Internal Audit Report

Comprehensive Operational Audit

Port of Seattle Aviation Division – Airfield Operations

January 1, 2008 – December 31, 2010

Issue Date: December 6, 2011

Report No. 2011-25

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Internal Audit Report

Comprehensive Operational Audit – Airfield Operations

January 1, 2008 to December 31, 2010

Audit

Compliance Audit

Table of Contents

Transmittal Letter ................................................................................................................................................................... 3

Executive Summary ............................................................................................................................................................... 4

Background.............................................................................................................................................................................. 5

Audit Objectives ..................................................................................................................................................................... 6

Highlights and Accomplishments ...................................................................................................................................... 7

Audit Scope and Methodology ............................................................................................................................................ 8

Conclusion ............................................................................................................................................................................... 8

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Internal Audit Report

Comprehensive Operational Audit – Airfield Operations

January 1, 2008 to December 31, 2010

Audit

Compliance Audit

Transmittal Letter

Audit Committee

Port of Seattle

Seattle, Washington

We have completed an audit of the Aviation Division’s Airfield Operations Department. The purpose of

the audit was to determine whether internal controls are adequate to ensure that operations are

efficient and effective.

We reviewed information relating to department operations from January 1, 2008 – December 31,

2010, and through the end of fieldwork in November 2011.

Management has primary responsibility to establish and implement effective controls. Our role was to

assess and test those controls in order to establish whether the controls were adequate to ensure

effective operations and compliance.

We conducted the audit in accordance with generally accepted government auditing standards.

Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence

to provide a reasonable basis for our conclusions based on our audit objectives. We believe that the

evidence obtained provides a reasonable basis for our conclusions based on our audit objectives.

The Airfield Operations Department has adequate controls to ensure efficient and effective operations

in compliance with applicable rules and regulations.

We extend our appreciation to the Airfield Operations staff for their assistance and cooperation during

the audit.

Joyce Kirangi, CPA

Internal Audit, Director

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Internal Audit Report

Comprehensive Operational Audit – Airfield Operations

January 1, 2008 to December 31, 2010

Audit

Compliance Audit

Executive Summary

Audit Scope and Objective The purpose of the audit was to determine whether management has

implemented adequate controls to ensure:

1. Revenue generated by the Airfield Operations Department is complete and accurate

2. Professional services contracts are in compliance with requirements

3. Small and attractive items are properly safeguarded

4. Benchmarks are available and can be used to help improve airport operations

We reviewed information for the period January 1, 2008, through December 31, 2010, including

activity through the end of fieldwork in November 2011.

Background The Airfield Operations Department has 24 employees with an annual operating

budget of $3.5 million (exclusive of depreciation expenses). The Department is responsible for

ensuring continuing compliance with the Federal Aviation Administration’s (FAA) Federal Aviation

Regulations (FAR – Chapter 139) for airfield operations, operating certification, training and wildlife

management. Additionally, the Department oversees the Airport Communications Center, and has

taken the lead in implementing one of the nation’s first Safety Management Systems at Seattle-

Tacoma International Airport (STIA).

The Department accounts for all airfield revenues, including landing fees, gate fees and parking fees

for all aircraft, in accordance with the fee schedule established under Port Tariff No. 1. During the

period under audit, the Department collected an average of $62 million annually for multiple airfield

activities.

Audit Result Summary The Department has adequate controls to ensure airfield operations are

efficient and effective, in compliance with internal policies and procedures and airfield revenues are

complete and accurate. We have identified and shared some best practices to help improve controls

and operational efficiencies.

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Internal Audit Report

Comprehensive Operational Audit – Airfield Operations

January 1, 2008 to December 31, 2010

Audit

Compliance Audit

Background

The Airfield Operations Department has 24 employees with an annual operating budget of $3.5

million (exclusive of depreciation expenses). The Department is responsible for ensuring continuing

compliance with the Federal Aviation Administration’s (FAA) Federal Aviation Regulations (FAR –

Chapter 139) for airfield operations, operating certification, training and wildlife management.

Additionally, the Department oversees the Airport Communications Center, and has taken the lead in

implementing one of the nation’s first Safety Management Systems at Seattle-Tacoma International

Airport (STIA).

The Department accounts for all airfield revenues, including landing fees, gate fees and parking fees

for all aircraft, in accordance with the fee schedule established under Port Tariff No. 1. During the

period under audit, the Department collected at an average of $62 million annually (see Figure 1).

Decreases in airfield revenues beginning in 2009 relate to the economic recession, which began in

2008. As the recession eased, the revenues increased slightly in 2010.

Figure 1: Airfield revenues by account, 2008-2010

Account

2008

2009

2010

Signatory & Non-Signatory Airlines

$66,293,215

$51,500,618

$57,028,879

Airline Gate Charge - Exempt

$2,514,132

$3,598,920

$3,519,402

Ramp Tower Fee

$979,687

$971,789

$973,591

General Aviation

$81,068

$54,558

$72,811

Fuel Flowage Fees

$100,232

$90,864

$42,821

Space Rental Joint Use- Exempt

$493

$439

$38,019

Aircraft Parking -Cargo Hardstand

$1,229

Miscellaneous Revenue - Exempt

$300

Land Rental - Exempt

$9,169

Total

$69,978,296

$56,217,188

$61,677,052

Data Source: PeopleSoft Financials

The Department’s most significant expense during the audit period was the depreciation of airfield

assets, which include the physical elements of the airfield (i.e., runway, lighting, and signage),

accounting for 83 percent (or $60 million) of total expenses. The other significant expenses are

salaries, benefits, taxes and professional services.

