High time for a market in Heathrow slots

City & Business

The idea floated by British Airways chief executive Robert Ayling last week of a free market in take-off and landing slots at Heathrow airport may not be new, but it is now being pursued with a degree of urgency it has been denied in the past.

BA has already put the suggestion to the Department of Transport and will be raising it with the European Commission, which is already reviewing the issue. Later this month, the question will also be put to the International Air Transport Association's influential industry affairs committee. There is a distinct sense that the idea is securing greater appeal and a degree of political will that it has so far lacked.

The impetus is the deadlock between the British and US governments in their negotiations over a new air travel agreement. Although a certain amount of posturing is an inevitable feature of any bilateral discussions, the breakdown has an added dimension this time round given that a successful open skies agreement has been imposed as a condition for US approval of the proposed alliance between BA and American Airlines.

One of the big stumbling blocks is access to Heathrow. The big US carriers such as NorthWest and Continental who are currently deprived of a presence at this aviation jewel are insisting that they are allowed that privilege as part of any open skies deal. Other airlines like United and our own Virgin Atlantic would like more slots in order to compete effectively with a powerful BA/American alliance.

How then can you devise a system that does not penalise excessively the incumbent slot holders but which allows new or expanding entrants fair access? The answer is a free market in slots.

Unfortunately it is not that simple. There are a number of complex and contentious issues to address. First, there is the question of who owns the slots. Although airlines have acquired rights to slots, they do not actually own them. Implicit in a slot market is certainty of ownership, and there will be much legal wrangling over this issue. Second, the question of the market structure must be addressed. A simple extension of the status quo would not meet US demands, and therefore a significant and sustainable overhaul would be required.

One option would be for the Government to treat slots something like ITV franchises. Airlines would bid for slots but would also have to demonstrate their ability to use them effectively and efficiently in the consumers' interest. The tender process would take account of the status quo by attributing a goodwill value to the slots held by airlines. This would encourage airlines to pay a premium for a change in slot "ownership" but would discourage powerful players from overbidding for slots simply to keep smaller competitors out. A franchise deemed by the chosen regulator not to be under effective operation would be seized from the airline in question and put back out to tender. The tendering process would create a Big Bang in slot redistribution. It may be traumatic, but it would ensure that the market began to operate sooner rather than later.

That market would encourage a much greater efficiency of use at Heathrow. That is important since it will help deal with the vexed question of matching increasing passenger demand with environmental pressure to restrict the growth in the number of flights.

The most efficient carriers, with the highest passenger-load factors, would be able to afford to pay the most for franchises either in the initial tender or in the marketplace. It would create a clear economic relationship between the slot and its commercial benefits. Less efficient operators would find it better, financially, to sell their fran- chises and move routes to other airports.

This should have a positive benefit for London's secondary airports. The joke that the only way to get a plane to land at Stansted is to hijack it would be rendered redundant.

An open market in slots at Heathrow would answer the question of access at a stroke. The open skies deal that the US and British governments seek would be secured. That would then allow the BA/American alliance to be considered in an environment free of the encumberances created by its linkage to an open skies agreement.

Hong Kong success

Eddie George, Governor of the Bank of England, has quietly pulled off an important international banking coup. A seminar he is hosting next week will see for the first time central bankers from both China and Hong Kong appearing on the same public platform. The seminar, entitled "Hong Kong's Monetary Arrangements Through 1997", will see Chen Yuan, deputy governor of the People's Bank of China, and Joseph Yam, chief executive of the Hong Kong Monetary Authority, sharing their vision of how the colony will handle its financial and monetary affairs during the handover next year.

Although the Bank is a somewhat conservative institution, there is no doubting its pleasure at hosting this important seminar. It is critical for the colony's prosperity that the transition to Chinese control is a smooth one. It is also critical that the outside world has confidence in the ability of those charged with that responsibility to deliver a seamless change in ownership.

What will perhaps surprise many who have not followed developments in Hong Kong at close quarters is just how close the working relationship has become between the Chinese and Hong Kong central banks. While we often feed on a diet of political conflict between China and the incumbent rulers that tends to mask the practical co-operation that has developed at the coal-face of market reality.

Mr Yam has worked tirelessly over the last few years to develop a solid relationship with his opposite numbers in China to ensure that the many problems associated with the handover are dealt with. It is no surprise that he has been tipped for a significant role in the post-1997 central banking regime.

Those that remain apprehensive about the transition of the colony to Chinese rule will find much at next week's seminar to reassure them. China cannot afford to undermine the attractions that have made Hong Kong such a successful financial centre. Chen Yuan will deliver tangible evidence of his commitment to the colony's financial integrity.