Modernizing the passenger facility charge to improve aviation
Photo 243423278 © Michael Schoen |

Policy Brief

Modernizing the passenger facility charge to improve aviation

Modernizing the passenger facility charge would improve airports and increase airline competition.

Executive Summary

The COVID-19 pandemic hit the transportation sector hard and perhaps the aviation industry hardest. At its worst in April 2020, U.S. air passenger transportation declined by 96% year-over-year. While air travel has rebounded since that nadir, full recovery is expected to take years, particularly for international and business travel. The passenger air transportation market at the end of the decade is likely to look very different than what had been projected prior to the pandemic.

Like all segments of the aviation market, airports will need to adjust to this new normal. Both airlines and airports received tens of billions of dollars in taxpayer bailouts in the United States, and returning the aviation industry to self-sufficiency is the only fiscally sustainable path forward.

To that end, giving airports maximum operational and financing flexibility to adjust to emerging conditions is critical to minimizing the costs and disruptions associated with aviation recovery. One important way that Congress can facilitate this flexibility at no cost to the Treasury is by modernizing the airport passenger facility charge.

The passenger facility charge (PFC) is a congressionally authorized, federally regulated local airport user fee. The PFC exists alongside the Airport Improvement Program (AIP), a federal grant program funded through aviation taxes. Together, the PFC and AIP have in recent years accounted for approximately half of total airport funding available for capital projects.

AIP funds generally can be used only for airside projects, such as runways, taxiways, aprons, noise abatement, and land acquisitions. In contrast, the PFC funds can be used for AIP-eligible projects plus numerous landside projects, such as passenger terminal and ground transportation improvements, and can be used to service debt. For commercial airports with sizable passenger volumes, these differences in flexibility have led to a strong preference for the PFC over AIP funding.

The federal passenger facility charge cap was last raised by Congress in 2000. Under current law, public airports in the U.S. can charge a maximum PFC of $4.50 per boarding for the first two flight segments of a trip, with PFC collections per passenger being capped at $9 per one-way and $18 per round-trip. Thanks to inflation, the passenger facility charge has seen its purchasing power plummet by approximately half, negatively impacting airports’ ability to address their growing list of needed improvements.

Two findings support modernizing the passenger facility charge. First, evidence suggests that PFC use has a positive effect on airport efficiency while AIP use has a negative effect. Legislation introduced in previous Congresses would have uncapped the PFC while proportionately reducing AIP authorized spending, with this change in the PFC/AIP mix expected to result in greater airport productive efficiency.

Second, major non-aeronautical revenue sources, especially revenue from parking and rental car fees, were facing heightened risks and declining prospects prior to the pandemic as travelers opted for new ride-hailing ground transportation services to and from airports. Pandemic-related concerns about shared transportation may have temporarily shifted traveler preferences back to driving modes that support parking and rental car revenue, but how long this will persist is highly uncertain. Since the PFC charges airport terminal users regardless of their use of terminal concessions, it represents a lower-risk, predictable, and sustainable revenue source.

In addition to providing airports with predictable and sustainable revenue, the PFC was also designed to promote airline competition. Beginning in the 1950s, airports negotiated long-term leases with their airline customers to lock in airline payments so as to retire debt and finance airport improvements. In exchange for this financial support, incumbent airlines received long-term exclusive-use gate leases, which they used to restrict access to new and often lower-cost entrants.

In recent years, the trend has shifted. Granting long-term, exclusive-use gate leases has faded as a concern, but limited gate availability at large and medium-sized hub airports has still been estimated to raise consumer airfares by billions of dollars every year. In addition to serving as an important airport self-help tool, the PFC can increase airline competition and thereby dilute price-setting power by dominant incumbent airlines. Air travelers can thus benefit from improved airport facilities and lower airfares.

Alternatives to the passenger facility charge are inferior from both airport revenue collection and consumer welfare perspectives. Modernizing the passenger facility charge would promote local airport self-sufficiency, airport efficiency, and reduced airfares through enhanced carrier competition as the U.S. recovers from the COVID-19 pandemic. As Congress debates the FAA reauthorization due at the end of September 2023, it should eliminate the statutory passenger facility charge cap of $4.50 to promote a pro-consumer and pro-taxpayer aviation recovery.

Full Brief: Modernizing the Passenger Facility Charge for Aviation Recovery