Airport Slot Auctions

Research by Michael Ball, George L. Donohue, and Karla Hoffman

In the absence of slot controls, current policies at congested airports implicitly encourage airlines to overschedule and then cancel or delay flights. If airline A acts responsibly and does not increase its schedule at a congested airport, it will have gives a competitor the opportunity to schedule more flights at that airport; if that competitor decides to increase its schedule, airline A may lose market share. To combat these problems administrative slot controls have been put in place at certain airports. These administrative rules have distorted airline behavior by encouraging slot hoarding and inefficient use of slots. Market-based approaches to slot allocation have the potential to addresses these problems in a much more effective manner. 

In a recent paper, “Auctions for the Safe, Efficient and Equitable Allocation of Airspace System Resources,” Michael Ball, Orkand Corporation Professor of Management Science in Smith’s department of decision and information technologies, with co-authors George L. Donohue and Karla Hoffman, professors at George Mason University, examine the possibilities of using auctions to allocate national airspace resources and thereby control congestion. The paper describes the possible use of market-based mechanisms for three levels of airspace resource allocation: the sale of long-term leases for airport arrival and departure slots, the exchange of such leases over shorter time frames via a secondary market and the very short term exchange of individual slots on a particular day of operations.

At most U.S. airports, there are no limitations set on the number of flight arrivals and departures scheduled by airlines. However, congestion problems led the FAA to impose slot controls at four high-density rule airports in 1969. The elimination of controls at O’Hare in 2003 led to significant delay increases that were eventually “solved” through a protracted series of negotiations between the FAA and the major airline players. A relaxation of the controls at LaGuardia in 2000-2001 led to intolerable levels of congestion that were resolved by a reduction in the number of slots and a reallocation of certain slots via a lottery.

These experiences clearly demonstrate the need for controls. But the current administrative allocation measures, which essentially provide incumbents infinite-lifetime slots, limit the ability of carriers to expand operations and make it difficult for new entrants to gain access. Ball argues that a market-based allocation system such as auctions would be more efficient, maximizing the benefits to the consumer and the economy by allocating the slots to the airlines that can generate the greatest benefit from their use. The transparency of an auction process also renders it less open to legal challenge.

Airlines have objected to auctions on the grounds that they would impose a new financial burden on airlines at a time when most are in financial distress. Ball argues that careful auction design could choose objectives that encourage new market entries and discourage monopolistic control over markets, rather than maximizing revenue. Auction revenues could be used to offset existing fees paid by the airlines and/or passengers, and any excess revenues could be used to enhance airspace capacity.

Although the FAA “owns” the airspace immediately above the runways and so has the authority to allocate the use of that airspace, any auction must take into account the physical necessities—gates, baggage terminals—which are owned by the airport and which often have been developed at the expense of a particular airline. The distribution of aircraft types using the slots also impacts the capacity of the system, so the number of arrival slots to be auctioned may vary depending on the type of aircraft that would use them. Thus, when determining winners, the auctioneer must assure that the physical limitations of the airport are considered when choosing a feasible allocation set. Property rights must also be carefully specified in an auction–specifically, what it means to own a slot must be clarified. This question can be challenging when one considers the variety of disruptions that can occur on a given day within the national airspace system.

Ball recommends a transition period that moves the airline industry from an administrative process to a market-clearing process, starting with the nation’s most congested airports, like LaGuardia, during its most congested time periods. The implicit property rights of incumbents could be taken into account through a system of vouchers or through an allocation of limited term leases during a transition period.

Although it might be appropriate to reduce flight operations to reduce delays, the number of passengers serviced during these time periods may remain the same or even increase, because airlines will choose to use larger aircraft with a greater number of seats. Flights for which there is less demand will likely move to alternate time periods where it makes sense to have smaller planes in service.

Ball and Hoffman are now leading a large project funded by the FAA and the U.S. Department of Transportation to explore the use of market mechanisms for slot allocation at LaGuardia, sponsored by NEXTOR, the National Center of Excellence for Aviation Operations Research, which Ball co-directs. Two strategic simulations have been performed comparing administrative actions, congestion pricing and slot auctions, the first in November 2004 and the second in February 2005. Representatives of the federal government, various airport authorities and the airline industry participated in both simulations.

“Auctions for the Safe, Efficient and Equitable Allocation of Airspace System Resources” was co-authored by Michael Ball, George L. Donohue, and Karla Hoffman. Continued research, including further strategic simulations, are planned. For more information, contact mball@rhsmith.umd.edu.