0  25.9  25.2  29.1  31.2  37.1  40.4  202.
                                                                     8
======================================================================
Total                   $49.  $90.  $88.  $101  $109  $129  $141  $709
                           0     5     1    .8    .2    .8    .4    .8
----------------------------------------------------------------------
Note:  The amount of the returned AIP apportionment funds that is
targeted to small airports, including general aviation airports, is
87.5 percent of the total.  The remaining 12.5 percent may be
distributed to any airport in the national system, regardless of
type. 

The PFC law passed in 1990 states that it was the sense of the
Congress that the Department of Transportation ï¿½should not reduce
funding under the discretionary fund .  .  .  for small commercial
service and general aviation airports as a result of additional funds
made available to such airports under thisï¿½ provision.  However, we
cannot determine the extent to which this provision has been met for
two reasons.  First, the sense of the Congress states that funding
should not be reduced but does not provide a specific minimum dollar
threshold or more specifically define the minimum protected funding
level.  The implication is that small airports should not receive
less discretionary funds than they would have received had there been
no requirement for redistribution of AIP funds from large to small
airports.  However, the level of discretionary funding that small
airports would have received without redistribution is unknown. 

Second, changes in the distribution formula for AIP funds have
altered the amounts of funds targeted to small airports as
discretionary versus apportionment funds.  Since 1990, some AIP funds
targeted to small airports as discretionary funds were deleted from
the AIP distribution formula while some apportionment funds targeted
to small airports were increased.  For example, in fiscal year 1991,
10 percent of total AIP appropriations were targeted to certain
general aviation airports as discretionary funds.  That portion was
reduced to 5 percent for fiscal year 1993 and was completely
eliminated for fiscal year 1997.  State apportionment funds, however,
which are targeted to general aviation airports, increased from 12
percent of total AIP appropriations for fiscal years 1995 and 1996 to
18.5 percent for fiscal years 1997 and 1998. 

While actual gains from the redistribution of federal grant funds to
small airports cannot be determined, the distribution of
discretionary funding between large and small airports shows that the
total dollar amount of AIP discretionary funding for small airports
has remained above the fiscal year 1990 level (the year the PFC
statute became law).  However, discretionary funding for small
airports declined between fiscal years 1992 and 1995, both in
absolute terms and relative to discretionary funding for large
airports.  Moreover, since fiscal year 1994, small airports have
received less discretionary funds than large airports.  Various
factors can affect the actual distribution of discretionary funds
including, for example, the total amount of AIP appropriated, formula
changes such as those already discussed, and the array of airports
receiving discretionary grants for projects (in contrast to the
distribution of apportionment funds which is based on the number of
passengers enplaning at an airport).  Figure 3.4 illustrates the
proportional distribution of AIP discretionary funds between large
and small airports. 

   Figure 3.4:  Proportional
   Distribution of AIP
   Discretionary Funds to Large
   and Small Airports, Fiscal
   Years 1982 Through 1998

   (See figure in printed
   edition.)

Note:  Large airports consist of large and medium hub airports, while
small airports consist of small hub, nonhub, other commercial
service, and general aviation airports. 

FAA officials note that statutory changes in the AIP distribution
formula eliminated some discretionary funds targeted to small
airports while increasing some apportionment funds targeted to small
airports.  Because of that, they stated, an assessment of small
airports' benefits must include consideration of the shares of total
AIP funds awarded to large and small airports.  Figure 3.5 shows that
small airports have received a greater proportion of total AIP funds
than large airports for fiscal years 1982 through 1998. 

   Figure 3.5:  Proportional
   Distribution of Total AIP Funds
   Between Large and Small
   Airports, Fiscal Years 1982
   Through 1998

   (See figure in printed
   edition.)

Note:  Large airports consist of large and medium hub airports, while
small airports consist of small hub, nonhub, other commercial
service, and general aviation airports. 

--------------------
\9 AIP discretionary grants may be awarded for projects at any
national system airport, whereas AIP apportionment funds are awarded
to primary airports (large hub, medium hub, small hub, and nonhub
airports) on the basis of a statutory formula tied to passenger
levels. 

\10 Although the statute was passed in 1990, returns of AIP funds by
large airports did not begin until fiscal year 1993, while actual
collections of the PFC began in fiscal year 1992. 

   USE OF PFCS AS SOLE SUPPORT FOR
   NEW BONDING AUTHORITY HAS BEEN
   SLOW TO DEVELOP
---------------------------------------------------------- Chapter 3:5

With the initiation of the PFC program, some airport representatives
had hoped that PFCs would indirectly benefit airports by providing
additional cash flow that could be used as the sole support for the
issuance of new airport bonds used to pay for capital development. 
Currently, the vast majority of airport bonds are issued using
general airport revenues as the payment source because they provide a
guaranteed future cash flow.  While PFC revenues have been used for
debt service payments since the program started, some aviation and
airport representatives hoped that PFCs could also provide a
continuous source of future cash flow that could be used as the sole
revenue source for the issuance of new bonds. 

However, until 1996 airports had little success in using PFCs for
this purpose.  According to bond raters and underwriters, the
difficulty was that PFCs were not an assured funding source.  Under
federal statutes, the Department of Transportation may terminate an
approved PFC collection if the airport does not use the funds as
agreed or if it violates the Airport Noise and Capacity Act.  If PFC
collections were terminated, bond payments supported by those
collections would be at risk.  For this reason, bond raters and
underwriters have been reluctant to support bonds backed solely by
PFCs. 

FAA has taken steps to facilitate the use of PFCs as the sole funding
source to secure debt.  In response to the financial community's
concern about the potential for early termination of PFC collections,
FAA developed an extended resolution process for correcting an
airport's possible violations of the terms of its PFC agreement.\11
That process includes provisions for increasing the financial
community's confidence that bond payments would be met even if
termination eventually occurred.  If FAA remains unsatisfied with
attempts to resolve possible violations, it could reduce the
airport's authority to collect PFCs to the amount necessary to
complete payment on the bonds.  FAA may include the extended
resolution provisions in its approval of applications at the request
of the applying airport.  FAA officials stated that an airport must
meet certain conditions, such as limiting the portion of PFC
collections that will be used to back the bonds, in order to obtain
these termination protection provisions when FAA approves the
application. 

As a result of these extended resolution and termination protection
provisions, some airports have been able to use PFCs as sole backing
for new bonds.  Since 1996, FAA has included the extended resolution
process in its approval of PFC collections for seven airports (Little
Rock, Chicago, Boston, Fort Lauderdale, Palm Springs, Seattle, and
Des Moines), and has had requests for the provisions from airports in
Portland, Oregon, and Kansas City, Missouri.  Six of these approved
PFC applications include the language protecting payment of the bonds
in cases of termination.  According to FAA officials, the Fort Myers
airport was apparently able to issue bonds backed solely by PFCs
without this extended resolution process because it made a commitment
in its bond agreement to meet any FAA requirements for rectification
if potential violations are identified. 

--------------------
\11 FAA regulations require that the first step in resolving
potential violations consist of an informal resolution process that,
in practice, according to FAA officials, involves telephone
conversations, correspondence, and informal meetings between FAA
officials and airport representatives.  If this approach does not
resolve all of the violations, the extended resolution provisions
create the opportunity for two successive 90-day periods for the
airport to resolve any remaining possible violations.  During these
periods, PFC collections would be held by a trustee directed by FAA
to use the collections to continue debt payments.  After the second
90-day period, FAA can also start to withhold current and future AIP
entitlement funds up to the amount of PFCs that would be collected
each year.  According to FAA officials, FAA would retain these AIP
funds if FAA and the airport could not resolve their differences
regarding violations, but FAA would return the funds to the airport
if timely and satisfactory resolution occurred. 

THE POTENTIAL EFFECTS OF PROGRAM
CHANGES DEPEND LARGELY ON
ACCOMPANYING CONDITIONS
============================================================ Chapter 4

Proposed changes to the PFC program fall into three broad
categoriesï¿½increasing the fee charged to passengers, tightening or
easing restrictions on the types of airport projects eligible for
funding, and adding new requirements that must be met before eligible
projects can be approved.  Proposals for increasing PFCs take two
main forms.  The first approach involves raising the fee from its
current maximum of $3 per flight segment.  Our analysis indicates
that with a $1 increase over the current $3 maximum, commercial
airports would receive close to one-half billion dollars more each
year in PFC revenues over what they would receive from the first $3,
even after taking into account estimated passenger reductions.  The
second approach to increasing PFCs would allow airports to increase
the fee but at the expense of losing more, or all, of their AIP
funding.  Large airports are likely to benefit the most under either
approach.  According to a model we developed, increasing PFC fees
would reduce the number of passengers in the short term, but the
extent of that reduction is difficult to estimate because of the need
to estimate measures of certain kinds of behavior, such as
passengers' sensitivity to changes in ticket prices.  Also, many
factors influence air fares simultaneously, but in order to analyze
the impact of one factor, our analysis holds constant the effects of
all other factors.  These other factors, however, could enhance or
offset the effect of increasing the PFC, making the net effect
difficult to determine.  On the basis of the model we developed, we
estimate that for a $1 increase in the PFC, passenger reductions
would range from 0.5 to 1.8 percent (and have a midrange estimate of
0.85 percent) and would be proportionally greater for nonbusiness
passengers, low-fare airlines, large airports, and passengers taking
relatively short flights.  In the short term, forecast growth in
passengers could overshadow all or some of the passenger reduction,
depending on how high the fee is raised.  On the other hand, in the
long term, any improvements in passenger safety and comfort that may
result from airport improvements could stimulate the demand for air
travel.  According to our model, passenger reductions and the extent
to which an airline may choose to absorb the increase in the PFC
instead of passing it on to passengers would reduce an airline's
gross revenues. 

