1. AIRPORT FINANCIAL MANAGEMENT
CHAPTER-8
AIRPORT FINANCIAL MANAGEMENT

2. AIRPORT FINANCIAL MANAGEMENT
Large amount of financial resources are required to operate, maintain, and improve A/Ps property, infrastructure, and labor
Such resources are arranged through a number of strategies available to airport management
With each source of funding available to A/Ps, come rules and policies that determine which strategy A/P mgt may employ to cover a portion of the A/P’s cost burdens

3. AIRPORT EXPENSES A/P expenses fall into two types
Operation and Maintenance Costs. costs consist of those expenses that occur on a regular basis and are required to maintain the current ops at the A/P. Such expenses typically include wages and salary of A/P employees, costs of utilities such as power, water, and telecommunications, and a broad range of regularly needed supplies
Capital Improvement Expenses. are very large, periodic expenses which contribute to A/P infrastructure improvement or expansion. Capital improvement expenses include the costs of major construction projects such as airfield and terminal expansion, the acquisition of major utilities such as air rescue and fire fighting vehicles, and the purchase of land for future expansion

4. AIRPORT FINANCIAL ACCOUNTING
Revenues from ops of the A/P are used to cover the A/P’s O&M expenses
Financial accounting is employed to manage the balance of operating revenues and expenses
A/P accounting involves the accumulation, communication, and interpretation of economic data relating to the financial position of an A/P and the results of its ops for decision-making purposes
A/P accounting differs from accounting procedures found in business firms because A/P differ considerably in terms of goals, size, and operational characteristics. As such, it is difficult to derive a unified accounting system that can be used by all A/Ps
System tailored to the needs of a large commercial A/P might be impractical for a small GA A/P or vice versa as A/Ps have different definitions of what elements constitute operating and non-operating revenues and expenses and sources of funds for A/P development

5. Operating expenses can be divided into four major groupings
AIRFIELD AREA
TERMINAL
HANGARS/CARGO/OTHER BUILDINGS & GROUNDS
GENERAL AND ADMINISTRATIVE EXPENSESS

6. AIRFIELD AREA EXPENSES
OPERATING EXPENSES
O&M expenses associated with the airfield area include: 
i. R/Ws, T/Ws, apron areas, A/C parking areas, & A/F light sys maint
ii. Service on airport equipment
iii. Maintenance on fire equipment and airport service roads
iv. Utilities (electricity) for the airfield.
AIRFIELD AREA EXPENSES
O&M expenses associated with the terminal include:
 i. Buildings and grounds—maintenance and custodial services
ii. Improvements to the land and landscaping
iii. Loading bridges and gates—maintenance and custodial services
iv. Concession facilities and services
v. Observation facilities—maintenance and custodial services
vi. Passenger, employee, and tenant parking facilities
vii. Utilities (electricity, air-conditioning and heating, and water)
viii. Waste disposal —maintenance.
ix. Equipment (air-conditioning, heating, baggage handling)—maint
TERMINAL EXPENSES

7. GENERAL & ADMINISTRATIVE EXPENSES
OPERATING EXPENSES
O&M expenses include:
 i. Buildings and grounds—maintenance and custodial services
ii. Improvements to the land and landscaping
iii. Employee parking—maintenance
iv. Access roadways—maintenance
v. Utilities (electricity, air-conditioning and heating, and water)
vi. Waste disposal —maintenance
HANGARS, CARGO FACILITIES,
OTHER BUILDINGS, & GROUNDS EXPENSES
GENERAL & ADMINISTRATIVE EXPENSES
General and administrative expenses include:-
 i. Payroll expenses for the maint, ops, and admin staff of the A/P
ii. Other operating expenses for materials and supplies
iii. Non-operating expenses including the payment of interest on outstanding debt, contributions to govt bodies, and other miscellaneous expenses

8. LIABILITY INSURANCE
Large % of A/P expenses are derived from insurance to cover various areas of liability
A/Ps and their tenants have the same general type & degree of liability exposure as the operator of most public premises
People sustain injuries from obstructions, automobiles are damaged when struck by A/P service vehicles on the A/P premises. Claims from such accidents can be for large amounts
But claims from A/C accidents are huge. The passangers might be killed or severely injured and expensive A/C damaged or destroyed, not to mention injury to other persons or other types of property at or near an A/P
Liability in such instances can stem from
Defect in the surface of the R/W
Failure of A/P mgt to mark obstructions properly
Failure to send out the necessary warnings and to close the A/P when it is not in usable condition

9. A/P operators require that all tenants purchase their own insurance as appropriate for their particular circumstances and with certain min limits of liability
Generally, A/P operator is included as an additional insured under the tenant’s insurance coverage; however, this does not relieve the A/P operator from securing its own liability protection under a separate policy

