ACI World Director General Justin Erbacci explains why airports want a greater say in slot allocation and what reform could mean for airlines and passengers.
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David Casey:
Hello and welcome to Window Seat Aviation Week's Air Transport Podcast. I'm David Casey, editor-in-chief of Routes. Welcome aboard. This week we're going to be talking about airport slots, the system that decides when airlines can operate at airports where demand exceeds capacity. Those decisions can shape competition, airfares, and even which destinations passengers can reach. ACI World is campaigning to reform the system while airline groups argue that the current rules provide essential stability. Joining me to discuss ACI World's proposals is its director general, Justin Erbacci. We'll also look at how airports can finance the capacity they need. So, Justin, thank you for joining us and welcome to Window Seat.
Justin Erbacci:
Thank you for inviting me. It's a pleasure to be here.
David Casey:
I think most passengers probably hear the word slots when they are on a flight and it's delayed, but we're actually going to be talking today about airport slots, which might not sound the most exciting part of aviation policy, but they do help determine where airlines can fly and when they can operate. Now, more than 200 airports worldwide are designated Level 3, which means that demand exceeds capacity. And that includes major hubs like Heathrow and New York JFK to smaller airports such as Bristol here in the UK where I am. So, before we get into ACI'sproposals and some of those reforms that you want to see happen, perhaps if you could briefly explain how the current system decides which airlines get access when demand exceeds that airport capacity.
Justin Erbacci:
Sure. So, a slot is basically, as you mentioned, up to permission for an airline to land or take off at a set time, and that's at capacity-constrained airports. So, the current slot system was developed back in the 1970s when governments were basically deciding who flew where. And since then, aviation has liberalized significantly and modernized, but airport slot allocation has not kept pace. So, if we look at the number of slot restricted airports, we see that they're up more than 25% in a decade. And we're looking at having our passenger traffic nearly doubling by 2047 or so. And so, the need for modernization of slot policies is never more important than it is now because we're going to have more and more constrained airports and we're going to need to have a more modernized system to determine how we get the right flights to the right destinations by the right airlines correct.
And this is a huge public interest issue. Back in the '70s when they put these slots in place, we didn't have the capacity issues that we have. But now that we have them, it's going to be very important for not just airlines to determine who flies where, but also for government interests to be taken into consideration as well because it matters to connectivity, what places people can go to from their airport. And it also dictates competition, which ultimately leads to lower airfares. And it's important for a region to be able to determine how the economic development of that region is enabled through connectivity to the right locations in the world.
David Casey:
I guess under the current system then, airlines can be quite limited in where they can fly and the access they can get at some airports. They might identify a new route, but if the slots aren't there, its options are fairly limited, aren't they? They can either wait and see, they can apply to the next pool and see if they're successful. They can maybe arrange a slot swap or a transfer, but realistically it's very difficult, isn't it, for airlines, particularly new entrants, to get slots in some of these capacity-constrained airports?
Justin Erbacci:
Yeah, absolutely it is because of the way that the rules are set, it gives airlines the ability to maintain their slots based upon only the simple criteria that it gets used 80%, which there are a lot of ways to be able to accommodate that. So it's extremely difficult for new entrants to gain access to slot-constrained airports. And again, that limits the ability for new markets, for competition in the regions which lead to low airfares. And then again, it doesn't allow the region to have any say in where they're going to be connected, which is important for their economic development.
David Casey:
And so, you've published a white paper a few weeks ago and you've proposed several reforms. I think there's nine different proposals that you've set out. That includes giving a stronger role for airports, greater transparency about slot use and trading and changes as well to how historic access is retained. Perhaps you could just talk us through what ACI wants to change in each of those areas and what problems the reforms are intended to solve.
Justin Erbacci:
So, the first thing that we want to do is have everybody agree that slot policies need to be modernized and sit down and start to do that. And the first thing that we would like to see is more transparency in the way that slots today are being utilized and being exchanged. It kind of happens in a black box right now and there's not a lot of transparency as to what is happening with slots and what airlines are doing with slots. So, this is the first part of what we need to have as part of this modernization and full transparency. And I don't understand why anybody would argue against full transparency. The second aspect is that we want to make sure that airports and regional governments have a say in how slots are allocated. And I'm not saying that airports or governments should choose which airlines get the slots, but today there is not much way of criteria that the coordinators are using in order to allocate the slots.
So, we want to have more modernized criteria for coordinators to take into consideration. We do believe very much so in the independence of the coordinators that are allocating these slots, but we think that there has to be more criteria that they follow in how they allocate the slots simply other than just somebody had one before and they get it automatically. So those are the key things. There are others that we lay out in our white paper, but I think those are really criticalaspects of what we're looking for this modernization to include.