Proposals to change the types of projects eligible for PFC
fundingï¿½whether they expand or narrow the coverage--are likely to
produce little change in how airports are using the program. 
Participating airports can expect to experience little impact,
especially in the short term, because most of them have had PFC
collections approved that are set to run for a number of years. 
Collection periods approved for airports range from 6 months to more
than 40 years.  Among the last category of proposalsï¿½those affecting
how airport projects are selectedï¿½there are three main types: 
funding projects on the basis of a priority system, requiring that
projects pass a cost-benefit test, or requiring that they be approved
by airlines before they can be authorized for funding.  Any such
change is likely to reduce the flexibility that airports currently
have in levying PFCs and applying them to specific projects.  Under
more stringent eligibility requirements, some of the projects
currently funded with PFCs might not have been approved.  If the
program remains unchanged, there is unlikely to be much change in how
many airports are charging the fee or in how they are applying those
funds. 

   LARGE AIRPORTS WOULD GAIN THE
   MOST FROM AN INCREASE IN PFCS
---------------------------------------------------------- Chapter 4:1

Increasing PFCs will benefit both large and small airports but not to
the same degree.  Receipts from higher PFCs would help both large and
small airports reduce the differences between funding and planned
development that we identified in our 1998 analysis.\1

--------------------
\1 Airport Financing:  Funding Sources for Airport Development
(GAO/RCED-98-71, Mar.  12, 1998). 

      GAINS ARE GREATEST FOR LARGE
      AIRPORTS
-------------------------------------------------------- Chapter 4:1.1

At the current maximum $3 fee, airports charging the PFC as of
October 1, 1998, will collect about $1.4 billion a year in total
receipts on the basis of 1997 enplanement levels.\2 If passenger
levels were to be unaffected by a higher fee, then each $1 increase
in the fee would add about $479 million to annual receipts from PFCs
if all of those airports imposed the higher fee.\3 As we will
discuss, however, according to a model we developed, an increase in
the PFC will reduce enplanements, thereby reducing the revenues that
any increase in the fee would generate.  When the reduction in
enplanements is taken into account, we estimate that the gain from a
$1 increase in the fee would be about $463 million a year.  We
further estimate that a $2 increase would produce about $917 million
a year over the receipts of a $3 fee, and a $3 increase would produce
about $1.36 billion more a year than the $3 fee.  The total revenues
from an increase in the PFC would be higher if additional airports
choose to participate in the program. 

Large airports would gain the most by fee increases because they
enplane substantially more passengers than small airports.  If all
participating large airports raised their fee to $6, for example,
that fee would produce an estimated $2.5 billion in total receipts
for large airports, compared with about $268 million for small
airports, after adjusting for potential passenger reductions but
before adjusting for returned AIP apportionment funds. 

To gain a more accurate picture of how airport revenues would be
affected overall by higher PFCs, it is also necessary to consider the
effects of the law's requirement regarding the redistribution of AIP
grants.  For large airports, the current requirement to return a
portion of their AIP apportionment funds reduces their net gain from
the PFC program.  Currently, large airports are required to return 50
cents of every AIP apportionment dollar for every dollar of projected
revenues from PFCs, up to a maximum of 50 percent of their AIP
apportionment funds.  Small hub, nonhub, and other commercial service
airports, on the other hand, are not required to return any IP
apportionment funds and are targeted, as a group, to receive 62.5
percent of the returned funds; even if the small airports collect
PFCs they are allowed to receive grants from the apportionment funds
returned by the large airports.\4 Table 4.1 shows the gross receipts
from PFC collections at higher fees and the net gains after adjusting
for returned AIP apportionment funds under the current redistribution
formula. 

                               Table 4.1
                
                 Estimated Annual Total Collections at
                   Different PFC Fees, Based on 1997
                  Enplanements, and Program Net Gains

                              Estimated receipts (in millions)
                      ------------------------------------------------
                        Large airports      Small airports
                      ------------------  ------------------
                                     Net                 Net     Total
PFC fee               Receipts    gain\a  Receipts    gain\a  receipts
--------------------  --------  --------  --------  --------  --------
$3 (current maximum     $1,263    $1,101      $136      $237    $1,399
 level)
4                        1,681     1,519       181       282     1,862
5                        2,091     1,930       225       326     2,316
6                        2,495     2,333       268       369     2,763
7                        2,891     2,729       311       412     3,202
8                        3,279     3,118       352       453     3,631
9                        3,660     3,499       393       494     4,053
10                       4,034     3,873       434       535     4,468
11                       4,401     4,239       473       574     4,874
12                       4,760     4,598       512       613     5,272
----------------------------------------------------------------------
Note:  Large airports are large and medium hub airports, and small
airports are small hub, nonhub, and other commercial service
airports.  Calculations are based on airports collecting PFCs as of
October 1, 1998, using 1997 median collection rates and 1997
enplanements.  Calculations include our midrange estimate of the
potential loss of passengers as a result of higher fees.  (See
discussion in this chapter.)

\a Net gains for large airports result from deleting apportionment
funds that must be returned by large and medium hub airports that
choose to charge PFCs, using fiscal year 1999 apportionments
returned.  Net gains for small airports include 62.5 percent of
apportionment funds returned by large airports because that is the
percentage required to be redistributed to small hub, nonhub, and
other commercial service airports, whether the airports levy PFCs or
not; some of the redistributed funds may go to small airports that
are not levying a PFC.  Twenty-five percent of the returned
apportionment funds are required to be redistributed to general
aviation airports, which are not eligible to collect PFCs; those
funds are not reflected in the net gains for small airports.  The
remaining 12.5 percent of the returned funds may be distributed to
any airport in the national system; those funds are not reflected in
the net gains for airports. 

Some proposals suggest that additional AIP funds--apportionment
funds, discretionary funds, or both--could or should be forfeited if
airports are allowed to collect higher PFC fees.  Table 4.2 shows how
revenues at large airports would be affected under three scenarios
related to the forfeiture of AIP funds after taking into
consideration the potential loss of passengers:  (1) the loss of all
remaining AIP apportionment funds, (2) the loss of all discretionary
funds, and (3) the loss of all funding in both AIP categories.  For
example, if large airports were able to collect $4 per enplanement
(representing a $1 increase per enplanement) but had to give up their
remaining AIP apportionment funds in return, they would still
collectively have a net gain from the $1 increase of about $255
million.  If the PFC fee rose $2, the net gain could be about $666
million, and with a $3 increase, it could approach $1.1 billion. 
Even if large airports lost all of their AIP funds (both
apportionment and discretionary), they would still benefit from a net
gain of about $366 million if the PFC fee were increased by $2. 

                               Table 4.2
                
                Net Gain or Loss for Large Airports From
                 PFC Fee Increases That Are Accompanied
                   by Further Reductions in AIP Funds

                                Net gain or loss for large airports
                               after adjusting AIP funding as follows
                                       (dollars in millions)
                              ----------------------------------------
                                                                    No
                                                          apportionmen
                                        No            No          t or
                              apportionmen  discretionar  discretionar
PFC fee increase                   t funds       y funds       y funds
----------------------------  ------------  ------------  ------------
$1                                    $255          $118          -$44
2                                      666           529           366
3                                    1,069           932           770
4                                    1,465         1,328         1,165
5                                    1,854         1,717         1,554
6                                    2,235         2,098         1,935
7                                    2,609         2,472         2,309
8                                    2,975         2,839         2,676
9                                    3,335         3,198         3,035
----------------------------------------------------------------------
Note:  Large airports are large and medium hub airports that
currently levy PFCs.  These data represent a 100-percent loss of AIP
apportionment funds for the large airports, thus removing the
remaining AIP apportionment funds (about $163 million in fiscal year
1998) that large airports retain after returning up to 50 percent
when they charge PFCs.  If the return of only 75 percent of
apportionment funds were required instead of 100 percent, then the
net gain for large airports would be, for example, about $336.6
million with a $1 increase in the PFC, $747.2 million with a $2
increase, and about $1.15 billion with a $3 increase.  The loss of
AIP apportionment funds for large airports is based on fiscal year
1998 AIP funding.  All AIP data used in the calculations are AIP
receipts only for those airports levying PFCs as of October 1, 1998. 
Net gain or loss data incorporate our midrange estimate of the
potential loss of passengers as a result of higher PFCs. 

