Slot Allocation Grandfather Rights

Existing users of these airports enjoy grandfather rights in relation to their current slot holdings. While the regulation provides for 50 per cent of any slots not subject to grandfather rights to be allocated to new entrants, and the remainder allocated according. Slots, granting the right to take-off or land at so-called ‘Level 3’ (or slot-coordinated) airports at a specific time period, are allocated by independent coordinators on the basis of historic rights (or ‘grandfather rights’) at the given airport. Grandfather rights and centralized airport slot allocation rules in use in most EU countries are often criticized for harming competition. We show however that anti-competitive airline behaviors may actually raise the overall welfare.

Fundamental principle of the slot allocation process of IATA is the grandfather right, i.e., the right of an airline to keep a slot of the pr eceding equivalent season. This right is granted if and only if such a slot was used at least 80% of the time (use-it-or-lose-it rule). However, this procedure is far from being efficient. Well as general aviation). The primary allocation5 of the slots is made by the slot coordinator, subject to historical precedence –so-called grandfather rights- and retimings of historical slots for operational reasons. Obviously, the allocation in this system is dominated by the grandfather.

Airports are under pressure to free up space for carriers – or face the crippling effects of congestion. Ross Davies talks to Emmanuelle Maire of the European Commission about how altering the current slot allocation system could provide the industry with greater leeway and stave off what is already being described as a ‘capacity crisis’.

On average, 26,000 flights take place every day across Europe's skyways. According to analysis conducted by the European Commission, passenger numbers could almost quadruple by 2030.

Put simply, the majority of Europe's airports are being stretched to their limits, prompting Siim Kallas, the EU's commissioner for transport, to recently label the current situation a 'capacity crisis'. If efficiency isn't improved, there is a serious danger that the continent's airports will become maxed out, leading to interminable delays and congestion.

Supporting traffic growth has long been a quandary that the European Commission has sought to remedy. Following the formation of a single aviation market in the 1990s, the regulation of take-off and landing slots at airports was cited as a key recourse. However, that the process is still ongoing over a decade later is indicative of the regulatory headache that slot allocation poses. The general consensus points to an overall lack of efficiency across the system.

'With the current slot constraints, airports simply cannot accommodate traffic,' says Emmanuelle Maire, head of the European Commission's internal market and airports unit at the Directorate for Mobility and Transport. 'EU regulations as they currently stand are no longer fit for purpose and are unable to accommodate the evolution of the aviation market.'

Healthy competition

Presently, slots at EU airports are allocated to airlines by independent coordinators, which do so under the proviso of fair and non-discriminatory selection. However, once carriers have their slot, they are entitled to keep it on an indefinite basis, providing they continue to use it and adhere to certain regulations.

The concept, known as 'grandfather rights', has come under fire as being inefficient and bottlenecking competition from new entrants.

'There are definitely question marks over competition,' says Maire. 'We need to find the right balance between stability and strengthening this competition. This will require clearer legislation concerning the independence of slot coordinators, for instance, to make sure that allocation is absolutely impartial.'

The Commission's last report, made public in December 2011, mooted the possibility of imposing a sanction by which airlines would need to use at least 85% of their allocated slots in a given year - up from the previous threshold of 80%. If they failed to meet the stipulations, carriers would automatically forfeit their slot to other claimants.

Many airlines and airports have railed against the 'use it or lose it' rule, with some, including airline lobby group the International Air Transport Association (IATA), claiming that in order to adequately follow such measures, airlines would be in danger of being forced to fly empty planes so as to preserve their slots. Maire disagrees with the accusation.

'I thank that's something of an overreaction,' she says. 'From the research we have conducted, setting the bar at 85% would actually mean that there would be no financial damages whatsoever for airlines. Furthermore, there would be more passengers on planes, which is the overall aim for the industry.'

Secondary trading and slot auctions

If that particular proposal has been met by opprobrium, one option that has proven to be a more attractive alternative is the idea of secondary trading, which, in effect, would create an open marketplace for airlines to buy and sell slots among themselves. By conducting this in a transparent, fully regulated way, operators would be incentivised to sell underused slots to other carriers, creating better capacity.

