Chinese Journal of Aeronautics, (2023), 36(12): 1–12

Chinese Society of Aeronautics and Astronautics

& Beihang University
Chinese Journal of Aeronautics
[email protected]
www.sciencedirect.com

REVIEW

Secondary trading of airport slots: Issues and

challenges
Yanjun WANG a,*, Mengyin WANG a, Weishan XU b, Mark HANSEN a,c
a
College of Civil Aviation, Nanjing University of Aeronautics and Astronautics, Nanjing 210016, China
b
Adam Smith Businesses School, University of Glasgow, Glasgow G12 8QQ, UK
c
Department of Civil and Environmental Engineering, University of California, Berkeley 94720, USA

Received 26 December 2022; revised 5 July 2023; accepted 7 July 2023

Available online 13 July 2023

KEYWORDS Abstract Most Level 3 airports around the world suffer severe congestion and flight delays. Air-
Air traffic management; lines have to obtain airport slots in order to schedule flights at such airports. The main way for air-
Airport capacity; lines to acquire slots is primary slot allocation, in which a slot coordinator distributes slots to
Airport slot allocation; airlines according to certain rules and regulations. Due to excessive demand for slots and restric-
Market-based mechanism; tions on allocation rules, it is difficult for some airlines to obtain the desired slots in this manner.
Secondary slot trading Another way for airlines to obtain slots is through secondary slot trading, in which slots can be
redistributed among airlines without being returned to slot pool. The secondary trading of airport
slots has played a positive role in promoting the efficient utilization of slot resources, but systematic
studies are insufficient. This paper discusses the reasons for the existence of slot secondary trading,
sorts out the main policies and rules governing the mechanism, investigates its impacts on the indus-
try and society, and points out the major problems and challenges. The paper provides a reference
for subsequent research and practical application of airport slot secondary trading in the future.
Ó 2023 Production and hosting by Elsevier Ltd. on behalf of Chinese Society of Aeronautics and
Astronautics. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/
licenses/by-nc-nd/4.0/).

1. Introduction which contributed up to 50% of the total passenger traffic.

Although the COVID-19 outbreak has significantly impacted
Air transportation is by far the most efficient and fastest mode the air transportation industry, it is foreseen that the industry
for moving people and goods over long distances. As an essen- will recover very quickly when the pandemic ends. At this time,
tial component of the comprehensive transportation system, it is anticipated that air traffic demand will surpass capacity at
air transportation plays an important role in national and local Level 3 airports. Efficient and effective means are required to
economic development. According to Airport Council Interna- manage the imbalance between demand and capacity.
tional (ACI), the Year 2019 witnessed the global total passen- A prevalent approach for airport demand management is
ger traffic exceeding 9.1 billion at a total of 2565 airports in airport slot control.1–4 A slot is defined as ‘‘permission given
180 countries, with an increase of 3.5% over the Year 2018. by a coordinator for a planned operation to use the full range
Among these airports, there are about 200 Level 3 airports, of airport infrastructure necessary to arrive or depart at a
Level 3 airport on a specific date and time”.5 After obtaining
* Corresponding author. slots, an airline will plan its transportation service by generat-
E-mail address: [email protected] (Y. WANG). ing strategic schedules. The International Air Transportation
https://doi.org/10.1016/j.cja.2023.07.004
1000-9361 Ó 2023 Production and hosting by Elsevier Ltd. on behalf of Chinese Society of Aeronautics and Astronautics.
This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
2 Y. WANG et al.

