Airport Revenue Bond

What Is an Airport Revenue Bond?

An airport revenue bond is a type of municipal bond in which the operating revenue of an airport is used to secure the bond. A municipality or airport authority will issue an airport revenue bond, with the funds going toward improving, expanding or building a new airport.

In some cases, an airport revenue bond is a type of public purpose bond. The bonds are generally exempt from federal taxes if no more than 10% of proceeds are used for private business.

Understanding Airport Revenue Bond

Airport revenue bonds are a common form of airport debt. Because a municipality or airport authority issues the debt, it is more likely to pay a lower interest rate, which lowers financing costs for the airport.

Like other municipal bonds, airport revenue bonds are generally exempt from federal taxes. They can be exempt from state and local taxes as well if the buyer resides in the same place where the bond is issued. However, the tax-exempt status of an airport revenue bond depends on the airport's mix of public and private use. If more than 10% of the bond's proceeds are used for private business, it is considered a private-purpose bond and may not qualify for tax-exempt treatment.

Credit analysts rate airport revenue bonds on the amount of traffic the airport receives, how well the airport performs financially, and how likely it is that airlines will continue to use the facility.

The U.S. Congress and the Federal Aviation Administration (FAA) regulate the use of airport revenue if the operators have accepted federal assistance. Common acceptable uses include airport improvements, gateway improvements, safety improvements, and capacity enhancements, as well as building new facilities. 

Other Kinds of Municipal Revenue Bonds

Revenue bonds are municipal bonds that finance income-producing projects and are secured by a specific revenue source. Examples would include projects such as a toll road, a recycling plant, or a local sports stadium. Government agencies managed as businesses can issue revenue bonds.

Revenue bonds are backed from the money streams created by a specific project. They are considered riskier than general obligation (GO) bonds, which are repaid through a variety of municipal tax sources and rely on the full credit of the issuing municipality, as no assets are used as collateral. However, because of the greater risk, revenue bonds typically pay a higher interest rate.

In the case of an airport revenue bond, a municipality may issue a bond to build a new terminal. The income generated from airport activities secures the debt. Once completed, airport landing fees, terminal rents, concession revenue, parking charges and other income streams will be used to pay off the bond.

In addition to airport revenue bonds, other revenue bonds include housing revenue bonds, student loan revenue bonds, highway revenue bonds, and transit revenue bonds.