Central planning of airline take-off and landing slot allocation is driving up costs for consumers and incentivising airlines to run ghost' flights, warns the Institute of Economic Affairs
- Liberalisation of the aviation industry has democratised travel, with flying no longer reserved for the better-off.
- But the allocation of take-off and landing slots continues to be centrally planned.
- Slots are either grandfathered (i.e. used by the airline that has always used it), or allocated by a government-appointed administrator, rather than bought and sold in an open market at major UK airports.
- Grandfathering is an implicit subsidy to long-established incumbents. It acts as a barrier to entry for newcomers, while also preventing smaller and medium-sized competitors from upscaling.
- Brexit enables the UK to replace the EU/International Air Transport Association (IATA) slot allocation rules with an alternative system.
- Like any form of central planning, slot allocation by government administrators creates major inefficiencies. Airport slots should be bought and sold on the market like any other good or service, not allocated by government bureaucrats.
- Airlines have to actively use each slot at least 80 per cent of the time or lose it. Many fly smaller planes than necessary and run empty ghost flights, which is both bad economics and environmentally damaging.The allocation of airport landing slots is distorted in favour of well-established incumbents, with the largest airlines receiving an implicit subsidy worth billions, says new research from the Institute of Economic Affairs.
Major airports do not control the allocation of slots. If an airline has used a particular slot in the past they have an automatic right (subject to some conditions) to carry on using it - indefinitely. The remainder of slots are allocated by a quango, through an administrative process under retained EU law.
The grandfathering of slots distorts the market in favour of well-established incumbents. It is a primary reason why European airports are dominated by national legacy carriers.
Airlines pay service charges to airports but they do not pay for the landing and take-off slots. At congested airports, where demand for slots exceeds supply, these regulated charges come nowhere near the market value of the slots.
This can be seen by the prices of slots on the secondary market. At Heathrow, an off-peak slot pair is usually worth at least 5m, and peak-hour slots can be worth many times more than that. For example, Oman Air purchased a pair of take-off and landing slots at Heathrow for $75 million in 2016. Thus, the slot portfolio of a large incumbent can be worth billions of pounds.
Airlines do not have an unconditional right to keep a slot forever. They have to use each slot at least 80 per cent of the time and if they fail to do so it is returned to the slot pool.
Airlines operate empty flights or fly smaller planes than necessary to retain these slots. Over the winter of 2021/22, even after the use-it-or-lose-it threshold was lowered to 50 per cent, the Lufthansa Group claimed to fly around 18,000 empty flights to maintain slots. Many airlines fly smaller planes to less popular destinations to maintain slots. Under a more rational slot allocation system, under which airlines would have to pay realistic prices for their slots, neither of these practices would make any commercial sense.
The system also hampers competition between airlines. At Heathrow, the International Airlines Group (IAG) - the parent company of British Airways - holds 55 per cent of all slots. This prevents any airline from competing with British Airways at a similar scale, thereby reducing options and increasing prices for consumers.
A liberal alternative to slot allocation would mean introducing a primary market for airport slots. That could be done by a simple auction, by congestion pricing, or it might be possible to allow airport operators to devise whatever slot pricing mechanism they see fit, and rent out airport slots to whoever they choose. Grandfathered rights would be phased out, and the slot allocation rules would cease to apply.
Dr Kristian Niemietz, IEA Head of Political Economy and author of Terminal Problem, said:
The liberalisation of air travel has been a great economic success story. A former luxury good has become widely accessible, including to low-income earners.
However, the system of allocating take-off and landing slots remains an island of central planning in an otherwise liberalised sector. It is a bizarre anachronism - a hangover from a time when air travel was a nationalised industry - which no longer makes any sense today.
The system weakens competition between airlines and leads to an inefficient allocation of an extremely valuable resource. With airport capacity as constrained as it is, it becomes all the more important that we use this limited capacity as efficiently as possible. But this is precisely what the current rules prevent airport operators from doing.
It is about time to bring the slot allocation system into line with the rest of the air travel sector and expose it to market forces. Airport slots should be bought and sold on the market like any other good or service. There should be no state allocator, and no special allocation rules.
Notes to editors
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IEA spokespeople are available for interview and further comment.
A copy of Terminal Problem? The case for a market-based slot allocation system can be found here: https://iea.org.uk/wp-content/uploads/2022/05/DP107_Terminal-problem__web.pdf
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.