10. OPERATING REVENUES

11. A/P operating revenues can be divided into five major groupings
AIRFIELD AREA
TERMINAL AREA CONCESSIONS
AIRLINE LEASED AREAS
OTHER LEASED AREAS
OTHER OPERATING REVENUE

12. TERMINAL AERA CONCESSIONS
OPERATING REVENUE
A/F or airside of the A/P produces revenues from sources that are directly related to the operation of A/C:
 i. Landing fees for scheduled and unscheduled airlines, itinerant A/C, military or govt A/C
ii. A/C parking charges in hangars, paved and unpaved areas
iii. Fuel flowage fees from fuel suppliers
AIRFIELD AREA
Terminal concessions include all of the nonairline users of the terminal area:
 i. Food & beverage concessions (restaurants, snack bars, lounges)
ii. Travel services & facilities (lockers, flight insurance, restrooms, car rentals, and telephones)
iii. Specialty stores & shops (boutiques, newsstands, banks, gift shops, clothing stores, duty-free shops)
iv. Personal services (beauty and barber shops, shoeshine stands)
v. Amusements (video arcades, movie and TV rooms)
vi. Display advertising
vii. Outside terminal concessions (parking, ground transport, hotels)
TERMINAL AERA CONCESSIONS

13. OTHER LEASED AREAS AIRLINE LEASED AREAS OPERATING REVENUE
include revenue derived from the air carriers for
Ground equipment rentals
Cargo terminals
Office rentals
Ticket counters
Hangars
Operations
Maintenance facilities
AIRLINE LEASED AREAS
OTHER LEASED AREAS
All of the remaining leased areas at A/P that produce revenue are brought together under other leased areas such as
Freight forwarders
Fixed-base operators
Governmental units
Businesses in the A/P industrial area

14. OTHER OPERATING REVENUE
includes revenues from
Operation of distribution systems for public utilities, such as electricity
Contract work performed for tenants
A/Ps also generate non-operating revenues, including
Interest earned on investments in governmental securities
Local taxes
Subsidies or grants-in-aid
Selling or leasing of properties owned by A/P but not related to A/P ops
Magnitude of non-operating income can differ considerably between A/P

15. Planning and Administering
an Operating Budget

16. Planning and Administering an Operating Budget
Planning an operating budget is an integral part of A/P financial management
Every A/P must make short-term decisions about the allocation and scheduling of its limited resources over many competing uses
It must make long-term decisions about rates of expansion of capital improvements and funding sources
Both short-term and long-term decisions require planning

17. PLANNING & ADMINISTERING
BUDGET APPROPRIATION
PLANNING & ADMINISTERING
OPERATING BUDGET
Once A/P decide a plan of action for the future, these plans are incorporated into a written financial budget
Budgets are simply the planned amounts needed to operate and maintain the A/P during a definite period of time such as a year
Budgets cover major capital expenditures such as R/W resurfacing, R/W construction and for operating expenses during the planning period
Real expenses incurred during the year are a measure of the actual performance
Difference between actual expenses and the budgeted amount is called a variance
Variance measures the efficiency of the department

18. PLANNING & ADMINISTERING
BUDGET APPROPRIATION
PLANNING & ADMINISTERING
OPERATING BUDGET
A/Ps operate under one of three different forms of budget appropriation
LUMP SUM APPROPRIATIONS
APPROPRIATION BY ACTIVITY
LINE-ITEM BUDGETING

19. BUDGET APPROPRIATION Lump Sum Appropriation Appropriation by Activity
PLANNING & ADMINISTERING
OPERATING BUDGET
is the simplest form of budget and generally only utilized by small GA A/Ps
No specific restrictions as to how money should be spent
Only the total expenditure for the period is fixed
This is the most flexible form of budgeting
Appropriation by Activity
Appropriated expenses are planned according to major work area or activity with no further detailed breakdown
Appropriation by activity enables mgt to establish capital and operating expense budgets for particular areas such as airside facilities, terminal building area, and so forth
It also permits flexibility in responding to changing conditions

20. PLANNING & ADMINISTERING
BUDGET APPROPRIATION
Line-Item Budget
PLANNING & ADMINISTERING
OPERATING BUDGET
Line-item budget is the most detailed form of budgeting, used quite extensively at the large commercial airports
Numerical codes are established for each operating and capital expense item
Budgets are established for each item and often adjusted to take into consideration changes in volume of activity
For example, as the number of passenger enplanements changes, budgets for the terminal building maintenance can be adjusted accordingly

21. ADMINISTERING AN OPERATING BUDGET PLANNING & ADMINISTERING
In drawing up a budget, the first step involve an estimate of revenues from all sources for the coming year
Next step is to establish budgets for the various areas of responsibility
When budgets are being investigated, predetermined, and integrated, the department managers who must live within the budgets are consulted about the amount of money available and help draw up budgets for their departments for the coming period
Actual expenses are then checked against budgeted expenses during the period that the budgets are in effect
Managers are supplied with figures of actual expenses so that they can compare them with budgeted expenses and investigate variances

