EU SLOT TRADING Slot trading in the EU John Pheasant, partner at Hogan & Hartson in Brussels and London, and Matthew Giles, associate at Hogan & Hartson in London, ask what role competition law has in promoting the most efficient allocation of airline slots at international airports lots are a bundle of rights that allow transatlantic flights to American cities solely access and slot illiquidity at Heathrow and airlines to take off, land and use other from their home country as was required other airports will continue to constitute sig- Sinfrastructure at a given airport. They under previous bilateral arrangements. nificant barriers to entry for the provision of are a key input into the downstream provi- In terms of Heathrow, Open Skies will transatlantic services on the most profitable sion of air travel services. Many major car- supersede the 1977 ‘Bermuda II’ bilateral routes. This is the result of both the histori- riers therefore view slots as a particularly agreement between the US and UK which cal manner in which slots have been allo- valuable ‘asset’, especially at congested air- permits only British Airways, Virgin Atlan- cated and the privileges of use (and reuse) ports such as London Heathrow. For exam- tic, American Airlines and United Airlines to that have been bestowed upon incumbent ple, British Airways has 3,800 slots a week fly between the US and Heathrow. It should carriers under the existing allocation rules. at Heathrow (roughly 40 per cent of those be noted that the Bermuda II agreement only Currently, the allocation of slots in the available), which are estimated to have a covered Heathrow. Other airports in the UK EU is an administrative procedure gov- value in excess of €3 billion. were open to any US carrier. erned by EC Council Regulation 95/93 (as However, the demand for slots at some amended). The regulation defines slot capac- European airports vastly exceeds supply, ity available for allocation (a definition that, with the scarcity of slots seen as a major since the coming into force of Regulation obstacle to full liberalisation of the trans- Some anticipate 793/2004, also includes the use of airport atlantic air transport market. The issue is infrastructure), the process of such alloca- particularly apparent at Heathrow, where that Open Skies tion, and the supervision and monitoring of there is a severe shortage of airport slots how allocated slots are then used. available for potential new entrants – that The rights to use airport infrastructure is, carriers who, in light of the Open Skies will increase overall to operate services out of congested airports agreement signed between the United States are allocated by ‘slot coordinators’, who and the European Union, might otherwise transatlantic air have a duty to act in a transparent, neu- challenge incumbent carriers by offering tral and non-discriminatory manner. The their own transatlantic services to and from travel by as much coordinator allocates slots to applicants as Heathrow. Open Skies may have granted permissions to use the airport infrastruc- carriers the legal right to fly in and out of as 50 per cent by ture for landing and taking off during the Heathrow, but it has not facilitated actual requested period. Once this period of use access for potential new entrants. 2013 has elapsed, the carrier has a right of first In response to the problems caused by refusal to continue using the slots subject to congestion and the illiquidity in slots, the a ‘use-it-or-lose-it’ rule requiring the carrier European Commission, stakeholders and to demonstrate that it has used the slots for other regulatory bodies have been discuss- In theory, the privileged position of this at least 80 per cent of this period. ing formalising a market approach to slots small group of carriers will be terminated Only when the carrier cannot demon- to ensure that scarce airport capacity is allo- by Open Skies: any US or EU carrier will strate such required intensity of use (or cated efficiently. In light of this, it is impor- be entitled to fly directly between Heath- elects voluntarily to give up the slots) are tant to ask what role competition law has row and US destinations. As a result, some slots returned to the pool. Otherwise, the in promoting the most efficient allocation anticipate that Open Skies will liberalise the incumbent may continue to retain already of this scarce resource and whether com- lucrative transatlantic passenger market, held and employed slots. These rights are petition law can deal with anti-competitive reducing UK-to-US ticket prices by approx- known as ‘grandfather rights’ and they behaviour arising out of the use of market imately 10 per cent and increasing overall potentially enable incumbent carriers to mechanisms, however configured, for slot transatlantic air travel by as much as 50 per hold allocated slots in perpetuity. allocation and trading. cent by 2013. It