Modeling the effects of airline slot hoarding behavior under the grandfather rights with use-it-or-lose-it rule

Abstract

The prevalent airport slot policy, based on the grandfather rights and use-it-or-lose-it rule, may induce the so-called slot hoarding behavior, i.e., airline intentionally operates excessive or even unprofitable flights. This paper develops a vertical-structured model to explore the effects of such slot policy on airline’s service decisions (flight frequency, aircraft size and airfare) and airline profit, and the resultant implications for a profit-maximizing airport or a welfare-maximizing airport. The effects of airline competition on slot hoarding behavior are also examined with an oligopoly competition model in which the carriers provide horizontally differentiated flight services. Analytical solutions are derived and compared with the “no slot policy” scenario. We find that the claimed negative effects of the slot policy on airport congestion may be overstated since an airline chooses to hoard slots if and only if the demand/capacity ratio is significantly low. When the airline has to hoard slots by operating excessive flights, it would use smaller aircraft, charge a higher airfare and serve more passengers. For a private airport, the slot policy may increase the airport’s profit by allowing the airport to transfer some of the negative effects of weak travel demand to airlines. For a public airport, the slot policy does not decrease social welfare unless passengers’ valuation toward frequency benefit is low. Finally, for airlines with equal access to airport slots, as the substitutability among airlines and/or the number of competing airlines increases, the incentive of slot hoarding decreases. Hence, regulators may expect a much milder negative effect of slot hoarding in a competitive aviation market.