Association (IATA) classified airports into three categories: WASG as well as most slot guidelines provide several ways
Level 1, Level 2 (i.e. slot facilitated airport), and Level 3 (i.e. of secondary trading, such as slot exchange, transfer, and joint
slot coordinated airport). In a Level 1 airport, the airport operation, there are ambiguous rules and concerns that hinder
capacity can satisfy the demand all the time. At Level 2 air- the orderly flow of slots between airlines. The policies and reg-
ports flight demand may surpass the capacity at a certain speci- ulations on secondary trading vary from country to country,
fic time of day, or a certain week or season. Thus, a slot while the impact of fully allowing secondary trading is
facilitator is required to facilitate the planned operations to unknown. Here we review the policies, reports, and studies
solve the imbalance. A Level 3 airport usually has the follow- on the secondary trading of airport slots. We draw from these
ing issues: (A) Flight demand is significantly greater than air- works to discuss policy and research insights.
port capacity most of the time; (B) It is impossible to
increase airport capacity through expanding airport infrastruc-
ture in the short term; (C) Voluntary schedule adjustments are 2. Secondary trading: A market-based mechanism in practice
inadequate to address capacity and demand imbalance; (D)
Slot allocation process is carried out, with an appointed slot Airport capacity and demand management is recognized as an
coordinator to allocate the slots to all air carriers who are important instrument to reduce congestion in air transporta-
requesting the slots. tion.6–8 A prevalent approach for airport demand management
In general, there are two approaches for an airline to obtain is airport slot allocation. The mechanisms of slot allocation
slots at a Level 3 airport: through the primary allocation or can be divided into two categories: administrative and
secondary allocation (see Fig. 1). In the former, the number market-based. In the former and more prevalent method, a
of slots that can be allocated to airlines per unit time will be slot coordinator is responsible for allocating airport slots
defined firstly; this is commonly known as airport declared based on codified rules, regulations, and procedures. The latter
capacity. Airlines submit slot requests, and the relevant encompasses both pure-economic approaches (i.e. congestion
authority will distribute slots to the airlines whether based pricing) and hybrid approaches (slot auction, slot secondary
on administrative controls or market-based mechanisms. At trading).9 Due to its simplicity, the administrative approach
present, most Level 3 airports choose administrative is favored by many countries/regions, including the European
approaches to allocate slots. According to the Worldwide Air- Union (EU), China, South Korea, etc. Under such an
port Slot Guidelines (WASG, formerly known as Worldwide approach, the slot coordination parameters are first deter-
Slot Guidelines (WSG)) published by the Worldwide Airport mined by the relevant authority. These parameters predefine
Coordinator Group (WWASG), IATA, and ACI, each coun- the upper limits of the number of slots per unit time that can
try or region can put forward its own rules and regulations be allocated to the airlines. Slots that were assigned to incum-
to allocate slots by taking local laws and practice into account. bent airlines in the past, termed historic slots, are identified.
In fact, most of the slot allocation guidelines around the The entitled airlines or other aircraft operators will submit
world are based on two fundamental principles: Grandfather their requests for slots. The slot coordinator allocates the slots
rights and the use-it-or-lose-it rule. Grandfather rights entail to the airlines following certain rules.5 Countries/regions
that an aircraft operator enjoys the priority to hold and use adopting the administrative approaches establish slot rules
its historic slots in the next equivalent season under certain pre- and procedures that are applicable to their own practice. The
conditions, which aim to protect the consistency of the aircraft existing allocation rules mainly follow the WASG, which
operators’ flight service. The use-it-or-lose-it rule requires an incorporates the principle of Grandfather rights, the use-it-
airline to keep the utilization rate of a series of slots greater than or-lose-it rule, and NE preference in assigning slots not grand-
some minimum requirement, generally 80%. If an airline fails to fathered to incumbents.
meet this standard, the slot will be returned to the slot pool and In the past decades, the primary slot allocation has attracted
re-allocated to other airlines. The market-based mechanism is much attention from both academia and industry. As shown in
yet another method that is applied for primary allocation. Fig. 1, there are mainly two types of methods for primary slot
Two typical approaches are slot auction and congestion pricing. allocation: administrative approaches and market-based mech-
One main argument for market-based allocation is that the true anisms. The market-based mechanisms are discussed theoreti-
value of slots should be revealed in the market. The United cally by economists including slot auction and congestion
States had attempted to introduce market-based mechanisms pricing.10–18 It is believed that congestion pricing could be an
into slot allocation. However, the plan to auction slots at three economical approach that is applicable to all airports.16 How-
New York airports was blocked by the U.S. Court of Appeals ever, due to unresolved issues such as ambiguity of slot owner-
for the District of Columbia Circuit at the last minute. China ship and the price of slot, the market-based mechanism is rarely
has carried out two market-based slot allocation trials at applied in practice. In contrast, administrative slot allocation
Guangzhou Baiyun International Airport and Shanghai has been a mainstream of research in airport demand manage-
Pudong International Airport in 2015. No following up studies ment over the decades. The existing literature considers various
or reports were found. More detailed discussion of primary slot factors such as efficiency, fairness, priority, etc.19–22 An integer
allocation can be found in Jacquillat and Odoni.1 linear programming model for single-airport slot allocation is
Given the fact that there are a limited number of new slots developed in 2012 based on the IATA WSG and EU 95/93 slot
available at most congested airports, it has become extremely allocation rules.4 The objective of the model is to minimize
difficult for a New Entrant (NE) or small airlines to enter or schedule delay. Then, two bi-objective slot allocation models,
expand the market via the primary allocation. An alternate considering slot allocation efficiency and acceptability, are pro-
way for airlines to obtain slots at a Level 3 airport is through posed. However, these models do not consider slot request pri-
secondary trading, i.e., slot flows between airlines without orities. In a work by Ribeiro et al., a multi-objective dictionary
being returned to the slot pool (see Fig. 1). Although the minimization slot allocation model is formulated, which con-
Secondary trading of airport slots: Issues and challenges 3

Fig. 1 Main methods of airport slot allocation.

siders all the slot requests priorities given in WSG.23 As fairness (3) The approach inhibits market competition and discour-
among airlines has received more attention, researchers started ages NEs from entering the market.32–34 Grandfather
to introduce fairness into the slot allocation model. For exam- rights prevent NEs from entering the market to compete
ple, bi-objective models that trade-offs schedule displacements with the incumbents. To alleviate this constraint, WASG
and fairness are developed.24,25 The results show that the fair- stipulates that 50% of the slots in the slot pool can only
ness of slot allocation can be improved significantly by increas- be provided to the NEs. However, owing to the scarcity
ing a small number of displacements. Note that the works of airport capacity and the desire of current slot holders
mentioned above all focused on a single airport. At the airport to retain their slots, the number of slots in the pool is
network level, the slot allocation model considers the coupling very limited. It remains hard for a NE to acquire enough
of slots needed to operate flights at departure and arrival air- slots to compete with incumbent air carriers. The num-
ports, as well as sector capacity constraints.11,26 To further ber of slots available in the pool may force NEs to offer
account for the uncertainty of airport capacity, a two-stage low-frequency services.
random programming algorithm is presented for slot allocation (4) Slot pool allocation policies, while favoring NEs, may
at the network level.27 A heuristic algorithm is developed to create an incentive for incumbents to resist actions that
solve the slot allocation problem of airport networks expand the slot pool, such as adding additional capacity
effectively.28 to the airport.
However, the administrative approach has gradually
exposed defects in the context of the evolution of the air trans- Faced with these problems, many researchers favor imple-
portation industry, which may impede market development. menting market-based mechanisms to allocate slots. Slot value
The main deficiencies criticized by the airlines and researchers and airline preferences are better reflected in market-based
include: mechanisms, which are expected to allocate slots to the air car-
riers that can put them to the highest and best use. Addition-
(1) Due to the natural property of the administrative ally, market-based approaches promote the flow of slots
approach, the current administrative system is widely between air carriers and enhance market competition, thereby
criticized as being economically inefficient by researchers eliminating the major deficiencies of administrative allocation.
and regulators. One main reason is that the scarcity of
capacity at congested airports is not revealed using the 3. Policy and regulations for slot secondary trading
administrative mechanism. Economists argue that the
airport slots may not be allocated to the airlines that One way to alleviate the problems that result from administra-
value them most.29,30 tive slot allocation is to introduce a secondary mechanism by
(2) The incentive to retain slots leads to unproductive slot which slots can be shifted between air carriers after the pri-
usage. Driven by Grandfather rights and the use-it-or- mary allocation has been completed. As early as 1979, Grether
lose-it rule, airlines tend to hoard low-value slots to et al.35 investigated the problem of secondary slot trading.
reserve them for future use. To minimize the cost of Because the slots of different airports are allocated separately,
using these slots, smaller aircraft are arranged to fly the slots obtained by an airline at two airports may be at
short-haul routes because of lower load factors. Empir- incompatible times. Therefore, secondary allocation is neces-
ical evidence shows that airport capacity is not being sary to adjust the initial allocation. Bilateral trade is one of
fully or efficiently used.31 the main methods in this aftermarket mechanism. For exam-
4 Y. WANG et al.

