Market mechanisms are used for countless transactions in modern economies. But the examples described in Section 5.3 are distinctive because auctions and trading mechanisms are used to determine the allocation of a scarce resource in cases where there is excess demand. In this section, we consider the relevance of these examples to the case of airport slots, and review the limited experience to date of airport slot trading in the US. We also address the definition of a “slot”, as participants affected by any market mechanism would require a degree of certainty about the nature of the commodity being traded.
5.4.1. Comparison with use in other sectors
The most obvious difference between airport slots and the commodities discussed in Section 5.3 is that airport slots are considerably more heterogeneous. Whereas fishing and emissions quotas, in particular, simply convey the right to catch a certain quantity of fish or produce a certain quantity of emissions within a given geographical area and subject to a time limit, an airport slot is specific to particular time and a particular day at a single airport, and slots at other times or at other airports may be very imperfect substitutes. This
35 In the first seven months of the scheme, the volume of trading is estimated to be between 800,000 and 1,000,000
allowances changing hands in between 150 and 200 trades. See Department for Environment, Food and Rural Affairs, The UK Emissions Trading Scheme: Auction Analysis and Progress Report, October 2002.
36 There were 14 trades in 2001, and 10 in the first nine months of 2002. See Sigurd Lauge Pedersen, “Danish CO2
Cap&Trade Scheme: Function and Experiences”, Presentation to SERC Workshop on CO2 Emissions Trading in
73 heterogeneity greatly increases the number of lots that must be sold in any auction or be assigned a specific posted price, and also decreases the number of potential buyers and sellers if slots are traded (as airlines will be interested in a particular slot, rather than simply any slot).
In some cases, the definition of a slot may be even more specific, reflecting the greater complexity of capacity constraints. It may well specify whether the slot is for a take-off or a landing, and it may also be associated with the right to access a particular terminal, with a specific size of plane and using a particular type of stand. While there may be flexibility to change some of these specifications, this degree of differentiation will nevertheless make the application of market mechanisms more difficult than in the cases discussed above.
A further significant factor is the existence of demand complementarities between different slots. At each airport, airlines will need appropriate combinations of landing and take-off slots so that they may move their planes in and out, and they clearly need suitably timed slots at both the origin and destination airports for each journey. In addition to such basic constraints, the value of a particular slot is likely to be significantly affected by the other slots held by an airline, reflecting factors such as:
•
appropriate turn-round times, so that the airline can achieve its desired level of aircraft utilisation while not putting undue stress on its schedules in the event of disruption;•
appropriate connecting flights, particularly at major hub airports; and•
the ability to offer a regular service on a particular route (which is an important factor in attracting business passengers).As discussed in Chapter 9 below, demand complementarities are likely to pose particular problems for the potential use of auction mechanisms.
5.4.2. Experience of slot trading in the US
The main experience of trading airport slots is in the US, where slots at four airports have been traded since 1986.37 Access to other US airports is unconstrained, but limits have been
placed on the number of take-off and landing slots available at these four airports, in order to limit congestion. After an initial period, during which slot allocations were determined collectively by incumbent airlines, trading was introduced for slots used for domestic services. Other slots, for example for international services and commuter services, are ringfenced and cannot be traded (though straight swaps may be allowed).
37 The four airports are John F Kennedy and La Guardia in New York, plus O’Hare in Chicago and Ronald Reagan
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Trading takes place even though airlines enjoy operating privileges, rather than formal property rights, over slots. While it is explicitly recognised that slots can be withdrawn, individual slots are assigned a withdrawal number, and this may allow airlines and others to assess the likelihood of a particular slot being withdrawn. Not only has trading occurred, despite the lack of formal property rights, but some airlines have also mortgaged slots to financial institutions.
Trading occurs through bilateral negotiations between slot owners, which are facilitated both by informal contacts between airlines and also by regular meetings organised by the Air Transport Association. In addition, some brokers are active, though these operate within the framework of bilateral negotiations rather than through any institutionalised marketplace. Trading is purely voluntary, therefore, and selling airlines will generally know the identity of those seeking to acquire slots.
There is some evidence to suggest that the major airlines have increased the proportion of slots they hold at these four airports, compared with new entrants. But commentators disagree about whether this reflects efficiency benefits or anti-competitive behaviour, or indeed whether it simply reflects some entrants’ decisions to avoid congested airports.
