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Reason Foundation

Airport Policy and Security Newsletter #30

Topics include: Reason's New York airport congestion pricing study; slot auctions versus runway pricing; IATA's WSG the wrong answer to airport delays; questionable anti-MANPADS program; and other news.

Robert Poole
December 1, 2007

In this issue:


Congestion Pricing Best for New York Airport Delays, Study Concludes

The Reason Foundation has just released a new policy study, focused on the serious (and worsening) delay problems at the three major New York metro area airports (www.reason.org/ps366.pdf). We concluded that congestion pricing—basically, a runway departure charge proportional to the length of the departure queue at various times of day—would be the best way of getting the most productive use from these airports' limited runway capacity.

How we got to this conclusion is worth explaining. To be sure, given Reason's free-market orientation, some form of market allocation (rather than "administrative" allocation) of runway capacity naturally appealed. But for the reasons Mike Levine laid out in the policy brief we published last month, the New York airports present an especially difficult setting (see www.reason.org/pb66_nycongestion.pdf). That's because the Port Authority, which operates the airports, has a legal exemption from the normal federal rules that require all airport revenue to be spent for airport purposes. Hence, the airlines fear a congestion price could end up as simply a new tax on flying, with the proceeds not benefiting either themselves or their passengers.

But that was just the beginning. The airlines have numerous concerns about pricing, which the Air Transport Association and several carriers went to considerable lengths to explain to Reason colleague Ben Dachis and me. These fall into three broad areas: that pricing wouldn't actually work at these airports, that JFK (and, by implication Newark) is a special case due to its trans-Atlantic operations, and that "demand management" such as congestion pricing would divert attention away from the real need, which is to expand airport capacity.

We unpacked those concerns into nine specific issues, and our main ATA contact agreed that we had accurately represented all nine. Then we went to work, examining two decades of airport pricing studies to see if we could find or devise a pricing approach that would address these concerns. One of these was the NEXTOR "strategic simulation" of pricing alternatives at LaGuardia—a kind of war game in which airline schedulers played the role of airlines responding to three alternative forms of demand management: administrative cutbacks, congestion pricing, and slot auctions (see www.reason.org/pb67_airportdelays.pdf). The results of that simulation showed that congestion pricing did very well on those airline concerns that were relevant at LGA.

Based on that positive result, Ben built a congestion pricing model for JFK, with a similar departure charge based on departure queue lengths, and a similar iterative process of setting the prices for each time of day (a kind of quasi-auction to set each season's prices). The results paralleled those for LGA, but they also addressed the "JFK is an exception" case, by demonstrating that the evening window for trans-Atlantic departures would be protected, as airlines shifted regional jet operations out of that window and used up-gauging on some of their feeder flights.

Finally, we took on the "what to do with the revenues" and "disincentives for capacity expansion" issues, with the help of former PA Aviation Director David Plavin's excellent briefing paper (www.reason.org/pb68_airportpricing.pdf). Although initial indications are that our proposed departure charges—if used instead of existing weight-based landing fees—would be close to revenue neutral, we proposed that any net new revenues be sequestered in a "lockbox" dedicated solely to projects to expand the airports' capacity.

And we proposed that the DOT/FAA's part of the deal would be to prioritize NextGen investments and shorter-term improvements in ATC procedures for the New York airports and any other congested airports that implement congestion pricing.

The DOT's current position is that since the PA as of now does not want to implement congestion pricing, DOT is going to try implementing slot auctions. We think that path is fraught with obstacles (see next article). We also think that New York/New Jersey business and political leaders don't really understand the kind of congestion pricing approach laid out in our study—which would reduce flight operations at the airports without reducing passenger throughput, while focusing federal attention on incremental and longer-term increases in capacity. New York leaders' real concern seems to be that a mandated cutback in flight operations would reduce passenger volume—as it likely would, in the absence of real pricing incentives to make more productive use of that expensive capacity.

We even think there's a chance the airlines could come to see the congestion pricing package we proposed as less-bad than what DOT is proposing—mandated schedule cutbacks and a limited amount of slot auctions. That approach will likely require that foreign carriers be exempted—unlike our pricing approach. And it does not include an all-out DOT priority on airport and ATC improvements in the New York region.

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Slot Auctions vs. Runway Congestion Pricing

There are two different ways of using the market—rather than administrative measures—to allocate a congested airport's limited capacity during peak periods. One is to charge congestion-based prices for runway use (either landings or take-offs or both). The other is to auction off all the "slots" (allowable operations, in specific quarter-hour time blocks) on a periodic basis. Economists can show that, in terms of long-term results, the two methods end up producing pretty much the same results, allocating that scarce capacity to its most economically valuable uses.

But in the real world, where we are starting from a messy situation at highly congested airports like LGA and JFK that formerly had administratively allocated slots under the now-repealed High Density Rule, there are big differences between the two approaches. Most proposals for introducing slot auctions would phase them in (e.g., auction 10% of the slots each year for 10 years, with some kind of finite life such as five years). So as not to be "arbitrary" in deciding who goes first, they'd use some kind of random selection of which 10% to auction first, etc. That kind of process is not likely to lead to highest-and-best use until the entire 10-year phase-in has been completed (and some argue for as long as a 20-year phase-in). Nor, therefore, would it provide much immediate congestion relief.