ple, suppose an aircraft operator obtains a departure slot at compensation. The Airport Coordination Limited (ACL),
airport A but cannot match with an arrival slot at airport B which provides slot coordination services and secondary trad-
because of a schedule mismatch. The operator may purchase ing services for most airports in the UK, has detailed informa-
a suitable arrival slot at airport B and sell the old one in the tion and data on secondary trading data for London
market. Rassenti et al.36 designed a combinatorial auction Heathrow Airport and Gatwick Airport. ACL’s definition of
mechanism to trade slot packages in the primary allocation slot secondary trading is quite broad, and includes almost all
to solve the problem of this mismatch in 1982. A secondary types trading, including the exchange of airport slots, transfers,
mechanism is set up that allows airlines to buy and sell slots. and leases. Under the umbrella of Regulation 95/93, ACL does
In terms of slot guidance, from the first edition of the World- not provide explicit rules on whether any form of monetary
wide Scheduling Guidelines (WSG) issued in 2000 to the pre- compensation can be involved in slot trading.
sent WASG, IATA consistently encourages the flow of slots A particular means for regulating slots is the use of ‘‘com-
between airlines. However, there has been little explicit policy petition remedy” slots when a considerable number of slots
making about secondary slot trading. The IATA and other will be traded between two incumbent airlines. This includes
civil aviation authorities (except the United States (U.S.)) have the situations such as the merger of two airlines, or the
never established clear guidance on whether to allow slots exchange of a large amount of slots between two airlines.
trading. The impact of airport slot secondary trading on the The competition remedy means that two airlines must return
slot holders and air transportation market clearly deserves fur- a proportion of the total traded slots to compensate for the
ther investigation in airport demand and capacity potential adverse impact on market competition. Common
management. approaches for competition remedy can be divided into two
Market-based mechanisms include congestion pricing, slot categories: (A) Airlines voluntarily return a proportion of air-
auctions and slot secondary trading. The main views on the port slots. For example, Air France and KLM agreed to form
first two approaches are: (A) congestion pricing can internalize the Air France-KLM group in 2004, and the two airlines gave
the delay cost of airlines, but issues of fairness and predictabil- up a total of 94 daily arrival and departure slots; (B) Airlines
ity are unresolved; (B) slot auctions can promote a more effi- transfer or sell some of the slots to NEs or Low-Cost Carriers
cient allocation of resources than administrative allocation, (LCCs). For instance, US Airways acquired American Airlines
but there are risks of increasing operating costs and market in 2013 and committed to transfer 104 slots to LCCs. Compe-
monopoly. Here, our focus is on the secondary trading of air- tition remedies have been implemented ad hoc, without articu-
port slots. After obtaining slots in the primary, presumably lated policies specifying what slots must be returned or
administrative, allocation, airlines can exchange, sell, transfer, transferred for any given exchange.
or lease/rent the slot in the market. Slots can be redistributed The Civil Aviation Administration of China (CAAC) pro-
among the airlines without being returned to the pool. This posed a reform plan in 2015, adopting a pilot attempt to carry
process is carried out in the secondary allocation mechanism. out market-based allocation of slots at Shanghai Pudong Air-
The United States approved the ‘‘Buy/sell rule” in 1986, port and Guangzhou Baiyun Airport. In 2018, CAAC38 issued
which allows airlines to sell, buy, or lease slots at four airports the ‘‘Administrative Measures for Civil Aviation Airport
(John F. Kennedy International Airport (JFK), LaGuardia Slots”, allowing airlines to exchange, transfer, and jointly
International Airports (LGA), O’Hare International Airport operate their slots. However, the trading is restricted to slots
(ORD), Ronald Reagan National Airport (DCA)) under the at the same airport and limits the quantity of slots that can
High-Density Rule (HDR). Due to objections from NEs, the be exchanged or transferred.
U.S. made a series of adjustments to the rules. For example, Regulations on the manner and scope of slot transfers in
the Federal Aviation Administration (FAA) established a the secondary mechanism in different countries are shown in
‘‘blind market” at O’Hare Airport and LaGuardia Airport in Table 1 5,38,39. The U.S. Department of Transport (DOT) spec-
2005 and 2006, respectively. In the blind market, airlines are ifies that only domestic slots can be bought, sold, rented, or
allowed to take the bid level as the only consideration when used as collateral for loans. The EU slot regulation emphasizes
trading slots. The evolution of secondary trading in the U.S. that only slot transfers or one-for-one exchanges without mon-
is shown in Fig. 2. etary compensation are allowed. However, in practice, grey
To address the problems arising from administrative alloca- markets exist where slots sales or rentals do involve monetary
tion, the EU has also investigated related regulations on slot compensation. As discussed above, the use of competitive
secondary trading. Early in 1967, slot allocation in the EU fol- remedial slots is also included. China’s latest slot guidelines
lowed the IATA Scheduling Procedures Guide (SPG). A new issued in 2018 allow one-by-one exchange, transfer, and joint
regulation EU Regulation 95/93 came into force in 1993, operation of slots at the same airport. The observed differences
which is again based on the IATA’s regulation. Interestingly, may reflect varying attitudes of different countries/regions
IATA does not explicitly allow or prohibit slot trading involv- towards slot property issues, which will be discussed in
ing compensation. It only states that ‘‘may only take place Section 6.1.
where they are not prohibited by the laws of the relevant coun-
try.” However, the grey market of secondary trading was legit- 4. Impacts of slot secondary trading
imated by the United Kingdom (UK) High Court in 1999
when the slot trading between British Airways and the KLM Under existing slot rules and policies, airlines are allowed to
was approved.37 The 2004 amendment to Council Regulation use the secondary mechanism to trade slots, which will inevita-
(EEC) 95/93 on Common Rules for the Allocation of Slots bly impact the air transportation market. Here, we review cur-
at Community Airports (Regulation 95/93) allows air carriers rent literature and practice related to slot secondary trading,
to trade and transfer slots under certain circumstances, but and analyze the consequence of this slot allocation regime with
there is no clear legal provision on issues involving monetary
Secondary trading of airport slots: Issues and challenges 5

Fig. 2 Slot regulation development timeline in Europe and the US.