is also important to note that the use- it-or-lose-it requirement is purely a quantita- OPEN SKIES SLOT ALLOCATION AND ILLIQUIDITY tive concept and has no qualitative aspect in The Open Skies agreement will allow any Despite the optimism, the benefits of terms of evaluating how the allocated slots EU-based airline to fly directly to any US unrestricted transatlantic competition are have been employed. Given the value of destination and vice versa (as of 31 March unlikely to be fully realised given existing slots and the access they will provide in the 2008). In particular, European airlines will congestion, access and infrastructure issues future at congested airports, there is argu- no longer be restricted from scheduling at Europe’s busiest airports. Limited slot ably a strong incentive to use allocated slots 30 GLOBAL COMPETITION REVIEW EU SLOT TRADING at less than optimal efficiency (eg, by oper- ensuring that slots (whether they be new that deals only with available or new slots ating half-empty flights) rather than risking ones or those already subject to grandfather is unlikely to change the current dynamic reallocation from the pool to a competitor. provisions) were allocated to airlines that and provide credible possibilities for new This raises the question of whether other valued them most highly. Secondary trad- entrants. In particular, the retention of the carriers might make more effective use of ing, in turn, would be used once an initial grandfather rights principle will continue the slots and, if so, how to construct a sys- allocation of slots had been made, allowing to favour incumbents that have entrenched tem that deters inefficient use and ensures airlines to sell (or possibly lease) slots that positions at hub airports and that would allocation or transfer to those carriers likely they had been allocated. Such secondary have very little reason or incentive to return to employ the slots most efficiently. trading would, therefore, further increase slots to the pool for reallocation. In addi- Incumbent carriers have historically efficiency by allowing changes or correc- tion, any benefits from secondary slot trad- benefited from more-or-less free use of slots: tions to be made via the market once the ing would be reduced by a system that valuable rights to which their competitors primary allocation had been established. retains the grandfather rights approach and have had only limited access. This position restricts overall liquidity since only a small is a legacy of the days of state-run, flagship number of slots (and often those of lesser carriers that has not been addressed by pri- commercial value) would likely be subject vatisation or deregulation of the European to secondary trading. airline industry. As it stands, the principle of British Airways In short, many argue that any form of grandfather rights insulates and reinforces primary allocation that does not address the incumbent positions at hub airports and has 3,800 slots a potential distortion produced by the histori- means that there is very little slot liquidity. cal allocation (and continued possession) of Thus, at Heathrow 97 per cent of the slot week at Heathrow, slots will make very little meaningful dif- capacity is allocated (and unlikely to become ference (and might make matters worse). available), while the remaining unallocated estimated to have They suggest that only the reclamation of slots are largely unsuitable or unattrac- grandfathered slots and primary allocation tive for transatlantic operations. Although a value in excess of of time-limited rights through, for example, new entrants do receive priority when slots an auction, would result in the most efficient become available, they are very limited in €3 billion use of slots, increased competition and, in number: the loss rate for grandfathered slots turn, the greatest overall benefit to consum- is less than 0.5 per cent annually, whereas ers. increases in runway capacity and the recov- Against this, others argue that slot ery and reallocation of slots during peak and There appears to be strong support mobility should not be a goal in itself and prime periods have been very limited in the for secondary trading of slots as it would that a formalised secondary market might be past decade. formalise a practice that has been in exist- beneficial, even without the introduction of Open Skies will not address the lack of ence for several years now, at least in the a primary market mechanism. There would slots or slot illiquidity that has resulted from UK. Heathrow slots have been traded and still be benefits in establishing a secondary capacity constraints and an allocation sys- exchanged along with (often) undisclosed market as long as there are rules in place to tem that assigns slots primarily on the basis sums of money. This practice was scrutinised deal with instances of market power (as dis- of historic use.