If similar requirements were put in place for small airports, the fee
would have to rise considerably more than for large airports before
small airports could achieve a net gain.  For example, if small
airports had to return their apportionment funding, they would have a
net loss of funds, as a group, until the fee reached $8.  A $7 fee
would produce a net gain if small airports lost only their
discretionary funds. 

--------------------
\2 Calendar year 1997 enplanements are the most recently available
enplanement data. 

\3 This calculation is based on the most recently available
enplanement levelsï¿½those for calendar year 1997ï¿½and the median
collection rates for airport categories, which are based on calendar
year 1997 collections.  The calculations include only those airports
collecting the fee as of October 1, 1998. 

\4 Twenty-five percent of the returned apportionment funds must be
redistributed to general aviation airports that are not eligible to
collect PFCs.  The remaining 12.5 percent may be awarded for projects
at any airport in the national system. 

      LARGE AIRPORTS COULD ADDRESS
      THEIR CAPITAL NEEDS WITH A
      MODERATE PFC INCREASE, WHILE
      SMALL AIRPORTS COULD NOT
-------------------------------------------------------- Chapter 4:1.2

Our March 1998 report found that the annual average cost of planned
development at all national system airports for fiscal years 1997
through 2001 was about $10 billion, while funds available for airport
capital development in 1996 totaled about $7 billion at the 3,304
airports included in the NPIAS for fiscal years 1997 through 2001.\5
The funds available to large and medium hub airports in 1996 would
have covered about 79 percent of the average annual cost of their
planned development for fiscal years 1997 through 2001, leaving a
funding difference of about $1.5 billion.  For small hub, nonhub, and
other commercial service airports, available funds would have covered
just 56 percent of their planned development costs, leaving a funding
difference of about $655 million.\6

Increased PFC collections will help large airports more than small
ones in eliminating this difference.  Our analysis shows that under
current AIP redistribution rules, large airports, as a group, may be
able to eliminate their shortfall with a $4 increase in the PFC
(producing a $7 fee in total).\7 With a $5 increase, large airports
could eliminate the difference even with a loss of all of their AIP
funds.  (See table 4.3.)

                               Table 4.3
                
                 Estimated Impact of Higher PFC Fees on
                    the Funding Difference for Large
                                Airports

                        Remaining funding difference\a (dollars in
                                        millions)
                    --------------------------------------------------
                           PFC
                      increase                            Loss of both
                       onlyï¿½no     Loss of   Loss of all  apportionmen
                       loss of     all AIP           AIP         t and
                           AIP  apportionm  discretionar  discretionar
PFC fee                funding   ent funds       y funds       y funds
------------------  ----------  ----------  ------------  ------------
$4                        $819        $982        $1,119        $1,282
5                          409         572           708           871
6                            5         168           305           468
7                            0           0             0            72
8 and above                  0           0             0             0
----------------------------------------------------------------------
Note:  Calculations include our midrange estimate of the potential
loss of passengers as a result of higher PFCs. 

\a The funding difference used in the calculations is based on data
in our report Airport Financing:  Funding Sources for Airport
Development (GAO/RCED-98-71, Mar.  12, 1998). 

In contrast, small airports, as a group, are unlikely to be able to
eliminate their funding shortfall with higher fees, even if the fee
is increased to $12 per flight segmentï¿½the highest fee level we
examined.  As table 4.4 shows, with a PFC of $12, the shortfall for
these airports would still be over $250 million.  If small airports
were required to give back part of their AIP funds as a condition of
levying PFCs, the shortfall would be larger. 

                               Table 4.4
                
                 Estimated Impact of Higher PFC Fees on
                    the Funding Difference for Small
                                Airports

                                                     Remaining funding
                                                          difference\a
PFC fee                                          (dollars in millions)
----------------------------------------  ----------------------------
$4                                                                $586
5                                                                  542
6                                                                  499
7                                                                  456
8                                                                  414
9                                                                  373
10                                                                 333
11                                                                 294
12                                                                 255
----------------------------------------------------------------------
Note:  The funding difference for small airports is about $655
million.  When general aviation airports are included in the data,
the funding difference rises to about $1.4 billion.  The analysis of
small airports' funding includes data on PFC collections only for
those small airports collecting PFCs as of October 1, 1998.  Planned
development costs are for all small hub, nonhub, and other commercial
service airports in the national system and do not include data for
general aviation airports.  Calculations of the remaining funding
difference include our midrange estimate of the potential loss of
passengers as a result of higher PFCs. 

\a The funding difference used is based on data in our report Airport
Financing:  Funding Sources for Airport Development (GAO/RCED-98- 71,
Mar.  12, 1998). 

--------------------
\5 Besides the 529 commercial service airports that are the focus of
this report, these estimates include the 2,815 general aviation
airports in the national airport system.  Data in the analysis of the
impact of higher PFCs on closing the funding difference for small
airports include data only for small hub, nonhub, and other
commercial service airports in the national system. 

\6 The funding difference for general aviation airports, which
benefit only indirectly from the PFC program through the
redistribution of some AIP apportionment funds from large and medium
hub airports that collect PFCs, and through ownership by a commercial
service airport authority, was $754 million. 

\7 While the overall funding difference for large and medium hub
airports, as a group, may disappear, funding differences for
individual airports could continue to exist and would do so for
airports not collecting PFCs, assuming all other funding levels
remained the same.  Some individual airports, of course, may have no
funding difference.  Receipts from the higher fees are calculated on
the basis of those airports charging PFCs, while the funding
difference is based on data for all large and medium hub airports in
the national system.  Calculations of the remaining funding
difference include our midrange estimate of the potential loss of
passengers as a result of higher PFCs. 

      SOME PROPOSALS TO INCREASE
      THE PFC TARGET THE USE OF
      THE ADDITIONAL FUNDS
-------------------------------------------------------- Chapter 4:1.3

Some proposals for increasing the PFC would target the use of the
additional funds that would be collected (beyond what the current $3
provides) either by specifying more narrowly the types of projects
that the additional funds should be spent on or by requiring projects
to be screened through new selection criteria.  With all but one of
the participating airports charging the $3 maximum PFC, it is likely
that participating airports will seek permission to collect the
additional funds as soon as practicable.  While targeting the use of
the additional funds would focus that money on the designated
projects, the risk involved in targeting is that the additional
collections may, over time, become the only funds used on those types
of projects.  Moreover, this result could occur sooner if airports
request amendments to their existing applications in order to shift
previously approved eligible projects to the new funding.  Under that
circumstance, collections already approved at the $3 fee level could
be used to complete other approved projects in a shorter time than
originally expected, or they could be freed up for use on additional
projects not eligible for the increase in collections.  With regard
to nonparticipating airports, even if the additional funds collected
from an increase in the fee are targeted for use more narrowly than
the law now provides, the increase in the PFC could entice more
airports to participate in the program. 

      AUTHORIZING HIGHER FEE
      OPTIONS IS UNLIKELY TO
      AFFECT THE PROGRAM'S
      MANAGEMENT
-------------------------------------------------------- Chapter 4:1.4

We examined the likely effects of PFC increases on FAA's management
of the program.  We found that adding only new fee levels as options
for airports would not add to FAA's review and approval process for
individual airport applications.  However, allowing a higher fee,
whether the additional funds are targeted for specific uses or not,
could have a near-term impact on the program's administration to the
extent that airports submit new applications or amendments in order
to apply the higher fee as soon as possible.\8 FAA's workload could
also increase under some specific funding scenariosï¿½for example,
increasing the fee on the basis of inflation or giving FAA discretion
to authorize higher funding levels by individual airport. 

--------------------
\8 Because the PFC statute prohibits the collection of funds in
excess of the cost of approved projects, an increase in PFC
collections is likely to reduce the number of years currently
required to accumulate sufficient money to pay for the current
catalog of approved projects.  Thus, with an increase in the fee,
airports could fund additional projects within the same time frame
now allotted to pay for currently approved projects, and/or retire
existing PFC-backed debt earlier. 

   HIGHER PFCS WOULD REDUCE AIR
   TRAVEL IN THE SHORT TERM, BUT
   THE EXTENT OF THAT REDUCTION IS
   UNCERTAIN
---------------------------------------------------------- Chapter 4:2

On the basis of a model that we developed to analyze the impact of
higher PFCs on passengers, increases in PFCs would result in
short-term reductions in passenger traffic, but the extent of this
reduction is difficult to estimate because of unknowns, such as the
extent to which higher prices will cause travelers not to fly. 
Increasing PFCs is likely to cause some passengers to forgo trips or
to use another form of transportation.  Measuring the size of the
reduction, however, is difficult and imprecise because the analysis
requires making critical assumptions.  The estimated reductions in
air travel are highly dependent on the assumptions underlying the
calculations because different assumptions yield different passenger
reduction estimates. 

