Case Study
TO: Secretary Elizabeth Dole, Department of TransportationSUBJECT: Recommendation that the Department of Transportation should implement a competitive market system of slot allocation as a means of achieving efficiency. In this scheme, supply and demand determines the market price for slots, resulting in an optimal price and output of landing slots for all airlines. This policy memo recommends shifting to a market system of slot allocation. Airport deregulation and various other issues have led the FAA and the Department of Transportation to make a decision to resolve competing demands for airport slots. This analysis describes options ranging from auctions to "grandfathering," allowing airlines that had based decisions on large amounts of slots to avoid disruption. Implementing a solution that encompasses the auctioning off of slots in an effective manner and then shifting to a market system is clearly the most socially efficient solution. In order to gain the support of large incumbent airlines it has been suggested that those airlines receive discounted prices at the time of the auction ensuring equity and efficiency.
This memo considers the current alternatives Secretary Dole faces and offers the recommendation as stated in the above summary section. Disadvantages Potentially massive disruptions in service during period of auction. Mineta spoke adequately when he said, "I fail to see how it can be argued that because we have given the right to the airlines to possible windfall profits from operating slots, we should give them further windfall profits from selling the slots. IMPLEMENTATIONIt is recommended that the Department of Transportation carry out the auction in the following manner: Establish a price floor based on the lowest amount paid during the experimental market in 1982 and adjust for inflation for current year. RECOMMENDATIONThis analysis recommends that Department of Transportation approve a market-based system with an auction for the initial allocation of slots. The traveling options available to the public would therefore be limited, if not curtailed, and almost certainly the airlines would pass the higher costs along to the public. In light of the current political environment, this type of system has the makings for a government failure that can best be corrected or avoided by shifting to a market approach. Administrative burden on FAA of allocating large number of spots on semi-annual basis. It is recommended that implementation of this approach be carried out as outlined below. For smaller communities, the issue is not one of access but convenience. "The total welfare gain from [price] deregulation was positive, and quite large. Advantages More equitable allocation of slots: smaller and new entrant airlines have a better opportunity to obtain slots. Since the early 1980's, the FAA has faced increased criticism over the effectiveness of this regulation, yet no resolution has emerged. A market system with an auction for initial allocation is preferable to each of the other options. This solution is more politically feasible that a market system with grandfather rights.
Common topics in this essay:
Department Transportation,
Advisors CEA,
Political Environment,
DOT FAA,
International AOCI,
Deregulation Act,
Status Quo,
CONTEXT Stakeholders,
FTC CEA,
Administration FAA,
market system,
incumbent airlines,
slot allocation,
windfall profits,
department transportation,
market approach,
grandfather rights,
allocation slots,
supply demand,
market solution,
system slot allocation,
airport expansion schemes,
oppose airport expansion,
shifting market system,
deregulation airline pricing,
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Acceptance Essays
