In 2008, the US Federal Aviation Administration (FAA) proposed an auction process for slots at New York airports. The opposition was strong enough to take the proposal to a Court of Appeal and eventually the FAA relented.
But with traffic increasing and infrastructure development failing to keep pace, the slot auction concept continued to lurk in the background.
Recently, China experimented with the idea, putting a selection of slots on the market at Guangzhou Baiyun and running a slot lottery at Shanghai Pudong.
In other words, even a small-scale slot auction can be the difference between profit and loss for an airline
This raised a substantial amount of cash but, according to an IATA assessment, that is part of the problem.
“The experiment showed that paying a large amount of money for slots is not sustainable,” says James Wiltshire, IATA’s Senior Economist.
“If you boil down the money paid for the Chinese slots to a per passenger basis, it pretty much wipes out the anticipated $4.44 per passenger average profit for Asia-Pacific carriers in 2017, and that’s only for slots at one end of the route.”
In other words, even a small-scale slot auction can be the difference between profit and loss for an airline.
The same conclusion can be reached from a different viewpoint.
In China, the auction winners have been granted the right to use the slot for three years. It typically takes up to three years for airlines to make money on new routes, given start-up costs, marketing, and the time taken to develop consumer awareness.
Slot auctions would shift the goalposts so airlines would have to question the viability of marginally profitable routes
If the slots are put up for auction again after three years, there is no guarantee the same airlines would be successful or that the price would remain the same.
“It’s difficult for airlines to make money even in the best of operating conditions,” says Wiltshire. “Slot auctions would shift the goalposts so airlines would have to question the viability of marginally profitable routes.”
It’s not surprising then, that Lara Maughan, IATA’s Head of Worldwide Airport Slots, is unequivocal in her condemnation of the auction idea. “It’s not just about the final price airlines have to pay,” she says. “Having a “For Sale” sign on slots would have a detrimental effect on the dynamics of the industry.”
One fundamental concern is that slot auctions would accelerate an already worsening congestion problem. Air connectivity is in demand and the best answer to that demand is more airports and runways.
As it stands, at the 177 airports where IATA’s Worldwide Slot Guidelines (WSG) are used, demand outstrips infrastructure supply.
This makes slots a scarce commodity. Airport owners, government or private, would have an incentive to keep slot prices high by drip-feeding capacity.
Long term, that is not in anybody’s interest. It would fail to satisfy consumer demand and deny countries aviation’s social and economic benefits.
It’s not just infrastructure development that would be endangered. Slot auctions would affect airlines more directly too.
“It is fairly certain that regional and cargo carriers will be the also-rans in slot auctions,” informs Maughan. “Think how that would affect operations, not to mention consumer choice and competition.”
Regional carriers provide a vital feeder service for larger airlines and are essential to the connectivity that drives communities, economies, and cultural understanding.
One set of rules is essential. Otherwise, it’s like trying to put a jigsaw puzzle together without knowing the picture
A hub without regional services wouldn’t be a hub for long.
“And cargo carriers often have flights with multiple legs, all carefully coordinated,” Maughan says.
“If they can’t afford access to a particular gateway, it will not only disrupt the schedule but detrimentally affect entire supply chains. The knock-on effect could be huge if goods or product components don’t get to the correct destination in time.”
Basic operational problems would accompany this industry stranglehold.
Every journey has a beginning and an end. An auction process at one end and the WSG at the other wouldn’t work.
An airline could get a slot under the WSG but then lose an auction for its “partner” slot at the destination. That would throw networks and schedules into disarray and, given the planning involved in putting routes together, it would take years to sort out.
“Networks are a complex business,” stresses Maughan. “One set of rules is essential. Otherwise, it’s like trying to put a jigsaw puzzle together without knowing the picture.”
Why the WSG?
Outside of plentiful, cost-effective airspace, terminals and runways, the best way of ensuring passengers the connectivity they crave is to use the WSG.
These global guidelines maximize capacity and give airlines the certainty and flexibility they need to meet demand in a fair and transparent way.
The WSG allows the airlines to be sure their slot requests are being treated fairly
Some 43% of all passengers use a slot-constrained or Level 3 airport. For ultra-long-haul passengers, it’s 60%. Pretty much every A380 route has a Level 3 airport at one end, usually both.
Paul Petrykowycz, Qantas International Scheduling Manager and Chair of IATA’s Slot Policy Working Group, knows the value the WSG brings when implemented correctly.
“The WSG allows the airlines to be sure their slot requests are being treated fairly and equally and importantly means we understand how the process will work and to what timeline,” he affirms.
Deviations from the WSG are being tackled by IATA. In Brazil, punctuality forms part of the slot allocation process even though the WSG incorporates various means to address poor performance. It means an airline could lose a slot in Brazil while retaining it at the other end of the route.
Elsewhere, one airport is reported to be using aircraft size as a factor in allocating slots.
This equates to dictating an airline’s commercial strategy. Airlines must be free to choose the size of aircraft to fit their commercial model and the needs of the route.
Regional or short-haul connectivity could be affected by this bizarre move, which has been likened to having a restaurant choosing what a diner has to eat.
In Greenland, meanwhile, three airports were made slot coordinated even though this was unnecessary given traffic levels. Using slots needlessly is just as bad as divergence from the rules.
“We have to fight any divergence from global standards and guard against the idea of auctions spreading to other areas of the industry,” Maughan sums up.
Who owns a slot?
If something is going to be sold, it should be clear who owns it. That is not the case with airport slots. Under the WSG, airlines have a right to use a slot, especially under the 80/20 “use it or lose it” rule. But, many airports, especially ones under private management, view a slot as a function of their infrastructure.
Secondary trading is completely different from slot auctions, which concern primary allocation. With secondary trading, airlines can swap slots that they have been given the right to use under the WSG but are unable to use in the future.
Not every jurisdiction allows secondary trading and it is probably only required at the most congested gateways. In the UK, secondary trading has been used successfully at London Heathrow and, to a lesser extent, at London Gatwick.
Airlines must have used a slot for two years before it can be traded but the final deal is dependent purely on the negotiations between the two parties.
The European Aviation Package recommends all European airports adopt secondary trading as a means to combat congestion in the region.