"Policy and Procedures Concerning the Use of Airport Revenue"

Tuesday, October 19, 2004

Policy and Procedures Concerning the Use of Airport Revenue/
Petition of the Sarasota-Manatee Airport Authority To Allow Use of Airport
Revenue for Airline Subsidies
The Federal Register


ADDRESSES: Comments received on the petition are available for public review
in the Dockets Office, U.S. Department of Transportation, Room Plaza 401,
400 Seventh Street, SW., Washington, DC 20590-0001. The documents have been
filed under FAA Docket Number 2003-16227. The Dockets Office is open between
9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The
Dockets Office is on the plaza level of the Nassif Building at the
Department of Transportation at the above address. Also, you may review
public dockets on the Internet at http://dms.dot.gov.

FOR FURTHER INFORMATION CONTACT: Charles Erhard, Manager, Airport Compliance
Division, AAS-400, Federal Aviation Administration, 800 Independence Ave.
SW., Washington, DC 20591, telephone (202) 267-3085.

SUPPLEMENTARY INFORMATION:

I. The Petition

On March 10, 2003, the Federal Aviation Administration (FAA) received a
petition from Frederick J. Piccolo, President, Chief Executive Officer of
the Sarasota Manatee Airport Authority (SMAA), requesting that the FAA
provide an opportunity for notice and comment on SMAA's proposed change to
FAA's Policy and Procedures Concerning the Use of Airport Revenue (Revenue
Use Policy). The petitioner requested that the FAA amend the Revenue Use
Policy to permit certain airport sponsors to use airport revenue for the
direct subsidy of commercial airline service under specific and limited
circumstances. The FAA has interpreted Federal law to prohibit an airport
sponsor that is the recipient or subject of Federal assistance for airport
improvements from using airport revenue for a direct subsidy to an air
carrier, and that interpretation is reflected in the Revenue Use Policy. The
petitioner represents that some airport sponsors have been able to provide
either financial subsidies or revenue guarantees carriers to secure airline
service using non-airport funds. These airport sponsors are general-purpose
municipalities that can use funds from non-airport sources for general
economic development without restriction on their use under the Revenue Use
Policy. In contrast, those airport sponsors governed by a special-purpose
airport authority cannot provide direct subsidies to carriers, or use any
revenue for general economic development, because all of their funds are
considered airport revenue subject to the requirements in Federal law and
the Revenue Use Policy.

Specifically, the petitioner requested an amendment to the Revenue Use
Policy that would "permit airports that have less than 0.25 percent of the
total U.S. passenger boardings to use airport revenues at their discretion
for subsidies to air carriers willing to provide service to those airports."
The petitioner suggested the following conditions to be contingent to this
amendment:

1. The community must have a minimum population of 200,000 residents in the
airport's local county(s).

2. Airport revenues considered for use are not subject to the airline
agreement in place and do not affect the rate-making methodology of the
agreement.

3. Subsidy is limited to new service.

* Airline not presently at the airport.

* City pair not presently served by any airline at the applicant airport.

4. Subsidy cannot exceed 12 consecutive months to any airline.

5. Airline receiving the subsidy must be willing to provide the following:

* Daily scheduled service with a minimum seating capacity of 50 seats.

* Must commit to a minimum of twelve consecutive months of service.

Airline cannot utilize the program more than once at the same airport.

