We envisage that market mechanisms would be applied only in situations where there is likely to be excess demand for slots. With secondary trading, this might occur automatically, as airlines would be unlikely to pay other airlines for slots when they could obtain similar slots, free of charge (except for conventional airport charges), directly from the airport operator or co-ordinator. Under primary trading approaches, it might be necessary for airport operators or co-ordinators to identify the set of slots for which they
77 expected there would be excess demand, and declare that these slots would be subject to the appropriate market mechanism (either higher posted prices or an auction).
Market mechanisms would therefore only operate at some (and perhaps a relatively small number of) EU airports, and possibly only at certain times of the day at some of these. It is essential, therefore, that the operation of any market mechanism is consistent with the timing and processes currently used to allocate airport slots worldwide, as described in Section 2.5 above. This is addressed in our discussion of specific mechanisms, as set out in Chapters 7 to 11 below.
In the specific cases of auctions, for the reasons set out in Chapter 9 below, we have very serious doubts about their suitability for allocating a large proportion of airport slots. We have therefore restricted our analysis of auction mechanisms to two specific options:
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auctions applied only to pool slots;•
auctions applied to both pool slots and 10 per cent of grandfathered slots. 5.5.2. The role of primary and secondary trading mechanismsEither primary or secondary trading mechanisms could be used, in isolation, to allocate airport slots. Where a primary mechanism (such as higher posted prices or auctions) is applied, then this will generally replace the existing administrative allocation mechanism, though there may still be a role for an additional allocation mechanism to deal with any cases where the new primary mechanism fails to produce a single or comprehensive allocation. For example, if higher posted prices are introduced but they are not quite high enough to remove all of the excess demand for some slots, then an administrative mechanism could be used to allocate the available slots among those airlines willing to pay the relevant posted price.
It would also be possible to use a combination of different primary allocation mechanisms, with market mechanisms being used to allocate some slots and administrative mechanisms being used to allocate others. In one sense, all of our options feature this type of approach, as we envisage that market mechanisms would apply only at airports, and potentially only at times of day, where there is expected to be excess demand for slots. And even at congested airports, it is possible to use a mixture of administrative and market mechanisms, in particular by declaring that existing grandfather rights should continue to apply, but market mechanisms (such as an auction) should be used to allocate other slots – either newly created slots or slots for which grandfather rights no longer apply.
In contrast, if only a secondary trading mechanism is introduced, then there will still need to be some other mechanism (such as the existing administrative procedures) to achieve an initial allocation of slots. Theoretically, if secondary trading is completely effective then almost any mechanism could be used to generate a primary allocation, on the basis that
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secondary trading will then act to remove any remaining inefficiencies. Indeed, as noted above, lotteries have been used to distribute airport slots in the US, which could then be traded between airlines. In practice, however:
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as discussed in Chapter 7, there are possible reasons why secondary trading may not be completely efficient. The more efficient the primary allocation, therefore, the more likely it is that secondary trading will deliver an allocation that is close to the optimum;•
airlines allocated scarce slots may enjoy windfall gains as a result of being able either to use those slots themselves or else to sell them to other airlines. The primary allocation mechanism therefore needs to be fair and defensible.Finally, it is possible to use a combination of both primary and secondary trading mechanisms to allocate slots. In such cases, we would generally expect the primary allocation mechanism to remove some (and perhaps quite a high proportion) of the inefficiency that might have resulted from applying an administrative mechanism. The main role of secondary trading will then be to help remove any inefficiencies that remain after the (market-based) primary allocation has been completed, or else to help deal with subsequent changes that mean that an alternative allocation would now be preferable. But there are cases where secondary trading can have a more prominent role, in particular: