Tuesday, 11 June 2019

No more fear of flying

Emailed in by Benj, from IATA.org, the Q&A box:

How are slot allocations made?

Slots are handed out twice a year, for summer and winter schedules. “Grandfather” rights entitle incumbent airlines to continue using the slot if it has been used for at least 80 per cent of the previous period. In the UK, slots are traded in the secondary market

What about new slots?

New slots are put into a pool. Half are supposed to go to new airlines

What’s being proposed?

The government wants to promote competition, including auctioning slots to the highest bidder. The existing system provides incentives for “slot hoarding”, when airlines retain as many slots as possible and sell them to make a profit.

From the article itself:

Existing slots are held by airlines using so-called “grandfather rights”. In Britain, they can be traded in a “secondary market”, often commanding huge sums. A record $75 million was paid by Oman Air for a set of rights at Heathrow. 

The government said in its Brexit planning guidance that slot allocations would remain unchanged in the event of no deal. It insisted that the rights would be allocated in a “transparent and non-discriminatory way”.

However, the transport department is understood to be seriously considering the adoption of an auction system. The department’s aviation strategy, published before Christmas, confirmed that the government was considering market-based mechanisms for release of additional capacity”, and added: “This could include auctioning all slots or a limited number that would be most sought-after.” 

A House of Commons library paper from 2017 admitted that auctions “may be more difficult for small carriers with lower purchasing power”.

Lara Maughan, the IATA head of worldwide airport slots, said: “Making airlines pay for entering or growing at an airport means consumers will be the losers. At a time when Britain is looking to improve its competitiveness and to build more connections to the world, these proposed changes will do the exact opposite. 

"Extracting even more cash from airlines and their passengers will mean higher costs, less choice and less investment. The government’s stated objective to improve regional access to Heathrow would be irreparably damaged by an auction system that would force airlines to prioritise the most lucrative long-haul routes.”

IAG said: “We support IATA’s view that slot auctions would negatively impact consumers and undermine Britain’s aviation industry.”

Do these people not proof-read their own propaganda?

1. The easiest way to make money from aviation under current rules is to set up a small airline, be allocated some freebie-slots and then sell the slots. The article says as much. Small new airlines tend to go out of business fairly quickly, and when the majors are buying them, they value them mainly on the slots they own. It's a bit like buying land, getting planning permission and then selling the land again. It's the most profitable part of 'property developing'.

2. If airlines are happy to pay for second-hand slots, how is this any different to paying the government for them? No different. And paying one year in advance in an auction is a lot less risky than paying a lump sum in the hope it will be grandfathered for ever. If their claim that auctions lead to higher ticket prices were correct, then there would be a sudden increase in ticket prices after a slot has been bought by a successor airline. No such evidence.

3. We know that ticket prices are largely 'rent' and have little to do with costs. A flight from Stansted to Gdansk is a longer distance, but cheaper than a flight from London Heathrow to Berlin Tegel. An early morning or late night flight is cheaper than a midday flight etc. Flights to holiday destinations during the school holidays are more expensive than out-of-season. Airlines like to fill planes, so do a weird auction process with rising or falling prices; different passengers on the same flight will have paid different amounts. If costs exceed (potential) ticket price, the route is not used.

4. The balance of ticket prices minus actual costs is the rental element. A slot in itself has no cost of production, they are created - or destroyed - at the stroke of a bureaucrat's pen. Some have huge value (unrelated to cost of production), so they are 'land' in economic terms. Therefore, what you pay for the slot does not influence ticket prices - ticket prices influence slot values!

5. The small airlines are the Poor Widows or the Small Shopkeepers of the aviation business, "They'll go out of business because the majors have deeper pockets." That's easily dealt with, keep giving them free slots, on the condition that if they go out of business or are taken over by a major, the slots are forfeited. or just make them free for the first two or three years until they are up and running.

6. If an auction system "forces airlines to 'prioritise the most lucrative long-haul routes", then that is great news. I note that the IATA lady also claims that auctions would prevent airlines from "build[ing] connections to the world". So which is it? It can't be both.

7. It's the take-off and landing that incur the highest costs (fuel used; risks/risk mitigation and noise pollution), so it is more efficient to fly long haul. If that means fewer, less lucrative domestic flights, so be it. Take the train or drive. All things considered, this is better for the economy.

8. Whatever the merits of auctions, they are infinitely better than Air Passenger Duty. We don't know whether auctions would raise more or less money than APD; of whether this would lead to more or less flying, but that is irrelevant. It would be the 'right' amount of money and the 'right' amount of flying.