From Airlines.IATA.org:
Recently, China experimented with the idea, putting a selection of slots on the market at Guangzhou Baiyun and running a slot lottery at Shanghai Pudong. This raised a substantial amount of cash but, according to an IATA assessment, that is part of the problem.
“The experiment showed that paying a large amount of money for slots is not sustainable,” says James Wiltshire, IATA’s Senior Economist. “If you boil down the money paid for the Chinese slots to a per passenger basis, it pretty much wipes out the anticipated $4.44 per passenger average profit for Asia-Pacific carriers in 2017, and that’s only for slots at one end of the route.”
In other words, even a small-scale slot auction can be the difference between profit and loss for an airline. The same conclusion can be reached from a different viewpoint.
In China, the auction winners have been granted the right to use the slot for three years. It typically takes up to three years for airlines to make money on new routes, given start-up costs, marketing, and the time taken to develop consumer awareness.
Are they saying that airlines are so f***ing stupid, they would a single dime for a slot which is not going to earn them a profit?
Seriously?
I think the three year claim is an outright lie as well. If you want to fly from A to B, you type in A and B on one of these comparison sites and choose whichever time and price suit you, I'm sure most people don't care who the actual airline is. I doubt anybody cares whether that airline has ben flying that route for decades or for a couple of weeks.
As it stands, at the 177 airports where IATA’s Worldwide Slot Guidelines (WSG) are used, demand outstrips infrastructure supply.
This makes slots a scarce commodity. Airport owners, government or private, would have an incentive to keep slot prices high by drip-feeding capacity.
Brilliant one-sided economics worthy of the Faux Libs. Slot prices are only high because ticket prices are high; and tickets prices are high because supply is restricted. So incumbent airlines are actually quite happy with restricted supply - it keeps their profits up. (I am heartily indifferent as to whether there should be more capacity or not, the Greenies would say definitely not).
Secondary trading
Secondary trading is completely different from slot auctions, which concern primary allocation. With secondary trading, airlines can swap slots that they have been given the right to use under the WSG but are unable to use in the future.
Not every jurisdiction allows secondary trading and it is probably only required at the most congested gateways. In the UK, secondary trading has been used successfully at London Heathrow and, to a lesser extent, at London Gatwick.
Airlines must have used a slot for two years before it can be traded but the final deal is dependent purely on the negotiations between the two parties.
And at the major hubs, large amounts of cash change hands.
But that is somehow COMPLETELY different to a public auction. Not.
Wednesday, 31 July 2019
"The dangers of slot auctions"
My latest blogpost: "The dangers of slot auctions"Tweet this! Posted by Mark Wadsworth at 14:15
Labels: Air travel, Auctions, Twats
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5 comments:
«Are they saying that airlines are so f***ing stupid, they would a single dime for a slot which is not going to earn them a profit?»
There be fixed costs too, and induced business, and without a slot one cannot sell seats at all. It is a well known effect, which has been studied in various experiments: if there are 10 people who need X and only 9 X available for sale, the price for X at auction is "everything you got" for all those 9 people.
Consider housing: there are 10 people who need a house and a job, and only 9 houses are available where there are jobs. The 10th person is going to be homeless and thus unemployed. What's the price of one of those 9 houses in that area where there are jobs?
"Are they saying that airlines are so f***ing stupid, they would a single dime for a slot which is not going to earn them a profit?
Seriously?"
Surprisingly, potentially, yes. Consider it to be an exercise in locking up the available real estate.
Leaving aside the reality that all of China's internal airlines are state controlled - So it isn't real money these these companies are spending, and we are talking no foreigners and no new competition from within either - You've mistakenly applied what effectively is "London Heathrow Airport" notions of slot scarcity, in respect to runway slots, to a country whose air travel market is so small and that is so littered with public works airport projects that the idea that these things are scarce is simply flat out wrong. They are not scarce at all.
"As it stands, at the 177 airports where IATA’s Worldwide Slot Guidelines (WSG) are used, demand outstrips infrastructure supply.
This makes slots a scarce commodity. Airport owners, government or private, would have an incentive to keep slot prices high by drip-feeding capacity."
The issue is, airline demand for runway slots is limitless, to borrow from the immortal words of Mandy Rice-Davies, "well they would, wouldn't they?" - In respect to questions about slot scarcity, and yet look at what they then operate, turboprops, dinky regional jets, 737's, Airbus A320s, etc, etc, because that side of their business they have to control.
Most airports that get built in, as Donald Trump would put it, Shithole parts of the world, are boondoggles. Everyone believes that yet another airport, yet another high speed railway line, yet another road, yet another escalator to nowhere, stimulates subsequent economic growth, almost as if it is some sort of linear function. However, you and I would note that the marginal utility of each additional airport, runway, bridge, escalator etc is arguably not like that.
China constitutes this public-works bullshit in monstrous proportions, in that Ding Dong International Airport, at the back end of wherever, is laid out with multiple runways and terminals, there to await the inevitable Chinese dominance of every aspect of the universe, and whatever aspect of the economy that Ding Dong has been directed to specialise in.
Hence in most instances, the slots are not like those of JFK or Heathrow, where there truly are landside resource constraints. Most of the slots are underutilised if not valueless. Not worthless, note - But that are currently lacking in quantifiable value. This is the issue.
Thing is, since the Chinese aspire to achieve their rightful place running the entire universe any decade now, the logic of bidders runs that it is only a matter of time before these slots will one day acquire value. Diligently locking them up every few years then constitutes a sensible, precautionary business expense. You may lack the ability to discern how to make money from the "asset" today but by owning this "asset," it then sees to it your competition has no chance to make money from it themselves, and they may know something you don't.
Everyone then has an incentive to scream loudly for more capacity, and then run some dinky little turboprop down it, happy in the knowledge that their competition cannot run an Airbus A380.
The lack of Secondary Trading then is explained in that you never give these things up, for any reason and any circumstance. It is only at major hubs, where genuine price elasticity potentially exists, that these assets then, theoretically, change hands. Otherwise it is cheaper to just scream loudly about capacity, and demand someone else pay and pour the concrete for an extra runway, whoever "they" are.
Additional (Sorry about this.) : "But that is somehow COMPLETELY different to a public auction. Not."
It IS different to a public auction in that unlike a public auction, the trade takes place in private, under terms that you and I are potentially not privy to, theoretically in the form of a brick of cash shoved under the door of a toilet. Which is how airlines often really did do these things in the west until very recently, let alone in other arts of the world.
Din, I'd demand is price sensitive then a small shortage means prices shoot up (petrol). Demand for air travel is price sensitive, people have a holiday budget and stick to it. So I doubt the effect is that large except at LHR and LGW, which is where 90% of slot value arises. (see ASM comment).
ASM, excellent points, I skimped on the details.
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