Table 1 Secondary slot market practices permitted in the U.S., the UK and China.5,38,39
Practice Definition U.S. UK China
p
Sale Slots can be sold and bought between airlines. D
p
Lease/Rent Slots can be leased to another airline for use. D
p
Mortgage Airlines can use slots as collateral in exchange for the loan.
p p p
Exchange Airlines can swap slots on the basis of one-to-one exchange.
p p p
Transfer Slots can be transferred to another airline that is serving or planning to serve the same airport.
p p p
Shared A shared operation involves slots held by one airline being used by another airline.
operation
p p
Competition Two airlines must return part of total traded slots in certain situation to compensate for the potential
remedy adverse impact on market competition.
p
Note: : allowed in policy; D: not allowed in principle, but grey areas exist.

respect to resource utilization, market competition, airline In economic theory, the mobility of resources encourages
operations, slot hoarding, and social welfare. We further allocative efficiency, by allowing them to shift to those agents
divide those impacts into those that are widely considered to who value them the most. When there is limited competition,
be beneficial and those that are more problematic or even however, mobility of slots is not an unqualified good. If a large
detrimental. number of slots shift to a leading airline, it may reduce compe-
tition in the market. Therefore, how to ensure that slot mobil-
4.1. Beneficial effects ity results in market dynamism rather than market
monopolization is an important policy challenge.
4.1.1. Facilitating flow of slots between airlines
When the number of slots in the slot pool is insufficient to meet 4.1.2. Promoting market competition
demand, secondary trading is an effective means to improve Air carriers can use a variety of secondary trading methods in
the liquidity and availability of slots, thereby promoting effi- combination with primary allocation to gain access to new air-
cient utilization of airport capacity. Strong evidence suggests ports and expand their presence in airports they already serve.
that the Grandfather rights and use-it-or-lose-it principles For instance, Delta Airlines initially entered London Hea-
are the main reason for airlines holding unused slots rather throw Airport through joint ventures with Air France and
than returning slots. Constrained by the physical infrastructure KLM. Later, it gained the historical precedence of slots by
and air traffic operation procedures of the airport, it is difficult leasing and purchasing slots, and finally achieved its purpose
to add new slots to the slot pool. Statistics in an ACL’s report of expanding at Heathrow Airport. Guiomard34 analyzed the
show that a total of 4710 weekly slots were traded in the sec- relationship between slot control rules and competition at
ondary mechanism from the 2008 summer flight season to Dublin Airport. The author argued that the best way to pro-
the 2019 summer season at severely congested London Hea- mote competition in the aviation market was to choose a mar-
throw Airport, while there were only 356 slots allocated from ket mechanism including slot trading or runway charges.
the pool.40 In other words, over 90% of slot acquisitions dur- Researchers have used econometric methods to investigate
ing this period resulted from secondary trading instead of pri- the impact of secondary trading on market competition. For
mary allocation. example, Fukui analyzed slot trading data in the UK. It was
6 Y. WANG et al.