II. Discussion

A. Summary of Comments

Comments in support of the petition: In its petition and subsequently
submitted comments, the SMAA argues that there is an inequity within the
Revenue Use Policy that places airports governed by general-purpose
municipalities at an advantage over airports governed by independent
authorities. SMAA contends that municipally-run airports are free to use
non-airport revenue to offer subsidies for airline service while independent
authorities are prevented from providing subsidies from their airport
revenues because of the Revenue Use Policy. SMAA states that in a few cases
authority-governed airports have funds that FAA defines as airport revenue,
but the funds are separate and distinct from revenues required to support
airline costs under the airport rate-setting methodology. SMAA proposes that
these funds should be allowed for use as a direct subsidy in the manner
proposed in its petition, because the cost of the subsidy will not be borne
by the incumbent airlines at those airports. In addition, SMAA contends that
a successful subsidy program will add airline service and benefit the
incumbent airlines by reducing their airport fees. SMAA also adds that this
proposal is consistent with the intent of Congress, despite legislative
language that might suggest otherwise, in part because SMAA and other
airports like it are not monopolies, but rather experience passenger leakage
to nearby, larger airports that can serve the same population. Therefore,
airport authorities should have the ability to fight passenger leakage by
subsidizing air service, to promote a long-term sustainable market.

Four airport operators besides the petitioner submitted comments in support
of SMAA's proposal. Five other airport operators submitted comments
generally in support, but with suggested changes in the limiting conditions.
One airport operator suggested that any airport authority offering such
subsidies, as outlined by the petitioner, be prevented from accepting
funding under the Essential Air Service program.

The Airports Council International North America (ACI) and the American
Association of Airport Executives (AAAE) submitted identical comments
supporting the petition. ACI/AAAE stated that the FAA should allow any
non-discriminatory subsidies, or at least the FAA should accept SMAA's
proposal but without SMAA's proposed limits on population or aircraft
capacity. ACI/AAAE also observed that:

"Under the current revenue-use policy, airport sponsors which are
general-purpose municipalities may use funds from a non-airport source to
provide direct subsidies. However, airport sponsors governed by a
special-purpose airport authority cannot provide direct subsidies to air
carriers, because all the funds are considered airport revenue subject to
the revenue use policy prohibitions. Although general-purpose municipalities
may use non-airport revenues for air carrier subsidies, the truth of the
matter is that these municipalities and other airport sponsors, such as
State departments of transportation, are also facing severe financial
difficulty. Revising the revenue use policy to afford any airport the
opportunity to offer a subsidy, regardless of airport sponsor status, should
at lease provide a more level playing field for airports to solicit new
routes and services."

ACI/AAAE acknowledged that GAO determined that direct subsidies "have not
produced an effective transportation solution for passengers at many small
communities." However, ACI/AAAE contend that even though "direct subsidies
provided by individual airports will not address all or even the majority of
inadequate air service issues, they are a legitimate tool." Finally,
ACI/AAAE contend that the Revenue Use Policy is contradictory in that it
permits airports to spend airport revenues for promotional and marketing
programs and to waive landing and other fees for a limited period in order
to entice new market entrants or encourage incumbent airlines to add
service, but denies airports the ability to directly subsidize airline
service from airport revenues.

Five airports submitted comments that the SMAA proposal is too narrow and
would "result in different treatment for different airports." The City of
Fresno suggested that municipal airports be allowed to spend airport revenue
for direct subsidies without the limitations requested in the petition.
Other airports objected to the population limits, the 12-month duration
limit, and aircraft size limits. Two individual users of Sarasota Bradenton
International Airport commented in favor of the proposal, citing the high
cost of fares at their preferred airport and the inconvenience of driving to
a larger airport in a neighboring community. Two Sarasota area Chambers of
Commerce submitted similar comments, stating, "[t]he lack of adequate local
air service has been a severe impediment to our efforts to attract new
industry to our area." They also stated that the proposal would provide a
region-wide benefit.

Comments opposing the petition: Three airport operators objected to the
proposal. Generally, these commenters noted that unintended, potentially
detrimental consequences could result from such a policy change. These
consequences could include airports bidding for airline service or airlines
demanding subsidies to keep service in a market. The manager of Ithaca
Tompkins Regional Airport stated, "In our fight for better airline service
we would lose out to bigger airports simply because they can offer more
money * * * * I think the Sarasota proposal could set a dangerous precedent
for the nation's smallest airports. In addition, it would unfairly
discriminate against incumbent carriers and create an uneven playing field.
Ultimately, it could start a free-for-all and even end up being a detriment
to Sarasota itself."

