Scoring auctions: are they the key to marketbased allocation of airport slots?

Abstract

Air transport has increased almost fifteen-fold worldwide in the last half-century and is expected to return to this trend in the next few years, after falling from 4.558 billion passengers in 2019 to 1.809 billion passengers in 2020 due to the Covid-19 pandemic. Airport capacity has not kept pace with such growth and, therefore, more than two hundred major airports worldwide face capacity constraints and are "coordinated". Efficient allocation of scarce airport capacity is critical for air traffic growth, as well as for the overall air transport dynamic efficiency. However, the allocation of airport slots in Europe and elsewhere is still ruled by administrative processes, based on the IATA Worldwide Slot Guidelines, which follow historical precedence (called "Grandfather Rights") and time adjustments of historical slots. Several objections have been raised to the adoption of market mechanisms in slot allocation, as an alternative to administrative processes, and they are still rarely used. Despite often being suggested in the literature, the use of auctions for slot allocation has only been implemented in some local routes in China, and apparently this underemployment of auction mechanisms has been due to the reluctance of coordination authorities to face the risks that have been pointed out regarding airlines' long-term route planning, the usage costs related to excess slots, origin-destination pairing, and competition distortions. However, scoring auctions have never been considered and our research shows that their properties combined with an appropriate auction design could overcome most of those objections and mitigate the associated risks. Furthermore, the current drop in air traffic provides an opportune window for the introduction of auctions as a mechanism for the allocation of airport slots with minimal risks of disruption to airline business models.IN 2019, A "NORMAL YEAR", 1 the aviation industry supported 11.3 million direct aviation jobs and a total of 87.7 million jobs worldwide (the sum of direct aviation jobs, indirect jobs, induced jobs, and tourism catalytic jobs -see next paragraph). It contributed, in a direct way to global GDP by an estimated * The authors are grateful to Lara Gamas for her inspiring work on slot auctions in the context of her MSc degree in Economics. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

Market-Based Allocation of Airport Slots: The PAUSE Auction Mechanism and Extensions

“…Most of the auction procedures proposed in the literature deal with these public interest objectives by assuming they will be reflected in the constraints imposed on how lots are to be used. Cardadeiro & Gata (2021) suggest that the use of a multidimensional objective function, where the auction revenue is only one of the dimensions, in line with the 'scoring auctions' literature. Furthermore, to define such objective function, they suggest the use of MACBETH 15 and Collaborative Value Modeling methodologies (Bana e Costa et al, 1994Costa et al, , 2012Vieira et al, 2020) so that a robust objective function could be considered.…”

“…Auctions have been proposed as an airport slot allocation mechanism for more than four decades 11 and, despite the complexity of slot allocation among airlines and some 11 As mentioned in Cardadeiro & Gata (2021), in several instances auction mechanisms have been used to allocate airport slots. In 2016, the Civil Aviation Administration of China initiated a trial slot auction scheme for domestic flights at Guangzhou Baiyun and Shanghai Pudong Airports.…”

“…drawbacks, the theory of auctions has evolved significantly (Milgrom, 2021) providing several tools that could improve the efficiency of how airports use and manage limited capacity (Rassenti et al, 1982;Button, 2008;Basso et al, 2010;Sheng et al, 2015;Ball et al,2018). Cardadeiro & Gata (2021) suggest a combinatorial scoring auction approach, with multiple phases, as an attempt to mitigate some of the criticism regarding previous slot auction proposals, namely the clock-proxy one, and argue, along with other authors (e.g., Ockenfels et al, 2021) that the transitory Covid-driven air traffic reduction should be considered a window of opportunity to implement auctions for slot allocation in congested airports. Steinberg (2021) also supports the use of auctions for this purpose, but further suggests the use of PAUSE as the appropriate auction mechanism, as described by Land et al (2006).…”

“…Given such a capacity constraint scenario, and as argued in Cardadeiro & Gata (2021) an efficient allocation of scarce airport capacity is critical for air traffic growth, as well as for the overall dynamic efficiency of air transport.…”