How much are Aer Lingus’ Heathrow slots actually worth?
By Economics Correspondent Sean Whelan
UCD Economist Colm McCarthy presented a paper on the hot topic of Aer Lingus slots at Heathrow Airport at an IrishEconomy.ie conference in Dublin today, making some interesting points in the process.
He begins by setting out some basic facts about slots, Heathrow, and the two airlines at the heart of this matter – British Airways and Aer Lingus.
Heathrow and the Slots
There are 688 daily takeoff slots and 688 daily landing slots available at Heathrow in the summer schedule – and no more can be added.
The big constraint is that Heathrow only has two runways, and it is the busiest two runway airport in the world (airports with similar traffic typically have four runways).
A third runway has been suggested to add capacity and, assuming the construction of a sixth terminal to handle the extra passengers, Colm McCarthy expects BA could get up to 150 extra slots (based on its 50% share of the existing slots).
There is a grey market in trading existing slots, but the prices paid are very opaque.
Extra capacity would devalue the price paid for slots, but no third runway will be built before 2025 at the earliest.
Heathrow is by far the most popular of the London-area airports, but the normal price mechanism cannot be used to reduce demand because airport prices are capped by the regulator. Hence the grey market in slots.
The value of what Aer Lingus holds
A recently-cited example of a trade between SAS and a Gulf carrier that resulted in a $60m gain for SAS has been widely used to value Aer Lingus’s slots at Heathrow at around €1.2 billion.
Mr McCarthy says that figure is far too high – all slots do not have an equal value. The SAS slot was an early morning slot – slots before 9am command premium process as they are best for long haul arrivals.
The prices for slots fall during the day and evening slots command very little (as far as he can tell – the prices are not publicised).
Aer Lingus has 330 arrivals and departures per week in the summer schedule – 23 or 24 slot pairs.
The articles of association state they can only be sold with backing from the Government’s 25.1% shareholding and 5% from the remaining shareholders. Slots can be re-allocated for traffic other than to and from Ireland, but not sold without shareholder permission.
Aer Lingus has very few slots before 9am in the morning. A recent winter schedule cited by Mr McCarthy had one slot at 8am and three at 9am. The rest were spread across the day, with seven slots after 6pm. Mr McCarthy says a guess of €500 – €600 million is as good as any valuation on the slots.
He points out that Aer Lingus assigns a valuation of zero to its slots in its balance sheet, which contains €900 million in assets.
In the event of a break up he estimates the pension fund will need an extra €190 million of top up, and a redundancy programme would need the same again. So the omitted liabilities are similar to the omitted assets (the slots) in value, meaning the €1.36bn offer price would exceed the breakup value of the airline.
But does British Airways actually need the Aer Lingus slots at Heathrow to expand its own long-haul operations, particularly across the North Atlantic? This is the core of his argument about the Aer Lingus slots at Heathrow, and it’s worth quoting at length:
“To convert a short-haul slot into a more profitable long-haul deployment requires that a number of preconditions be met. The first is that long-haul route rights are readily available. There is an open skies regime on the North Atlantic but route rights elsewhere are not easily negotiated and are in any event often reciprocal, inviting competitive entry. There is no guarantee of profitability on any route and the main European carriers, including BA, face intense competition from Emirates and other Gulf carriers which has seen curtailments to some long-haul offerings. Reporting weak earnings last week, Air France/KLM blamed overcapacity on long-haul routes for some of its troubles.
BA has added just one daily long-haul service per annum at Heathrow over the last four years despite having around 350 daily slot-pairs to play with. It currently devotes 14 daily slot-pairs to its Dublin and Belfast services which it could divert to other uses tomorrow without buying Aer Lingus.
BA has also provided three daily slots to Vueling for what look like low-priority routes to small airports in Northwestern Spain. BA may be re-allocated the 9 slots it was required to yield to the Virgin subsidiary Little Red by the competition authorities when it acquired British Midland.
Little Red has lost money flying the former BM domestic UK routes into Heathrow and is ceasing operations. Unless there is another airline willing to fly the routes these slots revert to BA.
Finally BA operates up to 250 daily short-haul departures at peak from Heathrow and industry observers regard a few of these as slot-fillers, something the airline would doubtless deny. In sum BA is not short of slots at Heathrow. Should a third runway (and a sixth terminal) be constructed it would expect to be allocated perhaps as many as 150 new slots.
The BA long-haul fleet is being replaced and the airline has been taking delivery of new Airbus A380 and Boeing 787 wide-bodies. The new deliveries are being matched by retirements of its elderly B747 and B767 fleets. These are fuel-inefficient and less acceptable to customers. BA is short of aircraft rather than short of slots. There is also the consideration that BA’s new Terminal Five is fully utilised and it is having to use T1 and T3 for some services. Operating new long-haul routes away from T5, even if they had the aircraft and the route rights, would be less than ideal.
For a hub operator there must be a balance between short- and long-haul. At present BA operates up to 250 daily short-haul flights into Heathrow feeding passengers to about 100 long-haul departures. If the airline could magic up fifty wide-bodies doing one rotation per day it would then have only 200 short-haul arrivals feeding 150 long-haul departures. It would risk losing connecting traffic to competing hubs as well as sacrificing point-to-point volumes on short-haul.
Given the slot and aircraft constraints, it can safely be assumed that the current timetable, including the balance of short- and long-haul, has been optimised. Airlines modify their schedules twice a year but change tends to be incremental. Assertions that BA could profitably divert all, or even a significant number, of Aer Lingus slots to long-haul, assumes that route opportunities, suitable aircraft and the right terminal capacity are readily available and that there is no other source of runway slots. None of these assumptions appears to be correct.“