Congested Hubs, the EU Slot Regulation and Incentives to Invest

Abstract

We examine the slot management regime used in the EU and investigate how it may in the short run lead to inefficient outcomes and in the long run discourage support for expanded airport capacity. Slot administration is used to balance demand and supply when capacity is in short supply. Because airports are not permitted to, or do not, charge market-clearing prices for scarce runway capacity, airlines set fares to clear the market. In doing so they earn significant rents. These rents exist regardless of who owns the slots or if the slots are or are not concentrated in a few hands. The distribution of rents will depend on slot ownership. The EU regulations limiting incumbent airlines’ access to newly available slots does nothing to affect airfares. Restricting 50 percent of new capacity to new entrants will also exacerbate incumbents’ reluctance to support runway capacity expansion since they lose scarcity rent and potentially market share. The paper illustrates our argument using the current debate concerning runway expansion at Heathrow and Gatwick.