Slot allocation: the need to dump grandfather November 1997

One of the critical issues facing air transport in Europe today is that of slot allocation at congested airports.

The answer to the underlying problem is the construction of more runways, but, other than in exceptional circumstances, it is evident that environmental opposition will prevent such developments. The problem of airport congestion and excess demand can clearly only get worse.

This is why some form of regulation is necessary, to ensure that increasingly scarce slots are allocated in a fair, non-discriminatory and transparent way. But the Slot Allocation Regulation (EEC 95/93) which now prevails in Europe has another objective. It is designed, according to the European Commission, to increase competition in the internal aviation market by enabling new entrant carriers to serve their chosen destinations.

It is evident from the 1995 Coopers & Lybrand report on the operation of the Slot Allocation Regulation, produced at the request of the Commission, that the current rules leave much to be desired. There have been differing interpretations of clauses, resulting in confusion, and certain Member States have been slow to give effect to the obligations imposed upon them. However, relatively modest reform and clarification, combined with firmer enforcement action, would remove these problems.

A more fundamental difficulty is presented by the failure of the Regulation to do anything to increase competition. At Heathrow, for example, the principal competitors to the dominant airline, British Midland and Virgin Atlantic, have not gained at all from the Regulation. Instead, in recent years low frequency cargo operations and carriers from newly emerged States operating at off-peak times have been the main beneficiaries. British Airways' dominant position has not even been dented.

It is this missed opportunity that represents the greatest failure of the current Slot Regulation congestion. Radical solutions are needed. There is no shortage of such ideas, but there does appear to be a shortage of political will in parts of the Commission to pursue them. Instead, the much leaked but still officially confidential DG 7 proposals for a new Slot Allocation Regulation involve little more than tinkering with a system that has clearly failed.

Some argue that the problems associated with access to airports like Heathrow can be solved by simply charging airlines for the use of slots. Unfortunately, this would not create a single new slot. Rather, it would create yet another barrier to market entry for smaller airlines. A more open and transparent market for slots may have a role to play (although in reality everyone knows that a relatively efficient if murky market already exists), but it will not provide a solution to the underlying problem.

Slots in perpetuity

That requires the contentious issue of grandfather rights to be tackled head-on. From the beginning these have been a central feature of the slot allocation system first devised by IATA. They remain an important part of the EU's Slot Allocation Regulation and unfortunately the European Commission, or at least DG 7, shows little enthusiasm for getting rid of them.

Grandfather rights allow an incumbent airline to keep a slot in perpetuity. Provided a slot is used on at least 80% of occasions during one season, it can be retained for the next corresponding season. There are no real restrictions on the use to which the slot can be put.

It is grandfather rights that present the largest single barrier to entry for smaller airlines wanting to begin or expand services from airports such as Heathrow. They cement into place the dominant positions held by flag-carriers and put a stop to the circulation of slots which the Slot Allocation Regulation was supposed to encourage.

These large slot holdings were accumulated, of course, at a time when the airlines concerned were the favoured recipients of their government owners' largesse. They in no way reflect real consumer choice or the relative merits of the competing services which would emerge if slot allocation was truly opened up. It is not surprising that those with large slot holdings at congested airports, especially the major flag carriers, resist strenuously any attempt to interfere with the grandfather principle.

There has been much debate about who actually owns a slot, but most would agree that whoever it is, it is certainly not the airline which actually uses it. No European airline includes the slot value as assets in its annual accounts. If a carrier actually owns a slot, it would be illogical to allow for that slot to be confiscated should the airline concerned fail to use it intensively, as provided for in the EU Slot Allocation Regulation.

In other words, slots are valuable assets which are loaned to airlines on a long-term basis. Other industries, such as radio and TV franchises work on a similar basis. They have access to certain assets or rights for a limited period. At the end of that period the assets/rights are handed back to the owner, usually the government, and a new round of bidding commences.

It is far from obvious why a similar system could not work for slots. There may be particular problems associated with air transport, but these are likely to be insurmountable only for those who do not want to be persuaded. If every year a fixed proportion of slots at an airport (say 5 or 10%) had to be handed back to the pool for re-allocation according to fair and non-discriminatory rules, the effect on competition in the air transport industry would be substantial.

This is not confiscation, since as already explained airlines do not own slots in Europe. Nor would it necessarily mean that the current holders of slots would be forced to abandon routes. They would be free to apply for released slots along with everyone else. They would just no longer be in an advantageous position compared with new entrants. Everyone would be treated equally.

The Competition Directorate, DG4, clearly appreciates the competitive implications of grandfather rights and is aid to want to do something about them. Slot sales, on the other hand, are less favourably regarded, mainly on the grounds that smaller airlines would have difficulty matching the deep pockets of the larger carriers. Experience of buying and selling slots in the US lends credence to DG4's concern in this respect.

DG7, however, has adopted the opposite position on both points. It sees slot sales as a way of increasing slot availability to smaller airlines, provided dominant carriers are prevented from adding significantly to their slot holdings. (It has been suggested that any one airline should be allowed to add no more than 0.5% of the total number of slots at an airport each year. This would still permit a dominant carrier to increase its dominance, of course, albeit at a slow rate).

DG7 rejects out of hand any serious attack on grandfather rights, primarily on the grounds that stability and continuity of operations are of utmost importance for both airlines and passengers. Not only is this a poor justification (who says that passengers want stability if the alternative is a much improved service at lower prices?), it is also the very argument used for so long by those flag carriers resistant to liberalisation.

DG7 also argues that if grandfather rights were limited, there would be a serious risk that any released slots would be returned to the original holder. So what is the problem? The result would be no worse than the current situation, and it is just possible that a more competitive solution would result. If these are the best arguments the Commission can produce for resisting the abolition of grandfather rights, the intellectual debate is won.

In truth, of course, the main reason for DG7's reticence is that radical reform is opposed by the vast majority of Member States and EU airlines. Early acceptance of the abolition of grandfather rights seems highly unlikely. But the same could be said about the liberalisation of the EU internal aviation market in its early stages. It is a pity that DG7 is not prepared to bite the bullet and make proposals that would make a real difference to the competitive situation in Europe, even in the face of opposition.

Virgin Atlantic has brought real benefits for the travelling public on long-haul routes out of the UK, in the form of improved, innovatory products and lower fares. Yet the benefits created by Virgin and others could have been much greater had more slots been available at airports such as Heathrow.

Virgin's expansion has been substantially slowed by its inability to acquire sufficient slots for its expansion plans, even if by hard work it has been able to add the odd new route over the years.

This is the core of the argument. The costs for the travelling public of maintaining grandfather rights are huge. These costs represent a direct subsidy from consumers to those dominant airlines fortunate enough to have acquired slot holdings in the past as gifts from their government-owners. That should be unacceptable in a free market.