Of the EU's 27 member states, the UK has been the biggest exponent of secondary trading, with the High Court ruling in its favour in 1999. This was highlighted in a recent study conducted by transportation consultants Steer Davies Gleave. It claimed that at Heathrow - a notable example of an airport operating at near full capacity - airlines pay in the region of £30-40m for a pair of peak-time slots, and that the High Court's decision has induced, on average, an increase in aircraft size of 33%.

'The UK has a very good system, which is very transparent,' states Maire. 'I would like to see the same opportunity afforded to airlines across Europe, in the interest of using their existing capacity budget to procure new slots, but also with guarantees on the independence of coordinators and the transparency of data.'

Despite favourable recommendations for secondary trading from the likes of Steer Davies Gleave, Maire concedes that the Commission has its work cut out in passing legislation. In some EU countries, such trading is prohibited - although slots have tended to change hands privately - while question marks still remain over the willingness of airlines to sell slots to competitors.

'The problem in the past has been that secondary trading has not been clearly authorised across the EU,' says Maire. 'This goes back to administrative models that did not envisage the current market-based mechanisms. What we need to curb this is direct access for interested parties to slot data.'

The Commission has also looked into the viability of holding airport slot auctions, whereby in the case of runway expansion, or confiscation as a result of misuse, the slot would be auctioned off to the highest bidders. According to the aforementioned Steer Davies Gleave report, at current prices, the sale of spaces at Heathrow alone would raise in the region of £5-6bn.

While some governments may see this as a golden opportunity to line the coffers, the airline industry has been steadfast in its opposition to the idea of auctions, claiming that not only is it tantamount to taxation, but also that the process is too complex to undertake - namely, allocation at different airports is interdependent, which would require thousands of auctions to take place simultaneously across the EU.

In light of this opposition, slot auctions - which were also trialled and subsequently dropped at New York's JFK and La Guardia Airports in 2009 - do not feature in the Commission's current set of proposals.

'While there is an economic case for slot auctions in terms of creating competition, it would be very dangerous for overall stability,' says Maire. 'And, in practice, it would be very difficult to implement as you have to effectively connect the departure slot at one airport with an arrival slot at the destination airport. Consequently, it is not something we are proposing at this current time.'

A sizeable challenge

Another factor that needs to be taken into consideration relates to the size of the aircraft. At many of Europe's airports, a considerable number of slots are utilised by smaller aircraft for short-haul flights, limiting potential passenger numbers. In the face of this, the Commission is proposing that 50% of slots be set aside for new, larger entrants to ramp up capacity.

'We are proposing a revision of the threshold so that new entrants could be a bit bigger,' explains Maire. 'This entails not allocating the 50% of slots to mini or micro entrants, which, in turn, would create more competition at airports where there are slot constraints.'

Maire admits that the subject of slot allocation is still a work in progress. The Commission's latest set of proposals still needs to be approved by European Parliament before any concrete laws can come into play. At the time of writing, this could still be more than a year away.

Given the ongoing swell in passenger figures and projected growth, many industry mouthpieces, such as IATA, would argue that time is of the essence and Brussels will have to take action sooner or later. And if ministers are to follow the Commission's recommendations, Maire is hopeful that secondary trading could be implemented in all member states in the near future.

'From our findings, we believe that secondary trading offers, by far, the best benefits to airlines and airports,' she says. 'This has been amply demonstrated by Heathrow and Gatwick; perhaps one day soon, other airports could increase their passenger numbers, too. These changes could be worth €5bn, create up to 62,000 new jobs and would build an infrastructure able to handle 24 million more passengers by 2025.'

Such projections will be contingent on improving and aligning communication between slot coordinators, airports, airlines and air traffic control authorities - 'different actions among stakeholders,' as Maire puts it. If this can be achieved, the 'capacity crunch' referred to by Siim Kallas could yet be averted.

Our role is to promote the importance of competitive markets for consumers and wider society. One way we do this is by advising government on how its policies and laws might affect markets. We encourage government to promote competition, engaging with it to remove, limit or prevent public restrictions and distortions of competition, highlighting the many ways in which government shapes and influences markets. We call this engagement, advocacy.

