The Price of Decongesting Airports
by Sandy Ikeda
Mon, 19 May 2008 at 10:08 AM
Cities situate themselves at transport hubs. For millennia this has meant rivers and harbors. Later, it was the railroad. More recently it's been the intersections of major highways … and municipal airports. (Joel Garreau has written eloquently about this stage in the evolution of cities in his path-breaking book, "Edge City.") In fact, Phoenix's airport, where I'll be flying shortly, is evocatively called "Sky Harbor International Airport."
Now, most airports are owned by local governments, and what they charge any given aircraft to use a runway at a particular time doesn't come close to what other aircraft might be willing to pay. The predictable result is a shortage of take-off and landing slots during peak times — i.e., congestion — which has become a major problem in cities around the country. Congestion can, of course, be a good thing when it generates things like a flourishing culture. At airports, however, it's bad when it produces significant "external costs" such as delays, accidents, lost luggage, and lost people. Unchecked, external costs can severely retard urban economic development.
The Bush Administration proposed on Friday to auction slots at Kennedy and Newark airports to alleviate this kind of problem. Last month it made the same proposal for LaGuardia Airport. Caps on the amount of air traffic already exist for JFK and LaGuardia, and now the Administration wants to do the same at Newark. You can read about the details in this article in the New York Times. With these caps in place, it makes sense to allocate them via prices.
If flyers prefer to fly, say, Upstart Airlines over American Airlines for the remaining slot out of JFK on Mondays at 6:10 p.m., other things equal this would enable Upstart to outbid American at auction and win the slot. This is efficient because if Upstart were somehow prevented from winning it under these circumstances, American Airlines, which flyers prefer less, would wind up with the slot, and that's not efficient.
However, two things bother me about the Bush proposal. First, the U.S. Department of Transportation claims that the Federal Aviation Administration actually owns all slots, while the airlines, having invested quite a bit to acquire them, claim that they do. If the government has its way the DOT would simply take a portion of the big airlines' valuable slots and auction them off, which raises the possibility that this involves an unlawful "taking."
Second, rather than an auction, it makes at least as much economic sense to just give the incumbent airlines de jure ownership of their current slots and then let them buy and sell voluntarily in an open market. According to a former FAA administrator who is cited the Times article: "In some markets, airlines that hold slots can sell them to others. … That's how carriers like Delta and Continental are getting into Heathrow [in London]. … As far as I know, there's no government organization that takes slots and auctions them off," which is the Bush proposal.
So, using the same values as the previous example, if Upstart Airlines is granted ownership of the slot, it won't sell to American; if American owns it, Upstart will buy it from them. And because there are usually a relatively small number of players involved, transactions costs will likely be low enough to make these trades feasible. Once again, as long as all airlines can bid for any of the limited number of slots, the outcome will tend to be efficient and external costs will disappear. But making the FAA the de jure owner and auctioneer politicizes the process and is a recipe for inefficient rent-seeking by airlines and other special interests; and, as we've seen, preventing open bidding means the slots won't be allocated efficiently.
Neither is what the proposal is intended to do — presumably. I suspect though that the DOT sees this mainly as a cash cow for the FAA.
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