The European Commission has cleared the way for secondary slot trading at European Union airports, but what does this really mean for the industry? asks Robin Noble, managing consultant at Oxera Consulting
In April Jacques Barrot, vice-president of the European Commission, made it clear for the first time that "secondary trading is an acceptable way of allowing slots to be swapped among airlines" in the European Union. This statement and the associated official guidelines from the EC mean that slot trading can now emerge from the grey area it has inhabited for the past few years, and become a more mainstream activity at Europe's most congested airports.
On the face of it, the Commission issued this communication because it believes that allowing secondary trading will help to ensure more efficient use of available slots at congested airports. Its decision was influenced by the experience at London's airports, where grey market trading has "allowed a range of airlines to take advantage of the opportunities provided by the EU-US aviation agreement and to create new levels of competition".
Another perspective is that the EC had little option but to regularise slot trading eventually, since it is so widespread and integral to the way the airline business runs. The alternative, of banning trading, would have been likely to cause massive dislocation, especially to those airlines that survive in part on the implicit value of their slots, rather than their operating profit.
In any event, the prospect of secondary trading suggests a number of interesting implications for the industry.
Making slots tradeable effectively converts them into a liquid asset. For the first time, in its 2007 annual report, bmi included the value of its slot holdings at London Heathrow in its balance sheet. The impact of this was to increase the company's net asset value by £770 million ($1.5 billion). This is a very large increase against the £12 million net asset value it reported in its annual report for the previous year.
Tradeable slots have a much clearer market value, so creditors may be willing to accept them as collateral. Indeed, this has happened at various congested airports in the USA where trading has been allowed: slots at both New York La Guardia and Washington National, among others, have been held as collateral by a variety of banks against loans issued to airlines. For an industry facing a challenging operating environment, and with banks tending to be more risk-averse in light of the credit crunch, collateralising slots may improve airlines' ability to borrow.
" The EC had little alternative but to regularise slot trading, since it's so widespread"
However, other than in the case where slots are sold, the potential for slot trading will not affect an airline's ability to repay debt, since it does not have any effect on the cash flows of the airlines. Perhaps reflecting this, credit rating agencies have not amended the ratings on the unsecured debt of airlines such as British Airways and Iberia in response to these changes.
It should be noted that slots will not be a pure commodity there is limited scope for hoarding slots as unused assets as "use it or lose it" rules prevent slots from being held dormant by airlines. There is evidence of airlines mitigating this problem in the past by babysitting slots - for example, operating small aircraft on short routes just to keep the slot authority alive - but this is costly, and becoming even more so given rising fuel prices.
A primary reason advanced by the EC for liberalising secondary trading is the benefits to competition. However, this is based on a particular view of the market that is likely to be created if secondary trading is allowed - namely that the absence of a secondary market for slots stops new entrant airlines growing to a sufficient scale to be effective competitors to an incumbent. Indeed, with EU-US Open Skies, airlines such as Delta have begun acquiring Heathrow slots, often from alliance partners, in order to compete on transatlantic routes from London.
The impact of trading could also go the other way. If incumbent airlines are able to enhance their position at home airports by outbidding rivals to acquire slots, the net effect on competition could be negative. This opens up the possibility that formalising slot trading may result in competition law challenges to the way individual airlines, especially those that dominate major hubs, acquire and use scarce capacity.
Overall, the effects of the EC's decision would be greatest in two circumstances: first, where trading has not already been occurring on an extensive scale in the grey market and second, where capacity constraints at airports are a significant issue. As airlines point out, however, what secondary trading will not do is add any capacity to the increasing number of airports expected to suffer from capacity shortages over the next decade. Given the environmental and investment challenges associated with new runways, that is another story