found that slot trading between alliance or codeshare partners stances, consumers’ interests may be harmed. The two possible
did promote route competition by increasing the number of outcomes are known as the dilemma in market concentra-
airline competitors.41 tion.44 While recognizing the effects of secondary trading,
Matthews and Menaz30 also noted the issues of market con-
4.1.3. Enhancing flight frequency and service centration. Fukui41 found that slot trades among rival carriers
By participating in the secondary market, airlines can acquire in the UK market reduce the number of competitors on indi-
new slots. These slots can be used to enter new markets or vidual routes. Airlines are inclined to obtain slots from com-
enhance the frequency of existing services. Mott MacDonald39 petitors to strengthen their dominant advantage on existing
highlighted in its report that with the introduction of sec- routes.45
ondary trading in European airports, both hub carriers and The monopoly problem caused by secondary trading can-
NEs may become strong slot buyers. The hub carriers tend not be ignored. Restrictions and regulations are needed to dis-
to buy slots to add to their long-haul routes or to strengthen courage this outcome. However, secondary trading of slots was
important short-haul routes. For the NEs, slot purchasing initially introduced to maximize the efficiency and economic
may be difficult because of limited financial resources. benefits of slot utilization. It must be noted that restrictions
The average number of seats per slot purchased from the on the market may dilute the desired effects. Restrictions on
secondary mechanism is increased, since airlines prefer to use secondary slot trading must therefore maintain a delicate bal-
larger aircraft and fly longer routes with the slot. In contrast, ance between promoting market efficiency and curtailing mar-
airlines choose to use small aircraft to operate on unprofitable ket power.
routes to retain ‘‘junk slots” while minimizing losses. This
leads to inefficient slot usage, particularly in congested air- 4.2.2. Strategic behaviors of airlines
ports, resulting in wasted airport capacity. ACL completed It is widely agreed in literature that the Grandfather rights
an analysis of slot trading data at London’s Heathrow Airport principle and use-it-or-lose-it rule in the current slot allocation
in 2009. It was found that the average number of seats per air- mechanism lead to inefficiency in slot allocation and slot use.
craft and the average Available Seat-Kilometer (ASK) per slot The main reasons are the two strategic behaviors that airlines
increased significantly after slot trading was permitted. This may take: slot hoarding and slot babysitting.
clearly indicates that secondary trading can improve the effi- Most airlines tend to reserve new slots for future develop-
ciency of airport capacity utilization. ment, even though these slots would be not fully used at the
Secondary trading of airport slots received continuous con- moment. This behavior is referred to as slot hoarding.13 Slot
cern since the EU started to review its slot allocation mecha- hoarding blocks potential competitors from obtaining slots
nism. Several institutions, including the Civil Aviation and entering the market. However, the extent of hoarding is
Authority (CAA) of the UK and NERA Economic Consult- difficult to measure because it is virtually impossible to esti-
ing, conducted comprehensive analyses of the market mecha- mate how much a slot is worth to an airline. Slot babysitting
nisms for slot allocation and assessed their potential is a way to hoard slots while complying with the use-it-or-
impacts.42,43 These studies conclude that each country or lose it rule, by either operating small aircraft or permitting
region should tailor its slot management mechanisms and poli- another airline to use (or share) the slot, thereby reducing
cies to local conditions. Most researchers and institutions were the losses from meeting the usage requirement. Unfortunately,
optimistic about the application of slot secondary trading at such strategic behavior is likely to continue and inhibit market
the time of these publications. Undoubtedly, secondary trad- competition if there is secondary trading. Secondary trading
ing has positive effects on air transport market performance. may, however, reduce such behaviors to some extent if the
However, it may also have negative consequences, such as market is active enough to allow airlines to acquire slots when
market concentration, slot hoarding and potential damage to they need them, instead of simply holding slots for such an
social welfare, particularly if monetary compensation is eventuality.
involved. From the perspective of slot allocation mechanism, the
main reasons for airline slot hoarding are the Grandfather
4.2. Negative or controversial impacts rights and use-it-or-lose-it rules. To alleviate this issue, a sim-
ple but maybe impossible way is to cancel the two principles.
4.2.1. Dilemma in market concentration Pellegrini et al. assessed the impact of the Grandfather rights
Most congested airports have one or several dominant airlines, on the cost of all airlines in a hypothetical slot trading market.
especially at hub airports. The dominant airlines have a larger Surprisingly, the results showed that the effect was not signif-
share of slots at the airport than other airlines. When a large icant.26 Instead, the author reckons that Grandfather rights
block of slots of other airlines shifts to the dominant airlines can, to a certain extent, help the market to predict future slot
through secondary trading, market concentration will be requests. This can improve the performance of the slot trading
enhanced. Slots are accumulated in a few airlines. Two contra- market.
dictory consequences may emerge: (A) If airlines use new slots Overall, the mechanism for primary slot allocation inevita-
to explore new destinations or increase the frequency of exist- bly influences secondary slot trading, while the secondary trad-
ing flights, consumers may be provided with more travel ing mechanism conversely affects primary slot allocation.
choices and, if the slots were previously underutilized, the air- Ideally, mechanism designs should address both primary and
port capacity utilization rate will be improved because of secondary allocation in an integrated manner. Likewise, incre-
increasing flights. (B) If the dominant airlines acquire more mental changes to the primary mechanism, such as changing
slots in order to prevent other airlines from entering the mar- Grandfather rights, should be accompanied by complementary
ket, market monopoly may be intensified. Under such circum- changes in secondary trading mechanisms.
Secondary trading of airport slots: Issues and challenges 7

4.2.3. Issues of social welfare costs of all airlines. It should be noted that slots are allocated
To maximize social welfare is one objective of air transporta- at all the airports, rather than just Level 3 airports. The pro-
tion, but secondary trading may have negative impacts on it. posed mechanism employs a coordinator (who is assumed to
Compared with freely obtained slots in administrative alloca- be different from the slot coordinator employed in the current
tion, the cost of slot acquisition increases when airlines partic- slot allocation system) with whom airlines can share sensitive
ipate in secondary trading. To maximize profit, airlines may data related to the costs of shifting their flight schedules from
transfer the cost to the consumers. The most direct way is to ideal times to ones for which they have slots. Experiments
increase the ticket price. In addition, when the market is overly showed that the proposed mechanism can significantly reduce
concentrated on a few airlines, market monopoly occurs. This the costs of airlines when compared to bilateral trading. Addi-
may also lead to higher fares. Due to the high cost of slots at tionally, the authors found that the optimal solution without
congested airports, airlines will use slots on routes that can considering en-route sector capacity is not feasible in practice,
bring greater revenue and may be reluctant to fly regional where sector capacity must be considered during the flight. It
routes. This could diminish traveling choices for travelers, deserves further study whether it is necessary to consider both
and may reduce social welfare, at least in certain markets. airspace and airport capacity to develop slot secondary trading
Valdes and Gillen46 analyzed domestic flight panel data at mechanisms. Furthermore, the presence of Grandfather rights
Mexico City International Airport, and found that shifting in the primary mechanism seems to have an insignificant
slots from traditional airlines to low-cost airlines by secondary impact on secondary trading.
trading could result in a decrease in service quality, as well as There are several issues with the Pelligrini model that
an increase in fares due to reduced supply. deserve further debate. First, the proposed Mixed Integer Lin-
In fact, the question of how slot secondary trading affects ear Programing (MILP) model does not consider all the rules
social welfare remains controversial. As discussed before, sec- that the slot coordinator must apply when allocating slots,
ondary trading can lead to higher ticket prices and fewer except for Grandfather rights. Second airlines are assumed
choices for travelers. However, when dominant airlines use to submit truthful information to the exchange coordinator.
these slots to increase the frequency of the existing routes Third, the model assumes that shifting costs are separable into
and expand their networks, it will improve the quality of pas- flight specific components, which does not allow for combina-
senger service. Fundamentally, it is very difficult to predict the torial effects related to shifts of multiple flights.
behaviors of airlines. Thus, it is not easy to design an effective Bichler et al.49 develop a slot trading market mechanism
secondary trading mechanism that enhances social welfare and that accounts for financial constraints of individual airlines
avoids negative impacts. and which is core stable, meaning that no coalition of airlines
can benefit from deviating from the slot allocations and prices
obtained from the mechanism. A secondary trading model for
5. Mechanism design market design is developed that aims to maximize the welfare
of airlines, considering the budget balance, supply and demand
Currently, bilateral agreement is the major approach for sec- balance, individual rationality, budget constraints of all bid-
ondary trading of airport slots. Airlines are allowed to negoti- ders. Compared to the MILP model mentioned above, a bile-
ate mutually about the details of the trade, for example, the vel program is applied to model slot trading. In the bilevel
number of traded slots, means of trading, the period of slots program, the objective of the upper level is to maximize wel-
for trading. While simple, bilateral trading does not, in gen- fare with constraints being economic pricing, budget balance,
eral, yield an efficient allocation of slots, because each party individual rationality etc. In the lower level, the potential coali-
has private information about their valuation of the slots.47 tion of bidders (airlines) are modeled as a maximization prob-
The inefficiencies from such private information are substan- lem. The objective is to maximize the minimal profit of a
tially mitigated if there are multiple buyers and sellers.48 A bidder of a blocking coalition. The model is tested with a small
market where different airlines can communicate and perform size slot trading problem with 10 buyers and sellers. The com-
trading on a multi-lateral basis is therefore considered to be a putational complexity of the secondary trading problem
better approach to secondary trading. The slot market is inher- increases significantly with the increase in the number of play-
ently complex and dynamic, making it challenging to design a ers. Experimental results demonstrate that the proposed slot
mechanism that ensures the orderly operation of the secondary trading mechanism considering budget constraints and core
mechanism. There is a limited body of research that study sec- stability can increase revenue for the airlines from the trading.
ondary trading models. The objectives of the models are gen- In a recent study, Jacquillat et al.50 discuss the efficiency of
erally to minimize airlines’ costs or maximize airlines’ profits primary and secondary mechanisms for infrastructure capacity
from the trading. allocation, such as airport slot allocation. A multi-stage game-
Pellegrini et al. introduced a market mechanism designed theoretic framework was developed between centralized a
for trading of slots in air traffic flow management into airport infrastructure manager (IM, e.g., slot coordinator) and dis-
slot secondary trading. A combinatorial exchange mechanism tributed infrastructure users (IU, e.g., airlines). Under primary
for airport slots that is budget balanced and in which does not allocation, the IM performs schedule optimization by taking
disadvantage any participating airline is proposed.26 Recogniz- capacity and airlines’ requests into account. It is the final
ing that airspace congestion is one of the critical reasons for schedule that no one could make any change. Under secondary
the congestion of European airports, the authors proposed allocation, the optimized schedule by the IM can be resched-
the concept of sector slot. Both airport capacity and sector uled by the IUs within their slots. Then the schedule is final-
capacity are considered in the mechanism when conducting ized. To model the secondary mechanism, a three-stage game
secondary trading. The mechanism combines departure and is formalized. At the first stage, the IUs submitting slot
arrival slots as a package, aiming to minimize the total shift requests is modeled as to minimize the expected weighted
8 Y. WANG et al.