The results of our analysis are affected by assumptions about four
key variables:  (1) the price sensitivity of air travelers--that is,
at what price will travelers decide to forgo air travel?  (2) the
extent, if any, to which airlines absorb the increase in PFCs by not
passing the increase on to passengers; (3) the distribution of
passengers between business and nonbusiness travel; and (4) the
estimates of the different fares paid by business and nonbusiness
passengers.  A detailed discussion of each of these issues can be
found in appendix I.  Our model estimates the effect of changing the
PFC independently of other factors that may occur simultaneously. 
These other factors could enhance or offset the effect of changing
the PFC making the net effect difficult to determine.  For example,
data on enplanement levels at individual airports that first started
levying the fee in 1996 indicate that enplanements have both
increased and decreased following the initial imposition of the fee
by airports. 

In our analysis, we used a model to develop three scenarios that are
based on different combinations of assumptions in order to produce
high, midrange, and low estimates of the potential reduction in
passengers resulting from increases in PFCs.  In each scenario, we
used different assumptions about the sensitivity of passengers to
price changes and the extent to which airlines will adjust their
prices in response to an increase in PFCs.  (See app.  I for a
discussion of the assumptions used in each scenario.) On the basis of
these scenarios, we estimate that passenger reductions would range
from about 0.5 to 1.8 percent for each $1 increase in PFCs; the
midrange estimate is 0.85 percent.  Based on this midrange estimate,
less than one passenger in one hundred would be affected by a $1
increase in the PFC.  These estimates represent a reduction of about
1.6 million to about 6.1 million of the 338 million one-way trips
used in our analysis for the 12 months ending June 30, 1998.  The
assumptions in our midrange scenario lead to an estimate of a 2.9
million reduction in those one-way trips.  In the short term, FAA's
estimated 3.4 percent annual growth in enplanements would overshadow
passenger losses identified in our midrange estimate unless the fee
increase exceeded $4.  On the other hand, in the long term, any
improvements in passenger safety and comfort that may result from
airport improvements could stimulate the demand for air travel. 

      HIGHER PFCS WOULD REDUCE
      TRAVEL MORE FOR NONBUSINESS
      PASSENGERS
-------------------------------------------------------- Chapter 4:2.1

Because nonbusiness travel is generally much more sensitive to price
changes than business travel, a disproportionately larger share of
the decrease in travel comes from nonbusiness passengers.  Table 4.5
presents the expected reductions in passengers in the three scenarios
we examined. 

                               Table 4.5
                
                Estimated Reduction in Passengers per $1
                            Increase in PFCs

                                           Midrange
                         Low estimate      estimate     High estimate
                        --------------  --------------  --------------
                                  Perc            Perc            Perc
                          Number   ent    Number   ent    Number   ent
                        (thousan  decl  (thousan  decl  (thousan  decl
                             ds)   ine       ds)   ine       ds)   ine
----------------------  --------  ----  --------  ----  --------  ----
Business passengers          497  0.31       884  0.56     1,104  0.70
Nonbusiness passengers     1,127  0.63     2,004  1.12     5,010  2.80
======================================================================
Total                      1,624  0.48     2,888  0.85     6,114  1.81
----------------------------------------------------------------------

      AIR TRAVEL WILL BE MORE
      AFFECTED ON SOME TRIPS THAN
      ON OTHERS
-------------------------------------------------------- Chapter 4:2.2

While these estimates represent the overall reduction in passengers
that can be expected from a $1 increase in PFCs, some types of travel
are more likely to be affected than others.  Because of this, we
reviewed the extent to which higher PFCs might affect business and
nonbusiness travelers in the context of three basic ways to
categorize trips:  (1) trips involving passengers traveling on
regular-fare versus low-fare airlines,\9 (2) trips between two large
airports versus those that include at least one small airport at the
beginning or end of a trip, and (3) trips shorter than 500 miles
versus longer trips.  The results of the midrange scenario are
reported here because those estimates are derived from midrange
assumptions about price sensitivity and airlines' pricing strategies. 
The high and low scenarios are reported in appendix I. 

--------------------
\9 See appendix I for a list of airlines designated as low-fare
airlines in the analysis. 

         REGULAR-FARE VERSUS
         LOW-FARE AIRLINES
------------------------------------------------------ Chapter 4:2.2.1

Many airlines have been offering low fares as a standard practice. 
As table 4.6 shows, the rates of reduction in passengers on low-fare
airlines is more than one-third greater than the percent decline on
regular-fare airlines.  Low-fare airlines are likely to be more
affected by price increases because a $1 increase in the PFC
represents a larger percent change in price (assuming, as our
analysis does, that the increase in the PFC is passed on to
passengers at the same rate for all airlines and varies only for
business versus nonbusiness fares). 

                               Table 4.6
                
                Estimated Reduction in Passengers Using
                   Regular-Fare and Low-Fare Airlines

                             Regular-fare              Low-fare
                        ----------------------  ----------------------
                              Number   Percent        Number   Percent
                         (thousands)   decline   (thousands)   decline
----------------------  ------------  --------  ------------  --------
Business passengers              586      0.47           297      0.87
Nonbusiness passengers         1,464      1.04           539      1.40
======================================================================
Total                          2,050      0.77           836      1.15
----------------------------------------------------------------------

         LARGE VERSUS SMALL
         AIRPORTS
------------------------------------------------------ Chapter 4:2.2.2

To determine the impact of raising PFCs on airports, we estimated the
impact of higher PFCs on trips to or from small airports separately
from those trips with large airports as both the origin and
destination.  All trips that both began and ended at a large or
medium hub airport were included under the heading of large airports. 
However, when either the origin or destination was a small airport,
then the trip was included under the small airports designation.  As
table 4.7 shows, the rates of decline in the number of passengers for
small airports were considerably less than those for large airports. 
Trips to or from small airports are likely to decline less because a
$1 increase in the PFC represents a smaller increase in the total
fare since fares are higher, on average, for such trips. 

                               Table 4.7
                
                  Estimated Reduction in Passengers on
                Trips Involving Large or Small Airports

                            Large airports          Small airports
                        ----------------------  ----------------------
                            Number                  Number
                        (thousands     Percent  (thousands     Percent
                                 )     decline           )     decline
----------------------  ----------  ----------  ----------  ----------
Business passengers            625        0.64         259        0.42
Nonbusiness passengers       1,368        1.24         636        0.92
======================================================================
Total                        1,993        0.96         895        0.69
----------------------------------------------------------------------

         LONG VERSUS SHORT ROUTES
------------------------------------------------------ Chapter 4:2.2.3

Passengers on short routes are expected to be more sensitive to price
changes than those on long routes because switching to driving is a
more practical alternative for trips less than 500 miles.  This is
especially true for less time-sensitive nonbusiness travel.  As table
4.8 shows, the rates of decline on short routes were considerably
greater than on long routes. 

                               Table 4.8
                
                Estimated Reduction in Passengers Taking
                          Long and Short Trips

                             Long routes             Short routes
                        ----------------------  ----------------------
                            Number                  Number
                        (thousands     Percent  (thousands     Percent
                                 )     decline           )     decline
----------------------  ----------  ----------  ----------  ----------
Business passengers            530        0.49         354        0.71
Nonbusiness passengers       1,156        0.94         848        1.50
======================================================================
Total                        1,685        0.73       1,202        1.13
----------------------------------------------------------------------

      EFFECTS OF HIGHER PRICES
      COULD BE OFFSET
-------------------------------------------------------- Chapter 4:2.3

In the short term, the projected growth in enplanements--about 3.4
percent a year according to FAA forecasts for fiscal years 1999
through 2010--will mitigate the extent to which higher PFCs reduce
passenger levels.  On the basis of our midrange estimate of passenger
losses, the forecast growth in passenger enplanements would overcome
passenger losses resulting from higher fees unless the higher fee
exceeded $7.  On the other hand, in the long term, the effect of
increasing PFCs on the number of passengers traveling is likely to be
reduced or eliminated if PFC funds are used to enhance air travel. 
If PFCs are spent on projects that improve air travel in some wayï¿½for
example, by enhancing safety, comfort, or convenienceï¿½those
improvements could stimulate the demand for air travel, thereby
offsetting any decrease in passengers resulting from higher fees. 

