A new paper by Matthew Lesh, the ASI’s Head of Research, makes the case for building competition in the aviation sector:

Airline deregulation and airport privatisation has substantially increased aviation industry competition, improving passenger choice, encouraging innovation, and reducing flying costs. It has opened the opportunity of regular travel to millions, boosting economic growth.

Competition forces firms to innovate, reduce costs, and provide greater consumer benefits. It ensures resources are put to best use. Monopolies lead to stagnation, laziness, overcharging, and market manipulation.

There are a number of policies that could promote further aviation sector competition:

1. Initiate an independent process to assess the potential benefits of the competing Development Consent Order (DCO) applications for the Heathrow Airport expansion, with a view to the potential benefits provided by terminal competition at the design, construction, and operational stages. Despite separate ownership, following the Competition Commission (CC)’s forced BAA plc breakup in 2009, individual airports maintain substantial market power. Heathrow Airport has been accused of ‘gold plating’ infrastructure, contributing to the highest per passenger costs in the world.

There are now competing applications for Heathrow Airport’s expansion, for the first time since the introduction of the DCOs in 2008. There is no tender-like process to analyse DCO applications

International evidence, as well as pronouncements from the CC, favour terminal competition. JFK International Airport in New York City currently has five competing terminals, each owned by separate entities, providing lower costs without coordination difficulties.

2. Introduce slot auctions for the allocation of additional landing and take-off capacity at Heathrow and Gatwick airports, and consider auctioning some, if not all, grandfathered slots, following Britain’s exit from the EU. The existing system of landing and takeoff slot allocation allows existing airlines to hoard rights, resulting in inefficiency and creating a barrier to new entrants and smaller airline expansion. Over half of the slots at Heathrow Airport are currently allocated to IAG, the owner of British Airways, limiting competition.

Slot auctions would ensure that slots go to airlines willing to pay the most, leading to each slot being used most efficiently. This would provide opportunities for new and mid-sized carriers to expand, increasing market competition, encouraging innovation, and avoiding arbitrary decision-making and political interference.

If slot auctions are used to allocate expanded capacity at Heathrow Airport, there could be 16 million more passengers per year than under the existing allocation rules. This change could raise over £7.5 billion for the Heathrow expansion.