displacements of the requested slots. At the second stage, the fect regulations. Market-based allocation mechanisms have
IM performs schedule optimization which is modeled as an received much attention in recent years but have mainly
integer program. At the last stage, the IUs will swap slots to focused on congestion pricing and slot auctions.50–56 Litera-
minimize the total weighted displacements. To summarize, ture on the secondary trading of airport slots remains limited.
there are three key features of the framework: (A) The IU (air- The reason may be closely related to the privacy and confiden-
lines) knows the true value of a slot; (B) The IU can swap its tiality of slot trading data. The current air transportation
own slots to minimize the cost; (C) The game between IUs is industry has indeed been severely impacted by the COVID-
captured. It is shown that the secondary mechanism may result 19 pandemic. However, with the market gradually recovering,
in additional system-wide costs than primary mechanism if IUs secondary trading may become an effective means of slot allo-
are strategic. Despite the simplicity of trading mechanism it cation. In this section, we discuss the challenges that increased
discussed, this work may open a new avenue for theoretical secondary trading may pose to slot control authorities and
study of secondary trading of airport slots. airlines.
While most theorists favor multi-lateral exchange, in prac-
tice, for example secondary trading in UK, airlines tend to 6.1. Issue of slot ownership
exchange airport slots by bilateral trading. Bilateral trade is
the exchange of goods between two users through direct nego- The issue of slot ownership has been debated for decades. It is
tiation under the adopted rules. It does not limit air carriers’ essential to deal with the question of ‘‘who owns a slot” in a
willingness to trade slots because of the freedom of trade com- definitive way at Level 3 airports when adopting slot secondary
pared with an official market. However, the approach may trading.57 There is little or no explicit regulation or law
influence the fairness and transparency of the transaction. addressing this issue. Varying definitions of ‘‘slot” found in
Because the airlines may reach some under-table agreements, slot control rules applied in different countries/regions reflect
which could hamper market competition. The combinatorial different views on the issue of slot ownership. The opinions
exchange mechanism allows multiple users to submit bids of EU on slot ownership have evolved through three stages.
and ask for bundles of items. All the airlines have to trade in At first, the EC stipulated that airline is entitled Grandfather
one market rather than through bilateral trade. In a combina- rights under IATA’s guideline, but also emphasized that slots
torial exchange, the bundles are the sets of slots composing a belonged neither to airlines nor airports. Later, in EC Regula-
route connecting the origin and destination airports. In the tion 793/2004, a slot was defined as ‘‘permission” for airlines to
market, the airlines and the coordinators are both buyers use airport facilities. Finally, the EU allows slot trading by air-
and sellers. An airline may express one bid on each possible lines at some congested airports, which seemed to implicitly
flight route, which indicates the willingness to buy the items. endorse airline ownership of slots. In the United States, the
The advantage is that multiple sellers and multiple buyers par- FAA has defined slots as government-owned property, stating
ticipate in the trade so that market competition is activated. that the government can recall and reallocate slots when neces-
Additionally, research showed that the combinatorial sary. FAA nonetheless allows the sale or lease of slots. In
exchange can reduce costs significantly compared to the bilat- China, a slot is defined as ‘‘the right of an aircraft to use the
eral agreement. However, the problem of airline’s strategic relevant infrastructure and services for arriving and departing
behaviors remains. Airlines may hide their true purpose and from an airport on a specific date and time”. In practice, air-
behave strategically, which may increase the costs.50 No single port slot is a kind of state-owned resource, and airlines only
best mechanism for slot secondary trading has been commonly have the right to use it.
accepted. The analytical and theoretical study of practicable These discrepancies in the meaning of slot ownership not
market designs for slot trading deserves more research. In only reflect the state’s management policy on the secondary
the air transportation market, airlines, airports and customers mechanism but also affect the enthusiasm of airlines to partic-
are all related stakeholders. How to achieve the overall optimal ipate in secondary trading. Ball et al. 58 argued that the market
interests of the different stakeholders in the secondary mecha- product in a slot auction should be a slot lease rather than out-
nism is an interesting yet challenging question. When designing right slot ownership. This concept can also be applied in sec-
a secondary trading mechanism for slots, issues such as eco- ondary trading. By setting a certain period for the validity of
nomic effectiveness, fairness, and flexibility & stability should the lease, it can not only avoid the problem of slot ownership
be addressed.51 Faced with market defects, solutions can be but also promote the mobility of slots.
explored based on lessons learned from other fields, such as The ambiguous ownership of slots raised in secondary trad-
using public policies to make up for market defects in the pric- ing may affect the primary allocation as well. For example, it is
ing mechanism. In addition, future research can investigate not clear whether a slot purchased with money from secondary
approaches that simultaneously design the primary mechanism mechanism has to meet the 80/20 or other ‘‘use-it-or-lose-it”
and secondary mechanisms to allocate slots. An objective func- rule. During the period when the slot purchaser has rights to
tion that incorporates overall economic benefits and social wel- the slot, should slot coordinators have the right to recall the
fare should be considered in order to achieve the optimal slot and assign it to other airlines if the slot utilization rate
allocation of airport slots. requirement is unsatisfied? An even more practical question
is whether state-owned airlines’ slots are state-owned assets.
6. Challenges If such slots are traded with private airlines or foreign airlines,
is it viewed as a loss of state-owned assets? All these questions
The critical challenge faced by secondary trading is how to must be addressed when market-based mechanisms are intro-
achieve a balance between incomplete competition and imper- duced for either secondary trading or primary allocation.
Secondary trading of airport slots: Issues and challenges 9

