Currently, many EU Category 1 airports for which there is excess demand at peak times have a great deal of capacity available at off peak times. This is a form of inefficiency in the current system because airport charges at off peak times will tend to exceed marginal costs, so that some flights for which airlines are willing to pay marginal cost may not operate. If market mechanisms were implemented as part of a package to reform airport charges, it would be possible to make better use of those airports which operate at capacity during peak times but are under utilised for substantial parts of the day.
It may be costly for airlines to reschedule flight times, but we know that they are able to do so. This is demonstrated by some of the most congested EU airports - Heathrow, Gatwick, Linate, Düsseldorf and Frankfurt - where the number of movements is fairly constant throughout the day. In these cases, airlines have been obliged to fly outside their preferred times because slots at those times were not available or too costly to obtain.
Figure 4.5 shows use of runway capacity at a EU Category 1 airport which is constrained at peak times. For several hours during the day there is a considerable amount of excess capacity. Figure 4.6 shows use of runway capacity at a EU Category 1 airport which is primarily used for leisure purposes; there is very little use of the airport on Tuesdays and Thursdays, though it operates at capacity on Wednesdays and at the weekend.
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Use of an Example EU Category 1 Airport Throughout the Day
0 20 40 60 80 100 0:00 8:00 16:00 0:00 Time of Day N u m b er of m o ve m en ts pe r hour (m o vi n g av er ag e) Figure 4.6
Use of an Example EU Category 1 Airport Throughout the Week
0 5 10 15 20 25 Monday Tuesd ay Wedne sday Thu rsday Frida y Satur day Sunda y
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5.
POTENTIAL MARKET MECHANISMS
5.1. Introduction
In this chapter we examine the scope for using market mechanisms to allocate slots at congested airports. In broad terms, we define market mechanisms as being those which allocate slots primarily on the basis of airlines’ (or other parties’) willingness to pay for them. There is an important distinction between primary trading and secondary trading mechanisms, which is discussed in Section 5.2 below. Otherwise, the defining feature of market mechanisms is that slots are allocated on the basis of airlines’ willingness to buy (and, where relevant, sell) slots, rather than other criteria such as the identity of the airline, whether or not it has used the same slot in previous seasons, the route it proposes to serve, and so on.
All market mechanisms therefore involve slots being bought and sold in some way. But there are important differences between mechanisms, depending on factors such as:
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the identity of the party selling the slot – this relates to the distinction between primary trading and secondary trading, discussed below;•
the way in which the price of a slot is determined; and•
the way in which individual buyers are identified.Market mechanisms are, of course, used at many airports around the world, through the imposition of cost-related charges. But these charges are intended to cover airport operators’ costs, rather than acting as a mechanism to allocate slots. In situations where the demand for airport capacity at these charges exceeds the available supply, capacity is often allocated administratively, for example with reference to historical precedence. This can lead to inefficiencies, both because the initial allocation may be “wrong”, and also because there may be no process through which the “right” allocation can be established.
Market mechanisms therefore have the potential to improve efficiency as, compared with administrative or other non-market allocation mechanisms, they are more likely to ensure that slots are allocated to those airlines that value them most. This is in contrast to the current, largely administrative procedure, under which slot allocations are often determined by non-market criteria, such as historical precedence, which may bear little relation to an airline’s willingness to pay for a slot.
It is true, of course, that an airline’s willingness to pay for a slot may be an imperfect indicator of the value to society of the service provided by that airline. For example, the value of different services may not fully reflect the pollution, noise and other external effects caused by those services. And society may attach a value to regional air services that is not captured by the airlines operating those services. It would often be more effective to take
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such factors into account of outside of the slot allocation procedure, for example through explicit taxes for noise and pollution and subsidies for regional services. To the extent that this is not possible, however, such factors could be taken account of through adjustments to, rather than a rejection of, market mechanisms. We consider possible approaches that might be adopted under each specific option in Chapters 7 to 11 below.
Equally, airlines may have a high willingness to pay for particular slots for reasons that do not reflect a corresponding value to society. For example:
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airlines might pay “too much” for slots at particular airports, because they wish to maintain a presence at that airport for reasons of corporate or national prestige, even if they make a financial loss on those services; or•
airlines might pay high prices for particular slots in order to prevent a potential competitor from entering the market.It could be argued that the first of these may not result in inefficiency, to the extent that the airline paying inflated prices for a slot derives genuine value from the continued use of that slot. But it may lead to inefficiencies if airlines’ willingness to pay is affected by the private objectives of airline managers, rather than the corporate or national objectives of the airline concerned. The second factor – the risk of anti-competitive behaviour – poses a potentially greater threat to the efficiency properties of market mechanisms. But competition law, rather than slot allocation procedures, may be the most appropriate way to deal with any such problems.
To date, the main experience of using market mechanisms to allocate airport slots is in the US, where slot trading is allowed for domestic services at four specific airports. This experience is reviewed in Section 5.4 below, where we also consider more general issues arising with the use of market mechanisms to allocate airport slots. Before this, in Sections 5.2 and 5.3, we describe the distinction between primary trading and secondary trading and summarise the experience of using market-based allocation mechanisms in other sectors. Section 5.4 then considers the potential to use particular market mechanisms to allocate airport slots, and Section 5.5 lists the specific options that we examine in the rest of this report.