Funding Options: In-line Systems: Consultant explores alternative financing mechanisms available to airports

Security FUNDING OPTIONS: IN-LINE SYSTEMS Consultant explores alternative financing mechanisms available to airports By Dan Dean May 2004 Many U.S. airports are currently embarking upon in-line baggagescreening system projects...


Security

FUNDING OPTIONS: IN-LINE SYSTEMS

Consultant explores alternative financing mechanisms available to airports

By Dan Dean

May 2004

Many U.S. airports are currently embarking upon in-line baggagescreening system projects — that is, the "in-line" installation ofexplosive detection systems in baggage handling systems. While somelarger airports have been able to fund the systems up front witha promise of future funding from the Transportation Security Administration (TSA) via letters of intent, most commercial aiports continue to grapple with how to finance the systems. Here, an industry consultant offers insights into some of the funding mechanisms which airport sponsors should consider when looking to fund the in-line systems.

TSA has mandated that all U.S. airports electronically screen 100 percent of all baggage. To assist airports in meeting this requirement, TSA devised the Letter of Intent (LOI) program to reimburse airports for the capital and engineering costs associated with the installation of in-line baggage screening systems.

Baggage System Baggage System

To date, TSA has issued only eight LOIs (LAX, Denver, Dallas/Ft. Worth, Boston Logan, Las Vegas McCarran, Seattle-Tacoma, Atlanta Hartsfield-Jackson, Phoenix SkyHarbor). The earlier LOIs were to be funded with a 75 percent federal contribution. The recent FAA reauthorization bill requires TSA to adjust all LOIs to a higher 90 percent federal contribution level. Acting TSA director David Stone revealed in March that the administration’s request for $250 million for FY2005 EDS funds will only allow the administration to fund the eight LOIs at the lower 75 percent level. Stone also says that TSA has no plans to issue additional LOIs in the current fiscal year or in FY2005.

The Challenges
In-line projects at many airports have been placed on hold indefinitely due to:

a) financing challenges;
b) airline resistance to paying for in-line projects; and,
c) the real or perceived risk that pursuing in-line projects without prior TSA commitment may result in the airport becoming a lower priority when the TSA makes decisions to dole out future grant reimbursements.

Traditional Methods
Given TSA’s limitations in extending additional LOIs, the continuation of in-line project development will likely depend on innovative financing solutions and negotiations with TSA for non-LOI funding sources (e.g. reimbursement of security personnel cost savings). The following are the traditional finance methods used by airports:

  • General Airport Revenue Bonds (GARBs).
  • Passenger Facility Charge (PFC) Revenue Bonds.
  • Commercial Paper (CP).
  • Equipment Loans & Leases.

For many airports, traditional financing methods are unacceptable due to:

  • Revenue covenants may require increases in airlines’ rates and charges (a “tough sell”).
  • Limited capacity and high cost of traditional credit enhancement.
  • PFCs may be previously committed to other projects or are needed for planned projects.
  • High interest cost associated with non-enhanced bonds and equipment loans and leases.
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