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Slot trading at Heathrow

As a rash of slot trades takes place at Heathrow with US carriers bidding to enter London's premier international gateway, the future of these critical and often controversial assets is once again under the spotlight

What is the going price for peak time morning slots at Heathrow? Deals at £5 million to £20 million ($10-40 million) a pair have hit the headlines recently, while there is also talk of still higher prices in some quarters.

Understandably, most involved in trading prefer to keep the terms of the deals secret. Air France-KLM chairman Jean-Cyril Spinetta, for example, will not be drawn on how much Heathrow slots are going for except that it is a "very high price". Whatever the cost, their scarcity at airports like Heathrow means prices can only inflate, and the issue of slot trading is once again rising up the agenda.

For instance, slots are a top priority at Continental, Delta and Northwest Airlines as they prepare to spend big to gain long awaited access to Heathrow. These carriers - previously excluded from the airport under the restrictive bilateral rules - can now serve Heathrow from March 2008 under the newly liberalised transatlantic Open Skies accord.

Free trading
The industry is also debating whether slot trading, now effectively restricted to the UK, should be freely allowed across Europe. Some feel it is almost inevitable as more airports reach saturation. Consultancy Mott MacDonald recently led a slots study for the European Commission. "Research for the study into secondary slot trading confirmed that within a few years pressure for slot trading, which is currently primarily a London Heathrow phenomenon, at other European hub airports will increase significantly as traffic growth exceeds available runway capacity and future runway development plans are thwarted by growing environmental constraints," says Laurie Price, aviation strategy director at Mott MacDonald.

It is called secondary trading because the trades take place with slots that have already been given to airlines for free. The internationally-recognised system for allocating slots says that airlines retain the slots under so-called grandfather rights as long as they use them for 80% of the time in a given season.

Slot trading, however, has long been a controversial issue and one clouded for years by question marks over its legality in Europe. It also has incredibly high stakes. As the charts of slot allocations for this summer at some of Europe's largest airports clearly illustrate, the continuing ownership of these slots for hub carriers is crucial. "Airlines see slots as an extremely strategic issue because it goes to the heart of the hub," says one airline insider. "Destroy the slots system and you destroy the network."

Today's activity over slots is not restricted to the present dealing at Heathrow as the EC is pondering possible changes to how slots are traded and allocated. The options range from simply amending current guidelines on trading to allow the UK method to be used across Europe, to a complete overhaul of the system. Airlines fear the latter as it will expose the issue to Europe's full political process with the risk of tampering with a system that protects their historic access to slots.

This debate will rumble on into 2008 and beyond. The near future sees the focus firmly on trading at Heathrow as carriers move their US services from Gatwick or open new routes, particularly to their US hubs. Heathrow does have a handful of free slots, but they are at inconvenient times.

Trading slots
The only alternative is to trade, and several carriers are turning to their alliance partners to get slots. Air France-KLM, for example, is working out how to trade slots with SkyTeam partners Continental, Delta and Northwest to enable them to launch Heathrow services.

"Because of the high-speed train, which will strongly affect our Paris-London services, we will have slots available at Heathrow," says Spinetta. "We won't sell these slots - we will see with our partners what we can do with them. We are considering all options - we could lease them, or we could operate out of Heathrow to the US with our own aircraft.

"We will consider leasing them to our SkyTeam partners and put our code on their US flights," says Spinetta. "For example, we could put Air France's code on Delta's Heathrow-New York flights. A decision on what to do with these slots will be taken either at the end of 2007 or early in 2008."

With demand for slots so high some carriers that were previously hanging on to them are starting to give. According to Tim Bye, deputy chief executive of UK carrier bmi, not all the "low-hanging fruit" in terms of carriers looking to dispose of slots has gone. "I don't think so, no, because I think it is clear that there are some people looking to offload slots from either a medium-term leasing perspective or to sell them. Certainly the market has got tighter because of demand from the US and Middle East carriers."

Put simply, the temptation to cash in is too great. These carriers may not leave Heathrow altogether, but can sell some spare capacity. As the table on page 72 shows, slot transfers at Heathrow, some of which will involve money but not all, are still relatively rare. According to Airport Coordination Ltd, which co-ordinates slot allocations at UK and some Irish airports, there were only 233 slot transfers per week for the 2007 summer season compared to a total weekly allocation of 9,498.

Not surprisingly, the airport's largest carriers, British Airways, bmi and Virgin Atlantic, have been the most active slot traders at the airport. Figures from ACL show that BA has been building its holding back to about 41% of slots at Heathrow since it dipped to 36% in 2000, while just over half of all of Virgin's 300 slots per week have been acquired through trades. Both carriers have been consolidating their hub position at Heathrow since 2001 through slot trades.

"We have put in some offers for slots over the last year or two," says Nigel Turner, chief executive of bmi, which at 11% is the second largest slot holder at Heathrow.

"We've tried to buy some slots, we've certainly acquired some slots and we have been approached by any number, probably over ten airlines wishing to get into Heathrow over the last year or so regarding leasing slots, buying slots, borrowing slots, stealing slots, whatever you want to call it. It happens, it will continue to happen."