      HIGHER PFCS COULD REDUCE
      AIRLINES' GROSS REVENUES
-------------------------------------------------------- Chapter 4:2.4

Two factors could cause airlines to receive less gross revenues if
PFCs are increased:  the reduction in ticket sales resulting from
fewer passengers flying at the higher prices and the extent, if any,
to which airlines choose to absorb the increase in PFCs.  On the
basis of our midrange scenario, airlines could receive about 1.3
percent less in gross revenues with a $1 increase in PFCs.\10 A
little more than half of this loss would come from the estimated
decline in passengers.  These two factors would cause the larger
shares of gross revenue losses to be attributable to the reductions
in nonbusiness travelers, trips involving large airports, trips on
regular-fare airlines, and trips of 500 miles or longer. 

Any decline in passengers because of higher PFCs would mean that
airlines' gross revenues from ticket sales would also decline.  Given
our midrange estimate of passenger losses and a $1 increase in the
PFC, airlines could receive about 0.7 percent less of the $45.8
billion they could have expected (from the 338 million one-way trips
and estimated fares we used) before PFCs were increased.  The percent
decline in revenue would be less than the 0.85 percent decline in
passengers because nonbusiness travelers are a greater portion of the
reduction in passengers and they usually pay less for their tickets,
on average, than business travelers.  While airlines' gross revenues
would decline because of the loss of passengers, costs would also
decline; thus, the loss of profits would depend on how much costs
decline in conjunction with the decline in gross revenues. 

The second way in which airlines could receive less in gross revenues
if PFCs were increased is the extent, if any, to which airlines
decide to absorb the PFC increase rather than pass it on to
passengers.  To the extent that airlines absorb some or all of the
PFC increase, they can limit or eliminate the reduction of
passengers.  We assumed that airlines might be willing to absorb some
of the higher cost to remain competitive in a given market.  In our
midrange scenario, airlines pass on the full increase in PFCs to
business travelers but only half of the increase to nonbusiness
travelers.  On the basis of that scenario, airlines could receive
about 0.6 percent less of the $45.8 billion they could have expected
before the increase in PFCs. 

--------------------
\10 The 1.3 percent figure represents about $614 million out of the
$45.8 billion in gross revenues that airlines could have expected
from the 338 million one-way trips in the database we used and the
estimated fares we used for business and nonbusiness travelers. 

   CHANGES IN PROJECT ELIGIBILITY
   MAY HAVE LITTLE IMMEDIATE
   EFFECT ON PROGRAM RESULTS
---------------------------------------------------------- Chapter 4:3

Some proposals would change the kinds of projects that are authorized
for funding with PFCs.  On the basis of the most recently available
data, at least 57 percent, and possibly more, of the development
projects planned at commercial service airports are eligible for PFC
funding.\11

The effects of any changes in the eligibility of projects are
difficult to assess without knowing which categories of projects
would be added or deleted or whether a change will be accompanied by
any other conditions.  Also, effects are likely to vary depending on
such factors as whether an airport is already charging PFCs, whether
it is a large or small airport, or whether the change in eligibility
is accompanied by an increase in PFCs.  However, some general
observations can be drawn about the potential effects of making a
change in either directionï¿½expanding or reducing eligibility. 
Generally, any impact on airports now imposing PFCs is likely to be
delayed since approved collections are earmarked for specific
projects that are now eligible and will generally be made over a
period of years.  Collection periods range from as little as 6 months
to as many as 40 years or more, with half the airports using
collection periods less than 6.6 years, and half with collections
periods in excess of that length.\12 Moreover, changes in eligibility
can be expected to have minimal impact, if any, on increasing the
number of airports participating in the program.  In the case of
large airports, most large and medium hubs already participate.  In
the case of small airports, without an increase in PFCs, changing the
types of projects eligible for funding would add little new incentive
to participate.  The potential impacts of either an expansion or
narrowing of eligibility are discussed in the next two sections. 

--------------------
\11 The cost of AIP-eligible projects at commercial service airports
comprised 57 percent of the annual average cost of planned
development for 1997 through 2001.  (See Airport Financing:  Funding
Sources for Airport Development [GAO/RCED-98-71, Mar.  12, 1998] ). 
As we discuss in chapter 2, all projects eligible for AIP funding are
also eligible for PFC funding, and PFCs can also fund some projects
that are not eligible for AIP funding.  Available data did not
identify how much, if any, of the planned development that was not
eligible for AIP funds are projects that could be funded with PFCs. 

\12 The average collection period is 9 years. 

      EXPANDING PROJECT
      ELIGIBILITY WILL NOT ALTER
      CURRENT FUNDING AT
      PARTICIPATING AIRPORTS
-------------------------------------------------------- Chapter 4:3.1

Any expansion in the eligibility of projects will allow airports to
use PFCs to pay for additional projects that cannot now be funded
through federally authorized programs.  As noted, because collections
occur over several years and are earmarked for specific projects,
expanding the eligibility of projects will not alter current funding
patterns very much at participating airports nor is it likely to
entice many new airports into the program. 

Nevertheless, some factors could prompt new airports to participate. 
For example, because the PFC program requires only consultation with
airlines instead of airline approval, an airport's incentive to
participate may increase if the expanded eligibility includes
projects that have lacked airline support in the past.  The type of
newly eligible projectsï¿½if they are landside or airside projects--may
also affect whether expanded eligibility generates interest in the
PFC program among nonparticipating large or small airports.  Table
4.9 provides an overview of some potential effects of any expansion
in project eligibility. 

                                        Table 4.9
                         
                         Potential Effects of Expanding the Types
                          of Projects Eligible for Funding With
                                           PFCs

Impact on            Potential impact
-------------------  --------------------------------------------------------------------
Participating        In the short term, participating airports are likely to experience
airports             little immediate impact because approved PFC collections are
                     earmarked for projects and the statute prohibits collection of more
                     funds than needed for the approved projects. In the long term,
                     participating airports would have to file new applications to use
                     PFCs for the newly eligible projects.

Nonparticipating     Little increase in participation is likely. In the case of large
airports             airports, increased participation would be limited because only 14
                     of the 70 large and medium hub airports are currently not
                     participating. Expanded eligibility alone may not entice many small
                     airports to participate because of the limited funds generated by
                     their lower passenger levels. The impact of expanding eligibility,
                     nevertheless, may provide some incentive for more airports to
                     participate because
                     newly eligible projects were not previously eligible for federally
                     authorized funding and
                     PFCs represent a funding source not subject to an airline veto.

Airlines             To the extent airports turn to PFCs to fund the new projects instead
                     of using funding sources that the airlines have more influence over,
                     the airlines' role in development decision-making could be
                     diminished. The impact on the airlines also depends on the extent to
                     which expanded eligibility attracts new airport participants and
                     whether the airlines absorb, usually for competitive reasons, part
                     or all of the new fees or existing fees at other airports.

Passengers           Passengers could benefit if the expanded eligibility hastens
                     development. The impact on passengers depends also on the extent to
                     which their airfares change because of the airlines' decisions
                     concerning absorbing or passing on PFCs at newly or previously
                     participating airports.

Management of the    Expanding eligibility is likely to have little impact on FAA's
program              management of the program, although a period of increased
                     communication between FAA and aviation groups may be needed to
                     clarify the changes.
-----------------------------------------------------------------------------------------

      NARROWING PROJECT
      ELIGIBILITY WILL NOT
      IMMEDIATELY AFFECT
      PARTICIPATING AIRPORTS
-------------------------------------------------------- Chapter 4:3.2

Narrowing the eligibility of projects could eliminate projects that
remain eligible for AIP funding, or it could eliminate projects that
are not eligible under AIP.  Narrowing the eligibility of projects is
not likely to have an immediate impact on funding patterns at
participating airports because of the length of approved collection
periods and the earmarking of funds for specific projects, but in the
long run, airports will have to find other ways to pay for the
eliminated project types.  Table 4.10 provides an overview of some
potential effects of narrowing the eligibility of projects. 

                                        Table 4.10
                         
                         Potential Effects of Narrowing the Types
                          of Projects Eligible for Funding With
                                           PFCs

Impact on            Potential impact
-------------------  --------------------------------------------------------------------
Participating        Participating airports are likely to experience little immediate
airports             impact because approved PFC collections are generally earmarked for
                     a period of years. In the long term, airports would have to find
                     other funding sources for projects no longer eligible. Their success
                     in doing so could depend on whether the projects are eligible for
                     AIP and whether airlines are supportive of those kinds of projects.
                     Large airports may have an easier time than small airports in
                     accommodating narrowed eligibility because of their greater access
                     to other funding sources such as bonds and available airport
                     revenues.

Nonparticipating     Narrowing the eligibility of projects reduces the scope of the
airports             program's possible benefits. What effect this will have on an
                     airport's decision to participate is unknown. Narrowing the
                     eligibility of projects may not entice nonparticipants to join the
                     program, but it also does not necessarily discourage participation
                     because an airport could still use PFC funds for the types of
                     projects that remain eligible.

Airlines             The airlines' role in development decision-making could be enhanced
                     if the narrowing of eligibility leads airports to use funding
                     sources over which airlines have more influence than over PFCs.

