The example of Heathrow

Heathrow is characterised by severe excess demand at almost all times of the day. No charter carriers or low-cost airlines use the airport. BA is the largest slot holder. Slot utilisation is very high.

Slot mobility

Four hundred and ninety-nine slots were traded at London-Heathrow between 2001 and 2006, which is about 6% of the total number of Heathrow slots (8,700 per week according to Mott McDonald, 2006).; therefore, an average of 1.2% of total slots available was traded annually.18

Slot mobility increased after 9/11 because more airlines were willing to sell owing to financial distress (Sabena, United, for example). In addition, press attention for monetary slot trading increased awareness among airlines at Heathrow. This awareness made the market for slots much more competitive, and resulted in higher slot prices. The slot pool has been declining steadily, indicating that slot trading is becoming more and more important to obtain access to Heathrow (CAA/OFT 2005). A number of slot trades have been disclosed in the press. For example, BA and Swissair were involved in an exchange for eight slots at Heathrow for ₤35mln.

According to CAA/OFT (2005), the fairly small share of slot transfers at Heathrow has to do with the relative shortage of willing sellers. Airlines intending to maintain a long-term presence at Heathrow are unlikely to sell because of the lack of liquidity at the airport. In addition, it has become financially more difficult to buy slots at Heathrow because of the extremely high prices.19

Gatwick is said to be a much more liquid market, and has shown larger slot mobility in recent years (CAA/OFT 2005). A legalised market may stimulate slot mobility, as airlines would probably no longer be bound to one-for-one slot transfers in a legalised market.

Figure 5.1 Slot mobility at London Heathrow: 2001-2006

Source: Cole 2006

According to ACL, the types of slot trade include: • Sales of slots on commercial terms

• Lease of slots among airlines on commercial terms • Trade as part of bankruptcy restructuring

• Trade to re-deploy slots within an alliance group: for example, LH has built up a substantial slot inventory at LHR in cooperation with BMA.

18 _{Note that the number of slot transfers mentioned in Figure 5.1 encompasses slot trades but also includes} other types of transfers.

• Arrangements to temporarily ‘baby-sit’ surplus slots. Owing to a lack of liquidity at Heathrow, there is a mismatch in time between aircraft delivery and slot availability, which can be solved by temporarily ‘baby-sitting’ or leasing slots to other airlines. According to one airline representative, the secondary slot-trading mechanism at Heathrow is quite simple:

‘We have approached carriers pro-actively, other carriers have approached us. [..] Basically, a seller of slots would say, we have got some slots to sell; and they invite us and other carriers to bid, and they give a deadline, and they make a decision. It’s probably not more than that that has been taking place’.

Competition

Major buyers of slots include the hub carrier, BA and some 2nd_{-tier carriers, mainly long-haul.} These are the carriers with the highest willingness to pay. The secondary market gave BA the opportunity to increase its market share from 37% in 2000 to 40% in 2006.20 _{The increase in}

market share at Heathrow was primarily driven by the de-hubbing of its secondary Gatwick hub from 2000 on and the re-allocation of intercontinental flights from Gatwick to Heathrow (Burghouwt 2007; CAA/OFT 2005).

Secondary trading has helped not only BA, with 6% of the slots traded between 2001 and 2006 at Heathrow (Mott McDonald, 2006). Second-tier (mainly long-haul) carriers have been the other main purchasers, such as Virgin Atlantic (13%), Jet Airways (3%), Qantas, and Emirates (11%). It is said that they have frequently outbid BA in the slot-trading process. One reason for this is that BA, owing to its large slot portfolio at the airport, has much more flexibility to acquire a slot by reducing frequencies elsewhere in its schedule. As one airline representative put it,

Qantas paid about 20 million to buy slots. BA could drop a route that makes them 300,000 in the afternoon. They could save up that slot for 300,000, where it costs 20 million for Qantas. So BA can do exactly the same for 300,000 instead of 20 million21_.

The major sellers are, in particular, carriers with short-haul flights at Heathrow, and financially distressed airlines. From the literature, however, it is not clear to what extent and in which markets secondary trading in the UK has impacted competition levels at Heathrow or Gatwick.

20 _{Interview with an airline representative.} 21 _{Interview with an airline representative.}

Figure 5.2 BA’s Heathrow slot holdings

Source: Cole 2006

Figure 5.3 Virgin’s slot holdings at Heathrow

Source: Cole (2006)

Efficient use of airport capacity

The UK slot coordinator (ACL) argues that the grey market at Heathrow has resulted in a more efficient use of airport capacity (Cole 2006). Airlines that value the Heathrow slots most are those that use the slots for high-capacity, long-haul services. Based on a sample of Heathrow slot trades, it has been shown that average seat capacity per slot increases by 90%, average sector distance increases by a factor of 12, and the number of ASK increases by a factor of 22. At Heathrow, this has resulted in an overall increase of the share of long-haul services. According to a Heathrow airline representative,22 _{most slot trades involve a shift from a short-haul to a long-}

22 _{Interview with an airline representative.}

haul service, or from a long-haul to another long-haul service. Sometimes, an airline transfers its short-haul operations to Gatwick.