The Aircraft Owners and Pilots Association (AOPA), the Regional Airline
Association (RAA), and the Air Transport Association (ATA), American
Airlines, and Continental Airlines all submitted comments in opposition.
AOPA stated that it is strongly opposed to the proposal: "The safety and
utility of our national air transportation system relies on the ability of
an airport sponsor to maintain an airport in a safe and serviceable
condition. An airport sponsor remains responsible for funding airport
projects. Using airport revenue to subsidize airline service would take away
from an airport's ability to fund airport improvement projects." AOPA
also states its concern that air carriers will pressure airports to provide
such subsidies, basing service on the amount or availability of the subsidy,
instead of the underlying market, echoing some of the comments from airports
in opposition. ATA and other users stated that the change proposed by the
petitioner would require a change in Federal law, since the law prohibits
the use of airport revenue for general economic development. They noted that
both the SMAA and the Sarasota area Chambers of Commerce acknowledge that a
purpose of the proposal is general economic development. ATA argues that the
Revenue Use Policy explicitly prohibits the use of airport revenue for the
subsidy of airline service, regardless of the governing structure of an
airport. ATA contends that SMAA's premise that the policy is somehow
inequitable is flawed because the Revenue Use Policy currently treats all
airports exactly the same. ATA also contends that, regardless of the
governing structure, "an airport may receive financial assistance from local
or state governments or from private organizations without running afoul of
the Revenue Use Policy." ATA concludes that, notwithstanding the prohibition
of subsidies under Federal law and policy, the SMAA proposal, if enacted,
would violate Federal grant assurances 22 and 23, because it would limit
subsidies to airlines not presently serving SMAA and would therefore
discriminate against incumbent airlines. Finally, ATA stated, "the use of
any airport revenue to subsidize air service suggests that other airport
needs are going unmet, or alternatively that charges are higher than they
otherwise would have to be to maintain a self-sustaining rate structure."

B. Summary of Relevant Law and Policy

Petitions to amend the Revenue Use Policy must be evaluated with
consideration of the controlling Federal law.

Title 49 U.S.C. 47107(b)(1) requires that grant agreements for airport
development grants include an assurance that "the revenues generated by a
public airport will be expended for the capital or operating costs of-(A)
The airport; (B) the local airport system; or (C) other local facilities
owned or operated by the airport owner or operator and directly and
substantially related to the air transportation of passengers or property."
A substantially similar requirement is included in 49 U.S.C. 47133, which
applies directly to any airport that has received Federal assistance. In
1994, Congress expressly prohibited "the use of airport revenues for general
economic development, marketing and promotional activities unrelated to
airports or airport systems." 49 U.S.C. 47107(1)(2)(b). Sections V and VI of
the Revenue Use Policy, at 64 FR 7718-20, respectively, list uses of airport
revenue considered to be permitted or prohibited under the above statutes.
The list of prohibited uses of airport revenue in section VI B. includes the
following:

"12. Direct subsidy of air carrier operations. Direct subsidies are
considered to be payments of airport funds to carriers for air service.
Prohibited direct subsidies do not include waivers of fees or discounted
landing or other fees during a promotional period. Any fee waiver or
discount must be offered to all users of the airport, and provided to all
users that are willing to provide the same type and level of new services
consistent with the promotional offering. Likewise prohibited direct
subsidies do not include support for airline advertising or marketing of new
services to the extent permitted by Section V of this Policy Statement."

Some of the commenters discussed the applicability of Federal law under the
Airline Deregulation Act of 1978 (ADA). Under the ADA's preemption
provision, 49 U.S.C. 41713(b), State and local governments are prohibited
from enacting or enforcing any provision having the force or effect of law
related to a "price, route, or service of an air carrier.


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