One current example of our advocacy is from December 2018, when we advised the Department for Transport (DfT) on the impact on competition of how airport take-off and landing slots are allocated. Our advice recommends a move away from the current administrative system, towards a market-based approach to allocating new and existing slots.

What is an airport slot?

An airport slot is the right for an airline to take-off or land at a particular airport, at a particular time.

The current ‘grandfathering’ rule under the administrative system gives airlines an indefinite right to a slot, as long as they use it at least 80% of the time – the ‘use-it-or-lose-it’ rule.

Even when new slots become available, which is very rare at the busiest airports, only half of these are reserved for ‘new entrants’. Very few airlines meet the strict definition of a new entrant, needing to hold fewer than 5 slots at the airport on the day a new slot is allocated.

Current rules could produce worse outcomes for passengers

Slot Allocation Grandfather Rights Definition

Airlines may hold onto slots they do not necessarily need or are not able to use efficiently, simply to prevent other airlines from using them.

Although the use-it-or-lose-it rule is in place, it does not require an airline to use a slot in the most efficient way. For example, the airline with the slot may use a smaller aircraft whereas a new entrant might have an incentive to maximise the capacity the slot offers. The current rules also restrict the ability of new and/or smaller airlines to enter and expand their offerings.

These factors potentially limit choice of airlines, routes and flight times for passengers, and could lead to worse outcomes in terms of the routes and frequency of services, and higher air fares.

Why altering the current system will not be enough

Possible changes to the current administrative system, with a view to enhancing competition and connectivity, are set out in DfT's consultation. These include changes to the existing ‘new entrant’ rule or allocating slots without ‘grandfathering’ rights. In our view, more could be done to address concerns that slots are not used efficiently. The DfT plans to set out its preferred policy on slot allocation within the Aviation 2050 White Paper later this year.

The DfT also suggests reforms to secondary trading, which allows airlines to sell slots to other airlines. Secondary trading has been possible for some time but in its current form has not functioned effectively, with limited slots being traded.

Airlines are reluctant to trade as they don’t want to sell to competitors and because if they do sell, they may not be able to buy (back) slots in the future. The effectiveness of any reforms depends on addressing the incentives of airlines to trade. One option proposed by the DfT is to increase transparency but we do not think this goes far enough in addressing these issues.

Changes to secondary trading are also unlikely to resolve the issue that incumbent airlines already hold slots, whereas new entrants would have to pay to acquire them.

Why a market-based approach is better

A well-designed auction process would address the shortcomings of the current system. Rather than relying on administrators to decide who would be the most efficient user, an auction would mean the airline that values the slot the most wins the right to use it. This is because airlines hold information that isn’t available to an administrator and so would bid according to the value they see in any given slot.

Designing auction processes is not straightforward and comes with some risks. For example, large airlines may bid more aggressively to secure slots and entrench their existing position. This needs to be taken into account in designing the auction, but in our view, is not a reason not to pursue an auction route. For example, it could be managed by rules to limit the ability of large incumbents to keep or increase their existing allocation.

If risks are addressed appropriately in the auction design, our advice is that the benefits of a market-based approach will outweigh the risks. Ofcom’s move from an administrative to a market-based allocation of spectrum is a good example of where well thought-through auction design has ensured that potential risks have not materialised.

Why now?

Slot Allocation Grandfather Rights Amendment

The issue of how best to allocate airport slots is not new. In 2011 the European Commission recommended that new capacity should be auctioned off, though this ultimately wasn’t adopted.

Auctioning slots would help ensure that increasingly scarce capacity is used as efficiently as possible, delivering benefits to passengers and the aviation sector more generally. New capacity at Heathrow and potentially at Gatwick presents a good first opportunity to adopt a market-based approach.

Change and the process of competition can be unsettling. But in our view, it is important to remember that defenders of the status quo are often more organised and speak louder than the advocates for change.

Airport Slot Allocation Grandfather Rights

For more information you can read our full report on the competition impacts of airport slot allocation.