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Airline Industry

How airlines play the aviation slot machine  Mar 03, 2009

European airlines have asked authorities to drop a rule forcing them to use landing and take-off slots at least 80 percent of the time so that they can slash flight volumes during the economic downturn.

Following is a summary of how the slot system works:

-- What is a slot?

The right to land or take off on a specific day and time and to use airport infrastructure needed to operate flights.

-- Which airports operate a slot system?

Airports designated as "coordinated" airports: in practice the most congested. 140 airports worldwide ration flights.

-- Who allocates the slots?

Under European Union rules, each country appoints an independent coordinator. It must be impartial, though critics sometimes complain that local airlines get preference.

-- How often are the slots re-allocated?

Under the existing scheme, slots are allocated free of charge from a pool of available slots twice a year; in October for the summer schedule and in May for the winter schedule.

-- How does an airline qualify for a slot?

1) The system works first and foremost on historical precedence or the "grandfather rule": this year's slots can be kept next year. Slots can be fine-tuned without losing them.

Critics say such historical rights are unhealthy because they deprive new entrants of capacity and remove the incentive for established operators to release unwanted slots.

Airlines respond that the system creates stability and allows newcomers to become "grandfathered" in just two seasons.

2) Slots used less than 80 percent of the time must be returned to the available "slot pool".

Critics say this encourages a process of hoarding known as "slot-sitting", for example by operating small planes at a loss.

3) Up to 50 percent of new slots are reserved for new entrants.

-- What happens when no slots are available?

Airlines can exchange slots at a twice-yearly schedules conference, an air transport bazar at which more than 900 airlines try to maximise the efficiency of their portfolios.

In Britain, airlines can also buy or sell slots on an ad hoc basis in a secondary "grey market". Slot trading was first developed for the domestic market in the United States.

The value of slots varies according to time of day and other constraints and has been soaring due to deregulation.

After a 2007 Open Skies pact freeing transatlantic travel, Continental (CAL.N) paid a record $209 million for four slot pairs at Heathrow. That compares with 20 million pounds (then worth some $38 million) paid for 2 pairs by Qantas in 2004.

Volume is thin, however, with barely 1 percent of scarce Heathrow slots being traded annually, according to a study by SEO Economic Research, which is linked to Amsterdam University.

Experts suspect trading happens elsewhere in Europe too, but a legal blur has discouraged airlines from acknowledging this.

-- Towards European trading?

To clear up legal doubts preventing trading, the European Commission ruled last year that secondary slot trading was legal and could be used across the trade bloc to boost competition.

Airports say trading does not go far enough and want slots to be auctioned, eyeing revenue. Governments are split on the issue, says an official EU study by consultants Mott MacDonald.

For the airlines, lobby group IATA argues pricing mechanisms are ineffective and would mess up the global traffic system.

(Sources: EU regulations 95/93, 793/2004, SEO Economic Research, Airport Co-ordination Ltd, Mott MacDonald, IATA)

How airlines play the aviation slot machine
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