The European parliament's endorsement of secondary slot trading last December appeared, on the surface, to sanction the long-standing practice of selling, leasing and swapping runway rights at the continent's over-stretched aviation hubs.
Although proposed legislation is unlikely to progress during Ireland's presidency of the EU, which ends in June, this delay stems from a largely unrelated debate in Brussels. The European Commission had drawn up slot trading proposals as part of a wider package of measures governing airport reform. The European parliament reached a consensus on slot trading and aircraft noise mitigation, but it came unstuck over the issue of how best to liberalise ground handling services.
Notwithstanding the slow pace of reform, Morgan Foulkes, deputy director general of Airports Council International (ACI) Europe, says legislation on slot trading will be a boost for the continent's over-stretched airports.
"The major issue that we face in Europe is airport capacity," he explains. "We don't have the political courage to build the infrastructure when we need it Faced with this reality of the shortage in capacity, how do we make the best use of what we have? For us, secondary trading is one of the tools that we have to ensure that."
Eurocontrol forecasts that by 2030 at least 19 European airports will be operating at full capacity. Some gateways are already feeling the pinch. At London Heathrow airport, scarce capacity has given rise to a thriving secondary market in which airlines meet behind closed doors - away from the prying eyes of airport bosses and regulators - to negotiate the transferral of hugely valuable take-off and landing slots. There were 23 such transactions at the UK hub in summer 2012.
Secondary trading is "one of the few opportunities for an airline to grow at Heathrow", says Chris Butler, head of airline business development at the UK hub. The airport operates at 99.2% capacity amid political apathy in Britain over the construction of a third runway. Aside from by acquiring airlines - as was the driving factor behind British Airways' parent International Airlines Group's purchase of BMI - there are precious few opportunities for an airline to grow their slot pool.
"There is virtually no spare capacity at Heathrow, so in order for airlines to grow they need to either swap or trade slots," Butler says.
Heathrow's secondary market runs parallel to the primary slot allocation process, through which airlines attain grandfathering rights for their slots after two years - provided they have operated them at least 80% of the season (the use-it-or-lose-it 80:20 rule). Grandfathering is deemed necessary to block speculators from acquiring slots solely for trading purposes. Once a carrier has acquired the rights, its slots become owned assets that can be transacted at will.
"[By trading slots] airlines are doing what most organisations do, which is to make to make commercially sound decisions on behalf of their shareholders," says Butler.
He emphasises that selling the assets outright carries inherent risks because of supply-side constraints. Although statistics are hard to come by, slot prices are widely believed to have risen in tandem with burgeoning demand - the most commonly cited example is Continental's $209 million purchase of four peak-time slot pairs at Heathrow in 2008 - so carriers that relinquish their turf can expect to pay more if they want to buy it back in the future.
But Butler says leasing out a slot, or swapping it for a more conveniently timed schedule, offers clear benefits to existing operators at the hub. ACI's Foulkes agrees in principle, although he emphasises that airports must be viewed on a case-by-case basis, which in turn necessitates the fine-tuning of regulations "at a local level".
"What is very specific at Heathrow is that a lot of long-haul carriers want to add to the market, and this is not the case at a lot of other European airports," Foulkes says. "We want to make sure that people don't think that as soon as secondary trading is legalised in Europe, there will be all these trades generating millions of euros per trade. This is not the case. What is important is that we have a proper legal framework that allows us to get out of the grey market."
Although ACI supports most of the provisions in the European Commission's draft legislation, its insistence on tailoring regulations to the needs of individual markets has placed it at odds with Brussels over one key measure.
The "new entrant rule" states that during primary slot allocation, a given proportion of slots are awarded to new market players. This is intended to promote competition by exposing incumbents to new rivals. But Foulkes says the blanket approach often results in failed route launches, with new market entrants lacking the necessary scale to pose effective competition.
"Sometimes it may work and may allow a new carrier to enter into the market and provide competition," he concedes.
Rule of return
"We are in favour of either developing the new entrant rule at the local level through local rules, or modifying the rule to allow bigger carriers to qualify. For us it's quite clear that if you're a very small carrier and you get one or two slots at a very congested airport, you're not going to be able to provide competition to an established incumbent carrier."
Foulkes says effective competition tends to come from either alliance members or market-leading low-cost carriers, both of which are typically ineligible to take advantage of the new entrant rule.
Other measures proposed by the European Commission have, meanwhile, received ACI's full support. Under current regulations, there is no means by which an airline can return slots into the primary pool if it knows it will be unable to operate them. This not only results in wastefulness, but also provides a smokescreen behind which carriers can deliberately hoard capacity to block new market entrants. Brussels has proposed a "slot reservation system" to remedy this shortcoming.
"Between the allocation of a slot and the slot return deadline, airlines should be able to do whatever they want with the slots - trade them, exchange them, retime them," Foulkes says. "But if they hold onto their slots after the slot return deadline, then they must either operate the slots as scheduled, or if they don't show up on the day of operation they should be liable to pay a percentage of airport charges."