By contrast, a runway pricing system could be introduced for all airport users, all at once, and start producing its benefits immediately. There would be no need for a long transition period, or random losses of slots that some carriers might find hard to replace, even with a secondary market.

Ah yes, critics will reply, but who sets those "market-based" prices, and won't they most likely be too low (still allowing congestion) or too high (wasting scarce capacity)? Good question. Based on the approach developed for the NEXTOR simulation game, we recommend a pricing body for each airport, operating under agreed-upon rules, advised by a team of economists and operations researchers like those who devised the NEXTOR games. For each schedule season, the pricing body would create a proposed pricing schedule, based on the most recent congestion data, and submit it to the airlines for review. Airlines would adjust their schedules in response, and the pricing body would model the impact on congestion, adjusting prices in response to the schedule changes. After several rounds of this discovery process, the final prices and schedules would be set for the coming season. This iterative process functions as a kind of au ction, and in that sense is actually a blend of the two approaches.

The runway pricing approach also puts to rest any lingering belief that incumbent airlines have some sort of implied property right in their former "slots" at the airport. Those claims were never accepted by FAA/DOT in any event, and legal "slots" were abolished when Congress repealed the High Density Rule. Airports like O'Hare and LaGuardia that are operating under temporary administrative controls on maximum hourly operations do not have "slots" in the HDR-era sense of the term. But if a formal auction process is developed to allocate capacity at the New York airports, instead of congestion pricing, the units that will be auctioned will be called "slots," and all sorts of mischief will result. If there are going to be "slots," then shouldn't some be reserved for "new entrants," for "underserved cities," for airlines with planes of 19 or less seats? What about foreign carriers? The mind boggles.

But charging for the use of runways has always been the prerogative (indeed, the duty) of the airport operator. It's clear that under aviation law as it has developed in this country, airports may charge based on something other than aircraft weight, as long as those charges are nondiscriminatory. The International Civil Aviation Organization (ICAO), to which the United States is an original signatory, even encourages congested airports to use congestion pricing.

By contrast, DOT legal expert Nancy Kessler says the FAA has no authority to impose pricing on airports, unless Congress gives it that authority. And not only is Congress unlikely to do that, but if it ever did, it would not impose "clean" pricing. Oh, no! You can be sure that in an effort to protect every imaginable constituency, members of Congress would seek numerous exemptions from the pricing. That's what members of Congress do, after all. Far better, therefore, to rely on airports' historic responsibility to charge for the use of their runways, rather than asking Congress to enact a solution.

And another point, while we're on the topic of exemptions. Under current U.S. bilateral agreements, foreign carriers get rights to serve certain airports. Whenever slot allocations have been made at airports like JFK, foreign carriers have been given exemptions, to protect the rights granted by those bilaterals. DOT has already said that if it imposes administrative cuts in hourly operations at JFK, foreign carriers will be exempt, thanks to bilateral provisions. But that would not be the case with a revamped pricing system at JFK or EWR. The only U.S. obligation under international aviation law is to not discriminate against foreign carriers. They always pay the prevailing charges to use airport runways in whatever country they fly to. So there is no good case for exempting foreign carriers from a congestion pricing system at the New York airports.

Yet another advantage of a pricing solution: fractionals, air taxis, and corporate jets are not a good fit for a slot-auction system, since "slot" implies "scheduled"—and they don't operate on fixed schedules. Nearly all such GA flights at LGA, JFK, and EWR are high-value jets whose users in many cases are able and willing to pay the market price for using those airport runways (but who also, of course, have numerous other choices in the New York metro area, with 15 towered airports).

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Why the IATA Worldwide Scheduling Guidelines (WSG) Is the Wrong Answer

I cannot leave the subject of the New York airports delay problem without saying a few words about what has emerged as the main proposal from large carriers: adoption of the International Air Transport Association's "Worldwide Scheduling Guidelines" to the New York airports.

How this would work is the following. DOT would step back in time to the now-repealed "slots" of the High Density Rule and grant a permanent property right in them to the incumbent carriers. (When the HDR was in effect, DOT repeatedly made clear that they were temporary use rights, not permanent property rights, even though some airlines put them on their balance sheets.) Then any new slots that became available (via an incumbent's bankruptcy or withdrawal from the airport, or via ATC or runway improvements) would be auctioned off in a "secondary market" that would also permit incumbents to sell or trade their grandfathered slots. IATA and ATA have been going all-out, touting this as a market-based solution to airport congestion.

Yes, a secondary market is a market of sorts. And you would think that creating a market where there isn't one now is something a free-market guy would cheer. Well, count me out. There's a ton of empirical evidence that this IATA system of grandfathered slots and secondary trading—as used in Europe and elsewhere--leads to very few slots ever becoming available. WSG creates incentives for slot hoarding, not trading, given the use-it-or-lose-it rules that require a slot-holder to use the slot at least 80% of the time. In reality, this system serves as a very effective way to protect the "ins" from competitive threats from newcomers who might offer customers better combinations of price and service.

