Slot Trading: The New Proposal Of The European Commission

slot tradingOn 1st December 2011, the European Commission adopted a comprehensive package of measures whose declared aim is, among others, to address capacity shortage at European airports. The so called “better airports” package covers three main areas: slots, ground handling, and noise.

This article focuses on the proposed recognition of a secondary market for slots and presents the evolution of the Commission’s position on this topic since the adoption of Regulation No. 95/93 on common rules for the allocation of slots.

If the overall proposal of the Commission on slots has been partially criticized by the associations of airlines, the recognition of a secondary market for slots has been welcomed by the entire industry as a definite step forward that would favor decongestion of heavily congested European airports.
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Two New European Directives on Airport Charges: Airport Charges between Competition Law and Sector-Specific Regulation

By Jochen Meulman

In the past year, the European Communities’ legislative adopted a Directive regulating airport charges; meanwhile, a proposal for a Directive on airport security charges was submitted for approval by European Parliament and the Council of Ministers. Although in many economic sectors in which third-party access to infrastructure is essential, access charges have been regulated at the EU level, airport tariffs had so far escaped direct and general European legal scrutiny. Indirectly, and on a case-by-case basis however, airport charges have been the subject of the EU’s attention, mainly in cases in which such charges were suspect from the view of European competition law. Now, finally, a common legal framework for setting airport charges has been devised, which will – at the very least – render such charges and the procedures leading up to their determination more transparent. Whether lower tariffs for the use of airport-related services will ensue from this new regulation, will be discussed in this contribution. After a brief description of the background to airport tariffs and their regulation under EU competition law hitherto, this contribution will identify denominators common to both mentioned directives. Next, both directives and their impact on airport charges will be discussed, with a focus on their overlap with EU competition law. Finally, two questions will be answered; (1) to what extent do EU competition law and the new Directives overlap? (2), will the new legislation lead to lower charges for airport users?

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Transatlantic Open Aviation Area: A Template for a Globalised Civil Aviation Industry?

Open-SkiesCivil aviation is one of the major carriers of globalisation; it helps businesses to cross the state boundaries; it reduces the time for travelling and fosters migration. In other words, civil aviation brings speed and connectivity into human life. Despite today’s free market trend which is supported by the computer and internet, this highly technology intensive civil aviation industry is crippled by the series of rules and regulations. It is because; the civil aviation industry is not a normal business industry by any means rather it is a highly politicised industry which involves state sovereignty, national security and high level of diplomacy.

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1.5 – Regulation: It’s a Tough Job, But Somebody’s Got to Do It

By Athar Husain Khan and David Henderson

hussain-kahnThe airline industry has been struggling under a regulatory regime that at best could be called inconsistent; argue Husain Khan and Henderson of the Association of European Airlines. They stress the need for coherent policy and coherent legislation, and an integrative approach allowing for the best possibilities for the European airline industry to be sustainable.

1.2 – Europe and Developments in the Transatlantic Air Market

By Kenneth Button

buttonThe past 30 years have seen the radical liberalization of many parts of the air transport industry. Domestic reforms in the US were followed by changes within Europe and within many other markets that freed fares setting, market entry, or embraced privatization. International markets have largely been freed from market intervention on a bilateral basis, often involving some variant on the Open Skies approach of the US. The retraction of regulations governing air transport infrastructure, in particular airports and air navigation systems, has normally been more piecemeal, but nevertheless provided some complementary effects. The focus here is on what we can expect from the recent agreement between the EU and US to further liberalize the transatlantic airline market.

The North Atlantic is a large air transport market and is important to the macro‐economies on both sides. The EU and US are each other’s main trading partners, and air transport contributes to this in many ways. It constitutes about 60 per cent of global air traffic activity, but is particularly supportive for major growth industries, such as those involving high technology and tourism. Like most international markets in air services, the one between the US and EU has traditionally been highly regulated.