More recently, slot restrictions have been partially relaxed, and new entrants and new services to small communities have been allowed unrestricted access to the four airports. But this has resulted in a substantial increase in operations, particularly at La Guardia, and a very substantial increase in delays. The Federal Aviation Authority therefore consulted on possible long term options, including congestion-based landing fees, auctions and various administrative mechanisms.
Appendix C contains a more detailed description of the US experience of slot trading.
5.4.3. Experience of slot trading in the UK
In the United Kingdom, slot exchanges involving monetary compensation were the subject of a ruling by the High Court in 1999.38 The court held that an airline is entitled to be
allocated slots pursuant to the system of grandfather rights regardless of whether that airline intends to use them, and that the provisions allowing airlines to exchange slots permit exchanges regardless whether an airline party to the exchange intends to use them or whether financial considerations accompany the exchange.
Since the ruling, trades have occurred at the London airports on a regular basis. Often, these trades have involved the hub carrier BA. BA has managed to increase its slot holding at London Heathrow through the trades, either by outright buying slots from other airlines, or
38 R versus Airport Coordination Ltd, ex parte States of Guernsey Transport Board, judgement of High Court (Queens
75 by exchanging Heathrow slots for Gatwick slots. BA has traded with a variety of airlines, including short-haul carriers (for example Swissair in September 2003), regional airlines and airlines in financial difficulty (for example United Airlines in October 2003). The slots that BA has acquired at Heathrow have been used, among other things, to consolidate its long haul operations at Heathrow (previously, significant numbers of long haul services were operated from both Heathrow and Gatwick).
We have taken the UK experience into account in assessing the potential impact of market mechanisms (to be discussed in Chapter 6 and, in more detail, in Appendix E), not only in regard to the specific impacts at LHR and LGW (including the balance of services between these two airports), but also more generally. It has also informed our views on the specific impact of secondary trading, which we will cover in Chapter 7.
5.4.4. What is being traded?
For the purpose of this study, we interpret take-off or landing “slots” as potentially including all services required by an airline (and which it cannot provide itself) to operate a service to and from an airport. At a minimum, airlines will require access to the airport approach, a runway, a stand (which may be a remote stand) and terminal facilities. Aircraft parking (if the aircraft is not departing immediately) and refuelling facilities may also be required.
In relation to the use of market mechanisms, it is important that the mechanism takes account of all services that are capacity constrained at a particular airport. For example, if a terminal reaches full capacity at certain times of day, this should be reflected in the operation of the market mechanism. Otherwise an airline might run the risk of paying a large sum of money for take-off and landing slots, only to find that the “slot” offers no guarantee of access to the terminal and thus the airline is unable to load and unload its passengers. On the other hand, if the terminal operates below capacity, then there may be no need for any market mechanism that is used to allocate, say, runway slots to take account of terminal capacity as well.
The most appropriate approach to such cases will vary between different types of facility and different market mechanisms. In the case of an auction, it is important that bids are unambiguous and binding. Complex capacity constraints might be taken account of in a number of ways, for example:
•
by allowing airlines to submit conditional bids, where the size of a bid depends on whether or not the airline is successful in obtaining other services. This is often called a “combinatorial” auction; or•
by requiring airlines to state all relevant aspects of their service (such as arrival/departure time, type of aircraft, stand requirement and number of76
passengers) and running a computer programme to calculate the combination of bids that maximises proceeds subject to all relevant capacity constraints.
Conversely, in the case of bilateral trading, a much more flexible approach could be applied. If, for example, capacity constraints apply mainly to runways but also, at certain times of day, to terminals, then runway slots alone could still be bought and sold by airlines. Having conditionally agreed a deal, an airline proposing to purchase a slot would be able to check that sufficient terminal capacity is available before finalising the deal.
In many cases, while the introduction of market mechanisms would require an amendment to the existing EU slot regulation, it might still be possible to retain many of the features of the current framework. In some cases, grandfather rights might continue to apply alongside a market mechanism, so that an airline purchasing a slot might then enjoy grandfather rights in relation to that slot. Nevertheless, there might be some scope to improve the effectiveness of market mechanisms by clarifying the current legal framework. And some market mechanisms, notably auctions, might require the removal of grandfather rights after a certain period of time, in which cases the slots being auctioned might be viewed as the equivalent of time-limited concessions.