How do you regulate airlines?  You don’t.

 

You regulate the airports instead.  Rather than constrain airlines by route awards and fare regulation, the better model is regulate airports and we already have an agency that is well suited to the job.

 

Major airports, including those secondary airports in major cities, should be regulated by the regular auction of slots.   By auctioning these slots twice a year, airlines would be forced to consider the value of flying into an airport against the costs imposed on them by infrastructure and resources.  Currently, most large airports in the United States that suffer from congestion do so because of unlimited slot availability or overly high slot allocations per hour.  By setting hourly caps and making those slots available at a price, airlines will have to align their operations according to the value of operating a flight into the airport and the value of monopolizing those same resources would be greatly reduced.

 

What this means is that airlines who have to pay a high price for a slot at an airport such as JFK will be more likely to use that slot for an airplane carrying a larger number of passengers rather than wasting the slot on a regional jet carrying very few.  This would have the effect of shifting those regional jet flights to times of the day when airport use is relatively light.  Critics of such a plan (including airlines) would decry it as a loss of service for people in smaller communities and as interfering government regulation against free enterprise.

 

Nonsense.  Airlines should remain free to operate routes of their choice but they should only be permitted to use public facilities (and that is, in fact, what an airport is) in a way that benefits the whole rather than just their network.  Passengers from Binghamton, NY may have to realize that because they offer so few passengers, it may be necessary to fly at different times of the day and experience some longer connection times because there is no economic argument for them to experience the same service levels (or frequencies) as someone who lives in a major metropolitan airport.

 

By auctioning slots a couple of times a year, you force an airline to weigh the opportunity costs of operating flights into an area on a regular basis.  If Airline A cannot make a revenue argument for flying from Syracuse, NY to JFK at 5:00pm in the evening, then they won’t buy the slot for that route.  If, on the other hand, they can make the revenue argument for 3:00pm, they will.  

 

In addition, it will force more competition upon the airlines for serving such airports because Airline B may be willing to pay more for a slot as a function of having lower operating costs and the airline who manages their costs will be rewarded with greater revenue rather than Airline A who has held on to slots under the current “use them or lose them” regime in place at capacity constrained airports. 

 

Put another way, if Airline A, a legacy carrier, cannot justify bringing 10 regional jets into an airport such as JFK at 5pm in the evening, and Airline B and C can justify bringing in 5 mainline aircraft each into the airport at the same time, the greater whole is better served.  Rather than enjoying those slots as a monopoly, the airlines are forced to regularly evaluate the economics and cannot engage in predatory pricing to deny other airlines opportunities. 

 

The follow on effect of such regulation is that the patterns of demand on airport infrastructure would smooth out some which means airlines and airline facility labor demands would also smooth out resulting in greater productivity on a unit basis.  Airlines would have less incentive to “sit” on gates they’ve leased for peak demands and the barriers to entering a crowded market would be lessened.  If American Airlines has the same number of flights into JFK but they come in more spread out over 24 hours, they need fewer gates and airlines have no incentive to hold those gates for their exclusive use if they cost them money without producing revenue.

 

Does it favor trunk route flying at peak times?  Yes and it should.  An airport like JFK (or ATL or DFW or ORD) should see predominatly high capacity aircraft arriving and departing at those times.  It is more efficient for both the passenger as well as the airline.  It should not be possible for an airline to fly a regional jet between two major cities during the day because of the opportunity cost of doing so.  Right now, airlines are using low capacity regional jets to boost frequency on hub routes and the incremental cost of those passengers makes it more expensive for passengers flying that same route on mailine aircraft. 

 

If the FAA auctioned such slots at airports, they would have a revenue source for additioning staffing at peak times and an incentive for redesigning airways and air traffic control to boost slots at airports. 

 

It would also have the effect of providing a dis-incentive to people who want to fly a corporate jet into a busy hub airport at a peak time.  Such jets offer maximum inefficient use of airport infrastructure at the worst times.  Currently, landing fees offer no disincentive for such aircraft who want to use the airways (modern corporate jets fly at the same altitudes as commercial traffic) and airports (these jets are light and pay small landing fees presently).   The greater good is not served when 4 business people  travel from Cleveland to NYC in a Falcon business jet at 8am on a Monday.  Those people should be traveling on a Continental 737 or 757 to NYC.

 

Likewise, major airlines will have an incentive to right-size their fleets to their routes.   A major carrier will no longer be able to justify “holding” a lot by operating a larger aircraft on a route than necessary because the cost of that slot (presently almost non-existent) will rise to a point that requires a business justification for operating the right aircraft for the right route.  Put another way, a legacy carrier might operate a larger MD-80 on a peak time route, at times, that enjoys only a 50% load capacity just to “hold” that slot for better times.  Under an auction model, that airline can only justify the right aircraft for the right route at the right time and no more.  That legacy carrier might find it of far greater benefit to operate the same route with a Embraer 190 that enjoys a 90% load factor and 30% lower operating costs. 

 

If anything, this pattern of regulation serves to boost competition and efficient use of facilities which, in the end, does benefit the consumer *and* the taxpayer. 

Filed under: Airline Fleets, Airline Service, Airports by ajax