6.2. Measuring value of slots slots are being used more efficiently for the development of air-
port hubs. Slot management should conform with plans for a
It is widely accepted that the value of slots at different airports nation’s strategic development. The uncertainty of the market
and times is different, and value of the same slot is also differ- makes airlines’ strategic behaviors difficult to predict. Slot reg-
ent for different airlines. How to evaluate the value of slots is ulators have to take action to regulate when airlines abuse
critical and challenging. There are studies that summarized the their freedom to buy and sell slots. For example, EC has pros-
factors affecting the value of slots and evaluate the value of ecuted airlines whose behaviors are detrimental to market
slots.58–60 A key challenge is that the value of slots arises from competition. The Department of Justice of U.S. has investi-
their use in combination; thus the incremental value of a slot to gated slot trading between Delta and US Airways to determine
a particular user depends on what other slots are already whether there was any illegal collusion.
possessed. When the slots at a hub airport are acquired by a dominant
The value of a slot is multidimensional. It contains both airline through the secondary mechanism, it is easier for the
economic value and social value. There is no easy way to mea- airline to increase the frequency of the existing route than to
sure the social value of slots. European airports adopt bilateral open a new route. One possible outcome is that the number
exchange where the slot value is determined by the airlines of airlines providing transport service at the airport is reduced.
themselves. This approach gives airlines adequate freedom to A second outcome is that the number of non-stop destination
trade, but the difficulty of supervision and management airports may decrease, reducing the connectivity of the airport.
increases. In economic theory, the price of slots should be Therefore, it is difficult for regulators to assess whether an air-
determined by the market. However, as a scarce resource in line’s behavior is harmful to market competition, and to regu-
an imperfectly competitive market such as air transportation, late market operations without dampening the enthusiasm of
the pricing of slots may require centralized oversight to avoid airlines to participate in the market. Compared with slot allo-
excessive price increases, and to ensure that market outcomes cation in primary mechanism, slots mobility in secondary
reflect social considerations as well economic incentives of mechanism is more dynamic and unpredictable. It is very
individual airlines. important for regulators to set appropriate restrictions and
regulations to avoid problems such as market monopoly.
6.3. Monetary compensation
6.5. Impact of COVID-19 on air transport
When an airline participates in slot trading, it will inevitably
involve the measurement of the slot value. Currency is the sim- The outbreak of COVID-19 worldwide has had a severe and
plest way to reflect the value. However, the involvement of cur- protracted impact on air transportation. Besides the significant
rency makes it more difficult for governments to control the reduction in passenger travel demand, airports in various
market. Thus, it is controversial whether airlines are allowed regions impose epidemic-related restrictions and requirements
to trade currency in secondary trading. The U.S. government on passenger travel. It is reported by IATA that the interna-
is quite open to slot trading. The government approved the tional passenger demand in 2021 was 75.5% compared to that
‘‘Buy/sell rule” which allows airlines to buy, sell or transfer. Air- before the pandemic (2019).61 The reduction of traffic demand
lines can even mortgage slots in exchange for funds. Financial leads to the inefficient use of public resources such as airport
institutions can also hold slots, which means that slot holders slots. Ultimately, it has had a huge negative impact on the
may not be slot users.56 The EU explicitly allows its member profits of airlines and the economy.62 In the context of
states to trade slots on a one-to-one basis but requires that the COVID-19, the recovery of air traffic has become the biggest
trades be ‘‘without monetary or any other forms of compensa- challenge faced by airports. Corresponding measures and sup-
tion.” In China, it is not clearly specified whether slot trades port from the government are required for the recovery of air
can involve currency. In fact, slot transfers between airlines that transport.63–66
involve other forms of consideration, often in the form of Given the low travel demand, slot relief rules must be
‘‘under-table agreement”, are inevitable. Obviously, this implemented. To retain historical slots, airlines have to con-
increases the regulatory difficulty of slot management. On the tinue flying routes that have few passengers to meet the mini-
one hand, slot trading that does not involve monetary compen- mum slot usage requirement. Obviously, it is a waste of
sation could avoid troubles regarding money exchange and profit airline’s resources if there is no market while the 80/20 rule
distribution. However, the willingness of airlines may be discour- is still in force. Therefore, WASG67 suggests that the minimum
aged. On the other hand, there is no commonly accepted stan- requirement for slot utilization should be lower than the nor-
dard for the determination of slot value. A series of questions mal 80%. For example, Europe uses 64% as the minimum
may emerge if monetary compensation trading is allowed, such requirement on slot utilization for airlines to retain historic
as the loss of state-owned assets, inflated prices of scarce slots, rights during the ongoing COVID-19 pandemic. The FAA68
and revenue distribution issues. Slot coordinators may face great formulated a set of slot exemption policies at a few airports
pressure because airlines will try to obtain as many slots as they only for international flights. During the pandemic, the will-
can from primary allocation. These issues may undermine the ingness of airlines to participate in slot secondary trading
policies guiding primary allocation, and harm consumers. may be affected. However, slot trading could be a way to
improve the utilization of airport capacity. For instance, slots
6.4. Supervision and evaluation of the regulators could be transferred from a passenger-carrying airline to a
cargo airline, since the impacts of the Pandemic on cargo traf-
Facing the conflict between growing demand and limited fic have been much smaller. According to the COVID-19-
capacity at major airports, regulators have to ensure airport related slot relief policies, airlines need to return the slots tem-
10 Y. WANG et al.

