Our approach co
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We take estimates of the economic value of UK air services from an existing study48 on the contribution of aviation to the UK economy;nefits associat the efficiency
ults on the pot estimate the b row; which ial efficien ts of usi capacity is ins from auction to H
n inst aucti se the l res to e ate
ntial of seco
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sider y rate slots t be ded e toenefits ry allo over d abo that
calcu deve ates likely itude bar ning
ineff s in se stylise ple Ann 4.
Resu
potential benefits of using an auction for initial allocation of a 10% increase in capacity at an airport which is congested throughout the day. The base case for comparison is the use of an administrative allocation method with well-functioning secondary trading. The results are presented in Table 7 below.
The cases we
respectively to secondary market imperfections purely due to bargaining inefficiencies and due to both bargaining inefficiencies and matching problems betwe
48 The contribution of the aviation industry to the UK economy, Oxford Economic Forecasting, November 1999
slots change over time to erode the initial benefits of an efficient allocation (column three), the timing of new capacity (2006 and 2010 respectively, as in column one) and the share of total UK aviation that Heathrow represents (column four).
Table 7: Estimated benefits of using auctions for primary allocation of a 10% capacity increment
Assumptions
Impact (2006 GBP billion net present value)
Ye capacity ministrative allocation trading (% per ) benefits at affected airport (%) added Value Consumer surplus Total ar of Efficiency gain of auction against ad Rate of secondary Share of UK aviation increase (%) annum 2006 7% 5% 30% 0.2 0.5 0.8 2006 7% 1.5% 30% 0.3 0.7 1.0 2006 16% 1.5% 30% 0.6 1.6 2.2 2006 16% 1.5% 40% 0.8 2.1 3.0 2010 7% 5% 30% 0.3 0.7 0.9 2010 7% 1.5% 30% 0.3 0.9 1.2 2010 16% 1.5% 30% 0.7 2.0 2.7 2010 16% 1.5% 40% 1.0 2.6 3.6
327. Looking at the results in the final column, it can be seen that the most or affecting the results is the inefficiency of secondary trading, which we have derived from theoretical results. We find that with a 7%
328. Assumptions about the extent of secondary trading in response to changing circumstances and the date at which the capacity increase applies are much
10.2.1
329. In addition to the benefits included in our estimates, there may be a number of indirect benefits from increased efficiency in the use of scarce airport capacity. For example, the efficient allocation of airport slots should important fact
inefficiency in secondary trading, the benefit of using auctions would be at least £0.8bn (in net present value), whereas alternative assumptions of a 16% inefficiency substantially increase our estimates of the benefit up to around £3bn.
less important.
e a cons prod choic c 330. Seco abou
iden sirable to build more capacity. Where the price of s ts it is to m impr Ther are capa
10.3 Likely implementation costs
331. The one-off costs of implementing an auction include the costs of designing
r the auction. Assuming there are 50 bidders wanting to participate in the auction and that they
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design and implementation cost for auctioneer and Government of332.
10.3.1
333.
tions that can largely eliminate the problem, so these do not give rise to material
nh nce competition in downstream air traffic services to the benefit of umers and businesses for whom air traffic services is an input to uction. Increased competition in air traffic services would lead to better
e and quality as well as lower airfares. In turn, this may improve the ompetitiveness of UK businesses.
ndary trading and especially auction processes can reveal information t the value of slots to airlines. This has the potential to assist in tifying when it is de
lo exceeds the cost of additional capacity, including environmental costs, desirable to build more capacity. Furthermore, by encouraging airlines igrate from peak to off-peak slots where possible, auctioning may ove capacity utilisation and avoid unnecessary capacity building. efore, auctions (and to some extent secondary trading even if auctions not used) bring benefits in terms of planning and managing airport city.
and implementing the auction incurred by the auctioneer, the cost of carrying out regulatory oversight incurred by the NCA or other government agency and the costs for bidders in preparing fo
would each need two senior managers spending a year preparing valuations and bid strategy, the total costs may add up to £10-15 million as follows:
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100 senior managers for a year at £80,000 p.a., total of £8mn; and£5mn.49
Whilst the costs of implementing an auction are substantial, they are insignificant compared to the benefits.
Other costs
There are a variety of problems that could be introduced or exacerbated by the use of auctions. However, in each case there are mitigating ac
costs. In particular:
49 For example, it cost the Danish telecoms regulatory authority app. £2mn to design and implement an auction of a 3G spectrum licence in 2005. This included legal costs, consultants and government cost. Source: “Auction of Third-Generation (3G) Licence for Mobile Tele
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Whilst the potential for airlines to gain market power from cornering the r slots exists, there are a variety of mitigating measures available if competition law is insufficient. These include appropriate•
hrough higher charges for noisier aircraft or tradable noise or emissions quotas) charging for slots might encourage airlines to use
ing. However,
10.4 D
334. The estimation of benefits and costs above compares the total costs and
335.
rlines) and the auctioneer (which may be the Government, the airport operator or the coordinator). The Government might also incur
336.
broadly revenue-neutral situation for airlines as a whole. To the extent that auction revenues could be used to
337.
onsumer surplus, would primarily flow to UK consumers and businesses that use air traffic services
market fo
auction design and, in the extreme, quantitative limits on slot holdings;
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State-aided airlines from outside the EU may be more able to acquire slots, in which case discriminatory measures might be required. However, similar issues might arise regardless of the mechanism used for slot allocation;Without appropriate measures to discourage noise and emissions (for example t
larger aircraft which might be noisier or more pollut
providing that a system to encourage noise and emissions abatement is in place that provides appropriate incentives, using market mechanisms for allocation of slots should assist, rather than hinder, efficient abatement.