UK: A Glimpse Into How Competition Law Will Feature In Future UK Aviation Strategy

Last Updated: 24 July 2019
Article by Christopher Graf, Adrian Magnus, Nick Chandler and Sophie Albrighton

In response to the Department for Transport's green paper 'Aviation 2050: the future of UK aviation', the Competition and Markets Authority has said that a reform of the slot allocation mechanism may be necessary to promote competition for new capacity at Heathrow Airport.

In its December 2018 consultation (the Green Paper)1, the Department for Transport (DfT) acknowledged that the current slot allocation system is "not designed to stimulate a competitive market environment"2. It identified a range of issues affecting efficient slot allocation, including whether the timing of slot allocation is adequate to enable airlines to plan and invest, transparency of the allocation system, slot hoarding, the new entrant rule and grandfathering rights. The DfT asked for views on administrative changes to the allocation mechanism and new measures to facilitate effective competition and efficiency.  

Response of the Competition and Markets Authority (CMA) on slot allocation

The CMA's response3 was its second published work on slot allocation, after its written advice to the DfT on competition impacts of airport slot allocation4 was published alongside the Green Paper.  

In its response the CMA states that current administrative system is "inherently flawed"5  and needs reform to "maximise efficient use of scarce capacity and promote competition between airlines"6 , particularly in light of the Heathrow expansion.  The CMA considers that:

  • There is no merit in carrying out an in-depth review of slot allocation.  The current administrative system cannot take into account all relevant factors to allocate slots to the most efficient user.  This inefficiency would not be fully addressed by administrative reform.  
  • Market-based slot allocation is the "only approach that will substantially increase allocative efficiency in slot use"7 and could lead to more effective competition if the allocation mechanism were reformed to maximise efficient use of scarce capacity.
  • The CMA proposes an auction system.  Slots sold at a market price would incentivise airlines to use slots efficiently and would also promote other efficiencies, such as airlines using larger aeroplanes, increased routes for connecting passengers, increased utilisation of slots and to encourage leisure routes to be operated during off-peak hours.  Airlines would have to directly contribute to how they arrange their networks and respond to passenger demand.
  • A market based approach is not without risk – for example, airlines with market power could bid aggressively to ensure a greater concentration of slots.  However, the CMA is confident that such risks could be overcome in auction design and encourages the DfT to consider other auction systems, such as spectrum auctions.

Notwithstanding its views on administrative reform of the current slot system, the CMA also put forward some options to improve competition within the existing framework and on the secondary trading market.  The former includes a reform of the new entrant rule and the duration of grandfathering rights.  Half of the slots in a pool at the initial allocation must be allocated to new entrants under the current rules.  But airlines do not qualify as new entrants if they have more than 4% of the slots at the airports serving a given city, limiting their ability to connect passengers across their network.  Once allocated, there is no mechanism to require airlines to release slots. The CMA considers that shortening the duration of the right to use a slot could increase liquidity, although it could also reduce airlines' incentives to invest.

Other opportunities for reform

Outside the slot allocation mechanism, the CMA also made the following comments:

  • Competition must not be artificially restricted or distorted through 'open skies' agreements, which may exclude airlines from operating services.
  • There may be economic benefits to simplifying the regulation of interchange between airlines, but this must not be used to create or manage de facto airline alliances.
  • The CMA agrees that the scope of airport operation services, over which the Civil Aviation Authority (CAA) has concurrent competition enforcement powers, should be clarified.  However, expanding the CAA's concurrent powers to cover airlines may not give rise to material benefits at present given the CAA's limited competition resource and existing ability to input into the CMA's work. The CMA suggests that the DfT instead examines the benefits of the CAA gaining further powers in relation to airline licensing and consumer work.
  • The CMA responded positively to the government's proposal to modernise the rules on access to international traffic rights.  Instead of ownership and control, an airline's international traffic rights would be based on its primary place of business.
  • In relation to the Airline Insolvency Review, the CMA supports the introduction of a baseline of protection for all passengers against airline insolvency, not just those covered by the Air Travel Organiser's Licence (ATOL) scheme.
  • The CMA also set out its views on a proposed passenger charter, emphasising that passengers should not be subject to unfair terms and conditions when booking flights and should be able to make a clear comparison between competing offers when using digital comparison tools.  It also considered the reform of passengers' rights to redress when something goes wrong.  

Footnotes

  1. Department for Transport, Aviation 2050: The future of UK aviation, Cm 9714 (December 2018)
  2. Aviation 2050: The future of UK aviation, para 3.49
  3. Competition and Markets Authority, Aviation 2050: Response from the Competition and Markets Authority (July 2019)
  4. Competition and Markets Authority, Advice for the Department for Transport on competition impacts of airport slot allocation (December 2018) 
  5. Aviation 2050: Response from the Competition and Markets Authority, para 4.14  
  6. Aviation 2050: Response from the Competition and Markets Authority, para 1.2(c)  
  7. Aviation 2050: Response from the Competition and Markets Authority, para 4.3  

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