The Pulse by Seena Sarram

Slots help to manage existing capacity, not to create more!

Much has been written about airport slots recently, particularly in the context of discussions about airline competition. Slots was one of the key issues raised for discussion by the Federal Government through the Aviation Green Paper 2023, and the Government has already indicated the reforms it intends to pursue before the release of the Aviation White Paper. Slots are necessary for the production of an airline’s schedule. They are potentially highly valuable assets that consume significant management time and often attract close scrutiny from regulators when airlines propose to merge or acquire one another. In extreme cases slots are traded between airlines for tens of millions of dollars. So, what are slots? how do they affect airline competition? And how can the rules be changed to mitigate any anticompetitive effects?

What are slots?

In its simplest form a slot is permission to arrive at or depart from an airport a specific time, on a specific day of the week, during a specific scheduling season. There are two scheduling seasons each year: ‘Northern Summer’ from April to October and ‘Northern Winter’ from November to March. These periods correspond with European daylight-saving time. Slots are allocated each season by reference to ‘guidelines’ developed by the International Air Transport Association (IATA), an airline body. These guidelines are also used to categorise airports as Level 1, 2 or 3 depending on their level of congestion, and slots are only required when operating to or from Level 3 airports.

Most major airports around the world are Level 3 airports. In Australia there are eight Level 3 airports including Sydney, Melbourne, Brisbane, Perth and Adelaide. Notably, Canberra Airport is not categorised as Level 3 which means an airline does not need a slot to operate to or from Canberra. Although a slot would still be required at the origin or destination if that is a Level 3 airport.

How do slots affect airline competition?

One key slot guideline provides that if an airline uses a slot at least 80% of each season it will automatically be granted that slot the next corresponding season. This is known as the ‘use-it-or-lose-it’ rule or ‘80/20 rule’ and it can create a major barrier to entry for competitors if all slots are allocated. The rationale for the rule is that it provides certainty for airlines to plan their future operations and for consumers to plan their travel well ahead of departure. This should not come as a surprise given that the guidelines were developed by an airline body. The guidelines do still attempt to promote competition by giving new entrants priority access to half of newly available slots each season. Nonetheless, the 80/20 rule has proved to be highly contentious in some markets.

More recently in Australia, some critics have gone a step further to claim that the incumbent airlines are “slot hoarding”, that is, retaining slots for the primary purpose of stifling competition. If true, it would be a very costly way to stifle competition because those airlines would still need to operate flights for 80% of the season. Regardless, the criticism has been loud enough to attract the attention of the Federal Government which has sought potential solutions through the Aviation Green Paper.

It is worth noting that the legislation governing Sydney Airport’s slot allocation is more favourable to incumbent airlines in its application of the 80/20 rule than the IATA slot guidelines. For example, Section 9 of the Sydney Airport Slot Management Scheme 2013 provides that unused slots can still be treated as used if the reason for them being unused was outside the airline’s control, or if they have a ‘reasonable excuse’. The Iatter justification is not found in the IATA slot guidelines, making the guidelines more restrictive for incumbent airlines.

How can anticompetitive effects be mitigated?

Reduced buffer

One of the solutions put forward is to reduce the use-it-or-lose-it buffer from 20 to 10%, meaning airlines would have to operate at least 90% of slots to retain them the following season. This may reduce cancellations but it is unlikely to increase competition because if incumbent airlines operate 90% of the time, no new slots will become available.

This change would still benefit airport operators who would enjoy greater and more consistent use of their facilities. Unsurprisingly, Sydney Airport advocated for a change to 95%. However, a change of this kind across all flights at Sydney alone would mean incumbent airlines are forced to operate commercially unviable flights. Given that airlines historically produce very thin profit margins, this is likely to put at least some routes at risk of losing operators and ironically lead to increased dominance of those airlines that continue operating.

New entrant definition and preference

A review of slot arrangements at Sydney Airport (‘the Harris Review’) recommended that the Federal Government adopt the more progressive definition of ‘new entrant’ that is used in the guidelines. The guidelines define a new entrant as any airline that holds less than 7 slots on the day in question. This means an airline could operate 3 return services and still be considered a new entrant for the purpose of future slot requests. In contrast, the legislation governing Sydney Airport’s slot allocation treats any airline with a mere 2 return services on the day in question as no longer a new entrant.

