Compensatory Airline Agreement

In the 33 years since the deregulation of the aviation industry, many airports have moved from the residual pricing method to a compensatory or hybrid method. Under the residual method, all non-air revenue from the airport will be applied to costs and the balance will be billed to the airlines (or, in the event of excess non-air revenue, obtain a credit). Under the compensation method, the airport sets airline fares and charges on the basis of the percentage of costs corresponding to the use of the facilities by the airlines, regardless of the level of revenue from non-airlinen countries. Excess revenue is generally withheld by the airport. Hybrid methods are generally compensatory for terminals and remnants of airfield facilities. However, there are many possible hybrid variants, including methods that include compensation calculations, combined with a distribution of non-airline revenues with airlines. The choice of an interest rate setting method is considered a trade-off between risk and return. In the case of a pure residual method, airports are virtually unexposed to financial risk. Airlines collectively bear the full risk by ensuring that not all airport costs are covered by non-air revenues. However, the airport has limited or no means of generating or withholding excess revenue.

Airline fares and charges are set in such a way that they are sufficient to cover operating and debt service costs. In addition, airline use and leasing contracts on the basis of the residual method generally include a predominantly interest regime (MII) which requires the airport to obtain the approval of the majority of airlines operating at the airport, the majority being defined on the basis of the share of the weight of the territory or aircraft equipment, or both before proceeding with possible capital expenditures. Under the clearing method, airports are able to keep excess revenue offline and have greater control over airport investment decisions, but their financial situation is also becoming more dependent on non-company revenues and therefore more vulnerable to traffic fluctuations. However, most compensation agreements have mitigating characteristics, such as. B a mechanism for recovering deficits over time through annual interest rate adjustments and an exceptional hedging provision allowing a final year account if net revenues do not correspond to the execution of a bond interest pact. In summary, airports that use a clearing method take a greater risk in the short term, in exchange for the ability to generate and retain excess revenues from non-airlines and to exercise greater control over capital expenditures.