Crucially, this process would be revenue neutral as the airport would then allocate a rebate for the following season. The aim is not to generate profits for the airport operator, but "to encourage good behaviour from airlines".
Another thing that both the EU and ACI agree on is that any slot trading regime must be fully transparent. Foulkes declines to comment specifically on trading practices at Heathrow, but he stresses that ACI has concerns about any secondary market which is "devised by airlines for airlines" with no outside scrutiny.
Airlines - which raised concerns around Commission plans to adjust the 80:20 use-it-or-lose-it rule to 85:15 - have welcomed the clarity that legislation gives to slot trading.
Association of European Airlines (AEA) acting secretary general Athar Husain Khan says: "Slot trading, where it takes place, works well - for example in the USA or at the London airports. In the case of Heathrow following the EU-US aviation agreement, it had a demonstrably pro-competitive effect.
"The regularising of secondary trading in slots, foreseen in the proposed revision to the regulation, recognises the realities of how the business functions. In its current form, the draft legislation strikes a good balance between regulation with a light touch and the appropriate checks and safeguards against competitive distortion."
Heathrow's Butler says the airport typically has no involvement in the early stages of talks.The extent of Heathrow's direct involvement typically amounts to guidance on the logistical viability of a proposed transaction. This is because terminal and stand capacity must be factored into deals, with purchasing carriers often seeking to maximise ASK capacity through the deployment of larger aircraft.
"Each terminal has declaration limits dependent on capacity in each element of the passenger process - forecourts, check-in, security, etc - otherwise you would end up with an unacceptable level of service," notes Butler. Some deals will thus be abandoned in the nascent stages. For others, an interim solution involving off-peak periods may be settled on "so at least they have got a slot, and then they can try to swap it to a more preferred time".
Once the logistical obstacles have been overcome, the incumbent airline must approach the commercial arm of Airport Coordination Ltd (ACL), the UK's independent slot allocation body, to effect the change. Beyond cross-checking the proposal against declared terminal constraints and the EU's vaguely worded regulations, ACL simply rubberstamps the transfer.
Its perfunctory role in secondary trading contrasts with its higher authority in the primary slot allocation process, during which the organisation makes qualitative judgements about how best to coordinate scarce airport capacity at six UK airports - Heathrow, Gatwick, Stansted, Luton, London City and Manchester.
It is unclear to what degree the EU's vision for legalised slot trading resembles the de facto practices at Heathrow, but several grey areas are cause for concern. ACI's Foulkes says shoring up transparency must be top priority.
Although he defends the free-market economics of secondary trading - which ensure that the slot "goes to the airline that will make the best use of it" - Foulkes says transactions must be conducted openly. "We have asked for more transparency, and in particular transparency on the details of the individual trades. We believe the airport has a legitimate interest in knowing the value of the assets it provides."
To this end, ACI is calling for post-trade financial details to be provided to coordination committees. That does not occur at Heathrow, although many airlines voluntarily disclose sums on their balance sheets. ACI also opposes any restrictive covenants attached to transactions, and is in favour of operational information being provided to any rival carriers which might be affected by the trade.
ACI stops short of arguing that a central body should take over control of secondary trading. Instead, its official stance is that coordinators such as ACL should be kept at arms-length from the management of secondary trading.
On matters of transparency, the EU takes broadly the same stance as ACI. After years of insisting that secondary trading must not involve monetary compensation, the EU in 2008 formally acknowledged "certain advantages" associated with enhanced liquidity in the market. But it emphasised the need for "such exchanges to take place in a transparent manner".
Changing the rule
One final controversy was the 80:20 requirement, which the European Commission wanted to raise to 85:15. It argued the lower threshold encourages wastefulness by dominant carriers. ACI agreed, citing London Gatwick airport as an example. It estimates that in the busiest week of summer 2011, 320 slots would have been freed up for alternative use had the 85% provision been in place.
The European parliament disagreed in December, however, concluding that tighter requirements could spur carriers into running uneconomic services simply to retain slots. Foulkes is not optimistic of a rethink, saying: "We will probably focus on other issues."
Irrespective of how the mechanism is fine-tuned, the EU believes that a better regulated, more open secondary market across Europe will optimise slot allocation and result in 24 million more passengers being accommodated by 2025.
Another consequence of the growth in secondary trading is that airlines increasingly see their slots as quantifiable assets, rather than inherited legacy privileges. In 2008, BMI became the first UK airline to place its slots on-balance-sheet, booking £770 million in the process. Slots purchased on the secondary market are also typically capitalised once the transaction is complete.
BA's attempt at raising £250 million through a bond backed by its Heathrow slots may have been unsuccessful, but subsequent efforts to unlock the value of these assets seems assured. What is less certain is how long Brussels will take to legitimise peer-to-peer trading of slots under the auspices of EU law.