This change seems logical because theoretically, a greater number of airlines would have an opportunity to obtain new slots. It also complements a related recommendation by the Harris Review to adopt the new slot preferences reflected in the guidelines, being an even split between new entrants and incumbents (rather than prioritising slot change requests from incumbents). But this change in definition is unlikely to materially enhance competition because there are virtually no peak slots available at Sydney Airport to begin with.

The Government has indicated it will pursue a reform that could be especially beneficial for new entrants, which is to change the definition of ‘peak period’ from 6-11am to 7-11am. This is intended to release existing slots between 6-7am that are currently reserved for regional flights but which are not being utilised. This is a welcome reform as it is likely to unlock growth in peak periods. But slots involve more than the use of a runway and include an assessment of parking and terminal space. To maximize the return from the release of these slots the Government should examine the need for investment in infrastructure to support the use of these slots by larger aircraft at other terminals.

Independent coordinator

One of the key principles expressed in the guidelines is that slot coordinators be ‘functionally and financially independent of any single interested party’. In Australia, slot coordination is carried out by a private company whose shareholders include the major airlines and Sydney Airport. The Harris Review noted that no submission demonstrated any actual bias with the current arrangements in Australia. However, the guidelines are clear and even if there is no evidence of actual bias, the current arrangements are susceptible to public perception of bias in the way slots are allocated.

With the Federal Government expressing a willingness to reform the sector, this seems an appropriate time to call for any parties with an interest in slot outcomes divest all shareholdings in the slot coordinator. While such a change may not immediately impact levels of airline competition, it is reasonable to expect positive competitive effects over the long term and greater public trust in the system. This issue was not mentioned in the Aviation Green Paper but a concern has been raised by the Australian Competition and Consumer Commission. It is hoped that the Government will address this issue through the Aviation White Paper.

Long term solution

A meaningful increase in the level of airline competition will need to involve an increase in the capacity available at Level 3 airports, rather than changes to slot rules. This is because slots are not a solution to airport capacity limits but a way to manage that capacity – something that is made clear in the first page of the guidelines. At this time further major investment at Sydney’s Kingsford Smith Airport seems unlikely. So, further capacity can only be found through the relaxation of artificial limits imposed either through the overnight curfew or hourly movement cap. Removal of the curfew is unlikely to meaningfully increase competition because it provides no new capacity in peak periods so the incumbents would retain market leading positions.

The best alternative would be to relax the hourly movement cap, currently at 80, which could be done in a number of ways:

1. Increase the cap for new generation aircraft: the movement cap was imposed primarily to limit aircraft noise in response to community concerns in the 1990s. Aircraft today are much quieter, so this helps encourage both competition and environmentally friendly operations; or
2. Increase the cap during peak periods: this solution offers a compelling compromise between community protection from aircraft noise for most of the day and enhancing competition by giving new entrants an opportunity to establish lucrative peak-hour operations at Sydney Airport.

The Government recently indicated that it will reform the movement cap to allow 85 movements instead of 80, but only during major disruptions and only to accommodate pre-existing services. In its most recent Master Plan, Sydney Airport forecast a 17 per cent increase in aircraft movements over the next two decades. In contrast, Melbourne and Brisbane airports forecast 74 per cent and 78 per cent increases in aircraft movements respectively over a similar period, and some portion of this is likely to involve movements to and from Sydney. To avoid limiting critical economic growth at Sydney and other major Australian cities, the Government should re-examine the case for increasing the movement cap at Sydney Airport permanently during peak periods.

Summary

Slots are key assets for any airline operating to major airports because they are necessary for the production of the airline’s core product – the schedule. But slots are governed by rules developed by incumbent airlines, which unsurprisingly have potentially anticompetitive effects. Among these is the use-it-or-lose-it rule which creates certainty for incumbents but potential barriers to entry for new entrants. There are various ways to mitigate potentially anticompetitive effects of the slot guidelines including changes to definitions that give new entrants higher priority to slots. However, the slot guidelines are intended to manage access to limited infrastructure and not to create new capacity. To meaningfully enhance airline competition in the long term, governments should encourage investment in new airport infrastructure and relax artificial limits on existing infrastructure.