There are any number of different types of slot deal, all of which have to be checked out by ACL to ensure they are feasible, says Peter Morrisroe, ACL's managing director. Slot trading is a recognised practice in the UK with ACL having created an "artificial exchange" that allows slots to be exchanged legally. However, the UK's pragmatic approach, which ensures those wanting access to Heathrow can get it if they are willing to pay the price, is virtually unique in Europe.

There are several candidates for slot trading today at Europe's busiest airports. For example, access to slots at Milan Linate and Frankfurt is almost impossible as both airports are effectively full. But views among Europe's slot co-ordinators vary about whether to allow trades or not.

Spain for one forbids the practice outright. In Italy, slot co-ordinator Assoclearance does not allow trading, says its secretary general Giampiero Bozzo. For example, a few years ago bmi did try and sell some slots at Linate but when Assoclearance learnt of the deal it did not accept the exchange, he says.

Germany takes a more pragmatic approach. "Only in very rare cases do we do it," says Claus Ulrich, the head of the country's co­ordination body FHKD. However, it occurs less than 10 times a year at present at Frankfurt, which is almost 99% full. Like all co-ordinators, Ulrich remains neutral on what future slot trading system should be adopted. However, he sees a growing demand for trading, particularly with the coming of Open Skies.

In Amsterdam, although Schiphol is 95% full at peak morning and early evening times, there have not been any trades to date, says Michiel van der Zee, managing director of Airport Coordination Netherlands. "The ­airlines don't have to tell us whether or not there has been a financial transaction, but we know there has not been trading," he says.

"In Paris there will not be trading at Charles de Gaulle for quite a while because of new capacity potential, but it could be interesting for Orly," says Eric Herbane, managing director of French slot co-ordinator Cohor. Trading is not forbidden in France as in Spain, but Herbane says Cohor would not favour the practice spreading to Paris for the time being. A couple of carriers did try to sell peak time slots at CDG a couple of years ago, he notes. But with no takers they had to return them to the pool.

Call for consistency
For many the issue with slot trading is its inconsistent application across Europe and a lack of transparency about the deals. This arises because trading is technically illegal under European law. The UK's interpretation of the slot rules, where slot exchanges or swaps are allowed, was tested in a UK court in 1999. The court ruled at the time that the practice was acceptable.

The slot co-ordinators believe they have a major role to play in whichever system is developed. "We think we can be good facilitators in these bilateral negotiations," says van der Zee, who is also chairman of the European Union Airport Coordinators Association.

The EC recognises that slot trading might be a way to ensure the best use of scarce capacity at airports, but it does have an issue with the UK's approach, arguing that it breaches European law. That said, the EC knows that a ban on trading would make the Open Skies deal with the USA virtually meaningless as carriers would be excluded from using the access their politicians have won.

There are two main paths on future slots rules that could be followed. The first is to amend the current regulations to allow trading along the lines of the UK system. This status quo option has many supporters, who fear exposing the slots issue to the full political process in Europe.

But opinions between carriers are divided over whether slot trading should be more widely allowed. "I'm not personally in favour of this," says Spinetta of Air France-KLM. "The value of slots depends on undercapacity at airports and that's a bit shocking. It will modify the economic value of the companies. For example, if you operate at an airport [like London Heathrow] where it is possible to trade slots the balance sheets at BA and bmi would increase, but for airlines operating at airports that do not have overcapacity this is not the case."

The second, and less palatable option for many, is to formalise slot trading. So-called primary trading means throwing away the grandfather rights system and simply making carriers pay for the slots they want. Another possibility is to hold auctions when a large number of new slots are created, as would occur when a new runway opened.

IATA's current guidelines are silent on slot trading. With the issue gaining ground in Europe the association is discussing a common position, but has yet to reach consensus between its members. "The industry is trying to understand what the policy initiatives from Europe's regulators really are, and what they are trying to achieve," says IATA.

Again carriers are split on how best to tackle the slots issue. What is not in doubt is the strategic importance slots play in anchoring the hub operations of major network carriers. "When the regulator touches that, he is touching the very heart of our members' business model," says IATA.

The US position
For many in Europe, the US position on slots is interesting because of its importance to gaining access to congested airports now that transatlantic Open Skies is coming.

Some suggest the USA may ask for slots to be freed up for its carriers, an unpleasant prospect for those already holding them. "The question is whether slot confiscation is on the cards for phase two [of Open Skies]," says one expert. "The real business hubs in Europe are kind of blocked."

"We have told our EU counterparts that, in the second-phase negotiations, we'll want to look carefully at the extent to which infrastructure and environmental constraints affect the exercise of rights in the US-EU agreement," says John Byerly, deputy assistant secretary of state for transport, and chief US negotiator on Open Skies.

"We have not made any specific proposals at this early juncture, however," explains Byerly. "With my colleagues at DoT and other agencies, expect us to begin a careful, iterative process of consultation with US stakeholders this fall in preparation for the second-stage negotiations next year. We'll want to talk to airlines, airports, labour, and others as well as engaging with interested members and staff on Capitol Hill."

At present, however, the DoT's negotiating team is "focused on implementation of the first-stage agreement in early 2008," he says.

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