Passengers           Passengers may be affected by the extent to which reduced
                     eligibility results in delays in airport development.

Management of the    Narrowing eligibility is likely to have little impact on FAA's
program              management of the program, although a period of increased
                     communication between FAA and aviation groups may be needed to
                     clarify the changes.
-----------------------------------------------------------------------------------------

   SOME PROPOSED CHANGES PROVIDE
   NEW PROJECT SELECTION CRITERIA
---------------------------------------------------------- Chapter 4:4

In addition to changes to the fee level and the eligibility of
projects, some proposals to change the PFC program would add new
criteria for determining whether an eligible project should be
funded.  The following are three of those proposals: 

  -- prioritize projects,

  -- require projects to undergo cost-benefit analysis and meet a
     specified cost-to-benefit threshold, and

  -- require airline approval rather than consultation. 

Adding new selection criteria will reduce some of the flexibility
that airports have under the PFC program in comparison to their
ability to use some other funding sources such as bonds.  Under more
stringent screening requirements, it is possible that some projects
that are currently being funded with PFCs would not have been
approved.  The overall impact of these proposals, however, depends
mainly on the specifics of their implementation.  In determining how
any of these proposals might be implemented, there are a number of
issues that would be useful to consider.  Table 4.11 discusses some
of the issues that are important in connection with the
implementation of these proposals. 

                                        Table 4.11
                         
                          Issues to Consider Regarding Proposed
                             Changes to PFC Project Selection
                                         Criteria

                     New selection
Proposal             criteria            Issues to consider
-------------------  ------------------  ------------------------------------------------
Prioritize projects  Projects would be   Currently, project type has no impact on the
                     ranked according    decision to fund a project with PFCs beyond the
                     to selected         consideration of whether it is eligible and
                     criteria and would  meets a program objective.
                     be funded on the
                     basis of their      If prioritization is required, key issues for
                     priority. A lower-  consideration include the following:
                     priority project    What should the prioritization criteria be?
                     could not be        Should project ranking be affected by airport
                     funded before a     type?
                     higher-priority     What should be the relative prioritization
                     project.            between airside and landside projects? Should it
                                         be the same as for AIP projects? AIP uses a
                                         priority system that, if adopted for the PFC
                                         program, could cause the distribution of PFC
                                         funds among projects to more closely reflect the
                                         distribution pattern under AIP. While the AIP
                                         priority system is not the sole factor in
                                         determining which projects receive grants, it
                                         awards a higher priority to airside projects
                                         than to landside projects. Currently, a larger
                                         portion of PFC funds is spent on landside
                                         projects.

Cost-benefit         Only those          Currently, cost-benefit analyses are not
analysis             projects with       required for PFC projects but ï¿½adequate
                     benefits that meet  justificationï¿½ is. (See chapter 2.) Cost-
                     or exceed their     benefit analyses would likely replace the
                     costs would be      adequate justification requirement and could
                     funded.             result in more stringent selection criteria.
                                         Such analyses could also increase project
                                         planning costs and lengthen the time it takes
                                         airports to complete their applications.

                                         If such analyses are required, important issues
                                         for consideration include the following:
                                         Should all projects be required to undergo the
                                         analysis? If not, which ones should?
                                         How would the requirement affect statutorily
                                         mandated projects that do not meet the cost-
                                         benefit threshold?
                                         At what stage of project development or review
                                         should such analyses be required?
                                         How will nonfinancial costs and benefits be
                                         assessed?
                                         FAA is preparing to issue final guidelines for
                                         cost-benefit analysis of capacity projects that
                                         will use $5 million or more in AIP discretionary
                                         funds. Should the same guidelines apply to
                                         analyses of PFC projects? If not, how should
                                         guidelines be established?

Airline approval of  Projects could not  Currently, consultation with the airlines is
projects             be funded unless    required, but not their approval. Requiring
                     designated          airline approval would give airlines a veto over
                     airlines approved   the imposition and use of PFCs.
                     the project.
                                         If airline approval is required, important
                                         issues for consideration include the following:
                                         How would airline approval or disapproval be
                                         determined? For example, would a percentage of
                                         the number of airlines serving the airport
                                         constitute approval or disapproval, would
                                         airlines have weighted votes on the basis of
                                         some indicator of their share of the use of the
                                         airport or would both requirements apply as
                                         under the airport privatization pilot program,
                                         where 65 percent of both the number of airlines
                                         and the landed weight of airlines is required
                                         for decision-making?
                                         Should approval criteria differ for different
                                         airports, such as small versus large airports?
                                         Should airline approval be required for all
                                         types of projects, including those that enhance
                                         competition among airlines?
                                         Would airports have an opportunity to appeal
                                         airline disapproval of projects? If so, to
                                         whom?
                                         Should the bases for airline disapproval be
                                         defined by law or regulation?
-----------------------------------------------------------------------------------------

   THE OPTION OF MAKING NO CHANGE
   TO THE PFC PROGRAM
---------------------------------------------------------- Chapter 4:5

If the PFC program remains as currently designed and implemented,
PFCs will continue to fund airport development as described in
chapter 3.  Given the high rates of participation among large hub,
medium hub, and small hub airports and the lengths of approved
collection periods, the array of projects planned for funding with
PFCs is unlikely to change very much in the near term.  Retaining the
program's current profile is unlikely to increase participation
noticeably by eligible airports that do not currently levy the PFC
because there would be no added incentives to entice new entrants. 

The potential effects of retaining the PFC program's current
structure on airport development will also depend on the changing
demands placed on the aviation system and the resources available to
respond to those demands.  Demands appear to be increasing, largely
from a growth in air traffic.  For example, the National Civil
Aviation Review Commission reported in December 1997 that
airport-related congestion is expected to increase in the future. 
Also, FAA is forecasting a 3.4 percent annual growth in enplanements
for fiscal years 1999 through 2010. 

As we discussed earlier, participating airports can expect to collect
about $1.4 billion a year from PFCs on the basis of 1997 enplanement
levels.  Annual growth in enplanements will increase those revenues
somewhat.  But as we noted in our March 1998 report, even when the
contribution that PFCs make toward paying for airport development is
considered, the annual average cost of planned development exceeded
the amount of funding that was available by about $3 billion for the
more than 3,300 airports in the national system.\13 In an environment
in which demands on the aviation system appear to be increasing,
holding the PFC program relatively constant will increase pressure on
the need for other funding sources to accommodate any future
differences between the costs of planned development and total
available funding. 

--------------------
\13 That gap information is based on 3,304 airports that were in the
NPIAS for the fiscal years 1997 through 2001.  (See Airport
Financing:  Funding Sources for Airport Development [GAO/RCED-98-71,
Mar.  12, 1998].) The NPIAS for the fiscal years 1998 through 2002
shows an increase of 40 airports.  (See fig.  1.1.)

   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 4:6

We provided the Department of Transportation, FAA, our advisory panel
of two experts, ACI-NA, ATA, and NASAO with a copy of the draft
report, or portions thereof, for review and comment.  We spoke with
the Deputy Director of FAA's Office of Airport Planning and
Programming, the ATA's Director of Airport Planning and Development,
and the Vice President of NASAO, and we received comments from our
advisory panel of experts, all of whom generally agreed with the
facts presented and thought the report was both thorough and balanced
in its discussion of the issues.  They provided some suggestions for
clarification and additional information that we have incorporated in
the report as appropriate.  We met with the President, the Senior
Vice President for Economic and Associate Affairs, and the Vice
President for Government Affairs of the ACI-NA, who questioned
whether a reduction in passengers would actually occur if PFCs were
increased.  They questioned whether passengers would actually see an
increase in ticket fares if passenger facility charges were raised
because many factors, not only higher passenger facility charges,
affect the pricing decisions of airlines.  They also questioned the
use of elasticity analysis to assess the potential impact of higher
PFCs on passenger levels because it is theoretical; they suggested
that a historical analysis might provide more useful information. 

We believe that we have appropriately applied generally accepted
economic analysis methods to estimate how higher passenger facility
charges may affect ticket fares and how increases in those fares
could affect passenger levels, including acknowledging the
uncertainty associated with such an estimate.  Although many factors
influence air fares simultaneously, in analyzing the impact of one
factor, such as higher passenger facility charges, it is necessary to
hold constant the effect of all other factors.  Furthermore, the
elasticities used in our analysis were based on statistically
significant real world relationships between prices and passenger
levels and have been previously used by the Department of
Transportation.  Nevertheless, discussion of the uncertainties
associated with analysis of the potential effect of higher fees on
passenger levels was clarified, particularly in the executive
summary, to assure a clear understanding of our methodology. 

