Dallas-Fort Worth International Airport (DFW) and the Transportation Security Administration (TSA) are negotiating a deal that may serve as a model for funding $4.5 billion in structural modifications that must soon be made to airports across the nation.

The Aviation and Transportation Security Act (ATSA) required airports to begin screening all checked bags for explosives by Dec. 31, 2002. Many airports met the deadline with temporary measures such as explosive detection systems (EDS) installed in lobbies.

A permanent solution awaits modifications to terminals that will enable the in-line baggage-handling areas to integrate and support the weight of EDS machines the size of mini-vans. Some of the largest airports are designing systems that will require networks of dozens of these machines.

Airport and government officials estimate that the terminal modifications may cost $4.5 billion or more, exclusive of the cost of the machines themselves. Airports don't have the money to pay for the modifications. Neither does the TSA.

Where will the money come from? In early February, the Senate Aviation Subcommittee held a hearing to explore the status of this continuing problem. During his testimony, Charles Barclay, president of the American Association of Airport Executives, noted that a possible solution is under discussion with TSA. “We have joined the TSA in advocating the creation of a new program within the TSA's budget — perhaps modeled after the current FAA Letter of Intent process — that would allow airports to leverage their own resources to pay for the construction necessary to accommodate EDS equipment,” Barclay said.

The concept described by Barclay has historically helped fund airport improvement projects. Suppose, for example, that an airport wanted to build a new runway for $50 million. Negotiations between FAA and airport officials would produce a Letter of Intent carrying the promise of reimbursement from a federal fund usually earmarked for airport improvements over a period of years. The airport would use the Letter of Intent as collateral, borrow funds in the bond market, build the runway, and pay debt service on the bonds from existing cash flows. As FAA funds specified by the letter arrived in succeeding years, the airport would retire the bonds.

“When TSA was first organized, officials weren't familiar with this approach to funding,” says Jim Crites, executive vice president of operations at DFW. “Airports have suggested using this model. Instead of asking for $4.5 billion at a time when finance is a keen issue, the idea would enable airports to ask for a fraction of the overall total, get the work done, and pay it off over time.”

DFW and TSA are negotiating a Memorandum of Understanding that will use the reimbursement concept to fund approximately $145 million in structural modifications required to prepare DFW to accommodate in-line EDS equipment.

According to Ken Capps, a spokesperson for DFW, construction work on the modifications could begin almost immediately and conclude with the installation of approximately 40 EDS machines, which TSA would purchase.

The strategy may help resolve current funding woes but will only push back the day of reckoning for airports that have seen security mandates required by ATSA eat into more and more of their budgets.

Airport revenues come from a variety of sources including fees charged to airlines for the use of the facilities, entitlements provided under the Airport Improvement Programs (AIP), parking, passenger facility charges (PFCs), and joint revenue bonds bought by investors.

During the 2003 fiscal year, these and other sources of revenue will cover $327 million in DFW spending obligations, according to financial statements posted on the airport's Web site. Approximately $128 million will pay debt service on outstanding bonds. The remaining $202 million pays for operations and maintenance, the day-to-day spending necessary to running the airport.

But operation and maintenance costs have been rising, given increasing security expenses unrelated to structural modifications. Last year, for example, TSA security mandates required DFW to pay between $7 million and $10 million more on security than in the previous year. The additional expenditures by and large covered compensation paid for new security officers. ATSA permitted airports to draw this additional money from AIP funds, money generally earmarked for airport improvements.

Overall, current sources of funding are being stretched to the limit. When purchasing tickets, for example, airline passengers typically pay passenger facility charges (PFCs). These fees represent the share of airport maintenance paid by passengers. At DFW, PFCs have risen to $4.50 per landing and takeoff. Today, a passenger departing from and returning to DFW must pay $9 in round trip PFCs. The airport's financial forecast estimates that PFCs will generate about $10.3 million in revenue during 2003. As AIP money flows into security initiatives, PFCs can pick up only so much of the slack in operations and maintenance.

Airports can also charge some of these costs back to the airlines, but airports have been reluctant to take that path, given the financial difficulties faced by most air carriers in the current economic environment.

So far, DFW has chosen to balance its budget by deferring airport maintenance.

“We have an airport with 18,000 acres, seven runways, 35 miles of security fence, 100 miles of roads, and substantial plumbing and electrical installations,” Crites says. “That means we have a lot of maintenance to do every year, and we've had to defer maintenance. We can do that in the short term, but we can't do it indefinitely. At the end of the day, we're going to have to take on new debt to satisfy security mandates.”

Crites believes the FAA funding model being discussed with TSA represents a practical, but partial, solution to the critical problem of funding structural modifications to accommodate in-line EDS needs.

Once structural modifications to terminals have been completed and the EDS equipment installed, reimbursements promised by the Memorandum of Understanding will enable the airport to retire debt issued to investors. Assuming that Congress appropriates the funding promised by the Memorandum, DFW would then have to catch up on maintenance and operations spending deferred while paying debt service on the renovation bonds.

Despite the potential difficulties, Crites favors the bond-funding approach for modifying terminals because he believes it is a solution that will work for the TSA and for all airports. “A model that works for one will work for all,” he says.

At the same time, smaller and larger airports have different kinds of problems, according to Crites. “Given the volume of traffic and space constraints at larger airports, our challenges can be more complex than those of smaller airports,” Crites says. “But we have more financing options. For example, our larger passenger volumes generate significant funds through PFCs. Smaller airports generating fewer PFCs may have less complex problems but may face more severe financial problems overall when it comes to paying for security. The point is that we are not a homogenous lot.”