Academic journal article Federal Reserve Bank of St. Louis Review

Auctions as a Vehicle to Reduce Airport Delays and Achieve Value Capture

Academic journal article Federal Reserve Bank of St. Louis Review

Auctions as a Vehicle to Reduce Airport Delays and Achieve Value Capture

Article excerpt

Congestion at airports imposes large costs on airlines and their passengers. A key reason for congestion is that an airline schedules its flights without regard to the costs imposed on other airlines and their passengers. As a result, during some time intervals, airlines schedule more flights to and from an airport than that airport can accommodate and flights are delayed. This paper explores how a specific market-based proposal by the Federal Aviation Administration (FAA), which includes the use of auctions to determine the right to arrive or depart in a specific time interval at airports in the New York City area, might be used as part of a strategy to mitigate delays and congestion.

By explaining the underlying economic theory and key arguments with minimal technical jargon, the paper allows those with little formal training in economics to understand the fundamental issues associated with the FAA's controversial proposal. Moreover, the basics of the proposed auction process, known as a combinatorial auction, and value capture are also explained. (JEL R41, R48, L93)

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In rankings of on-time arrivals and departures for major airports, New York City area airports fare poorly. For 32 major airports during 2008, the on-time arrivals of Newark Liberty International Airport (Newark) ranked 32nd, LaGuardia Airport (LaGuardia) ranked 31st, and John F. Kennedy International Airport (Kennedy) ranked 29th. (1) Their on-time arrival percentages--Newark's 62 percent, LaGuardia's 63 percent, and Kennedy's 69 percent--revealed that fewer than seven of every ten flights arrived on time. (2) Thus, more than three of every ten flights arrived 15 or more minutes past their scheduled arrival time.

Many factors, such as weather and mechanical problems, determine an airport's on-time performance. This paper focuses on the delays and congestion associated with the scheduling of flight arrivals and departures. Generally speaking, an airline schedules its flights without regard to the costs it imposes on other airlines and their passengers. When airlines schedule more flights to and from an airport than that airport can accommodate, flights are delayed. These delays impose large costs on the airlines themselves and, ultimately, on passengers. With respect to New York City area airports, Levine (2009) cites an estimate that these airports are involved in three-quarters of congestion delay in the entire U.S. system. We explore how a specific market-based approach, the use of auctions to determine the right to arrive or depart in a specific interval of time, might be used as part of a strategy to mitigate delays and congestion.

The focus on specific time intervals reflects the fact that the demand for passenger travel varies throughout a day. It is this variability that increases the odds that the demand for takeoff and landing slots at certain times during the day will exceed an airport's capacity. Takeoff and landing fees that do not vary throughout the course of a day are simply too low to efficiently allocate the scarce good of the right to land or depart during some time intervals. Armed with this economic insight and eager to solve the obvious congestion problem, many economists have suggested using a market-based approach. (3)

On September 16, 2008, the Federal Aviation Administration (FAA) announced its intention to implement a market-based approach by auctioning a limited number of slots at Newark, LaGuardia, and Kennedy airports starting on January 12, 2009. (4) Ideally, the auctions would ensure that the slots would be purchased by airlines placing the highest value on those slots. In addition, the FAA stated that the proceeds from the auctions would be spent on New York City area projects to mitigate congestion and delay. (5) Consequently, in a cost-effective way, the FAA hoped to achieve its goals: reduce some congestion directly and immediately and generate financing for additional projects to reduce congestion and delay in the future. …

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