Tuesday, October 23, 2007
Airports, Aviation Competition and the Best Proposal on This Issue in Years
Posted by D. Daniel Sokol
Tomorrow I will be flying to a conference. Invariably, I will be delayed at some point in my trip at the airport because of inefficient allocation of landing slots. My heroes at the Economic Analysis Group of DOJ Antitrust, W. Tom Whalen, Dennis W. Carlton, Ken Heyer, and Oliver Richard have a proposal that is so simple, elegant and brilliant that of course Congress is likely to ignore it-- use slot auctions to promote more efficient use of gate capacity and promote competition. They describe their proposal here.
I reproduce their proposal below:
Our preferred method to allocate scarce airport capacity is
to auction slots for landings and takeoffs by time of day and to convey upon
their purchasers well-defined property rights. Unlike access pricing, which may
require the airport authority to continuously adjust prices, slot auctions
require only that the airport authority set at the outset the total number of
takeoffs and landings that the airport can accommodate in each time period under
normal weather conditions. This approach plays to the strengths of airport
authorities and the FAA, who have far greater expertise in determining an
airport's capacity than they do at setting prices.
These slots should then be auctioned off through a market-based
bidding process where each airline decides how much it would be willing to pay
for each slot. The prices obtained for slots would reflect the degree of
scarcity of capacity. The price could be close to zero at times of the day
where capacity is great relative to demand, and it will be highest during
periods where demand is at its greatest. Property rights would be awarded to
the highest bidders, as long as acquisitions do not anti-competitively enhance
market power. Prohibiting airlines from scheduling flights at times when they
do not have the right to use one of the auctioned slots would efficiently
address the problem of airport delay. Moreover, this market-based auction would
allocate these scarce slots to their highest valued uses.
Slot holders should also be permitted to sell or lease slots
in a secondary market. As service patterns and market conditions change,
particular airlines may want to move some of their operations at slot
constrained airports to different times, and the right to sell or lease would
facilitate these types of efficient adjustments. Having well-defined property rights should
encourage the development of a robust secondary market for slots, helping to
ensure that slots are allocated to their highest valued uses.
An important component of our proposal is that general
aviation users, such as corporate jets, be required to bid for access rights in
competition with all others who wish to use them. Under the current system, a
number of slots are reserved for general aviation aircraft. … The creation of
priority rights through slots auctions may be used to further improve the
efficiency of our current system. Weather issues at almost any airport in the
system frequently force airlines to delay or cancel flights, as the FAA
temporarily limits operations to respond to weather conditions. When those
conditions arise, not all slot holders will be able to exercise the right
conveyed by the slot, and the reduced capacity will have to be rationed. A
question then arises as to how most efficiently to allocate that capacity among
slot holders. One approach would be for the property rights of each slot to
include a cancellation priority in the event of weather-related cancellations. This
could be accomplished by ordering the slots in each time period, each with a
different priority. As weather conditions required cancellations, slots would
be canceled in order of their priority. Airlines could thus choose to pay a
premium to acquire slots that are less likely to be canceled, and they would be
able to advertise this high priority service to customers who value a lower
probability of delay. Such tickets likely would command a premium. Moreover,
during the delay period, the secondary market for slots would allow the
airlines to efficiently transact slots for that day. In particular, an airline
with a valuable departure could "buy up" to a higher priority
position, while an airline with a priority slot but a less valuable flight on
that day, could sell its priority position (though it could obviously not do so
if it had sold its flight as a "high priority" one).
Significantly as well, under our proposal the slot auctions
would generate revenues for the FAA and airport authorities. One possible use
for the revenues generated by slot auctions would be to help fund expansion
projects designed to increase capacity, such as the NextGen satellite navigation
system the FAA is constructing to improve capacity utilization of air space. Indeed,
it is difficult to justify subsidizing airlines by granting them for free
rights to use valuable public assets whose sale at auction could generate
considerable revenue.
https://lawprofessors.typepad.com/antitrustprof_blog/2007/10/airports-compet.html
Comments
The FAA has considered the idea from time to time, and the auction idea has been explored a lot in academic and industry research.
Hampering the FAA's interest is the high level political interest in ensuring service to small regional airports (even if not necessarily economic to do so) and ensuring accommodation for general aviation flyers (used by corporate jets, the very wealthy, the politicians affiliated with these interests, and a few aviation hobbyists).
Perhaps the continued record of failure that has resulted from continued use of methods that have failed before will lead to an urge to something else.
Posted by: Mike Giberson | Oct 25, 2007 9:08:03 AM
The information on this topic is very interesting and I found it very informative - thanks. I shall recommend others to read it also!
Posted by: Flights to New York | Mar 8, 2011 6:10:32 AM
The proposed system seems like a great idea. A slot auction system is also really obvious. I don't mean to disparage the suggestion - it is a very elegant implementation of the slot auction system, and it also takes into account issues such as weather and general aviation use. It's just odd to think that no one at the FAA thought of it any time in the last 30 or 40 years....
Posted by: David | Oct 23, 2007 11:12:57 PM