David Casey:
Okay. So, it's interesting then, so you're not proposing the airport should allocate individual slots, that's going to remain the job of the independent coordinators, but how then would airports have a stronger voice? What would that mean in practice? Because obviously airlines need workable timings at both ends of a route. How would you avoid creating more of a patchwork of different local priorities that makes international network planning more difficult?
Justin Erbacci:
Well, if you look at it in reality, that's what happens today anyway, is that the slots are allocated at a local level. So, it's not that modernization is going to disrupt the entire system on the contrary. But what's important is that airports today are not involved at all. The capacity constrained airports have absolutely zero say in how the slots are eradicated, so how their own capacity is being used. And then if airports can't, then certainly the local and regional governments can't have any input into that as well. And so that's an important aspect that we really need to make sure gets taken into consideration. So, the airports and the governments would take part in developing the criteria that are used by the independent coordinators to determine how they go about allocating the slots. And it's not just whether or not somebody's used a slot for 80%.
David Casey:
If you bring in the airline perspective here, because I think they would say that the current system is already making intensive use of the capacity that is available. I think I must say that slot utilization at congested airports is about 95 to 98% of some of those really congested airports. So there doesn't appear to be much capacity sitting idle. So, if almost every available slot is being used, what would ACI's reforms allow the industry to do differently than what it's doing today?
Justin Erbacci:
Yeah, but slot utilization doesn't tell the whole story in and of itself. So, in this statistics of utilization includes ghost flights, which airlines operate at very, very low capacity just to try to save the seats. And there are ways that airlines can accommodate the current 80% rule, which is the determinant. And so that's why we're saying that there needs to be more than just 80% rule because the very fact that there are very few slots available doesn't mean that the right locations are being serviced out of an airport or they have the right mix of airlines providing that service. And it doesn't mean that you're going to have the best use of the capacity for that particular airport. We agree with Ayat in the sense that slot rules can't create more capacity in themselves. It can't build another runway, and nobody is suggesting it can, but slot rules are about making the best use of the capacity we already have.
Certainly, independently we have to build more capacity and there's going to be already and will be a significant amount of development to increase the amount of capacity that airports have. And as we do that, how that additional capacity is allocated will also be very, very important.
David Casey:
How would you decide though that a new service would deliver more value than one that's already operating, particularly if it's an existing flight that feeds a much larger connecting network? How would those decisions be made on a route or airline by airline basis?
Justin Erbacci:
Well, I think those are all good things that have to be taken into consideration, but there has to be more criteria and clear criteria of where airports and local governments have the ability to influence what that criteria is when the decisions about where the slots should be allocated get made. But the things you mentioned are very important, but they're not necessarily the things that get utilized today when making slot decisions because there's historic slot and airlines can determine wherever they want to fly those without any input from the airport or the government or what kind of aircraft or destination or anything else.
David Casey:
From an airline perspective, if I was an airline CEO, they're obviously making investment decisions over a much longer timeframe. They order aircraft several years in advance, they build networks on the expectation that they'll continue to have access to the key airports that they want to serve. So, if an airline can meet the usage requirement and still risk losing the slots, how do you avoid undermining that confidence and what level of certainty should an airline reasonably expect before committing to new aircraft and to new routes?
Justin Erbacci:
So, predictability is essential for the airlines. They need to have predictability and we're not arguing against that at all. Permanent is not. We're very conscious of the need for airlines to plan and invest, but that doesn't mean that the priority over scarce airport capacity should last indefinitely with 80% slot usage as essentially the only condition that is used. So, what we would want to do as part of this modernization is to propose periodic reviews of the historic slots against clear published criteria with enough notice, enough advanced notice for airlines to be able to adjust. But right now the system overwhelmingly favors airlines that got there first and their commercial needs are taking precedence over almost everything else, even as markets and passenger needs change. So again, it makes it harder for new airlines to get in. And if you look at a typical major congested airport, the four largest airports, I'm sorry, four largest airlines at those airports hold about 67% of the flights, and that's not really changed for years.
David Casey:
Let's look at a more recent case because as we know, slots hold while they can carry considerable commercial value. And we saw recently at New York LaGuardia when Spirit relinquished 22 operating authorizations, and they were sold through a bankruptcy auction to JetBlue as a successful bidder. Now the FAA approved that transfer and barred JetBlue from leasing or trading them until after 2028. Now the FAA's argument was that JetBlue had a relatively small presence at LaGuardia and given it the slots to a low-fare competitor would benefit consumers. So, on the face of it, it seems to broadly align with ACI's aim of promoting competition, but you also want slot transfers to be more transparent and closely overseen. Where do you think that the FAA process got it right and what approach would you have preferred or what would you have liked to have done differently when it comes to that slot transfer?
