From The Times:
British Midland (bmi) may struggle to raise the £95 million in funding it needs to keep flying because potential buyers for its Heathrow landing slots have become thin on the ground...
In the airline’s most recent accounts, its directors warned that uncertainty over the slot sale cast doubt on the company’s ability to continue as a going concern next year. This has sparked fears about the future of the UK’s third-largest airline and Heathrow’s second-largest operator...
Bmi’s most valuable asset has been its 11 per cent of Heathrow landing slots. The airport has been so congested in the past that slots traded for huge sums of money. Continental Airlines paid $209 million for four pairs of slots two years ago, but today recession-hit carriers are cutting back rather than seeking to expand.
Until UK airports and British Airways were privatised about twenty years ago, nobody paid much attention to the inherent value of landing slots. The government of the time just handed over most of the slots to British Airways, rather than parcelling them up with the airports or the sensible option, retaining them as part of the state's assets.
Commonsense, and real life, tells us that the value of the slots is a balancing figure, i.e. the money an airline can earn from each flight minus its normal operating costs. The normal operating costs can be competed away so are a fairly stable figure but total ticket sales fluctuate a lot depending on current economic conditions (and/or fear of terrorist attacks), so the value of the slots fluctuates disproportionately.
What exacerbates the fluctuations is that slots are a semi-artifically rationed monopoly right (the only way to increase supply is to buil more airports, and the NIMBYs aren't having that, of course), which enhances their value even more. And the net present value is inversely proportional to prevailing borrowing rates. In other words, the value of the slots is a function of the super-profits that airlines can earn, and then some.
These value fluctuations don't affect those airlines who originally got the slots for free (and haven't used them as security for loans), but airlines who borrowed money to buy them are now in big trouble.
Would it not have been better for the state to take the sensible option, retain the slots and auction them off each year or every six months? The airlines would never bid anymore than next year's super-profits, so would never have been able to get into such debts; in bad years, the price will be bid down, so in the bad years airlines save money and still remain profitable.
The auction proceeds could be used to pay for the external costs of air travel in places round airports, i.e. noise pollution, extra congestion on roads and railway etc. Or to put it crudely, bribe local NIMBYs into accepting that collectively, we are better off with airports than without them.
What's not to like?
Stormlight
4 hours ago
17 comments:
That is akin to the French practice of giving cheap electricity to those living near nuclear plants, which clearly worked. Doubtless there would be some argument from the people just beyond the border & I doubt very much if most of the protestors actually have a local back yard.
So we're back to Ricardo and rents then.
Lola, everything in Economics is either footnotes to Smith and Ricardo, or Error.
NC, that's another good way of doing it. By the same token, the airport could offer every local resident half a dozen free flights a year, it all comes to the same thing.
L, exactly.
D, sure, so why do politicians put so much effort into steering us away from their insights? That's a serious question, by the way.
Incentives, dear boy, incentives.
£209m for four pairs of slots - we're in the wrong game.
Well said on the bribery or "compensation" for nimby's drop in location value
Aren't the airports massively subsidised by the taxpayer anyway, and could anyone afford to build one without subsidy?
Bayard - No & Yes.
JH, we might be in the wrong game, but bmi screwed up badly - they should have sold the landing slots a year or two ago; they could have made far more money from that than by actually running an airline. It's much the same with property developers - they make 80% of their profits when they get planning permission; actually building the houses is a right old slog and barely worth the effort.
Bayard, the airline industry generally is subsidised (Boeing/Airbus, no VAT on fuel etc), which makes things even murkier. But you can still claw back all the subsidies by auctioning landing slots. Neil Craig is the expert on this.
Zero Tax on fuel is not a subsidy in my book.
AC1, a tax break is the same as a subsidy. One man's tax break is another man's extra tax.
You have to explain why the fuel is undertaxed?
AC1, I didn't say "undertaxed", I said not taxed at all. But airlines have Air Passenger Duty to contend with, which evens it up a bit.
The best solution is still auctioning the landing slots.
So what should the tax on fuel be?
I agree with the tax on landing slots, not the tax on fuel.
AC1, and I agree with you. No fuel duty or APD and "whatever the market will bear" on the landing slots are the correct answers.
I glad to hear we agree, I really am a pedant, but that's from working in IT too long.
I would obviously hope that the Fuel "duty" would be included in the price of the fuel via an LVT mechanism on it's extraction.
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