Brussels has published its ideas on shaking up slot allocation, including a threat to curtail grandfather rights, but also an acceptance of slot trading
A controversial discussion document from the European Commission (EC) has brought the issue of slot reform back to the top of the Brussels agenda. The most eye-catching suggestion is a threat to curtail grandfather rights, by which airlines keep hold of an airport slot for the next season provided that they use it regularly.
However, slot reform has shot up the Brussels agenda before, only to slip rapidly back down again as it became mired in technical complexities and the various agendas of different interest groups. The EC last ruled on slots back in 1993, when regulation 95/93 effectively saw Europe adopt the guidelines already drawn up by IATA. Further attempts at reform have generally met with failure, with the main achievement being a modest amendment to some of the technical aspects of slot allocation which went through in April earlier this year.
Most doubt that the incoming transport commissioner Jacques Barrot would relish the fierce battle that the grandfather rights proposals would almost certainly trigger. The proposals would clearly face vocal opposition from most industry stakeholders, as well as a number of member states and at least some quarters in the European Parliament. Neither is Barrot, a 67-year-old Frenchman, seen as a politician looking to make a name for himself by taking on a controversial issue.
The regime of his energetic predecessor, Loyola de Palacio, periodically pushed forward the idea of reform, believing that the inability of new entrants to obtain slots at the most congested airports was hampering competition. However, the complexities involved in tinkering with the schedules that underpin today's network carriers meant that making headway proved difficult. Instead, Palacio focused her efforts on other areas where the rewards were more obvious and easier to achieve.
The Commission accepted a two-track approach, with the less contentious technical reforms in phase one and the more difficult market access issues (which are tackled in this latest document) put into phase two. Even the technical revision took around 30 months to wind its way through the European Union machinery, with much wrangling among various member states.
Although the latest threat to grandfather rights will have annoyed many airline chief executives, observers note that there are many positives to be drawn from the document, not least the tacit acceptance of slot trading. Chris Walsh, consultant at law firm Ince & Co says: "They appear to be accepting that the reality is that these things will be traded."
In the past, Brussels has made plain its distaste for the so-called grey market in slots, notably at Europe's largest and most congested airport, London Heathrow. This summer, the EC threatened to take action against the UK if it failed to crack down on the trading which has seen the likes of British Airways, Virgin Atlantic and Qantas buy slots from other carriers. However, the EC seemed to be warming to the idea of market mechanisms, with a Brussels-commissioned report by consultants NERA published in February suggesting that this approach could increase passenger numbers at Europe's primary airports by up to 6%.
Slot trading
In the new document, Brussels acknowledges that slot trading is a fact of life, and that there is little that the EC can do to stop it despite the lack of compliance with European law. The document says there is a need for a "clarification of such occurrences" to avoid distortion of competition. The Commission says that trading between carriers would have to be transparent, with a transaction only becoming effective if no other carrier was prepared to bid a higher price than the last one offered. Secondary trading typically involves transactions between carriers, whereas primary trading would see airport or aviation authorities effectively able to sell the slots to airlines.
The EC says the first airports where the new slot rules would be applied are those where there is excess demand around the clock, followed by those that suffer from excess demand at peak times. Third on the list would be airports where carriers have not been able to obtain slots over a number of scheduling seasons. The first category would include Düsseldorf, Frankfurt, London Gatwick, Heathrow, Madrid, Milan Linate and Paris Orly.
The Commission wants safeguards to ensure that new entrants are able to obtain slots at the most congested airports. "Strong buying power could result in the creation or strengthening of a dominant position that could not be acquired under the present system of slot allocation." The EC warns that: "It should be ensured that market entry at very congested airports is not deterred by the unwillingness of the hub carrier or the alliance to sell to a competitor or by the absence of initiative of an authority to make use of discretionary powers to enhance market entry."
Some within the industry argue that the EC is exaggerating the potential problems, pointing to the fact that over the years Virgin Atlantic and bmi have both built up strong positions at London Heathrow, where slots are in more demand than anywhere else in Europe. They also point to the fact that despite the active grey market at Heathrow, BA has a lower proportion of total slots than Air France or Lufthansa at their respective Paris Charles de Gaulle and Frankfurt hubs.
However, the Commission suggests it is necessary to have secondary trading incentives, "so as to make the willingness to trade the driving force behind market entry". Brussels says a "continuous refusal of air carriers to trade...could be sanctioned by forced release of slots". The promise is that this would include measures to prevent disruption of airline and airport operations, but that is unlikely to placate Europe's network carriers.
One idea floated by the Commission is for a fixed percentage of grandfathered slots - it suggests 3% - would be returned to the slot pool each year. This would happen if over a certain period - the EC suggests three years - new entrants were frustrated in efforts to gain access to a hub. The slots to be redistributed would be chosen by a system of lots involving all grandfathered units. Where lots are drawn for slots that have previously been paid for, a system of compensation will be drawn up. The document is vague about where the revenues derived from trading will go, leading some to suspect that they will end up in public coffers.
There is an additional condition attached, and most observers agree that this is a big one. The documents says: "Only slots that are used for intra-European operations would be subject to such withdrawal as a wider application could provoke retaliatory action from the Community's international partners." Walsh at Ince & Co points out that this could derail the Commission's intended goal of helping out new entrants, as non-European majors use their superior financial clout at airports such as Heathrow.
Brussels thinks that the threat of forced redistribution will mean that carriers will be inclined to sell slots rather than risk losing them for no payment. The EC believes that this risk will also put a cap on prices as airlines will not want to risk their slots remaining unsold.
The document also looks at the possibility of primary trading, with airports setting a price for each slot on a season-by-season basis. Grandfather rights would only apply if the airline was prepared to pay the posted price for the future season.
If more than one carrier is interested in a slot available in the pool, then it is possible that an auction system may have to be put in place, rather than the existing process where the slot allocator decides. Brussels admits that setting the right price level will be difficult.
Brussels envisages that an auction of pool slots at airports where there is excess demand would sit alongside secondary trading, enabling carriers to exchange slots gained at auction for more suitable ones, thus improving optimisation. This system, it argues, would have the smallest impact on the existing system.
Slot auctions
In contrast, an idea floated in the document for an auction of 10% of all slots each year would put a cap on grandfather rights. All slots would be auctioned at 10-year intervals, with grandfather rights restricted to those 10 years. Brussels admits that this system would potentially be "disruptive" for hub carriers. Against that, the costs involved could favour larger carriers whose networks enable them to make better use of auctioned lots. This system would also sit alongside secondary trading.
The main trade bodies are still examining the document, with responses due before December this year. The European Regions Airline Association (ERA) has expressed fears that smaller regional airlines will be priced out of hubs. The Association of European Airlines (AEA) representing mainline carriers warns that slot reform should not be seen as an alternative to tackling the capacity constraints that are present at main airports.
Although the threat to grandfather rights is generally seen as unwelcome, other than by new entrants, most agree that there are some interesting ideas in the document, not least the long overdue acceptance of secondary trading.
EC's working document on slots - main points
* Acceptance that secondary trading is a reality and that it must be transparent.
* Airports where new entrants are unable to gain entry over an extended period (possibly three years) could see 3% of grandfathered slots confiscated and returned to the slot pool. The EC believes this will ensure incumbents trade slots rather than risk losing them.
* The document also looks at primary trading, which would take place alongside secondary trading. Carriers would only keep grandfathered slots if they pay the price set for the next season.
* This could see 10% of slots put up for auction each year, effectively putting a 10-year life span on slots.
COLIN BAKER LONDON
Source: Airline Business
