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.