What Is an Airport Revenue Bond?

An airport revenue bond is a type of municipal bond issued by a municipality or airport authority that uses the revenues of the airport facility to back the bond. In some cases, the airport revenue bond is a type of public purpose bond. However if more than 10% of the benefit from the airport will go to the private sector, the bond will be a private bond.

An airport revenue bond, issued to improve, expand, or build a new facility is tax-exempt in most situations. 

Understanding Airport Revenue Bond

Airport revenue bonds are the most common form of airport debt. Because a municipality or airport authority issues the debt, it is more likely to have a lower interest rate, making the long-term financing costs for the airport lower.

Municipal bonds, such as airport revenue bonds are a type of tax-exempt income investment. When a taxpayer earns interest income on municipal bonds issued in their state of residence, the profit is exempt from both federal and state taxes. Also, the tax-exempt status of an airport revenue bond may depend on the airport's mix of public and private use.

The more an airport is for the private purpose uses, the less likely the bond will offer the full extent of tax-exempt options. 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. A credit analyst is a financial professional who possesses expertise in assessing the creditworthiness of individuals and companies.

The U.S. Congress and the Federal Aviation Administration (FAA) oversee the use of airport revenues. Common acceptable applications include airport and airway improvement, gateway improvements, safety, and capacity enhancements, as well as new facilities. 

Other Kinds of Municipal Revenue Bonds

When the revenue of a specific project, such as a toll road, a recycling plant, or a local stadium supports a municipal bond, it is called a revenue bond. Revenue bonds are municipal bonds that finance income-producing projects and are secured by a specified revenue source. Government agencies, managed as businesses can issue revenue bonds.

Revenue bonds have backing from the money streams created by a specific project. These bonds have a higher risk than GO bonds, but because of that, they can sometimes pay a higher rate of interest. Revenue bonds also contrast to general obligation bonds (GO), which are debt obligations repaid through a variety of tax sources. Holders of GO bonds must rely on the full credit of the issuing municipality as no assets are used as collateral.

For example, in the case of an airport revenue bond, the municipality issues a bond to build a new terminal. The bond depends on the income generated from airport activities to back the debt. Once completed, airport landing fees, terminal rents, concession revenue, parking charges, and other income streams will generate revenue that the city will use to pay off the bond.

There are numerous kinds of municipal revenue bonds, as many as the kind of projects they fund. The most common besides the airport revenue bond are housing revenue bonds, student loan revenue bonds, highway revenue bonds, and transit revenue bonds.