As Marc Scribner of the Competitive Enterprise Institute explained in a recent policy brief, Congress enacted the first PFC law in 1990, based on research carried out by the Transportation Department during the Ronald Reagan and George H.W. Bush administrations. While airport per-passenger fees were (and are) fairly common worldwide, Congress outlawed them in 1973 after the Supreme Court had ruled that they were perfectly legal. Congress enacted the Anti-Head Tax law at the behest of the major airlines.
In those days prior to airline deregulation, major airlines typically signed long-term leases with airports, in exchange for which they usually got “majority-in-interest” (MII) provisions in the leases. That gave incumbent carriers veto power over capital expenditures to expand terminal capacity, which would enable competing airlines to add service at those airports. This didn’t matter very much in the days when the Civil Aeronautics Board severely limited airline competition, but the major carriers didn’t want to take any chances.
After the Airline Deregulation Act of 1978 had been in operation for nearly a decade, Reagan transportation secretary Jim Burnley commissioned a 1987 paper on the feasibility of per-passenger airport charges for replacing federal airport grants. Under his successor, Sam Skinner, the department released a national strategy document, Moving America, that formally called for Passenger Facility Charges, and Congress enacted the first PFC law in 1990. Council of Economic Advisers member Thomas Gale Moore pointed out in these pages that having this new revenue source outside the strictures of MII clauses would “make airports less financially dependent on the tenant carriers and would encourage them to provide more facilities for new carriers.” (See “Good Enough for Government Work,” Summer 1990.)
The additional costs of checking bags, purchasing a meal or snack, etc., seem to have had little or no effect on the ever-increasing air passenger volume over the past decade.
And so it has proved. As Chuang points out, nearly all commercial-service airports have taken advantage of the PFC legislation, using the majority of the revenue for terminal expansion and improvement projects. Chuang and other critics of PFCs argue that airports should instead push for an increase in the size of the Airport Improvement Program (AIP), which provides annual grants to airports. But as the Congressional Research Service has noted, the large majority of AIP grants are used for “airside” projects such as runways and taxiways. More important, AIP grants cannot be used to expand terminals or add gates. The past three decades have seen a nationwide wave of airport terminal modernization and expansion, facilitating the growth of low-cost Southwest Airlines into a major national carrier and, more recently, enabling ultra-low-cost carriers (Allegiant, Frontier, Spirit) to become the fastest-growing segment of U.S. air travel. This would not have been possible under the old “fortress hub” model beloved by the major airlines.
PFCs today / But that was then; this is now. Chuang argues that airports don’t need an increase in the federal cap on PFCs because they are sitting on $16 billion in unallocated reserves. First of all, many airports seek and maintain investment-grade bond ratings (unlike many airlines, most of which have suffered bankruptcy within recent memory). That requires airports to maintain reserve funds to get them through the inevitable recessions when all their revenues decrease.
Moreover, one of the great successes of the PFC era is that the bond markets have accepted PFC revenue streams as a reliable funding source for airport revenue bonds. While no comprehensive figures are available (from either the airlines or the airports), it seems likely that much of the revenue stream from existing PFC levels is now dedicated to debt service on 30-year bonds issued to finance the terminal expansions of recent decades. Those revenues are not available for the additional terminal projects that are in many airports’ current five- and 10-year expansion plans.
A final argument against increased PFCs used by the airlines involves price elasticity. Chuang cites an airline example that if the PFC cap were increased from today’s $4.50 to a possible $8.50 per leg of the trip, the effect on a family of four’s vacation could be a travel-discouraging 4.6% increase in their airfare. That conveniently ignores the ever-increasing amount that airlines are getting from “ancillary revenues” — nominally voluntary payments for such things as checking bags, getting a meal or snack, etc. The latest study of ancillary revenues by transportation consultancy IdeaWorks found that over the last decade or so these charges have gone from zero to the equivalent of 18% of the total airfare on Southwest, 16% on American, 14% on United, and 12.5% on Delta. Yet these additional costs seem to have had little or no effect on the ever-increasing air passenger volume over the past decade.
That’s very likely because of the rapidly growing market share of low-cost and ultra-low-cost airlines during this same period, which has held down all air fares. And that growth has been enabled by the additional gates and terminal space made possible by PFCs.
Readings
- “Financing Airport Improvements (Update).” Congressional Research Service R43327, March 15, 2019.
- “Modernizing the Passenger Facility Charge to Increase Airport Investment, Reduce Federal Spending, and Save Travelers Money,” by Marc Scribner. OnPoint no. 256, Competitive Enterprise Institute, Aug. 14, 2019.
- Moving America: New Directions, New Opportunities — A Statement of National Transportation Policy Strategies for Action. U.S. Department of Transportation, February 1990.
- The Effects of Airport Defederalization: Final Report, DOT-P-36–87‑4. Office of the Secretary of Transportation, U.S. Department of Transportation, February 1987.