Los Angeles International Airport offers airport services to passengers from Los Angeles, California, United States and states in the metropolitan area. The airport is ranked one of the top 5 us airports due to its remarkable passenger and cargo trafficking. In 2018, it was ranked the world's fourth busiest airport and the United States' second busiest airport. In this paper, an evaluation of the Los Angeles international airport structure of finance will be conducted. In this respect, an n analysis of the airport's economic impact, the component of finance and sources of revenue will be addressed. Understanding these factors will enlighten the financing sources for US airports as well as the overall structure of airport finances in the United States and other countries.
Economic Impact on Communities and Societies
Reports have recognized Los Angeles Airport as a major economic generator in Southern California and surrounding states. Various activities and services in the airport have massive economic benefits for the southern regions consisting of the six counties (David, 2015) .Employment availed to individuals is an influencing factor to the experienced positive impacts. More than 620,610 local jobs are offered at the airport. In addition to 121, 6 40 annual jobs are also offered. Businesses and personal investment in locations near the airport are also economically boosted. Hotels, restaurants, theme parks, entertainment centers, and retail outlets are some of the advantaged businesses. Shipping services offered by the airport suppers the local manufacturing industry in a significant way (Song, 2018). Employees and suppliers of the manufacturing companies also benefit from the sales made internationally through the airport's shipping services. If the airport was non-existent, the unemployment rate in the subject states would be higher.
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Apart from creating employment opportunities, the company also generates revenue and tax that builds the economic state of the local governments in the subject states. In 2010, the airport generated $ 6.2 billion in state and local taxes (Paraschi, 2019). Besides, $ 8.7 billion were generated in federal tax revenue. Capital – improvement programs implemented in the airport are expected to generate more revenue and taxes in favor of the local state and the federal government.
Components of Airport’s Finance
Components of the airport’s finance include fees, rent, debts and operational expenditure. Annual financial reports of the airport provide great insight into the relevant components of its finance (Afusso, 2017). In the fiscal year 2018, the operating revenue totaled $ 1. Billion while the non-operating revenue was at $ 73.2 million. Bonded debt had increased from 2107 with a net increase of $ 4.04 million. Federal and government capital grants, another component of the airports' finance totaled to $ 87.8 million. Apart from the stated components, others include the value of assets and outflow resources as well as the value of residual operations gained through the transfer of assets and liabilities (Bernardino, 2019). In 2018, the company recognized a generator of residual transfer amounting to $ 140 million after transferring assets and liabilities to Ontario International Airport Authority.
Sources of Revenue for the Airport
Revenue in Los Angeles International Airport is generated through aeronautical and non-aeronautical activities. Aeronautical activities are the key generators of revenue and constitute the main service and products offered in the airport ( Bernardino, 2019) . In Los Angeles International Airport, offering flight and cargo shipping services is the primary source of revenue. Flight landing and parking charges on commercial flights are also significant income-generating activities for the airport. Shipping cargo to various destinations is done as a certain fee which generates profits and revenue (Peter, 2019). When more customers use the services offered in the airport, the more the revenue the company generates. Being an internationally recognized airport, generation of revenue through these channels is boosted by its position in the industry.
Non-aeronautical activities include other non-core income-generating activities offered at the airport. They include those offered within the airport and the spaces around it (Song, 2018). For instance, Investors running their businesses in the airport cut sales to the airport. Shops, hotels, and restaurants working corporations with the airport too have to give an agreed percentage of their revenue to the airport. Other retail revenue activities include offering car parking and cargo handling at a fee (David, 2015). Commercial advertising in the airport also generates revenue from companies and organizations marketing their services and products at the airport.
Types of Expenses
Generated revenue in the company is used in various ways. First, the airport pays taxes concerning relative legislation. Taxes include airport registration taxes, fuel taxes and other paid to local, state and federal governments. A bigger percentage of the revenue is also used to employees’ salaries and benefits (Peter, 2019). Payment of debts to credit investors is also an expense incurred by the airport. Operating expenses are used to finance daily activities at the airport. It includes expenses like insurance, materials and supplies, lease, advertising and other miscellaneous items (white, 2019). A percentage of the revenue is also used for renovations and upgrading of the airport to enhance better service provision.
Financing Sources for Us Airports
Airports in the United States receive funding from state and government airport grants, air-port generated intone and Passenger facility charges airport and facility bonds (Paraschi, 2019).Grants are offered through the airport improvement program (AIP) funded by congress through the airport and airway trust fund. Tax- exempt bonds are offered by state and local government or by the airport authorities. Passenger facility charges ( PFC) are funds from passenger fees while state and local contributions constitute funds from state aviation fuel, airline property taxes, aircraft registration fees among others (Patrick, 2016). Funds allocation in various airports varies depending on factors like operational capacity and whether it is a public or private airport. Airports are also exempted from federal and state taxes.
Allocation of funds is based on the revenue-generating potential of the subject airport. Variations in accessing financial sources are thus inevitable (Li, 2017). Large and medium airports are considered to be sound credit risk and therefore receive more cash reserves compared to smaller airports. However, they face restrictions in use of agreement and bond covenants which may limit access to bond financing. Smaller commercial airports are funded by the local and state governments (Paraschi, 2019). More than half of the AIP grants are allocated to small commercial and GAP airports thus reducing the finances allocated to bigger airports. PFC revenue, on the other hand, is concentrated on high activity airports. Top 80 airports are the greatest beneficiaries of this source of finance.
Structure of Airport Finances
Financial structure in airports aims at maintaining a balance between debt and equity. Also known as the capital structure, the financial structure ensures that debt capital does not surpass the equity capital generated in airports (Afusso, 2017). Debt capital is received from credit investors and is paid back over an agreed period. An interest rate is also paid for any debt capital the airport gets. Airports usually seek debt capital when implementing projects that require more revenue than the company can generate. For instance, major projects like airport expansion may require the management to seek debts capital from credit investors (Martin, 2016). Equity capital, on the other hand, is raised by shareholders. It gives them partial ownership of their investments.
It is worth noting that airports seek to finance their operations at the lowest cost so reduce capital obligations and enhance investments. When evaluating the financial structure in airports, managers seek to optimize the Weight Average Cost of Capital (WACC) (White, 2017). Calculates the payout rates of the airport's debt and equity capital requires implementation of this technique. Relevance of this aspect to Los Angeles International Airport is by the need for it to balance between the debt capital and the equity capital is maintained. Financial structuring is also essential as it highlights the claims that different players are entitled to in the airport (peter, 2019). Debt owners claim the finances and interests owned while equity owners are entitled to a share of the airport's future profits. It is also relevant in evaluating the risk the airport take when implementing various investment projects.
In conclusion, Los Angeles International Airport has various economic impacts which include reduction of employment rate and enhancing the economy through payment of various taxes. Components of the airport finance include federal and government capital, operating revenue as well as non-operating revenue. Sources of revenue for the company are bases on income-generating aeronautical and non- aeronautical activities. Financing sources for US airports include funding programs offered by state and federal government. Lastly, the structure of airport financing entails balancing the debt capital and equity capital in finance management.
References
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Bernardino, F. (2019). New US Airport Slot Policy in Flux. Journal of Transport Economics and Policy , 12(6), 99-102
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Patrick, M. (2016). Us Airport Costs and Production Technology. In Journal of Transport Economics and Policy, 38(3), 55-78
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