Brussels' latest proposals on slot reform have caused consternation within the industry and the European Commission itself

Few issues in the European aviation industry have proved as contentious or as long-running as that of slot reform. This is perhaps not surprising given the scarcity of capacity at most of the region's airports. New entrants regularly complain that they are finding it impossible to gain a foothold against the entrenched national carriers, while even the most conservative of observers acknowledge that current regulations are in need of updating for the post-deregulation era.

The European Commission (EC) last ruled on slots back in 1993 when regulation 95/93 effectively adopted the guidelines for slot allocation already laid out by the International Air Transport Association (IATA). A full review was promised within two years, but has consistently failed to materialise, despite occasional pressure from the Netherlands and the UK, the two strongest proponents of reform.

At the core is the old issue of how to tackle "grandfather" rights - whereby carriers simply hang on to the slots that they used the previous season. Although this pragmatic system avoids answering any difficult questions over slot ownership or fair competition, it does at least work, as the incumbent flag carriers are always keen to point out. In any case, as the main beneficiaries they have little interest in supporting radical reform.

Yet last summer, Loyola de Palacio became the latest European transport commissioner to set out new proposals which could begin to nibble away at the grandfather principle. Airlines were angered by the timing, which fell in the peak holiday period. Some saw this as an attempt to bump legislation through without debate. Pressure was applied from various quarters, including a gentle word from Xabier de Irala, Iberia chairman and a like-minded Spaniard. In the end de Palacio's department took a new approach.

This is basically a two-stage plan, initially focussing on the less contentious technical issues of slot allocation. Not for the first time, more fundamental reforms are put aside for a later date. Proposals are due to be put to the council of ministers when they meet in Gothenburg at the end of June. However, one source close to the EC negotiations warns: "The timetable still looks as uncertain as ever."

EC officials insist that proposals for the second stage of reforms will also be raised at Gothenburg. However, others in the industry do not expect initial proposals before the end of the year at the earliest. Even that could be optimistic given previous history.

"The two-stage approach runs the risk of further delay creeping into the process," warns Jonathan Edwards, head of airports policy at the UK's transport department. On the other hand, ACI Europe argues that at least some progress can be made this way, avoiding the likely stalemate which would result if the initial proposals were too radical.

One person who is apparently far from happy with the two-stage approach is EC competition commissioner, Mario Monti, who has made his feelings known to de Palacio. In the middle of May, he delayed an inter-service agreement with the transport directorate apparently as a result of the rift. Monti's predecessor had also been engaged in a similar feud with transport.

Indeed, Brussels insiders say that it is the competition rather than the transport directorate which is behind the more controversial proposals on slots which have been emanating from Brussels. Competition is said to fear that by putting the more fundamental issues on the back-burner, de Palacio is in effect indefinitely postponing any decision.

Another fly in the ointment is the ongoing dispute between Spain and the UK over the sovereignty of Gibraltar, which spills over into airspace disputes. If this issue is not resolved by the end of June, it threatens to block all European Union (EU) aviation legislation, including slot reform.

Timely debate

Perhaps inevitably, the question of what exactly constitutes a "technical" matter has itself become an issue. While grandfather rights are certainly a debate for the second stage, the EC is apparently keen to include early proposals for slot concessions. Effectively that would set time limits on how long a carrier holds any newly-acquired slot. Despite reassuring noises from Brussels and an extension of the earlier proposed 10-year concession period up to 20 years or more, Europe's major carriers are not happy.

The concession proposal brings with it another thorny subject - slot ownership. While this is definitely a subject for a latter date, given its complexity, the Commission plans to initially amend the definition of a slot, from a scheduled time of arrival or departure, to a right to take-off or land at a certain time.

This would open the way for a more widespread reform, possibly extending to secondary trading, with a formal system for swapping slots,or even primary trading with a full cash market. The most important precondition for market-based reforms would be a need to give a "clear, unambiguous legal form and status to what would be traded in the jurisdiction of the member state concerned" says Robin Pratt a director at the PricewaterhouseCoopers consultancy. "Rights and obligations, enforceable in the courts, would need to be attached to what was being allocated," he says.

