The Allocation of Slots in the Airline Industry

An increasing number of international airports is congested. To improve the use of scarce airport capacity, so called "slots" have been introduced. A slot represents the right to schedule a flight operation during a specific time interval at a specific airport. Slots are at most airports allocated by the "grandfather" rule, i.e. they are allocated to the incumbent of the prior flight plan period.
This mechanism has been criticized because of lacking allocative efficiency and reduced opportunities for competition. As a remedy it has been proposed to apply social marginal cost pricing or auction off slots. But these suggestions neglect investment in transaction specific capital, the network characteristic of flight services and transaction costs.
To take these factors into account the instruments of transaction cost economics have been applied to the airline industry. Requirements for a slot allocation mechanism are derived from the analysis. It is studied if the currently used mechanisms in the USA and the EU suffice these requirements and whether grandfather airlines have superior bargaining power. Finally, a framework for a slot contract and allocation mechanism is proposed.