The cost of designing and operating an auction, and the cost to airlines of planning for and participating in auctions, could be high, as we see from the experience in other sectors.
In other sectors, large auction bidders tend to use legal teams, investment banks, financial analysts and auction consultants to help them prepare for and participate in auctions. The teams may be involved on a part-time basis for up to a year before a major auction: in the telecommunications sector, companies may use up to 10 external consultants for large auctions, plus an internal team of up to 10 people for a period of a few months. Some auctions for telecommunications licences have extended over more than 100 rounds, with
183 only four or five rounds per day, involving senior management for a period of weeks. In practice, though, the extent of preparation would differ greatly between companies, even if they are similar in size.
The auction operator also tends to incur large costs. Though experience varies, the value of the work to prepare and design an auction tends to be related to the size of the auction proceeds. Small mistakes are much more costly in large transactions and therefore auctioneers are willing to incur significant preparation costs in order to avoid such mistakes.
However, auctions of airport slots have important differences from certain other auctions. They would be repeated regularly, and so there would be economies of experience for the designers and participants. And it may be possible to mitigate an error in the auction through subsequent trading. But the interdependencies are more extensive and complex than in sectors where auctions have typically been applied, so that the bidding strategy would be more difficult to formulate. Hence if such auctions were to be held regularly, and for a number of airports, the cost should be considerable.
The prospect of several auctions taking place at the same time might also raise logistical problems for airlines wanting to participate in several different auctions. In all except the simplest cases (for example, where an airline only requires a single pair of slots from those being auctioned) a bidding team comprising of at least a scheduling expert and a financial expert is likely to be required, and bigger teams might well be required for more complex cases (or cases where the airline is hoping to obtain a large number of slots). If there are several major auctions happening at the same time, then some airlines may not have sufficient staff with appropriate expertise to attend all of the auctions.
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10. AUCTIONS OF POOL SLOTS
10.1. Introduction
The first auction option we examine is an auction applied only to pool slots at congested airports. Grandfather rights will continue to apply to existing slots. Since we assume that secondary trading will be permitted alongside any auction mechanism, airlines will also be able to buy and sell slots. For this reason, we would expect any auction to apply mainly (and perhaps exclusively) to new slots, as we would expect existing slot holders to attempt to sell any unwanted slots to other airlines rather than surrendering them to the pool.
In broad terms, the “new” slots that we expect will account for most of the slots being auctioned might be created through one or both of:
•
new capacity that is delivered, often in small and relatively regular increments, by ongoing efforts by airport operators and co-ordinators to increase the number of slots that can be accommodated by existing capacity; and•
larger and less frequent blocks of slots delivered as a result of an increase in the physical capacity of an airport (such as a new runway, improved air traffic control, a new terminal or new stands), though in practice these are often released in a series of smaller increases.This distinction is not clear cut (or important), and there may be minor changes, such as greater use of existing runways following the provision of a new exit, which fall somewhere between the two.
Pool slots would only be auctioned in cases where there is likely to be excess demand for those slots. They could either include slots at all times of day, or only slots at times of day for which there is (or reasonably expected to be) excess demand for slots. Auctions would not be held for slots at uncongested airports.
Auctions would therefore replace the use of administrative criteria to allocate pool slots at certain airports. A further potential advantage of this approach is that it avoids the situation where valuable slots (ie because they can be traded) are “given away” to airlines on the basis of rather loosely defined and subjectively interpreted criteria. If instead, slots that could be traded were still allocated through the use of administrative criteria, we might expect airlines to put considerable efforts into submitting applications for slots on the basis that they think best meets the criteria, even if they have no real intention of running the services proposed for any length of time. Where slots have value, allocations that are based on subjective criteria might be open to allegations of discrimination, bias or even bribery.
Except where significant blocks of new capacity are added to an airport, we would not expect the proceeds from auctioning pool slots to be particularly large in relation to airport
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revenues as a whole. For this reason, there will be only limited opportunities to use the proceeds from such auctions to lower charges at uncongested times of day or at uncongested airports.
10.2. Description of Approach
10.2.1. Overview
The overall outline of the auction, and the roles and responsibilities, would be similar to that set out in Section 9.2 above. If only a very small number of slots were to be auctioned, then a simpler format (such as a conventional sealed bid auction) might be considered. Otherwise, we would expect the auction to take the form of a simultaneous ascending clock auction, which may or may not also provide for conditional (or “package”) bidding.113
As noted above, auctions could either include slots at all times of day, or only slots at times of day for which there is expected to be excess demand for slots. Including slots for all time periods would have an advantage in that airlines can obtain a complete set of slots in the auction to run a frequent service, and would also deal with the potential “shifting peak” problem that might occur if shifting demand due to higher peak prices would cause excess demand during off-peak periods as well. However, including slots for all time periods does extend the scope of the auction to periods where there is no excess demand, rendering the auction more complex. Auctioning peak slots only avoids this. Under this option, airlines could obtain off-peak slots through the conventional allocation procedure or in the secondary market. If auctions are implemented for pool slots, we would expect detailed criteria to be developed by governments or regulatory authorities to determine when it is permissible to hold an auction.
Auctions of new capacity might be keenly contested in situations where activity in secondary markets is relatively limited. But if secondary markets are fluid, functioning well and with a relatively high volume of activity, then airlines might view secondary trading as an easier and less risky means of getting hold of slots.
10.2.2. Nature of slots
Once an airline had been allocated a slot through a completed auction, that airline would be committed to paying the bid price. There would be no facility for winning bidders to withdraw after the end of an auction. But airlines would still be able to sell slots on to other airlines, and indeed the fact that an airline had paid a high price at the auction would indicate that a number of airlines wanted, and were willing to pay for, that same slot.
113 The potential advantages of allowing package bidding increase with the number of slots being auctioned. But so
does the complexity of bidding. One approach might be not to allow package bidding in early auctions, providing both auction designers and airlines with an opportunity to gain experience of participating in actual auctions, and then to consider allowing package bidding at a later stage.