Lynne Kiesling over at The Knowledge Problem relates a tale of woe returning from Washingon’s National airport to Chicago’s O’Hare, and offers some constructive suggestions for pricing takeoff and landing slots to alleviate congestion in addition to noting that pink shoes will be in this spring.

Lynne suggests:

*Treat the time slot as a property right to a scarce resource, for which airlines must pay. This would enable pricing of 5 PM, 6 PM, etc. time slots to reflect their true value to customers and, through them, to the airline.



*If those time slots are really that valuable, then customers would be willing to pay more for flights that land in those hours. Otherwise, they’ll shift to earlier or later flights. This is the most effective mechanism (and yes, it deserves the word) for reducing congestion and prioritizing the use of a scarce resource.



*Auction off those time slots dynamically, so that time slot prices could reflect the actual value of using the time slot on that day. Implement combinatorial auctions for takeoff/landing slots, as laid out in Rassenti, Bulfin & Smith Bell Journal of Economics Autumn 1982 and much follow-up work. Technology, operations research, and experience all exist to make the cost of such a system MUCH less than it was even a decade ago, let alone in 1982 when Rassenti et. al. proposed this allocation mechanism.



*If the certainty of a particular time slot is worth enough, let the airlines contract for the permanent property right to that slot. Make it an alienable property that they can trade away, so they can capture the full value of changes in demand. It could also reduce the transaction costs that accompany the time slot spot market. In other words, allow both forward contracting and spot contracting for time slots.



*Make little planes and big planes participate in the same auction. One of the most egregious uses of the nice, long runways at O’Hare during peak periods is seeing streams of Cessnas in between 737s. If the CEO’s private plane’s journey is that valuable at that time, make the company pay for the time slot.



That way we’d all get home on time and be able to enjoy an evening with the spouse and cat, and if we do it in a valuable time slot and pay more for it, at least it reflects the true value of the scarce resource and prioritizes the use of the resource accordingly.

There’s alot in this proposal, and I’m still working through my reactions, unfortunately the federal government doesn’t appear to be thinking along these lines at all.

The Department of Transportation has ordered United and American to cut their peak flights at O’Hare by 5% beginning in March and lasting for six months. Of course, this just limits consumer options and does nothing to solve structural problems.

Slot pricing and exchange empirically works quite well, even in the absence of fully developed property rights. As I noted a few weeks ago, one of the more interesting market innovations in airline slots is the ‘grey market’ that has developed at London Heathrow.

Slots ostensibly aren’t property. If an airline gives up the slot it should revert back to a local authority which would then be charged with divvying out that slot. In practice, however, transferable property rights exist. That’s because the slots are “exchangeable” — an airline with a peak afternoon slot can trade with an airline with a useless late night slot. In a completely unrelated action, that airline with the undesireable slot can also send along lots of cash.

Variable pricing to consumers is also a fairly advanced activity already. Airlines already offer peak and off-peak pricing. Usually that’s determined not by peak travel time but is a function of which flight times face competition from low fare carriers. It wouldn’t be difficult for airline pricing to reflect the varied costs facing each flight based on the cost of takeoffs and landings for that given flight.

The concern over small private planes taking valuable takeoff and landing spots without bearing the full cost is a valid one, but there’s something even a bit more perverse at work. There are special slots designated specifically for regional jets — the idea being that this would encourage service to smaller cities. So there isn’t just a pricing problem but also a subsidy.

All that said, slots may not be the biggest issue. Air traffic control may be the real heart of the matter. If we were able to handle a greater volume of air traffic in total, thus increasing the total number of available slots, travelers would be better off (abstracting away from price).

One way to do this would be to increase available runways or open a new nearby airport (Peotone has its advocates). Capital construction could potentially build our way out of the problem.

It seems to me, though, that there are some good arguments for air traffic control privatization and even decentralization. Neither are sufficiently a part of policy dialogue.

Privatization has worked well in Canada and Britain.

Heathrow is an aviation miracle. It is the busiest international airport in the world . . . [with] 60% more takeoffs and landings than JFK last year. . . . Heathrow shows just how efficient air traffic flow can be. Since it has been so overcrowded for so many years, [NATS] controllers and pilots work hard to make sure no second is squandered.

However technological solutions, as much as market restructuring, will improve the situation. Allowing planes and pilots to operate in the skies much like cars, with technology and communications that allow them to direct themselves while coordinating with each other (as a replacement for the current command and control model) offers some of the best hope for increasing the total capacity of the skies for air travel. Anything less seems like a temporary bandaid, albeit one with the potential to reallocate existing resources to their highest valued use.