PROYECTO DE LEY DE SISTEMAS DE PAGO

The FAA legally owns all slots, but the slot holders (airlines and non-airline entities) treat them as quasi-permanent assets.24 _{Slots are traded through a clearing house, operated by the Air}

Transport Association (US airline trade body), but regulated by the FAA (Debbage 2002; Gillen 2006). Slots are primarily allocated through grandfather rights (i.e., to carriers that already have slots). Moreover, users have to ‘use-or-lose’ their slots. If not used for a certain period,25 _slots

have to be returned to the FAA. Available slots in the pool are reallocated using a lottery, with 25% initially allocated to new entrants. These slots in the pool consist of newly created slots and slots returned to the pool by carriers.

When airlines have been allocated slots, there is an allowance to sell, buy, trade, and lease slots under the buy-sell rule. Airlines and non-airline entities (such as banks) are allowed to participate. The market is restricted to slots used for domestic services, which are divided into two groups: air carrier slots and commuter slots. Slots for Essential Air Services (EAS) and international air services are excluded. Note that the slot-allocation system at these high-density airports is substantially different from that in the EU, as shown in Table 5.1 points out.

23 _{The USA has taken the view that, in accordance with the ‘fair and equal opportunity’ provisions of} bilateral air service agreements, airport access must always be made available to carriers designated by the contracting states. Domestic slots are sometimes reduced to make way for international services. In Europe, however, designated international carriers have access only if they can obtain the necessary slots. 24 _{The slot value is explicitly recognised on carriers’ balance sheets.}

Table 5.1 Slot allocation in the US and the EU

US Europe Definition of a slot Right to take off and land at a

particular time of the day

Entitlement of carrier to use full range of airport infrastructure

Slot-allocation system IATA based? No Yes

Slot property FAA legally owns the slot but slot

holders treat them as quasi- permanent assets

Not defined

Slot trading allowed? Yes, between airlines and non- airline entities on the domestic market. Ring fences for

international, EAS, and commuter slots. International traffic subject to IATA slot-scheduling process.

Not allowed, but de facto slots are bought and sold, in particular in the UK (grey market)

Regulation with respect to secondary slot trading

Buy/sell rule of 1986 at high-density airports

Not applicable. Slot-trading mechanism Primarily by means of bilateral

negotiations between airlines, facilitated by (1) ATA (trade association of US airlines) and (2) informal networks

In the UK, secondary trading takes place on a bilateral basis.

Designation for slot coordination FAA sets rule Member states can designate airports as Level 2 (schedules facilitated) or Level 3 (fully coordinated)

Number of slot-coordinated airports Four airports until 2002. Slot coordination eliminated at ORD in 2002, at JFK and LGA in 2007. Remains at DCA. New regime is based on first-come-first-serve principle.

73 Level 3 EU airports 55 Level 2 EU airports

Coordinator FAA Government body appointment: slot

coordinator Use-it-or-lose-it rule? Yes, 80% use during 2-month

period by any party, including non- airline entities.

Yes. 80/20 rule. Series of slots have to be used at least 80% of the time during particular season in order to remain ‘historical’ (see also section 3.1).

Slot pool Surrendered and new slots are

assigned to a pool and reallocated using a lottery, with 25% initially offered to new entrants

Slot pool contains voluntarily returned slots, newly created slots, and slots otherwise unclaimed. Allocated free of charge by slot coordinator twice a year, with 50% of slots for new entrants (see also section 3.1).

Source: adapted from Gillen (2006)

Impact on slot mobility

In the first six to nine months after the buy-sell rule was introduced, trading volumes were substantial (NERA 2004, p. 270). After this first period of buying and selling, leasing and slot swaps started to dominate and the number of sales declined. Leases are more attractive than

sales, since the holder retains control and flexibility. Moreover, airlines hoard and baby-sit slots based on the potential network opportunity costs and knowledge about which airlines are current and potential competitors. In addition, carriers often swap one slot for another for scheduling and logistic reasons (Gillen 2006). After 1988, the number of transactions started to increase again and surpassed the trading level of 1986. This included in particular an increase in the number of slots leased. According to Starkie,26 _{the total turnover was about 20% of total}

available slots in 1987 and 1988. Thereafter, until 1993, total annual turnover rose to more than 50 per cent of the daily commuter and air carrier slots available during restricted hours at the four HD airports.

Mott McDonald (2006) concludes, therefore, that the secondary trading at the HD airports has proved a useful and beneficial tool that has led to increased slot mobility. Most of the trading, however, has taken the form of leasing, as opposed to outright sale. This enables carriers to retain ownership of these assets, while generating a stream of revenues if they choose to operate the slots themselves.

Since the slots are traded through an airline trade body (ATA), the trading process is not very transparent (Debbage 2002). Recent FAA proposals to improve transparency before as well as after trading occurs have raised a number of concerns from the Department of Justice (DoJ) with respect to the liquidity of the market. Mott MacDonald (2006, p. 5-29) therefore recommends restricting the system of secondary trading to providing only ex post market information in order to prevent strategic behaviour of incumbents.

