The plan to build a third runway at London Heathrow is expected to cost about $20 billion. That will allow for 350 additional takeoff and landing slots at the airport.
Under existing rules “new slots are distributed based on airlines’ existing proportion.” IAG carriers British Airways, Iberia, and Aer Lingus hold about 370 of the airport’s current 650 slots, and would therefore be slated to get an additional 200.
Virgin Atlantic, together with its owners Delta and Air France KLM, control about 10% of current slots. Richard Branson says Virgin should be given 150 of the 350 new slots, or 2.5 times the current total that the three airlines have. Otherwise, Virgin Atlantic CEO Shai Weiss says, the distribution of slots wuuld be “favouring the incumbent.”
He’s right that British Airways shouldn’t be given access to 200 more slots. He’s wrong that Virgin Atlantic should be gifted 150. Gifting of the right to acquire slots makes absolutely zero public policy sense.
Each incumbent airline flies the most valuable flights it can now. Each incremental slot would be put to less valuable use than the current flights offered. And while additional connecting traffic can make current flights more profitable (Virgin doesn’t operate a meaningful connecting network at Heathrow) slots are valuable resources that shouldn’t simply be gifted to airlines.
- Giving slots to airlines at congested airports is a huge subsidy to incumbent airlines, each slot pair is worth tens of millions of dollars.
- Making those slots perpetual property rights of the airline that holds them is a barrier to competition.
Use of slots for a period of time should be auctioned. There’s no justification for inefficient flights, or ghost flights, that airlines operate just to ‘squat’ on slots, since they only way they can lose them is not to use them.
That’s why British Mediterranean used to operate a flight between London Heathrow and Cardiff, Wales with no passengers. That’s a takeoff and landing opportunity that could benefit passengers who actually need to fly somewhere, and an opportunity to compete against existing service bringing down the cost of travel.
There currently are 650 slots at Heathrow, and a single slot pair (at particularly favorable times) sold to Oman Air in 2016 for $75 million.
Taking away the vested property right would be disruptive to the balance sheets of incumbent airlines, but so is adding 50% more capacity since each slot should be worth less. A ten year transition for current slots to be re-auctioned shouldn’t be necessary — the value of an asset changes with changes in the regulatory environment in virtually every industry — but should resolve concerns about unfairness to the airlines (never mind unfairness to competitors and passengers).
Regardless the addition of new slots at the airport should not automatically confer brand new gifted property rights to airlines. The right to use each slot pair for a period of time should be auctioned off to the highest bidder, with a new auction at the end of each use period allowing new entrants or incumbent carriers to secure the slots needed for the most valuable flights they can offer.
Slots need to be freed in the U.S. too. Government-granted airline privileges are a driver of industry consolidation. The primary reason Alaska Airlines acquired Virgin America was for access to gates and slots at congested airports. Badly run carriers, that provide poor passenger experience, are protected from market discipline because more innovative startups aren’t permitted to compete and incumbents can continue earning off inferior products because passengers lack other options.