slots allocation schemes
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January 2004 STUDY TO ASSESS THE EFFECTS OF DIFFERENT SLOT ALLOCATION SCHEMES A Report for the European Commission, DG TREN Project Team: Ian Jones, Stuart Holder, Jan Peter van der Veer, Emily Bulman, Neil Chesters, Simon Maunder, Dr Philip Kalmus, Dr Soren Sorensen, Federica Maiorano, Dr Pablo Mendes de Leon, Professor Piet-Jan Slot, Peter Somers
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TABLE OF CONTENTSEXECUTIVE SUMMARY 1. 2.2.1. 2.2. 2.3. 2.4. 2.5.
i 1 55 5 9 11 18
INTRODUCTION THE EXISTING FRAMEWORKIntroduction The Existing Slots Regulation Proposed Amendments to Regulation 95/93 Regulatory and Policy Context The Current Scheduling Process
3.3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 3.8. 3.9.
IMPACT OF THE EXISTING FRAMEWORKIntroduction Current Levels of Use of EU Category 1 Airports The Structure of Airport Charging The Extent of Excess Demand for Slots Variations in Traffic Mix Between Airports Variations in Aircraft Size and Loadings The Operational Patterns of Network Carriers and the Effect on Traffic Peaks Slot Holdings of Major Network Carriers Forecast of Changes in Excess Demand at Airports Between 2002 and 2007
2121 21 23 23 30 32 35 41 43
4.4.1. 4.2. 4.3. 4.4. 4.5. 4.6.
INEFFICIENCIES IN THE CURRENT FRAMEWORKIntroduction The Causes of Inefficiency Slots Utilisation Indicators of Inefficient Use of Slots Slot Mobility Peak and Off Peak Use of Airport Capacity
4949 49 53 56 61 62
5.5.1. 5.2. 5.3. 5.4. 5.5.
POTENTIAL MARKET MECHANISMSIntroduction Primary and Secondary Trading Mechanisms Use of Market Mechanisms in Other Sectors Use of Market Mechanisms to Allocate Airport Slots Specific Options Examined
6565 66 69 72 76
6.6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7.
POTENTIAL IMPACT OF MARKET MECHANISMSIntroduction Potential Impact: Airports with Severe Excess Demand throughout the Day Potential Impact: Airports with Limited Excess Demand Impact on the Use of Airport Capacity Overall Impact Impact on Airline Competition The Implications of Market Mechanisms for EU Policy on Airline Mergers
8181 82 87 92 100 101 112
6.8. 6.9. 6.10.
Impact on Fares and Service Levels Impact on the Environment Impact on Accessibility of the Regions
117 121 124
7.7.1. 7.2. 7.3. 7.4.
SECONDARY TRADINGIntroduction Description of Approach Practical Issues Impact Assessment
127127 127 129 135
8.8.1. 8.2. 8.3. 8.4.
HIGHER POSTED PRICESIntroduction Description of Approach Practical Issues Impact Assessment
147147 148 151 159
9.9.1. 9.2. 9.3.
APPLYING AUCTIONS TO AIRPORT SLOTSIntroduction Description of Approach Practical Issues
173173 173 177
10.10.1. 10.2. 10.3. 10.4.
AUCTIONS OF POOL SLOTSIntroduction Description of Approach Practical Issues Impact Assessment
185185 186 187 189
11.11.1. 11.2. 11.3. 11.4.
AUCTIONS OF TEN PER CENT OF ALL SLOTSIntroduction Description of Approach Practical Issues Impact Assessment
199199 199 201 203
APPENDIX A. APPENDIX B. APPENDIX C.
INFORMATION GATHERING LEGAL APPENDIX US EXPERIENCE OF SLOT TRADING
219 223 271 279
APPENDIX D. THEORY AND PRACTICE OF AUCTION DESIGN APPENDIX E.
APPROACH TO QUANTITATIVE ASSESSMENT OF IMPACTS 331 EXAMPLE CALCULATION 379
EXECUTIVE SUMMARYBackground This report, by National Economic Research Associates (NERA) in conjunction with the Faculty of Law at the University of Leiden and Consultair Associates, examines the feasibility and likely impact of using market mechanisms to allocate slots at congested EU airports. There is significant excess demand for slots at a number of EU airports. Among the 30 or so EU Category 1 airports:
seven airports experience excess demand for slots throughout the day these are Dsseldorf, Frankfurt, London Gatwick, London Heathrow, Madrid, Milan Linate and Paris Orly. In some cases, this situation is partly due to environmental restrictions or air traffic distribution rules; a further 14 airports experience excess demand for slots at certain times of the day.
While planned investments may ease the situation somewhat at Dsseldorf, Frankfurt and Madrid, these airports will still have excess demand at certain times of the day. For Category 1 airports as a whole, moreover, the general extent of excess demand is expected to increase over the next five years. Despite this excess demand, the effect of the current EU slot regulation (95/93) is that 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 to administrative criteria, there are usually very few slots available from this pool. It is therefore difficult for airlines to obtain slots in order to introduce new or more frequent services. The fact that existing airport charges fail to reflect the scarcity value of slots means that they may be allocated to services that are barely profitable at the current level of airport charges. Airlines that might be able to use these slots more efficiently (for example, because their services would carry more passengers or generate more profits), and would therefore be willing to pay considerably more than the current level of charges, may nevertheless be unable to get hold of any slots. In addition, the fact that airlines only pay charges based on their actual use of slots means that they have poor incentives to use slots efficiently. Some slots therefore remain unused, even at congested airports - either because they are returned late to airport coordinators (and cannot be reallocated) or because airlines simply fail to use their full allocation of slots. i
The Role of Market Mechanisms Market mechanisms have the potential to address these inefficiencies by confronting airlines with the cost of occupying scarce capacity. This occurs in one of two ways:
under primary trading mechanisms, such as auctions or higher posted prices, airlines have to pay for their slots. Both mechanisms aim to ensure that slots are allocated to the airlines that value them most, and they seek to achieve this by setting prices sufficiently high that other airlines are no longer interested in those slots; under secondary trading, airlines are able to buy and sell slots. Though existing slot holders do not have to pay for their slots, they nevertheless face an opportunity cost in the form of the revenues they forego if they carry on using a slot that could be sold instead to another airline.
If market mechanisms were introduced at congested EU airports, we believe that higher passenger volumes would use existing airport facilities for the following reasons:
a shift in the mix of services using congested airports, notably an increase in the proportion of long haul services, which, compared to short haul services, generally use larger aircraft, carrying a higher number of passengers, and often at higher load factors; within each category of service, a general shift to services with higher load factors. Within short haul services, for example, some regional services and services operated by full service carriers other than the hub carrier will be withdrawn, and more services will be operated by low cost carriers. Some of the least profitable long haul services will also be withdrawn; where possible, airlines will shift services to off-peak times or to uncongested airports. This is most likely to affect charter services and perhaps some long haul services, and will free up peak capacity for other services. For many services, however, shifting to off-peak times or uncongested airports will not be a realistic option; slot utilisation will also imp