Impact on competition

The buy-sell rule in the US appears to have contributed to the reinforcement of the dominant position of leading airlines (Pagliari 2001) (see also Table 5.2). The dominant carrier share of slots at high-density airports rose sharply between 1986 and 1996. Larger carriers are in a much stronger financial position to acquire slots.27 _{Moreover, the value of a slot for a dominant carrier}

includes not only the revenue generated by the flight that uses the slot, but also the contribution to the entire network. Hence, the dominant hub carrier has a higher willingness to pay. Finally, dominant hub carriers can have strategic reasons to preempt competition by hoarding slots (Gillen 2006), although this has been debated by others.28

In line with the well-known relationship between airport and route market concentration and air fares (see Borenstein 1989, for example), average fares at dominated airports are higher than at non-dominated airports, in particular in short-haul markets (Czerny & Tegner 2002). Fares at three of the four slot-constrained airports were found to be between 29 and 55 per cent higher than at non-constrained airports that serve similar communities (NERA 2004, p. 271).

26 _{Quoted in Mott MacDonald (2007, p. 5-12).}

27 _{Based on research by Sened and Riker (1996) (in Czerny & Tegner 2002) on 1972-1989 data for} Washington and O’Hare, the conclusion was drawn that the higher the percentage of occupied seats in each of its planes, the more likely a carrier was to purchase new slots. As a result of slot trading, the more profitable airlines were able to expand their slot shares.

Others (see also section 4.2.2) have noted, however, that high slot holdings by incumbent airlines and little entry by new carriers are not necessarily an inefficient outcome, but might reflect the efficient use of hubs:

• There is no evidence that new entrants have fewer slots at US slot-controlled airports than at other airports (NERA 2004, p. 271). The relationship between secondary trading and slot concentration, therefore, is less clear-cut than has been suggested in many studies. See also Reynolds-Feighan (1998), for example, for an analysis of concentration levels at US airports.

• Slot concentration was more likely a result of efficiency considerations by airlines than of anti-competitive behaviour (Kleit & Kobashi 1996). Newcomers do not derive the same network economies from increased slot holdings. Hence, they are likely to have a lower willingness to pay than incumbent airlines (Czerny & Tegner 2002).

• Hub-and-spoke networks create positive network effects, and the high prices at hubs may be an efficient way of allocating scarce capacity (Starkie 2006).

• Higher prices reflect superior direct services.

• Hub carriers face higher costs owing to the characteristics of the hub operations (complex baggage handling, crew scheduling, limited aircraft utilisation, etc.), which can be reflected in ticket prices.

• From this, Starkie concludes that secondary trading may work best at airports which are heavily congested and are not dominated by a single carrier (Mott MacDonald 2006, p.5-15). At hub airports, however, market concentration might be the result, as this reflects the efficient scale of the hub operation. The hub airlines increase their slot shares to benefit optimally from network economies. Table 5.2 Domestic slot allocations at the four high-density airports (% of total) (--: no

data)

1986 1991 1996 1999 Chicago O’Hare

American and United _{66 83 87 84}

Other established airlines _{28 13 9 --}

Financial institutions _{0 3 2 --}

Post-deregulation airlines _{6 1 1 --}

New York JFK

Shawmut Bank, American and Delta _{43 60 75 84}

Other established airlines _{49 18 13 --}

Financial institutions _{0 19 6 --}

Table 5.2 Domestic slot allocations at the four high-density airports (% of total) (--: no data) (continued)

1986 1991 1996 1999 New York La Guardia

American, Delta and US Air _{27 43 64 70}

Other established airlines _{58 39 14 --}

Financial institutions _{0 7 20 --}

Post-deregulation airlines _{15 12 2 --}

Washington National

American, Delta and US Air _{25 43 57 65}

Other established airlines _{58 42 20 --}

Financial institutions _{0 7 19 --}

Post-deregulation airlines _{17 8 5 --}

Source: Debbage 2002; Gillen 2006

Impact on efficient use of airport capacity

Has secondary trading at the high-density airports achieved a more efficient use of airport capacity? Despite concerns about market concentration and anti-competitive behaviour, many authors state that secondary trading in the US has generated a relatively dynamic and fluid market (Debbage 2002). Starkie (2006) states that the high level of market concentration at the high- density airports is not essentially an inefficient outcome in terms of the use of airport capacity, since network externalities increase the value for consumers. Moreover, the FAA concluded that buy-sell worked well in general: it resulted in a more efficient use of airport capacity at heavily congested airports. In addition, it allowed airlines to fine-tune their schedules (Mott MacDonald 2006, p. 5-13)

OECD (2006) and GAO (1996) conclude, in contrast, that the secondary market never became sufficiently liquid to achieve efficient allocation of slots. The lack of transparency permitted strategic purchases by incumbents to prevent new entries, which would certainly use the slot to compete with the incumbent on one of its routes. Moreover, there was uncertainty about the duration of the system. All parties interested in buying slots took the risk that the allocation system would change again and reduce the value of the slot. In addition, the US system is a domestic system, where dominant hub carriers have the highest willingness to pay and the greatest financial strength. The UK system has shown that large, long-haul non-hub carriers may frequently outbid the hub carrier. Furthermore, the secondary trading system has not secured high levels of competition (see above). Finally, especially at Chicago-O’Hare, secondary slot trading has not encouraged slot efficiency as might have been expected. Both hub carriers moved to regional jets for many of their operations. This may be attributed partly to the network economies of their hub networks and partly to frequency competition in their wave system that requires a high daily frequency traded-off by smaller aircraft. 29

29 _{In Europe, several measures were considered in the past to guarantee minimum aircraft size at congested} airports, like OPUS at Dusseldorf airport, and frequency-related minimum aircraft size at Paris Orly.