Shared Lessons for Managers of Airport Slots and Spectrum

Airport resources and radio spectrum have much in common. While candidates for privatization, they both typically are treated as public resources and not the property of specific users. Part of the reason government agencies typically manage airport take off and landing slots as well as spectrum lies in the concern that consumers may have limited and inconvenient alternatives should the resource become unavailable or prohibitively expensive. Alternatives for aviation consumers seeking to avoid high airfares caused by single carrier dominance typically result in use of a slower transportation option, or travel to another more competitive airport. Spectrum users, e.g., wireless cellphone subscribers, likewise have limited alternatives if one or more carriers dominate the market and engage in anticompetitive practices.Both aviation and telecommunications economists suggest that auctions would promote efficiency, relieve congestion and promote optimal use. However, managers of airports and spectrum have balked at migrating to a completely market driven allocation process. Incumbent users of both resources may have the ability and incentive to achieve or sustain market dominance, particularly for airports which serve as a fortress hub for a large percentage of one carrier’s flights and for spectrum uses where large monetary benefits accrue by thwarting market entry and more robust competition. The spectrum auctioning process in the United States confirms that incumbent carriers can dominate the competitive bidding process as highest bidders for most new spectrum and by finding ways to acquire spectrum held by nominal competitors, or reserved for underrepresented stakeholders. Incumbent wireline carriers extended their first mover advantage conferred by the Federal Communications Commission (“FCC”) in the “wireline set-aside,” the assignment of free spectrum for cellular telephone service coupled with a guaranteed delay to market for non-incumbents who had to participate in and win a comparative hearing. Incumbent carriers subsequently extended their market dominance by acquiring most of the subsequently available wireless spectrum by offering the highest bids in auctions, and by acquiring competitors, including small ventures headed by women and minorities who previously had qualified for a financial credit to promote their auction participation. The wireless marketplace in the United States evidences the same concentration as the airport hubs of the major air carriers.The management of aviation and spectrum resources requires thorough consideration whether and how anticompetitive outcomes can result from initial or more extensive reliance on auctions. In aviation major airlines have the incentive and ability to maintain or expand market dominance by dominating any take off and landing slot auction. Carriers can circumvent a “use or lose” condition by replacing large aircraft with smaller ones, no doubt justifying the decision with research indicating the need to increase the frequency of available departures and arrivals.In spectrum management dominance of auctions can lead to warehousing, the acquisition, of spectrum, not necessarily needed to satisfy demand and in any event not immediately used, so that competitors cannot acquire and immediately use the resource. Warehousing and the simple domination of the bidding process erect ever higher barriers to market entry creating the impression that the marketplace can only sustain a small number of super carriers too big to fail. The marketplace becomes concentrated, not necessarily as a product of scale economies, but as a result of auction dominance.This paper will identify what strategies airport and spectrum managers can use to promote sustainable competition. The paper considers the issue of caps, divestiture and rigorous merger review to ensure that incumbents do not foreclose the potential for market entry. The paper also examines likely arguments of incumbents that they deserve special treatment, including grandfathering of existing access rights, based on consumer demand or questionable arguments that airport authorities and the FCC bear responsibility for existing congestion and unsatisfied consumer demand.