The US began to press for reform of its restrictive international air service agreements in 1979, when the term “Open Skies” was first mentioned, but it did not negotiate its first European major “Open Skies” agreement, which was with the Netherlands, until 1992. A number of other similar agreements, notably with Germany, followed. This freed up the ability, on a bilateral basis, for the provision of market‐based services on some routes, but still restricted the ownership of the carriers involved and their rights to provide unfettered services beyond initial gateways. There were also some major routes that remained highly regulated, notably those between the US and the UK.

In March 2007, European transport ministers approved an Open Skies‐style agreement with the US to liberalize the transatlantic airline market. At the April 30 US/EU summit in Washington, they signed an agreement to further liberalize air services taking effect in April 2008. The first‐stage Air Transport Agreement replaces all existing bilateral agreements between the US and the 27 EU member states and establishes an Open Skies‐type framework between them. Any EU airline will be able to fly to any point in the US from anywhere within the EU, while any US carrier will be able to serve Heathrow and internal EU routes. This, in particular, removes restrictive arrangements between the US and UK. The agreement does not, however, provide for a free transatlantic air transportation market, because it only relates to air services and does not free up factor markets, limitations, for example, the extent to which US investors can put money into EU airlines and vice versa.

While the change is likely to generate benefits for the air traveler, it is unclear what the exact implications will be for the air transport industry, and for different regions of Europe.

The inclinations of airlines and airports, when confronted with institutional barriers, are to exploit those elements of the regime that help their financial position, and to circumvent those that damage it. Hence, we have traditionally seen, for example, airlines expending considerable resources in lobbying to gain bilateral air service rights. The major transatlantic carriers have sought to circumvent limitations on cross‐national investment by forming alliances, and these have also added to their scale advantages. The large airports serving the transatlantic market enjoyed a quasi‐monopoly position and their returns indicate significant rents, setting aside any inefficiency that can go with potential “gold‐plating” of facilities.

The airlines and the airports will feel the most immediate effect of the changes in international regulations, but the exact effects are uncertain. Ex ante studies have shown that the outcome of the enlarged transatlantic market will be complex, because of changes in feeder networks within Europe. In particular, given the slot limitations at the main London airports, it is likely that there will be reallocations towards long‐haul services there, as new carriers move into the London facilities, and existing ones modify their networks. There is also the issue of separating any existing trends from the impacts of the transatlantic reforms. The former include not only the secular long‐term growth in traffic, but also such things as the restructuring of networks that has been taking place on both sides of the Atlantic, as low‐cost carriers have been taking larger shares of markets within the US and the EU. The legacy carriers have been forced to focus more on long‐haul markets and on those protected by institutional arrangements.

But what will this mean for the airlines involved? Airlines are becoming more efficient as management techniques evolve, hardware improves, and as infrastructure, such as air navigation services, is gradually updated and systems integrated. Like many industries, air transport is dynamic and change is continual. Transatlantic liberalization will inevitably not only result in a continuation of developments already in train, but will also bring about unforeseeable structural shifts. Given the enhanced competition that will come about, the least we can say is that there will have to be innovative thinking on the parts of airlines if they are to retain some of the €377 million in economic surplus the UK’s Civil Aviation Authority has forecast it will generate for the aviation industry, rather than it all being dissipated in lower fares to be enjoyed by the predicted 34 per cent increase in passengers. The deregulated scheduled‐airline industry within both the US and EU finds it difficult to make a viable return, and, while there may be short‐term profits to be earned in a liberalized transatlantic market, it will require new thinking to ensure that these prove enduring.

What about the wider economic benefits? The EU and US combined are responsible for about two fifths of world trade: trade flows across the Atlantic amount to €1.7 billion a day. The “transatlantic workforce” is estimated at 12 to 14 million, of which roughly half are Americans, who owe their jobs directly or indirectly to EU companies. In 2005, exports of EU goods to the US amounted to €250 billion, while imports from the US amounted to €234 billion. In terms of trade in services, EU exports to the US amounted to €108.6 billion in 2004 while EU imports from the US were €93.0 billion. Air transport plays a multiplicity of roles in allowing all this to happen; it is one of the lubricants in the transatlantic economic engine.