So it's no surprise that in the DOT's recent New York Aviation Rulemaking Committee deliberations, there was considerable dissent from the majority airline view about the wisdom of adopting IATA WSG. Alas, most of the dissent was not very principled. AirTran, for example, focused mainly on making the case that WSG should not be applied at LaGuardia, which it serves. That was also the position of small-carrier trade group Air Carrier Association of America. Virgin America objected not to the principle of government slot allocation but to doing away with special exemptions for new entrants. The closest thing to a principled objection came from the National Air Carrier Association (representing Allegiant, ATA, Sun Country, and some cargo carriers). NACA actually opposed the use of WSG at all three airports, period.

As attorney Ken Quinn noted in his submission, "The entire premise of the WSG—granting rights of ‘historic precedence' in perpetuity—is antithetical to the Airline Deregulation Act." Doing this "would create a huge financial windfall to incumbent carriers, shut out new entrants, erect formidable barriers to entry, encourage slot hoarding, and facilitate incumbent attempts to extract scarcity rents from consumers." It would be the worst possible outcome of government attempts to fix the delay problem in New York.

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Questionable Airborne Anti-Missile Program Continues

I've written before in a skeptical vein about continued congressional interest in forcing airlines to equip all their planes with anti-missile systems, to counter the threat of man-portable air defense missiles (MANPADS) in the hands of terrorists. The cost would be very high (estimates run to $38 billion over 10 years) and the benefits questionable. Given that there is some degree of threat from the hundreds of thousands of such missiles that may be in civilian hands worldwide, far less costly alternatives might include (1) equipping only airliners that fly to regions where terrorist threats are much higher than in the United States, or (2) installing ground-based anti-missile systems (like Raytheon's Vigilant Eagle) around the major U.S. airports.

But Congress just cannot resist pushing the "equip-all-airliners" idea. In response to a congressional mandate, the Department of Homeland Security has spent several years flight testing anti-missile systems from BAE and Northrop Grumman on U.S. commercial cargo planes. In the 2007 homeland security appropriations bill, Congress added language, not sought by DHS, to select one of these firms to test the system on passenger airliners for a year. Last week DHS announced the winner; BAE Systems will use the $29 million to equip some American Airlines planes with its JetEye system. Like Northrop's Guardian, JetEye uses a multi-band infrared laser to mis-direct the approaching missile, which it spots via a combination of an infrared camera and an ultraviolet sensor warning system.

I'm no expert on these systems, but a letter in Aviation Week (Nov. 26, 2007) states that "UV sensors have a deplorable rate of finding rocket motor signatures in a high-ozone environment. And you encounter these conditions around every major metropolitan airport between 10 AM and 2 PM, the hours of peak solar heating during the summer." The letter writer, Capt. Clyde Romero, Jr., goes on to note that "Testing at White Sands Missile Range, NM, with a blue-sky background, is not consistent with the environment in which I fly daily with passengers."

If Capt. Romero's point is valid, then it appears that even if the system poses very few operational or maintenance problems in daily airline service, its effectiveness (assuming there are actual MANPADS threats within the USA) will have to be counted as unknown.

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News Notes

Canadian Pensioners Buying Auckland Airport. The Canada Pension Plan Investment Board has offered $1.4 billion for a 40% stake in the privatized Auckland International Airport. Existing shareholders include New Zealand's state pension fund, utilities investor Infratil, and two local governments. The Canada Pension Plan is a partially funded retirement program for all Canadians (except Quebec)—a hybrid between a pay-as-you-go system like U.S. Social Security and a fully funded pension plan. As part of its program to diversify and increase the rate of return on its investments, the CPP Investment Board now directs 3.6% of its investment to private equity, including infrastructure such as airports and toll roads.

End of One-Bag Carry-On Rule in Britain. Air travelers to (or through) U.K. airports can breathe a sigh of relief. Transport Minister Ruth Kelly announced last month that effective Jan. 7, 2008, the one-bag limit will be lifted at airports that have installed improved carry-on screening equipment. Manchester and all seven of BAA's U.K. airports have done so, and expect to be approved. (Friends of mine who changed planes at Heathrow several months ago told me horror stories of passengers arriving from other countries with two carry-ons and having to discard one (or exit security and stand in long lines to check the bag, then stand in even longer lines to re-enter through security. There were a great many very, very unhappy people.)

New TRB Research Efforts. The Transportation Research Board has announced two important new projects under its Airport Cooperative Research Program. The first (for which proposals were due by Dec. 7) is a systematic study to compare alternative models of airport governance and ownership, including privatization. (ACRP Project 11-08, Study Topic 1-08). The other (proposals due Jan. 9, 2008) is on understanding common-use approaches at airports. (ACRP 10-05). Details are on the TRB website: www.trb.org.

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Quotable Quote

"I am not in favor of a system that limits competition, nor do I want to reduce the ability of new entrants to fly into New York."

--Transportation Secretary Mary Peters, opening statement, New York Aviation Rulemaking Committee

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Robert Poole is Searle Freedom Trust Transportation Fellow and Director of Transportation Policy


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