This ultimately leads onto the issue of slot ownership. As Steve Aylward, manager competition and regulatory affairs at British Airways notes: "There are a range of candidates lining up to stake their claim." Airports, airlines and governments are all keen to ensure they do not lose out. The current thinking in Brussels is apparently that slots should be seen as public assets.

One concern is what happens to slots in airline mergers and the EC is expected to clarify this area in its initial proposals. Kees den Braven, managing director of Airports Coordination Netherlands (ACN), picks out a local example. KLMowns 80%of Transavia, yet the two carriers have their own designator and separate slots. "It is very unclear who controls the slots. This is a grey area," he says. There could be instances, he adds, where an airline with less than 50%control of a subsidiary, still controls the slots of its partner

Another key element of the technical reforms will be to promote more transparency. In particular, measures will be introduced to distance the slot allocation committees from the flag carriers. For example, those responsible for the allocation process in Greece, Belgium and Finland are on the pay-roll of the national carrier. BA's Aylward highlights Milan Malpensa, a familiar source of consternation to the airline community, where he claims that information was withheld from foreign carriers to the advantage of Alitalia.

Some member states have already developed independent slot organisations. ACN in the Netherlands is an autonomous foundation 66%-owned by the domestic carriers and 33%-owned by Schiphol Airport. A decade ago, British Airways led the move to establish Airport Coordination Limited (ACL) as a standalone company. Since replacing the old slot committee in 1992, ACL now co-ordinates all the main UK airports.

There are those in both Brussels and the wider industry who are keen to promote the idea of free competition between different slot allocation concerns, with companies bidding for the contracts at other airports. ACL and ACN both already handle a range of airports. Both are also keen to compete abroad.

Also at the technical level will be proposals to ensure proper enforcement of current regulations, such as the use-it-or-lose-it rule, whereby carriers have to make at least 80%-use of a slot. Indeed, cutting down on slot-abuse in general is a theme running through many of the technical proposals.

Protecting new entrants

However, reform of the grandfather rights principle continues to cause angst in the airline community. Under the current 1993 slot regulation, half of the slot pool was set aside for new entrants. However, this is widely seen to have failed in its objective to spur fresh competition.

ACI Europe states bluntly: "The priority given to new entrants has brought only very limited benefits to consumers." It argues that new entrants have rarely used such slot allocations, or only for a very limited period. "The hope of creating significant competition for incumbent carriers has simply not materialised," it says. The EC is keen to widen the definition of a new entrant, which should favour medium-sized carriers, which are in a better position to offer effective competition than smaller start-ups. In addition, airports are likely to be given room to use environmental and size as criteria for slot allocation.

Aylward claims that the policy to favour new entrants as a congested hub like London Heathrow has led to low-frequency carriers gaining access to scarce slots to the detriment of BA's world network. One of the main complaints against the current regulations is that they do not take account of the development of emerging hub-and-spoke strategies. "The role of the network in competition needs to be recognised," Alyward says. He believes that the EC should leave the area of grandfather rights well alone. Instead, BA favours establishing a legitimate system of secondary slot trading, although this is seen as one of the issues for a later date by Brussels. Primary trading of slots seems a long way off.

While such market-based solutions have gained support within the industry, there is plenty of opposition too. It is clear that slot reform is not going to happen fast. Some fear that the more fundamental changes may not happen at all, at least in the medium term. Likely next-step proposals for EC slot reform

- Concession system for a period of 15-20 years or more.

- Legal definition of slot ownership to be changed from a scheduled time for take-off or landing to the right to take-off or land within a certain timeframe.

- Definition of new entrant widened to increase competition from medium-sized carriers.

- Improve transparency of slot allocation process. Clear separation between slot coordinators and national carrier.

- Better enforcement of 80% lose-it or lose-it rule.

- Allow for allocation criteria such as aircraft size to be made at local level.

- Environmental constraints to be considered as a allocation parameter.

Source: Airline Business