The CMA’s response endorses the proposed changes in the consultation, aimed at improving the current system. The response also explains why the CMA recommends going further and makes the case for market-based mechanisms to allocate airport slots, by drawing upon the CMA’s previous advice and consultation responses in this sector.
The CMA is the UK’s principal competition and consumer authority. It is an
independent non-ministerial government department, and its responsibilities
include carrying out investigations into mergers and markets and enforcing
competition and consumer law. The CMA helps people, businesses and the
UK economy by promoting competitive markets and tackling unfair
behaviour.1 The CMA has a role in providing information and advice to
government and public authorities.2 The CMA’s advice and recommendations
are made with a view to ensuring that policy decisions take account of the
impacts on competition and consumers.
The CMA’s strategy includes “getting about and travelling” as an area of focus
and which continues in the CMA’s Annual Plan 2024-25. The transport sector
has great significance in supporting economic activity. The aviation sector
helps the UK trade and allows people to travel internationally and domestically
for work and pleasure. The air transport sector alone contributed £5.47 billion
to the UK economy in 2019, with the entire aviation industry contributing
almost £22 billion.
However, airport capacity is scarce and needs to be
allocated efficiently. We welcome measures to improve competition in this
sector in the interests of passengers, such as through reform to airport slot
allocation.
The CMA has engaged extensively with the Department for Transport (DfT)
on the issue of airport slot allocation system reform since 2018. We have
consistently made the case for using market-based approaches in allocating
airport slots. The CMA believes that, as well as improving competition in the
interests of passengers, market-based approaches can improve dynamism and innovation in one of the UK’s largest services export markets, making a
sizeable difference to the economy.
This response draws heavily both from the advice we gave to DfT in 2018 on
competition impacts of airport slot allocation and our response to DfT’s
Aviation 2050 consultation in 2019. This response should be read in
combination with those previous responses. We have continued to engage
with officials at DfT following these pieces of advice and we welcome their
work getting the consultation into this place.
The passenger aviation industry faced significant disruption during the
COVID-19 pandemic. However, aircraft movements and passenger numbers
have returned to near their pre-pandemic levels and are set to grow further.
We welcome that DfT is considering the issue of slots policy once again. We
continue to believe there is much to be gained from opening up the system to
market-based mechanisms.
The CMA’s stance in favour of using market-based mechanisms to allocate
slots is unchanged from our 2018 advice and 2019 consultation response.
Using market-based mechanisms helps ensure that scarce resources are
allocated to whoever values them the highest. Market-based mechanisms
also lower or remove barriers to entry for new airlines which supports
competition.
The CMA recognises that reform in this sector is complex. However, the
impact of effective reform will be substantial, both in terms of direct benefits to
passengers and the industry itself from enhanced efficiency and competition,
but also the wider UK economy, which depends on a productive and
competitive air services sector. The reform of slot allocation is a fundamental
change to a system which airlines and airports have been accustomed to for a
long time, although this is not a reason not to do it. How the new system is
designed and its roll-out will impact parts of the industry in different ways, but
the CMA maintains that the aggregate benefit of slot reform will be net
positive. Capacity constraints, which are only set to get worse over time,
make the case for slot reform, both for new and existing slots, compelling.
This response begins by restating the case for using market-based
mechanisms in allocating airport slots. It then offers the CMA’s overarching
position regarding slot reform. The consultation proposes multiple measures
to help allocate scarce slot capacity and our response puts on record the CMA’s advice regarding the impact these measures may have on efficiency
and competition. The case for using market-based mechanisms to allocate airport slots
9. Airlines will primarily compete for passengers on price, quality of service
offering and route connection options (in terms of route variety and route
frequency).
A market-based approach in the airline industry so far has led to
significant competition, lower fares for passengers and greater connectivity.
Competition between airlines drives innovation and efficiency among airlines,
leading to improved services and passenger experience. Indeed, procompetition interventions in the aviation market have led to benefits for
passengers, as evidenced by the CMA’s evaluation of the decision to break
up BAA.
Liberalisation of routes and the entry of low-cost carriers has increased
competitive pressure on incumbent carriers in the last 30 years. The
European Common Aviation Area (ECAA) has facilitated the growth of these
low-cost carriers and the UK’s ongoing participation in this agreement
following its departure from the EU continues to provide benefits to
passengers. Whilst, legally, these agreements permit any airline to fly to and
from any airport within the ECAA, an airline’s access to a particular airport at
a particular time (a slot) is now the principal restriction on competition.
Airport capacity is extremely limited and some airports in London and the
Southeast of England are expected to have exhausted that capacity by the
2030s. While the introduction of significant additional capacity in the
Southeast of England has been proposed (through an additional third runway
at London Heathrow and the use of the northern runway at London Gatwick),
how any additional capacity should be allocated is important. Currently,
incumbent carriers, through historic rights to slots, have entrenched positions
at major airports in the UK. Slot reform is therefore a further measure DfT
could take to open the market further to competition in the interests of
passengers.
In the current administrative system of slot allocation, airlines do not pay for
the economic value of airport slots. If an airline operates the slot for a given
proportion of the season, they retain the right to use it, avoiding paying the
price they would otherwise pay to buy or lease this slot on the open market.
This results in rigid slot holdings, especially at congested airports, that compound the underlying capacity constraint. This means that airlines find it
difficult to obtain additional slots to expand existing and launch new services;
as a result, competition in air services markets is constrained to the detriment
of passengers. This lack of dynamism in slot holdings means that some slots
have been held by airlines for a long period of time. Together with the inability
of new airlines to enter and provide services at an airport, or smaller scale
existing airlines at an airport to increase their operations, this makes it likely
that the existing pattern of slot holdings does not reflect the most efficient use
of all slots.
Part of the reason incumbent airlines hold onto slots is due to the difficulty of
acquiring new ones. This suggests that incumbent airlines may not be making
the most efficient use of some of their slots. Indeed, if slots could be obtained
easily through market-based methods, there would no longer be such a
‘retention premium’ on holding existing ones and so we would not expect the
level of slot holdings of incumbent airlines at certain major airports.
Absent any major increase in airport capacity, the CMA continues to believe
that the slot system should be reformed to ensure airlines pay a price to
acquire a slot which reflects the economic value of that slot. This may be best
achieved through auctions, but we suggest there may be other measures, as
outlined in the consultation, which can help airlines understand and take
account of the economic cost of holding onto a slot.
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