Airlines Prefer Customers Take Delay Risks Rather Than Face Market Mechanisms to Allocate Capacity at Jfk, Other Congested Airports

Michael Giberson

A New York Times article reports on negotiations initiated by the U.S. Department of Transportation seeking to get airlines to voluntarily give up landing slots at Kennedy Airport, one of the nation’s most congested airports. (Many other stories on this topic are available.)

After a pep talk by the secretary of transportation, Mary E. Peters, and the acting administrator of the Federal Aviation Administration, Bobby Sturgell, the airline executives were taken to separate rooms and brought back one by one to talk to government officials about their schedules.

At some hours, Kennedy has more than 100 scheduled arrivals and departures. The F.A.A. said the airport actually handled 80 or 81 per hour this summer, which is the maximum the Transportation Department wants the airlines to schedule.

The airlines said Kennedy could handle more with better equipment and procedures, and have complained that the department’s target number is too strict. Another problem is that some traffic may migrate to Newark, adding to delays there.

The government is hopeful it can get “voluntary” reductions, which would then be codified into a regulation. If the airlines do not “volunteer,” the government has said it could set quotas and assign slots. But, Ms. Peters said, “We have high hopes for market-based incentives.”

The D.O.T. has said it may order landing fees that vary by the hour as an incentive to move flights to off-peak periods. But Ms. Peters said, “We may very well need scheduling reductions to help solve congestion in the near term.”

… Years-old federal controls on how many planes can use Kennedy ended on Jan. 1. Since then, traffic jumped 20 percent, according to the F.A.A., to 1,200 flights a day from 1,000. In August, it was 1,300 flights a day.

According to the F.A.A., one result is that there are 77.4 delays per 1,000 landings or takeoffs so far this year, continuing a steady rise — there were 20.9 in 2003, 27.5 in 2004, 39.6 in 2005 and 60.4 in 2006.

The meetings did not run smoothly. USA Today: “The government’s effort to cut record flight delays at New York got off to a bitter start Tuesday when the airlines’ trade organization threatened to challenge new controls in court.” The Cox News Service: “It appears that the federal regulators ‘intend to impose cuts,’ said James May, president of the Air Transport Association, which represents the major carriers. ‘We are unalterably, adamantly opposed to it.’ ”

Economists at the U.S. Department of Justice recently produced a paper advocating the auction of airport take-off and landing slots. Tom Whalen, Dennis W. Carlton, Ken Heyer, and Oliver Richard explain the source of some of the problems and some suggested approaches:

Airlines’ private incentives to schedule flights to serve more destinations and offer passengers more choice in departure times do not take into account the delays that their own flights impose upon other airlines because airlines do not face the proper price incentives to use scarce airport capacity. Consequently, airlines schedule too many flights, generating delays that ripple across the highly integrated airline network and adversely affect all passengers. One approach to solving this problem might be to get the airlines together and have them collectively hammer out a solution. … Such collective decision-making would not necessarily benefit consumers. Indeed, collective decision-making by actual and potential rivals raises serious risks to competition.

The current approach is only slightly more problematic than industry-based collusion – as described above the Transportation Department employs, in essence, a combination of administrative fiat, bureaucratic saber rattling, and moral suasion to extract reluctant corporation compromise. You don’t need a Nobel Prize for mechanism design theory to spot the flaws in this system.

Whalen, et al., write, “Our preferred method to allocate scarce airport capacity is to auction slots for landings and takeoffs by time of day and to convey upon their purchasers well-defined property rights.” The slots would be resalable, so airlines have the flexibility to reorganize their flight schedules to changing demand, and could come with cancellation priorities that would come into play if weather or other conditions temporarily reduced capacity at an airport.

While the airlines oppose administrative cuts, most proposed market-based mechanisms really seem to make them crazy. The Washington Post story this morning quoted airline executives as saying that “congestion pricing and caps will curtail flights to towns and cities served by smaller planes,” and complaining that the government hasn’t done enough to expand capacity through New York airspace and at the Kennedy airport.

Of course the point is that flights are already being curtailed, via congestion that spills over through the air transportation system. Only, in the present system much of the risk and cost is hidden in unrealistic flight schedules that leave travelers guessing rather that made transparent through prices that adequately coordinate consumer preferences and air transportation costs.

The proposal to auction airline takeoff and landing slots has been around for at least since 1982, when “A Combinatorial Auction Mechanism for Airport Time Slot Allocation,” by Stephen Rassenti, Vernon Smith, and R. Bulfin, was published in the Bell Journal of Economics.

Strictly speaking, auction of airline slots could be done airport by airport, and done only for highly congested airports. While such an approach would be simple to implement, it presents bidding challenges to the airline. If the auction for Airport A happens before the auction for Airport B, and the airline wants to fly a route from A to B, it needs to know the price for landing at B before it can submit an efficient bid for a takeoff slot at A. The Rassenti proposal, the first published description of a combinatorial auction, provides a mechanism for addressing these and other complications.

The Washington Post noted, “operations are complicated by the fact that an unusual range of aircraft types use JFK’s runways, a mix of small regional jets, medium-size planes and wide-body jets. Smaller planes need more space to take off safely behind larger jets. Properly sequencing those flights during busy periods can be a challenge…” A combinatorial auction is designed to manage these kinds of interacting constraints on the system. It may sound complicated, but remember that airlines have a great deal of experience in using dynamic pricing systems to allocate scarce resources when the object is maximizing ticket revenue paid by consumers. Slot auctions just employ similar tools to induce airlines to better coordinate their use of scarce air travel resources. Yes, consumers traveling through popular airports at popular times will end up paying higher ticket prices, but at the same time they will be more likely to arrive on schedule.

Various proposals for extending and improving upon the ideas developed in the Rassenti article have appeared over the last 25 years – but really, improvement is beside the point, the point is to get started. While airport-by-airport auctions may be the technological equivalent of a barnstormer’s bi-plane, the current administrative jawboning is no more than a hot air balloon.

[HT to the Antitrust & Competition Policy Blog for the link to the Whalen et al. paper.]