Since the deregulation of airlines, certain airports have experienced severe congestion problems as the demand for flights to these markets has exceeded capacity. Particular attention has been focused on the three main airports serving the New York market, Newark Liberty International (EWR), LaGuardia Airport (LGA) and John F. Kennedy International (JFK). To alleviate this problem, the Federal Aviation Administration (FAA) limits the number of hourly departures and arrivals. Under this system, an airline must have an operating authorization, or "slot," before it can conduct a particular flight. The proper method of distributing and managing these slots has been debated for decades. Two aggressive new rules recently released by the FAA, which implement slot auctions at these three airports, has intensified discussion of this issue among airlines, airports, the FAA and other stakeholders.

Evolution of the Slot System

The High Density Rule (HDR), which went into effect in 1969, capped the number of departures and arrivals and resulted in today's slot system. This rule initially proved effective in controlling congestion; since few airlines served these airports prior to deregulation, competition for these slots was meager. However, after deregulation in 1978, a surge in requests for slots-deadlocked the original slot distribution method (through airport scheduling committees). In response, the FAA amended the HDR and assigned the majority of the slots at these airports to the incumbent airlines. The FAA also created the Buy/Sell Rule, which authorized a secondary market so slot holders could sell, lease or otherwise transfer their slots. Finally, the FAA instituted "use-or-lose" provisions, which required a slot holder to use the slot at least 65% of the time, or the holder would lose that slot.

As competition for slots and market share continued to increase, the FAA looked closely at the effect the slot system had on competition. A 1996 study by the Government Accountability Office (GAO) found, "control of slots by a few airlines greatly deters entry at key airports in Chicago, New York and Washington." The FAA continued to tweak the slot system to control congestion yet still allow for competition. One of the more notable modifications was a 1999 order in which the FAA granted JetBlue Airlines 75 slot exemptions at JFK. Through this order, the FAA signaled that it would seriously consider the issue of competition when it came to the issues of slots and congestion.

The two rules the FAA released on October 16, 2008 that implement slot auctions at EWR, LGA and JFK maintain a cap on departures and arrivals at each airport. In fact, the rule addressing LGA also proposes to reduce the number of slots per hour. The primary purpose of the auctions is to redistribute a small number of slots. The FAA hopes that the winner of a particular slot auction will be the most efficient user of that slot.

Under both rules, approximately 10% of the total slots at each airport will be withdrawn and either reallocated or retired. An airline that is slated to lose slots will be allowed to designate half of the slots to be withdrawn, while the FAA will determine the remaining slots. The FAA plans to auction one fifth of the withdrawn slots each year for a period of five years. One primary feature of the FAA's rule is the secondary market, where a carrier can buy, sell, lease or trade slots. The FAA believes that the auction will provide transparency regarding the market price for slots and thus reinvigorate the secondary market initially created with the Buy/Sell Rule. A robust secondary market should provide additional opportunities for carriers, especially new entrants, to obtain slots.

The Fight Begins 

The FAA's proposal has been criticized by many sectors of the aviation industry. Several groups, including the Port Authority of New York and New Jersey, have filed suit against the FAA to enjoin it from holding these auctions. Ratcheting up the tension among involved parties is the Port Authority's previous threat to bar any flights that use an auctioned slot. Other government agencies have come out against the legality of the FAA's auctions. In a legal opinion released on September 30, 2008, the GAO found that the "FAA currently lacks the authority to auction arrival and departure slots and thus also lacks authority to retain and use auction proceeds."

Besides the legality of the FAA's actions, industry professionals disagree about the efficacy of these auctions. Legacy carriers object to the removal of slots, which they have held, in some cases, for several decades. They have made investments and developed their service based on the holding of these slots. On the other hand, new entrants and low-cost carriers criticize the rules as not doing anything to encourage competition at these airports. They claim that these auctions would simply allow large, incumbent airlines to purchase the additional slots that would be auctioned. Legacy airlines have an inherent advantage under the current proposal because they are able to enjoy operating efficiencies due to their large number of operators at the airports. As such, legacy airlines can spread the costs of obtaining auctioned slots throughout their operations. Moreover, as the Department of Justice (DOJ) has said, large carriers may spend whatever it takes to keep competitors out of the market. Legacy airlines also have an incentive to outbid new entrants to prevent competition. Low-cost carriers allege that, without any mechanism to prevent large airlines from simply outbidding everyone else, the auctioned slots would likely go to those who would not be the most efficient operators. This is all happening during a period of industry consolidation.

Aviation industry professionals suggest a number of other measures to relieve congestion. Several variations to auctions have already been discussed. For instance, weighted auctions would weigh the bids of smaller carriers more than those of large, dominant carriers in order to level the bidding field. Other auction variations include distributing a certain number of slots in an auction in which only smaller carriers could participate. Other ideas, not involving the auction of slots, have also been proposed. Congestion-pricing plans seek to impose a surcharge on flights departing or arriving during peak times. Some suggest that this would encourage airlines to spread out their flights to off-peak hours, which would result in reduced numbers of flights during the most congested times. Also, regulating the average number of seats that an airline flies into an airport may relieve congestion. At a time when 50% of flights at many large airports are with smaller aircraft, this would encourage or require airlines to use larger airplanes when flying into a congested airport to maximize the efficiency of each slot. Finally, some have criticized the FAA for not implementing operational improvements that would greatly relieve congestion.

While discussions about relieving congestion have occurred for a while, the FAA's two new rules have intensified debate. Congestion affects all aspects of the aviation industry—dominant carriers, regional carriers, low-cost carriers, airports, the government and the traveling public. Consequently, the solutions proposed to relieve congestion will have substantial ramifications on the future direction of the entire industry. It is paramount that concerned parties become involved in these discussions to have their voices heard. The effective presentation of ideas by affected parties to the FAA is critical as it continues to craft solutions to congestion. As the industry has recently experienced bankruptcies, mergers and record-high fuel costs, the allocation of resources, such as airport slots, becomes all the more important.