The distinction between primary and secondary trading mechanisms is an important one. In broad terms:
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primary trading mechanisms may be used to determine an initial allocation of slots among airlines. The selling party in this case might be a national government, an airport or an airport co-ordinator;67
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secondary trading mechanisms may be used, once an initial allocation of slots has been determined, so that airlines can sell (or lease) slots that they have been allocated on to other airlines. Usually, both the buyer and the seller under secondary trading will be airlines.Primary trading has the potential to improve the efficiency of slot allocations by ensuring that more slots are allocated to the users that value them most. And secondary trading can improve efficiency by allowing further changes once the initial (or primary) allocation of slots to airlines has been determined.
5.2.1. Primary trading mechanisms
The general category of primary trading describes the use of market mechanisms to achieve an initial allocation of slots to airlines. Such mechanisms could be used, in theory at least, by governments, airport operators or co-ordinators to allocate slots to airlines. All primary trading mechanisms share a common general aim – to find a set of prices that matches the demand for slots with the available supply (both overall and also at particular times of day or week). In this way, the mechanism seeks to identify those airlines with the highest willingness to pay for particular slots, and ensure that, as far as possible, slots are allocated to these airlines.
Primary trading mechanisms differ according to the way that prices for individual slots are determined. The two main alternatives are that:
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the selling party (such as the government, airport operator or co-ordinator) sets a level of prices that it believes will clear the market (or come close to doing so);32 or•
the selling party holds an auction, to determine the price for each slot that will clearthe market.
These are basis for the two main primary trading mechanisms that we consider in this report: higher posted prices and auctions. In theory, if these approaches could be applied perfectly, then they would lead to the same outcome – that each slot would be allocated to the airline willing to pay most for it. But in practice there are many practical problems, such as the difficulty of either setting a level of prices that will clear the market or designing an auction mechanism that will lead to the most efficient outcome. And each approach will also have different implementation costs.
An important difference between higher posted prices and auction mechanisms relates to the options available to the seller if the initial price is too low (and therefore there is still
32 As we note in Section 8 below, prices may be set at a deliberately conservative level, to reduce the risk that some
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excess demand for particular slots). With higher posted prices, sellers may not be able to raise prices until the next season, whereas an auction allows for further rounds of bidding so that prices can continue rising until there is no longer any excess demand.
A third possible market-based primary trading mechanism, which lies somewhere between the options of posted prices and auctions, would involve direct negotiations between a body responsible for deciding the allocation of airport slots (such as the government, airport operator or co-ordinator) and airlines.33 For such an approach to be considered a market
mechanism, these negotiations would need to be carried out with the aim of identifying those airlines willing to pay most for the slots. In this case, the mechanism might be equivalent to some form of “informal” auction. If this is indeed the aim, then it seems unlikely that this approach (which might not involve all potential buyers and could be manipulated by strategic behaviour) could offer a more effective or efficient way of discovering how much airlines are willing to pay for slots than a more formal auction process.
A more serious problem with negotiations, moreover, is the significant lack of transparency. This makes them unsuitable as a primary allocation mechanism. There would be a very serious risk that the outcome would be influenced, either intentionally or unintentionally, by non-market considerations. And airlines might have little confidence that they would be treated on a fair and non-discriminatory basis.
Finally, we note that, even though there is a wide range of other possible primary allocation mechanisms, the scope of this study is confined to market mechanisms. Thus we do not consider options such as:
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“beauty contests”, where slots are allocated according to a mixture of financial and non-financial criteria; and•
lotteries, where slots are allocated at random. We note that lotteries have been used in the US to distribute slots which can then be traded. But a lottery is not a market mechanism, and in any case it is likely that simple administrative criteria could achieve an initial allocation that is closer to the optimum than a purely random allocation (and therefore will leave less work for the secondary allocation mechanism to do).
33 It is perfectly possible, and perhaps sensible, that an airport operator (or other party) aiming to set higher posted
prices might have informal discussions with airlines to gauge the likely strength of demand. But this is different from a negotiated allocation mechanism, under which prices would be determined and allocations agreed purely by negotiation.
69 5.2.2. Secondary trading mechanisms
Secondary trading can occur once a primary allocation of slots has been determined. Secondary trading could be introduced alongside a market-based primary trading mechanism, in which case it might fulfil a valuable role in dealing with any residual inefficiency (which could occur either because the primary allocation mechanism does not produce the outcome that would occur under an ideal market mechanism, or because of developments since the initial allocation was determined). Or secondary trading could be introduced on its own, alongside the current administrative allocation procedure.
The most straightforward way of introducing secondary trading is simply to allow airlines the freedom to buy and sell slots, in which case we would expect most deals to result from a process of bilateral negotiations between potential buyers and potential sellers. But other approaches are possible, including the establishment of a formal marketplace where slots can be bought and sold, perhaps on an anonymous basis.
In theory, there might be nothing to prevent an individual airline organising an auction for slots that it wished to sell, particularly if it was intending to sell a significant number of slots. But in addition to the sheer complexity of such an exercise, airlines might be concerned by the risk that collusion between participants (or even sheer confusion) would lead to lower than expected revenues, and some airlines might wish to retain the ability to block sales to certain airlines (which would be much more difficult to achieve in an auction).