The bankruptcy filing by American Airlines a few months ago signals that the U.S. aviation industry is once again primed for dramatic change. American Airlines is the last of the major U.S. carriers to seek bankruptcy protection, as most of the other big carriers have completed restructurings or mergers that have reduced the number of full-service carriers from seven in 2005 to just four today.
Industry consolidation can be a mixed bag for the flying public. Mergers can deliver efficiencies from scale, but they can also decrease competition. American Airlines has now become the latest acquisition target, perhaps by US Airways or Delta Air Lines. Against this shifting landscape within the industry, the Federal Aviation Administration (FAA) took an important step to help ensure that consumers continue to benefit from airline competition, especially when they want to swap assets. Instead of allowing airlines to swap some of their operations at the nations largest airports – in an effort to further concentrate their shares of regional markets – the FAA wisely chose to initiate the nations first-ever “slot auction” at the end of 2011. The long-term benefits for the flying public from this precedent are potentially tremendous.
A handful of the nations airports are slot-controlled, meaning that there are a limited number of flights that are allowed to arrive or depart at these airports based on the amount of runway capacity. Each flight in or out is a “slot,” in aviation lingo. Airlines without slots cannot serve these airports. Over time, slot-controlled airports have been underutilized because there is no easy way for airlines to trade slots, and airlines with slots are understandably hesitant to allow competing airlines access to the airport. Airlines have been known to “babysit” their slots by flying smaller aircraft into the airport to hold onto their valuable arrival and departing slots. As a result, the number of passengers served by slot-controlled airports shrinks even as flight delays remain the same.
The system serves neither the airlines nor their air travelers. The cost of airline delays and congestion in our aviation system is a huge drag on the U.S. economy. The Congressional Joint Economic Committee (JEC) estimates that flight delays cost passengers, airlines and the U.S. economy about $40 billion each year. And much of the delay is caused by just a handful of very congested airports, including LaGuardia.
As 2011 came to a close, the FAA took an important step toward improving that situation by making slots at two of the nations busiest airports available through a public auction. Airlines were able to submit bids for slots at New Yorks LaGuardia and Washingtons Reagan National airport. The auction winners were the airlines that were willing to pay more for access to the airport than other bidders. While this may seem like common sense, slots have historically been handed out to politically favored airlines or distributed administratively by lottery.
The auction was triggered when Delta and US Airways wanted to exchange some of their preferred routes in the Northeast. Delta wanted to add slots at LaGuardia, where it is already the top carrier. Similarly, US Airways wanted to expand its already dominant position at Reagan airport.
The winners of the auction were JetBlue Airways and Canadas WestJet. According to media reports, JetBlue paid $72 million for eight slot pairs at each airport, while WestJet paid $17.6 million for eight slot pairs at LaGuardia. The prices offered by the airlines reflected the value that the airlines saw in the slots (and the key drivers include: slot times, number of passengers that could be served, connecting passengers and broader business strategy).
While the auction mechanics are interesting, the real significance of this slot auction is that it represents a policy breakthrough that, if replicated, will lead to significant improvements for a broad cross-section of the flying public. The last administration proposed using the proceeds of an auction to finance other improvements in the airports as opposed to just providing a windfall to the incumbent airline. While that would have been preferable, the FAAs auction process in this case was still better than the status quo.
Of course, to address congestion and fix our current aviation system, we need to introduce more competition at capacity-constrained airports. A great emphasis should be put on building out the current airport infrastructure to accommodate more daily flights. But, as Alfred Kahn, an airline economist and former chairman of the Civil Aeronautics Board, said: “Whenever competition is feasible, it is, for all its imperfections, superior to regulation as a means of serving the public interest.”
The bottom line is that our current system enables airlines to hold onto slots they may not really need, limiting the number of airlines that serve popular airports and travel options at those airports. So instead of travel demand driving scheduling decisions at airports like LaGuardia, the current government-conferred slot monopoly encourages carriers to fly small planes to avoid the risk of losing a slot to another carrier that might fly bigger planes to more popular destinations.
Auctioning slots, however, allows the market to drive which carriers fly which planes to which cities from these popular airports. This in turn encourages airlines to service these airports with larger aircraft. Pricing also establishes important signals that can help guide policymakers as they try to decide which areas of the system need to be prioritized for capacity or capital improvements.
So while the airline industry endeavors down another round of consolidation, air travelers can take some comfort in the emergence of slot auctions that could at least help ensure that they will have more attractive options for flying into and out of some of the nations most popular airports.
Original Source: http://blogs.reuters.com/great-debate/2012/03/26/a-simple-plan-to-relieve-airport-congestion/