Valuing landing slots at Heathrow

Continuing my occasional series, the FT reported that Lufthansa had been tricked into paying £800 million for the 49% of BMI that they didn't already own, however "The value in BMI lies with its coveted take-off and landing slots at Heathrow, about a seventh of the total. Earlier this year, BMI put a balance sheet value on these slots at £770m."

The Times reckoned that BMI owned 11% of Heathrow's landing slots, so let's call it one-eighth in round figures. There are 471,000 aircraft movements at Heathrow each year, so that's 235,500 'pairs' (one to land, one to take-off) and BMI 'own' the right to land/take-off 30,000 times a year. £770 million ÷ 30,000 = £26,000 for the right to land/take-off once a year, in perpetuity.

Assuming that this right could be reasonably amortised over ten years, that's a notional cost of £2,600 per pair if you own them, and a real cost of £2,600 per pair if you have to buy them (cost of finance + uncertainty premium). In other words, if the local councils around Heathrow were allowed to auction off land slots, airlines would and could pay an average of £2,600 and still be profitable. Times that back up by 235,000 pairs gives local councils potential income of £611,000 million.

And the value of those landing slots is depressed by Air Passenger Duty. If we scrapped that crude tax as well, the annual 'rental' value of the slots would go up by another £673 million (67.3 million passengers at an average of £10 APD), bringing the total local revenues to a nice round £1.3 billion (rather less than my earlier estimate, I admit).

And in difficult times like these, the auction price would drop of course - in extremis to £nil in the short term. Great, that means that airlines can drop ticket prices by several per cent, which will hopefully keep things ticking over, minimise job losses and ensure that they recover much more quickly again in future (so the auction receipts quickly revive again, and so on and so forth).

"Ryanair withdraws 30% of planes from Stansted"

Obviously those slots at Stansted can't be worth very much, otherwise Ryanair would be doing a BMI.

This is chucklesome: Last month, Mr O'Leary [Ryanair boss] said that high oil prices would drive “crappy competitors” out of the airline business.

And why are the slots at STN (which is a super little airport, acres of marble and glass) worth so much less than at LHR or LGW? The answer is, there's no direct train from London or Stratford to STN, you have to take a coach (cheap but stressful) or a taxi (expensive).

"Planes fly empty to keep slots at Heathrow"

The Times devoted half of today's front page to this rather fascinating story, cont. page 8. This is well worth reading in full, if you have the time, but to sum up the salient facts:

Cost of running a flight from Heathrow to Edinburgh: £60,000
Take offs and landings on an average day at Heathrow: 1,303
Value of a peaktime Heathrow slot: £30 million
Average value of BMI's Heathrow slots: £5 million

Heathrow also have a rule that an airline that 'owns' a slot must use it at least 80% of the time or it forfeits it, which is why "It is, therefore, better for a carrier such as bmi to lose £20,000 per flight than to give up a £30 million slot. For bmi this is particularly important as it is trying to keep its value up for a potential sale this year. British Airways, Virgin Atlantic and Lufthansa are all interested in buying bmi, and the biggest attraction is the airline’s 11 per cent of Heathrow slots - the second-largest holding behind BA."

Of course, in a truly free market economy with no planning restrictions, supply and demand would even out and more airports would be built, so a landing slot would have negligible value. Indeed, if 'enough' airports were built in The Good Times, there would be a huge overcapacity in The Bad Times (fear of terrorist attacks, recession, high oil prices etc) and landing slots would have negative value - airports would have to pay airlines to land there (to skim off money from passengers at the airport shops etc). And it would, to be frank, be a bit of a waste of concrete and radar equipment to build airports that sometimes stand empty for year on end.

However the NIMBYs and Greenies are in charge, which is why we have chronic airport undercapacity - which is why the slots have such a colossal scarcity value - and it surely can't have been the intention of the NIMBYs and Greenies to generate windfall gains for BMI shareholders or to encourage a system whereby airlines fly empty planes, can it?* OTOH, air travel does have external costs - it causes noise and passengers use other local transport links to and from the nearest city.

Here's the interesting bit: "... some aviation analysts believe that there are no legal grounds for these carriers to own the slots, and advocate that they should belong to the State and be leased to the highest bidder. High prices for rented slots would encourage only profitable flights, which would almost certainly mean full flights."

I gave this a few hours thought a couple of months ago and came to exactly the same conclusion. The gimmick being that such an auction process only works if there is undercapacity.

The other possibility of course is that BAA just start charging much more for slots, but as they are Spanish-owned, why would anybody advocate this?

* That would be a good Conspiracy Theory - NIMBYs and Greenies are in fact all shareholders in smaller airlines.