Justin Erbacci:
So, I really don't want to comment specifically on the deal or in the FAA's approach, but a smaller independent airline gaining access at LaGuardia is not the issue, it's the process. Our colleagues in ACI North America made a submission to the FAA during the process pointing out that contradiction that the FAA treats slots as permissions to operate, not assets the airlines own. But yet some of those slots can be sold for almost $60 million in bankruptcy proceedings. We're saying a high bid doesn't necessarily mean the best outcome for passengers and the communities. And if you look in a different context unrelated to bankruptcy, the courts in the EU recently also clarified that historic slot rights are not property rights. So that's something that how airlines get, we're able to claim access or ownership of assets that are basically owned by the public or the local governments.
So, it's a very interesting concept there. So, I think that the clearest example though of lack of transparency in the current system is what happens in jurisdictions where airlines can monetize the slots. So, in the UK, as you know, airlines trade slots worth millions with almost no information disclosed about the transaction, who gets them and everything else. So that's one of the aspects we think is very important for greater transparency and oversight of how to access scarce airport capacity, which is a publicly regulated resource.
David Casey:
But from the airline perspective, you can see that they've obviously had that slot. They've met the slot requirement rules. Surely then it's up to them what they do with that slot for the season, isn't it?
Justin Erbacci:
Well, but that's the only criteria that gets used is, and again, the way that they use it is not necessarily to meet the criteria is not necessarily in the best interest of the public or the best use of that capacity overall. And if you're taking action just to save a slot that's not benefiting the region, there should be a way for those slot decisions to be reviewed over time.
David Casey:
Whatever then happens with allocation rules, they obviously, as you said, cannot create more capacity. They can't create new runways, terminals or gates, and airports still need to make better use of existing infrastructure while investing in new airport capacity. I think recently you said that the industry will need to invest more than $4 trillion by 2055 to accommodate future growth. Now you've urged governments to treat airport capacity as a national economic priority. What specifically needs to change? Is the problem, is it a shortage of capital or is it that investors lack confidence that airports will be allowed to recover their costs? And I suppose how as well do you answer airlines that support additional capacity? They want those slots, they want the capacity, but they'll worry they'll end up paying through it through unaffordable charges.
Justin Erbacci:
Yeah, so this is the issue that we're really bringing to light right now, especially in light of the IKOR Transport Conference that's going to be happening in November. So, as you pointed out, passenger traffic is set to nearly double by 2047 or so. And you're correct that we're estimating right now that we're going to need more than $4 trillion in infrastructure investments between now and 2055 to be able to meet that demand. So, the capacity and the modernizations of airports and the renewals, that has to be financed now because airport infrastructure takes years to deliver. But long-term investors are only going to commit when we have regulations that are stable and predictable and transparent and where they are comfortable that they are going to get the return on the investments that they need to meet. So that's why at the conference we're asking states for three things.
First is to recognize that airports are really strategic assets and essential to the economic development of their region, and then allow them to operate as viable businesses, which they are. And that means that they have to generate the funds and the revenues that they need to be able to operate, to innovate, to modernize, and then to grow. So, this is essential that states view the airports as these strategic assets to their regions. And second is to keep the regulation stable and predictable and proportionate to enable the investment, long-term financing and where appropriate private sector participation to get the returns they need. So, this is really important. And it's not only for the big airports, we're also asking states to support that concept for small and regional airports, which are often the communities only link there to the rest of the world. So, they need to provide stable funding mechanisms for that.
So, slots and investment go hand in hand. So, we need to build where we can, but then we also need to make the best use of what we already have. And that is the key that we're trying to push here.
David Casey:
Well, just before we close, if your reforms work as intended, what would passengers actually notice? Is it more competition, lower fares, different destinations? What are the key things that you think this reform would bring?
Justin Erbacci:
Yeah, and we're not naive to think that it's going to be noticeable overnight. This is a long-term process, but we need to start it now. Otherwise, we're never going to get there. So, what we want in the short term is for the recognition that there needs to be a modernization and to start having discussions around the modernization process. And it needs to include all the relevant stakeholders in the process. It's not like we're dictating in the end how it's going to go, but we definitely need to have more influence and input into the system by airports and local governments. And that's why we're calling out local governments to look at this now and say, "Hey, this is a public interest issue. It's not a technical issue. Slots are public interest issue that will impact your region's economic viability and the passengers in your district." So, what ultimately, if we get this right, what we'll see is for passengers, more competition, access to more destinations and lower fares.
For governments, we will get more of an important insight into how you want the aviation system to support your economic development.
David Casey:
We are out of time for this week's episode but thank you very much for joining us on Window Seat. It's been really useful to hear ACI World's case for slot reform as well as your thoughts needed to address the underlying capacity shortage. And we'll be watching closely to see how those debates develop over the coming weeks and months. If you enjoyed this conversation, please follow Window Seat wherever you get your podcasts. And thank you for listening and thanks to our producer, Natalia Pelayo. Until next time, this is David Casey disembarking from Window Seat.
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