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Internal Audit Report

Comprehensive Operational Audit – Airfield Operations

January 1, 2008 to December 31, 2010

Audit

Compliance Audit

The Department expended over $3.7 million over the entire audit period for professional services,

including the services of contractors and consultants. The professional services expenses are roughly

comparable to the exempt and non-exempt employee salaries and benefits. During the audit period,

the Department oversaw several capital projects, including the development of STIA’s Safety

Management System (SMS), which necessitated a number of professional service contracts. Outside

of projects, professional services included:

The largest single expense under professional services was for contracted services to operate STIA’s

Ramp Tower (69 percent of professional services). The remaining expenses were related to the SMS

program and specialized wildlife management and control operations.

Audit Objectives

The purpose of the audit was to determine whether management has implemented adequate controls

to ensure:

1. Revenue generated by the Airfield Operations Department is complete and accurate

2. Professional services contracts are in compliance with requirements

3. Small and attractive items are properly safeguarded

4. Benchmarks are available and can be used to help improve airport operations

We reviewed information for the period of January 1, 2008, through December 31, 2010, including

activity through the end of fieldwork in November 2011.

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Internal Audit Report

Comprehensive Operational Audit – Airfield Operations

January 1, 2008 to December 31, 2010

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Compliance Audit

Highlights and Accomplishments

Landing Fee Review

In 2010, the Airfield Operations Department hired a consultant to conduct the first review of airlines’

landing activities and the accuracy of the airlines’ self-reporting of these events, on which the Port

bases its invoicing to the airlines. The consultant reviewed all airline self-reports (January 2008 to

December 2009) for number of flights, fleet mix and landed weights and compared the self-reported

data to the data in the BAC (Business Analytics Center) radar-database. The review revealed a

revenue shortfall of $480,831: (1) The airlines had under-reported 653 flights and underpaid landing

fees by $207,244. (2) The Port did not collect landings fees for non-revenue flights totaling

$273,577. Effective April 1, 2011, the Port began billing and collecting landing fees for all non-

revenue flights.

Safety Management System

In 2007, Seattle-Tacoma International Airport became the first of 21 American airports selected by

the Federal Aviation Administration (FAA) to begin incorporating the best management practices of

the International Civil Aviation Organization to the US through the implementation of a Safety

Management System (SMS) Pilot Study Program. Airfield Operations received an FAA grant to

perform a gap analysis of existing regulatory requirements and best management practices in the

industry. In 2008, the Department received a second grant to document on the FAA’s behalf the

ability of airports to integrate SMS into their operating structure. Airfield Operations used a proof-

of-concept approach to prove out key elements and components of the SMS manual and verify

whether those elements were workable in the airport operating environment. In 2010, the

Department received a third grant to continue its industry-leading role in SMS, by initiating

implementation of the previous study findings and processes. In 2011, SMS training for Airport staff

was completed.

ISAGO Audit

The International Air Transport Association (IATA) sponsors and manages the IATA Safety Audit for

Ground Operators (ISAGO) program. This program is internationally recognized for its safety

standards and best management practices, and provides oversight for a minimum and consistent

level of safe performance and operations by applicable ground service providers at Seattle-Tacoma

International Airport. Through Airfield Operations, the airport has required all applicable ground

service providers to participate in this program. This ensures that all ground handlers meet

minimum ISAGO safety standards. Currently all ground handlers have either completed their

audits or are in the process of doing so by the first quarter of 2012.

Gate & Parking Review

In 2011, Airfield Operations began its second review of airline activity, related to self-reported

common gate and aircraft parking. The Department hired a consultant to track all common gate

arrivals and all parking activity around the clock for a two-month period of time: July - August

2011.The information will be compared to the self-reported activity provided by the airlines, as well

as the Port’s billings. The Department plans to complete the review by the end of 2011.

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Internal Audit Report

Comprehensive Operational Audit – Airfield Operations

January 1, 2008 to December 31, 2010

Audit

Compliance Audit

Audit Scope and Methodology

We reviewed information for the period January 1, 2008, through December 31, 2010, including

activity through the end of fieldwork in November 2011. We utilized a risk-based audit approach from

planning to testing. We gathered information through research, interviews, observations and analytical

reviews, in order to obtain a complete understanding of the Airfield Operations and its management.

We conducted an assessment of significant risks and identified controls to mitigate those risks. We

evaluated whether the controls were functioning as intended.

We applied additional detailed audit procedures to areas with the highest likelihood of significant

negative impact as follows:

1. We conducted sample testing of airfield revenues to determine whether they were complete

and accurate. For General Aviation (GA), we compared hard-copy records for the month of

September 2010 with electronic fuel records to ensure that GA activity was cited and billed by

the Port. For Signatory Airlines, we conducted expectation testing for the full three-year period

to determine whether revenues were within the statistical expectation for each of the audit

years.

2. We tested compliance with the requirements of CPO-1, which guides procurement of

professional service contracts below $50,000 (Category 1 contracts).

3. We conducted observational reviews of controls for small and attractive items, consisting

primarily of firearms, ammunition and pyrotechnics, in order to offer recommendations for

securing these items.

4. We obtained a limited number of responses from our external benchmarking of other airport

authorities with ramp tower operations, wildlife management activities and General Aviation

events.

Conclusion

The Department has adequate controls to ensure airfield operations are efficient and effective, in

compliance with internal policies and procedures and airfield revenues are complete and accurate.

We have identified and shared some best practices to help improve controls and operational

efficiencies.