METHODOLOGY FOR ANALYZING THE
POTENTIAL IMPACT OF INCREASES IN
PFC FEES ON PASSENGER TRAFFIC
=========================================================== Appendix I

To estimate the potential impact of increases in the passenger
facility charge (PFC) on passenger levels, we used data on the number
of passenger trips and the fares paid from July 1, 1997, through June
30, 1998.  The general approach of our analysis was to estimate the
percent increase in fares that would result from a PFC increase and
then to estimate the reduction in passengers likely to result from
that fare increase.  There is considerable uncertainty associated
with this analysis because the estimated reductions in air travel are
highly dependent on the assumptions underlying the calculations.  As
a result, we developed three scenarios to present midrange, high, and
low estimates of the reductions in passenger travel. 

This appendix describes our analysis.  The first two sections discuss
the key considerations in estimating the percent change in fares
resulting from a PFC increase and the reduction in passengers likely
to result from that fee increase.  The third section presents the
scenarios that we use in developing the estimates of the impact.  The
fourth section presents detailed estimates of the impacts for
different types of trips under each scenario.  The last section
discusses the data that we used. 

   KEY CONSIDERATIONS IN
   ESTIMATING FARE CHANGES
   RESULTING FROM PFC INCREASES
--------------------------------------------------------- Appendix I:1

Estimating the percent change in fares resulting from a PFC increase
requires knowing both the fares before the PFC increase and the
extent to which the PFC increase results in higher fares.  We used
fare data (which are discussed later) for different types of trips to
estimate the average fare for each trip type and the 25\th and 75\th
percentiles of the fare distribution.  On average, fares paid by
business travelers are higher than fares paid by nonbusiness
travelers on the same trips.  However, ticket samples used to provide
fare data do not indicate the purpose of the trip.  So, to estimate
the average fares separately for business and nonbusiness travelers,
we needed to make inferences from the distribution of all fares.  For
each type of trip, we used the 25\th and 75\th percentiles of the
fare distribution as proxies for the average fares paid by
nonbusiness and business travelers, respectively. 

The percent change in fares due to a PFC increase also depends on the
pricing strategies that airlines use in adjusting their fares in
response to an increase in the PFC and on the number of PFCs
collected per trip.  In an attempt to limit passenger losses
resulting from higher fares, in some cases, airlines might choose to
absorb some portion of the higher fee.  The more that they absorb,
the smaller the increase in fares.  Our scenarios incorporate
different assumptions about the extent to which PFCs are absorbed by
airlines. 

We used information on which airports charge PFCs to estimate for
each trip the number of PFCs paid per trip.  We also took into
account the limitation that only two PFCs can be collected per
one-way trip even when the trip includes more than two enplanements. 

   KEY CONSIDERATIONS IN
   ESTIMATING THE DECLINE IN
   PASSENGER LEVELS BECAUSE OF
   FARE INCREASES
--------------------------------------------------------- Appendix I:2

Estimating the decline in passenger levels for different types of
trips because of a given fare increase requires knowing the number of
travelers on each trip type and the sensitivity of travel demand to a
price change on each type of trip (a concept known as the price
elasticity of demand).  Our data on trips from the ticket sample
could be readily divided into trips defined by the following
characteristics: 

  -- distanceï¿½less than 500 miles (short-haul) versus 500 miles or
     more (long-haul);

  -- airport sizeï¿½large and medium hubs (large airports) as the
     origin and destination versus at least one small airport as the
     origin or destination; and

  -- carrierï¿½regular-fare carrier versus low-fare carrier.\1

To estimate the share of travel attributable to business versus
nonbusiness purposes, we relied on an estimate provided to us by an
analyst at the Air Transport Association that about 47 percent of
trips were for business purposes and about 53 percent were for
nonbusiness purposes. 

To identify what price elasticity estimates to use in our analysis,
we reviewed the literature on price elasticity estimates for
travel.\2 We found that existing studies of this sensitivity have
produced a variety of estimates.  Some of the estimates differ
because the studies focus on different groups of travelers, such as
business and nonbusiness travelers; but some of the estimates differ
because of inherent methodological difficulties in measuring the
sensitivity of air travelers to price changes.  In general, the more
sensitive that travelers are to price changes (that is, the more
price elastic the demand for air travel), the larger the decrease in
passenger trips that will occur for each $1 increase in the PFC. 
Studies of passengers' sensitivity to price changes show that the
degree of price sensitivity is typically greater for nonbusiness than
for business travelers and greater on short routes for which auto
travel is a feasible alternative than on long routes. 

--------------------
\1 We classified the following airlines as low-fare carriers:  Air
South, AirTran Airways, American Trans Air, Carnival, Frontier, Kiwi
Air, Morris Air (if prior to acquisition by Southwest), Nation's Air
Express, ProAir, Reno Air, Southwest, Spirit, Tower Air, ValuJet (if
prior to merger with AirTran), Vanguard, and Western Pacific.  All
other airlines were considered full-fare carriers. 

\2 We relied heavily on the summary of the literature on price
elasticity estimates for air travel that is presented in a May 1995
report of the Secretary of Transportation to the Congress on Child
Restraint Systems.  We also independently reviewed some of the
literature described in that report. 

   THREE SCENARIOS INCORPORATE
   DIFFERENT ASSUMPTIONS
--------------------------------------------------------- Appendix I:3

We developed three scenarios that incorporate different assumptions
about the price elasticity of demand for air travel and the extent to
which airlines will adjust their prices in response to an increase in
PFCs.  In each scenario, we made the same assumptions that 53 percent
of the trips represented nonbusiness travel, that 47 percent
represented business travel, and that the 25\th and 75\th percentile
fares could be proxies for average nonbusiness and business fares,
respectively.  In all of the scenarios, we treat the elasticities as
constants.  That is, if the elasticity is ï¿½1.0, a 1 percent increase
in fares will lead to a 1-percent decline in the number of
passengers, and a 5 percent increase in fares will lead to a
5-percent decline in the number of passengers.  These scenarios were
designed to yield a range of estimates of the reduction in passengers
resulting from an increase in PFCs. 

For our midrange scenario, we used estimates of the price elasticity
of demand that we determined to be typical of studies that have
produced such estimates.  In particular, this scenario incorporates
assumptions that for business travel, the elasticity was ï¿½1.0 for
short routes and ï¿½0.8 for long routes; for nonbusiness travel, the
elasticity was ï¿½2.0 for short routes and ï¿½1.6 for long routes.  For
this scenario, we also incorporated the assumption that because
business travel is less sensitive to price than nonbusiness travel,
airlines would be able to pass on the full increase in PFCs for
business travel by raising fares accordingly.  However, for
nonbusiness travel, they would have to absorb 50 percent of the
increase in PFCs to avoid losing too many passengers. 

For the high scenario, we raised all of the elasticity estimates by
25 percent and for the low scenario we lowered them all by 25
percent.  Also, for the high scenario we incorporated the assumption
that the airlines would pass on the full increase in PFCs for all
travelers, while for the low scenario we incorporated the assumption
that to avoid losing too many passengers, airlines would have to
absorb more of the PFC increase.  In particular, in the low scenario,
airlines would be able to pass through only 75 percent of the PFC
increase to business travelers and only 37.5 percent of the PFC
increase to nonbusiness travelers.\3

In the next section we present results showing the impacts on
passenger levels per $1 increase in the PFC.  A $2 increase, for
example, will result in an estimated decline twice as large as the
decline resulting from a $1 increase. 

--------------------
\3 In some sense, these combinations of assumptions for the high case
and low case scenarios may appear unrealistic when compared to the
midrange case.  With higher elasticities, as in the high case, one
might expect airlines to be less able rather than more able to pass
on PFC increases by raising fares than in the midrange case, in which
elasticities are lower.  However, we do not know the actual ability
that airlines would have to pass forward PFC increases.  Therefore,
in developing the high case and low case scenarios, we have
incorporated combinations of assumptions that are designed to yield
estimated reductions in passengers substantially different from those
in the midrange scenarios to show the wide range of possibilities
resulting from the inherent uncertainty of the estimation process. 

   DECLINES IN PASSENGERS PER $1
   INCREASE IN THE PFC WERE
   ESTIMATED UNDER EACH SCENARIO
--------------------------------------------------------- Appendix I:4

Tables I.1, I.2, and I.3 show the estimated declines in passenger
levels per $1 increase in the PFC for various types of routes under
our midrange, high, and low scenarios, respectively.  The calculation
of those results was performed by (1) estimating the number of
business and nonbusiness travelers in each trip category by
multiplying the percent distribution of business and nonbusiness
travelers times the total passengers in each trip category; (2)
estimating the percent change in the average business and nonbusiness
fare paid in each trip category as a result of a $1 increase by
mulitplying the average number of PFCs paid per trip by $1,
multiplying the result by the percent of the increase in the PFC that
airlines pass on to travelers to calculate the fare increase, and
then dividing that number by the average business and nonbusiness
fares to calculate the percent change in fares for each trip
category; (3) estimating the percent change in one-way business and
nonbusiness trips by multiplying the percent change in fares by the
price elasticity; and (4) estimating the change in one-way trips for
business and nonbusiness travelers in each trip category by
multiplying the respective percent changes by the respective number
of business and nonbusiness travelers. 