22. REVENUE STRATEGIES AT COMMERCIAL AIRPORTS
Financial and operational relationship between A/P operator and the air carriers is defined in legally binding agreements that specify how the risks and responsibilities of running the A/P are to be shared
Contractsknown as A/P use agreements, establish the terms and conditions governing the air carriers’ use of the A/P
Term airport use agreement is used commonly to include both legal contracts for the air carriers’ use of A/F facilities and leases for use of terminal facilities. At many A/Ps, both are combined in a single document
Airport use agreements also specify the methods for calculating rates air carriers must pay for use of A/P facilities and services; and they identify the air carriers’ rights and privileges, sometimes including the right to approve or disapprove any major proposed A/P capital development projects

23. REVENUE STRATEGIES AT COMMERCIAL A/P
Although financial management practices differ greatly among commercial A/P, the A/P-airline relationship at major A/Ps takes one of two very different forms, with important implications for A/P pricing and investment
Residual Cost Approach. under which one or more air carriers collectively assume significant financial risk by agreeing to pay any costs of running the A/P that are not allocated to other users or covered by all other sources of revenue
Compensatory Cost Approach. under which the A/P operator assumes the major financial risk of running the A/P and charges the air carriers fees and rental rates set so as to recover the actual costs of the facilities and services that they use

24. FEDERAL AND STATE GRANT PROGRAMS
AIRPORT FUNDING
Although the burdens of managing A/P finances to cover the costs of an A/P’s operating and maintenance budget have increased in recent years, the significantly greater costs associated with moderate to major construction and technology improvements that define capital improvement projects have historically been far beyond that of any revenues generated
As a result, A/Ps have relied on three alternative sources of funding to cover capital improvement costs
FEDERAL AND STATE GRANT PROGRAMS
BOND ISSUES
PRIVATE INVESTMENT

25. STATE GRANT PROGRAMS AIRPORT FUNDING GRANT PROGRAM
Since the post–World War II, federal govt has provided grant programs from which owners of public-use A/Ps could acquire funds for A/P development
These funds were provided without responsibility for paying any monies back to the govt, and thus have been known as grant-in-aid programs
STATE GRANT PROGRAMS
In addition to federal funding, many individual states in the nation offer grant programs for A/P capital improvements
These sources are found within state Departments of Transportation, funded from the general tax base of the state, state user fees on highway tolls, automobile and other vehicle registrations, and fuel taxes
State and local funding is offered either as supplemental funding to federal grants, or as primary funding for A/P and/or A/P projects not eligible for funding through other funding programs

26. AIRPORT FINANCING AIRPORT FUNDING
Largest source of funding for capital improvements at A/Ps has been through bond financing
Role of bond financing in overall investment differs greatly according to an A/P’s size and type of air traffic served
In terms of total dollar volume of bond sales, large and medium A/Ps are most prominent in the bond market
Of the total amount of municipal debt sold for A/P purposes during the last two decades, 90% was for large and medium A/Ps, in contrast to only 9% for small commercial A/Ps
GA A/Ps accounted for a little more than 1% of total A/P bond sales

27. PRIVATE INVESTMENT AIRPORT FUNDING
In many instances, particularly internationally, A/P capital projects have been funded by private investment
Many of these investments are focused on the construction of terminal and ground access facilities such as passenger and cargo terminal buildings, rental car facilities, and aircraft service facilities
Fewer private investments have been made on the construction of airfield facilities
Many such investments are made either through public-private partnerships or complete privatization. Privatization can be structured in a number of ways.

28. PRIVATE INVESTMENT AIRPORT FUNDING
Privatization can be structured in a number of ways
Build, Operate, and Transfer (BOT) Contracts
Lease, build, and operate (LBO) agreements
Full Privatization
Build, Operate, and Transfer (BOT) Contracts
Under a build, operate, and transfer (BOT) contract, private investment is used to construct and operate a facility for a period defined in the terms of the contract
At the end of the contract period, the ownership of the facility is transferred to the airport owner

29. PRIVATE INVESTMENT AIRPORT FUNDING
Lease, build, and operate (LBO) agreements
Lease arrangement allows a govt entity to get benefits associated with complete privatization without losing control over the A/P assets
In a long-term lease (20 to 40 years), govt allows the private sector company to build and manage an A/P facility, while leasing the property and facility from the A/P
Private builder/operator has much of the authority over the facility, including operations, strategic decisions, and development
In addition to a lease payment, the govt is able to capture the efficiencies and innovation of the private sector
Full Privatization
Final form of A/P privatization is the sale of the entire A/P or partial interest in the A/P
This form of privatization is prominent
Under the terms of complete sale, govt gives up all rights of ownership to private entity; however, govt maintains its regulatory authority