The official line within the European Commission is that the new agreement will generate $16 billion in economic benefits, and that it will create 80,000 new jobs over the next five years. These figures are at least speculative, but in addition, from a political perspective, the way benefits are distributed can be as important as their overall size. This is actually what we have the least information on, and is, by far, the most difficult thing to forecast. The transatlantic services network is currently changing, as airlines add secondary hubs to their networks to avoid congestion at major airports, and also to meet the new demands of changes in the economic geography of Europe and the US. Since 16 countries in the EU already had some form of Open Skies arrangement with the US, the new agreement may have limited impact on them. But even at the London locations, it will take time for the slots to be reallocated at Heathrow to reflect the new environment. Thus, while overall traffic will grow, there is no reason to expect that it will significantly affect the overall pattern that would have emerged without it, unless there is government interference.

So overall, from an economic point of view, the new agreement is to be welcomed. But we must be aware of the reason we have markets, and that is that markets are normally more efficient than planned and regulated systems. This is because the world is a complicated place, and because we understand very little of it. Market forces allow better use of resources, but what the outcome will be is simply unpredictable. So what will actually happen will be full of surprises.

About the Author
Dr. Kenneth Button is Professor of Public Policy at the George Mason School of Public Policy and Director of the Center for Transportation, Policy, Operations, and Logistics, and Director of the Aerospace Policy Research Center at the George Mason University.

Column: Air Transport Regulation in Brasil

As it has been widespread in market economies, air transportation in Brazil has a history of strict regulation. Curiously, the activity does not present any characteristic of natural monopoly: there is no relevant scale and scope economies to be explored in face of market dimensions; there are no relevant barriers to entry; the investment required can be financially leveraged and recouped without losses and so on. Thus, regulatory mechanisms for decades reflected a different logic: the aim was not neutralize the damages of monopoly power but to avoid competition to lead the market.

The air transportation market, let to itself, presents an intense competitive dynamic, generating instability in the short run, although one can expect an horizon of stability, in terms of sustainable configuration of the market, in the long run. Instability in public service provision is not a desired result for governments. That is the main reason behind pervasive intervention in this market.

During the nineties, Brazil economy experienced a new time of deregulation and it was no different for air transportation. By the beginning of this decade, new companies have entered the market, prices were free and demand has increase in a significant way.

Nonetheless, in the macroeconomic scenario, there were turbulence, with two cambial crisis (1999 and 2002) and years of recession. Not surprisingly, this environment brought huge problems to incumbent firms, namely Vasp, Transbrasil and Varig that, with Tam divided the domestic market. Vasp and Transbrasil left the market and Varig, the dominant firm so far, drowned itself in high costs and debts till recently, when a tiny reflect of its ancient exuberance – 10% of market share against the 50% of old times – was bought a month ago.

By 2003, the official diagnosis was that competition was responsible for the incumbent companies crisis, so, the liberalization program was revised. The step behind meant basically supply control, avoiding new entries and expansion of recent entrants.

In the meanwhile, the regulation environment was changed wit the creation this year of a new Regulatory Agency, ANAC, following the model of independent and technical decisions. The expectations over its performance are great, as the Brazilian air transportation market became highly concentrated: two companies, Tam and Gol – this entered the market in 2000 – dominate more than 90% of the market. Hopes are that ANAC will promote new entry and expansion of smaller companies, in benefit of tourism and business travelers, and the multiplication effect of this expanded demand.

Professor Lucia Helena Salgado, researcher in regulation and competition. (Instituto de Pesquisa Econômica Aplicada – IPEA – and Universidade do Estado do Rio de Janeiro – UERJ).

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