porarily after applying for exemption. Airlines will be entitled nized. Therefore, the introduction of market-based mecha-
to retain grandfather rights for these slots in next the schedul- nisms has received increasing attention. It is not easy to
ing season. The coordinator will reallocate the returned slots to replace the administrative mechanisms with market-based
other airlines (without historical priority). It might be interest- approaches in the primary allocation. However, the secondary
ing to study whether this reallocation process can be carried trading could be a good chance to introduce market forces
out through market-based mechanisms. without greatly unduly disrupting well-established slot alloca-
tion practices. Here we review relevant studies on the history,
6.6. Practical implementation issues policies and models of secondary trading. The potential impact
and the challenges of secondary trading are discussed.
Despite the challenges discussed above, the implementation of In summary, it is commonly agreed that a secondary trad-
slot secondary trading still has a long way to go. First, an orga- ing mechanism can promote the mobility of slots among air-
nization or a department should be established or appointed to lines. The allocation of slot resources can be regularly
manage the slot trading activities. For example, the ACL, UK adjusted through secondary trading, which results in more effi-
airport slot coordinator, provides slot trading services at sev- cient use of the scarce capacity at Level 3 airports. Air carriers
eral UK airports. There are also proposals to establish a new can use a combination of slot allocations from slot pools and
third-party organization. Lessons and experiences may be secondary trading to gain access to an airport and grow its
learned from stock exchanges. A regulatory body that oversees market share over time. By participating in the activities in
the slot exchange and trading rules must be specified. Second, the secondary mechanism, an airline can add new routes to
a trading platform needs to be established to facilitate airlines its hub airports or increase the frequency of incumbent flights
trading slots. An online slot trading platform (i.e., https:// which enhances its levels of service.
www.Slottrade.aero) was opened by the ACL to airlines for However, it must be pointed out that every slot acquired by
slot trading. However, airlines may prefer to conduct direct one airline is also forfeited by another, and the net social
transactions in private due to the privacy consideration of slot. impact of the transfer is affected by various regional factors.
The Slottrade website was then closed in 2017 due to unknown Market concentration will be enhanced, and market monopo-
reasons. Nevertheless, the information on completed transac- lization aggravated, if a large quantity of slots shifts to domi-
tion is posted on the ACL’s website (see an example shown nant airlines. Thus, attention needs to be paid to ensure that
in Table 269). Recall that one of the purposes of establishing the flow of slots promotes the development of the market
a trading platform is to provide the information about the rather than hindering it. Due to the confidentiality of slot trad-
offered slots, which would save airlines’ communication costs ing information, it is difficult to access slot trading data, which
and ensure transparency. However, one should consider what is the main reason for the lack of empirical studies on measur-
information needs to be disclosed and what information does ing the impact of slot secondary trading on market
not. Third, allowing secondary trading may increase the work- competition.
load of the slot coordinator. Under the rules of the WASG, It is believed that the Grandfather rights and use-it-or-lose-
slot secondary trading should be acknowledged by the slot it rule led airlines to adopt two strategic behaviors: slot hoard-
coordinator. The property of a traded slot may change. The ing and slot babysitting. Both behaviors have negative effects
introduction of secondary trading will undoubtedly increase on utilization efficiency. Unfortunately, the problem may
slot coordinator workload. Therefore, one should evaluate remain unresolved in the secondary mechanism. The impact
the potential benefits and negative impacts of secondary trad- of secondary trading on social welfare is uncertain: on the
ing on the coordinator’s work. Last but not least, the transac- one hand secondary trading could reduce competition, leading
tion fees as well as profit generated by secondary trading must to higher fares and fewer choices for travelers; alternatively,
be thoughtfully discussed. Due to the ambiguity of slot owner- slots obtained from secondary planning could enable an airline
ship, airport slots involve multiple stakeholders including the to strengthen its route network, which in turn will improve the
government, airports, and airlines. The distribution of benefits quality of passenger service.
is complex when monetary compensation is allowed. Issues such as slot ownership, slot pricing, monetary com-
pensation, manager evaluation and supervision need to be
addressed if one wants to advance secondary trading. As a
7. Conclusions and recommendations commodity traded in the market, the price of slot should in
large measure be determined by the market. However, as slots
The scarcity of airport capacity requires the rational allocation are a scarce resource in the imperfectly competitive air trans-
of airport slots. Most countries/regions use administrative sys- portation market, macro-control of slot prices may be needed
tems to allocate slots. The deficiencies of administrative alloca- to avoid excessive price increases. Market mechanisms that
tion regarding resource allocation efficiency, economic involve exchanges without monetary compensation are easy
benefits, and production efficiency have become widely recog- to control but reduce trading opportunities. The exchange of

Table 2 Example information of completed trades from ACL.69

Airport Season From airline To airline Transaction date Slots per week
LHR S23 British Airways Vueling 31-Jan-2023 2
Resource: ACL, https://www.acl-uk.org/completed-slot-trades/.
Secondary trading of airport slots: Issues and challenges 11

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