Sebastian Bauer: Airport Slot Reform in Europe

I study how the current system for allocating scarce airport capacity in Europe affects airline behavior. Airlines are required to use their allocated time slots at least 80% in a given year to avoid losing them, a fact that leads airlines to fly more than what they would like to, both to keep the slot in case they need it in the future and also to stop competing airlines from entering the airport. I am building a model to estimate how the current system affects consumers, and to find alternative allocation systems that could improve over the current system.

Last Winter I was awarded a Graduate Student Grant from The Europe Center at Stanford University. This award, together with an award from the George P. Shultz Dissertation Support Fund at SIEPR and my program’s research funds, allowed me to purchase a custom report from OAG’s Travel Analyser. OAG is a global travel data provider, and this custom report includes monthly data between 2015 and 2019 on average fare and tickets sold for each intra-European route, including both non-stop, one-stop and two-stop travel.

In my doctoral dissertation I study how we currently allocate scarce airport capacity in Europe, the effects of this allocation system, and how we can improve consumer welfare and economic efficiency, and reduce environmental impact. Currently, an airline that holds a time slot at a congested airport gets to automatically renew it for next year as long as they use the slot at least 80% of the time. So far, I have been able to use public data from Eurocontrol (the European air traffic control agency) to show that this system encourages airlines to hoard slots—i.e., to fly some routes more than what they would like to with the sole purpose of keeping their time slot. I have also also shown that this behavior can be partly explained by the incumbent airlines’ desire to keep out new entrants from their airports.

Despite these findings it is not obvious why airlines engage in this slot hoarding behavior, nor is it clear what the true costs of this behavior are in terms of consumer welfare and economic efficiency. While the anti-competitive motive behind slot hoarding is probably bad for consumers and efficiency, airlines have also argued in the past that the current system “allows for continuity of service to the public and provides the degree of stability and continuity needed for planning and long-term investment by airlines and airports.” [Sentance, 2003].

Fully comprehending the airlines’ behavior requires me to have access to ticket fares and quantities sold for all European markets, so that I can build and estimate a model of consumer demand and airline behavior. This is where the OAG data I recently purchased plays a key role. The data includes over 10 million observations, as for each intra-European route I have the number of tickets sold and the average monthly fare between 2015 and 2019.

With these data, I have been able to plot the passenger share, revenue share and total number of markets for the top 5 airline groups in Europe: Ryanair, Lufthansa, EasyJet, IAG (BA-Iberia) and AirFrance-KLM. As can be seen, Ryanair is by far the largest airline in terms of passengers carried, and throughout my period of analysis Ryanair has greatly expanded their market presence (defined as an origin-destination pair). The other interesting fact is that even though airlines of the Lufthansa Group carried less than half the number of passengers than Ryanair, the Lufthansa Group still got a higher revenue share than Ryanair. This squares with the different target audiences of both airline groups. I have used the data to estimate a model of air travel demand in the spirit of Berry and Jia [2010], Aguirregabiria and Ho [2012], and Yuan and Jia-Barwick [2024]. Unlike my paper, these papers focus on the US market, and the main difference I find is that European travelers are twice as sensitive to price changes compared to Americans. This finding could be explained by three facts: First, Europeans travel more for leisure than Americans. Second, European airlines face a strong outside competitor— trains. Finally, Europeans are on average less wealthy than Americans, which also means they are more price-sensitive.

I am currently working on building the supply-side model, which together with this demand model will allow me to estimate both how much of airline slot hoarding comes from anti-competitive motives, and also what the effect of alternative allocation methods would be.

References 

Victor Aguirregabiria and Chun-Yu Ho. A Dynamic Oligopoly Game of the US Airline Industry: Estimation and Policy Experiments. Journal of Econometrics, 168(1):156–173, 2012. 

Steven Berry and Panle Jia. Tracing the woes: An empirical analysis of the airline industry. American Economic Journal: Microeconomics, 2(3):1–43, 2010. 

Andrew Sentance. Airport slot auctions: desirable or feasible? Utilities policy, 11(1):53–57, 2003. 

Zhe Yuan and Panle Jia-Barwick. Network competition in the airline industry: An empirical framework. Technical report, National Bureau of Economic Research, 2024.