                                        Table I.1
                         
                          Estimated Decline in Passengers Per $1
                            Increase in the PFC -Midrange Case

                                (Passengers in thousands)

                    Business passengers    Nonbusiness passengers     Total passengers
                   ----------------------  ----------------------  ----------------------
Route type             Number     Percent      Number     Percent      Number     Percent
-----------------  ----------  ----------  ----------  ----------  ----------  ----------
Short-haul, sm
-----------------------------------------------------------------------------------------
Regular-fare             60.0        0.38       198.6        1.11       258.6        0.77
Low-fare                 35.0        0.56        63.8        0.90        98.8        0.74
Total                  95.1\a        0.43     262.3\a        1.05       357.4        0.76

Short-haul, la
-----------------------------------------------------------------------------------------
Regular-fare             94.9        0.64       277.9        1.66     372.7\b        1.18
Low-fare                163.9        1.26       308.0        2.10     471.8\b        1.71
Total                 258.7\a        0.93     585.8\a        1.87       844.5        1.43

Long-haul, sma
-----------------------------------------------------------------------------------------
Regular-fare            139.9        0.41       333.6        0.86     473.4\b        0.65
Low-fare                 24.1        0.51        39.9        0.75      63.9\b        0.64
Total                 163.9\a        0.42     373.4\a        0.85       537.3        0.64

Long-haul, lar
-----------------------------------------------------------------------------------------
Regular-fare            291.6        0.49       654.5        0.97       946.1        0.75
Low-fare                 74.1        0.73       127.8        1.12     202.0\b        0.94
Total                   365.7        0.52       782.3        0.99   1,148.1\b        0.77
All short-haul          353.8        0.71       848.1        1.50     1,201.9        1.13
All long-haul           529.7        0.49     1,155.7        0.94     1,685.4        0.73
All small airport       259.0        0.42       635.7        0.92       894.7        0.69
All large airport       624.5        0.64     1,368.1        1.24     1,992.6        0.96
All regular-fare        586.4        0.47     1,464.4        1.04     2,050.9        0.77
All low-fare            297.1        0.87       539.4        1.40       836.5        1.15
All routes            883.5\a        0.56   2,003.9\a        1.12   2,887.4\a        0.85
-----------------------------------------------------------------------------------------
\a Does not total because of rounding. 

\b Does not cross total because of rounding. 

                                        Table I.2
                         
                          Estimated Decline in Passengers Per $1
                              Increase in the PFC -High Case

                                (Passengers in thousands)

                    Business passengers    Nonbusiness passengers     Total passengers
                   ----------------------  ----------------------  ----------------------
Route type             Number     Percent      Number     Percent      Number     Percent
-----------------  ----------  ----------  ----------  ----------  ----------  ----------
Short-haul, sm
-----------------------------------------------------------------------------------------
Regular-fare             75.1        0.47       496.4        2.78     571.4\b        1.70
Low-fare                 43.8        0.70       159.5        2.25     203.2\b        1.52
Total                 118.8\a        0.54     655.8\a        2.63   774.7\a,b        1.65

Short-haul, la
-----------------------------------------------------------------------------------------
Regular-fare            118.6        0.80       694.6        4.14       813.2        2.57
Low-fare                204.8        1.58       769.9        5.26       974.7        3.53
Total                   323.4        1.16     1,464.5        4.66     1,787.9        3.02

Long-haul, sma
-----------------------------------------------------------------------------------------
Regular-fare            174.8        0.51       833.9        2.14     1,008.7        1.37
Low-fare                 30.1        0.64        99.6        1.89       129.7        1.30
Total                   204.9        0.52       933.5        2.11     1,138.4        1.37

Long-haul, lar
-----------------------------------------------------------------------------------------
Regular-fare            364.5        0.61     1,636.2        2.43   2,000.8\b        1.58
Low-fare                 92.7        0.92       319.6        2.80     412.2\b        1.92
Total                   457.2        0.66     1,955.8        2.49     2,413.0        1.63
All short-haul          442.3        0.88     2,120.4        3.76   2,562.6\b        2.41
All long-haul           662.1        0.61     2,889.3        2.35     3,551.4        1.53
All small               323.7        0.53     1,589.4        2.30     1,913.1        1.47
 airports
All large               780.6        0.80     3,420.3        3.11     4,200.9        2.02
 airports
All regular-fare        733.0        0.59     3,661.1        2.60     4,394.1        1.65
All low-fare            371.3        1.09     1,348.6        3.51     1,719.9        2.37
All routes          1,104.4\a        0.70   5,009.7\a        2.80   6,114.0\b        1.81
-----------------------------------------------------------------------------------------
\a Does not total because of rounding. 

\b Does not cross total because of rounding. 

                                        Table I.3
                         
                          Estimated Decline in Passengers Per $1
                              Increase in the PFC -Low Case

                                (Passengers in thousands)

                    Business passengers    Nonbusiness passengers     Total passengers
                   ----------------------  ----------------------  ----------------------
Route type             Number     Percent      Number     Percent      Number     Percent
-----------------  ----------  ----------  ----------  ----------  ----------  ----------
Short-haul, sm
-----------------------------------------------------------------------------------------
Regular-fare             33.8        0.21       111.7        0.63       145.5        0.43
Low-fare                 19.7        0.31        35.9        0.51        55.6        0.42
Total                    53.5        0.24       147.6        0.59   201.0\a,b        0.43

Short-haul, la
-----------------------------------------------------------------------------------------
Regular-fare             53.4        0.36       156.3        0.93       209.7        0.66
Low-fare                 92.2        0.71       173.2        1.18       265.4        0.96
Total                 145.5\a        0.52       329.5        1.05     475.1\b        0.80

Long-haul, sma
-----------------------------------------------------------------------------------------
Regular-fare             78.7        0.23       187.6        0.48       266.3        0.36
Low-fare                 13.5        0.29        22.4        0.42      36.0\b        0.36
Total                    92.2        0.24       210.0        0.48     302.3\b        0.36

Long-haul, lar
-----------------------------------------------------------------------------------------
Regular-fare            164.0        0.28       368.2        0.55       532.2        0.42
Low-fare                 41.7        0.41        71.9        0.63       113.6        0.53
Total                   205.7        0.30       440.1        0.56       645.8        0.44
All short-haul          199.0        0.40       477.1        0.85       676.1        0.64
All long-haul           297.9        0.27       650.1        0.53     948.0\a        0.41
All small               145.7        0.24       357.6        0.52       503.3        0.39
 airports
All large             351.3\a        0.36       769.6        0.70  1,120.8\a,        0.54
 airports                                                                   b
All regular-fare        329.9        0.26       823.7        0.59     1,153.6        0.43
All low-fare            167.1        0.49       303.4        0.79       470.5        0.65
All routes            497.0\a        0.31     1,127.2        0.63  1,624.1\a,        0.48
                                                                            b
-----------------------------------------------------------------------------------------
\a Does not total because of rounding. 

\b Does not cross total because of rounding. 

   DESCRIPTION OF DATA
--------------------------------------------------------- Appendix I:5

We contracted with GRA, Inc., a consulting firm that does extensive
work on aviation issues, to provide us with data for our analysis. 
Although we were not able to verify the data, GRA, Inc.  is very
experienced in handling airline data and has worked under contract
previously for the Federal Aviation Administration.  GRA, Inc.  used
data on the number of one-way trips made and the fares paid by a
sample of passengers from the Department of Transportation's DB1A
database for the period July 1, 1997, through June 30, 1998.  To
provide us a more reliable database, at our direction, GRA, Inc. 
applied several screens that excluded data from certain tickets. 
These screens ruled out the following: 

  -- all routes that average less than one passenger per day,

  -- trips with more than 3 coupons one-way,

  -- all tickets with fares of $12 or less (to eliminate frequent
     flyer tickets),

  -- tickets with an unreadable fare field, and

  -- trips that include an airport outside the continental United
     States. 

ADVISORY PANEL MEMBERS
========================================================== Appendix II

Stephen M.  Quilty
Assistant Professor
Bowling Green State University
Aerotechnology Annex, East Poe Road
Bowling Green, OH 43403-0307

Dr.  Seth Young
Assistant Professor
Department of Business Administration
Embry-Riddle Aeronautical University
600 South Clyde Morris Boulevard
Daytona Beach, FL 32114-3900

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION

Beverly Ann Bendekgey
Anne A.  Cangi
Jay R.  Cherlow
Lynne L.  Goldfarb
Julian L.  King
Stanley G.  Stenersen
John A.  Thomson, Jr.
Randall B.  Williamson

OFFICE OF THE GENERAL COUNSEL

David K.  Hooper

OFFICE OF THE CHIEF ECONOMIST

Joseph D.  Kile

*** End of document. ***