Valuing Flight/Slot Pairs

An Imperfect Valuation Model for Airport Landing Slots

Final Paper for Computer Science 286r – Spring 2004

Professor David Parkes

Submitted on: May 19, 2004

Submitted by:

Elaine Ou (elaine@eecs)

Jeff Shneidman (jeffsh@eecs)

Allan Sumiyama (asumiyama@hbs)

Abstract

Recent investigation has revealed that airplane takeoff and landing activity exceeds the safety standards at least once a day at TODO%a large percentage of the airports in the United States. In order to address this current resource over-utilization, and to better allocate resources to airlines in the future, several researchers have proposed using auctions and exchanges [1, 4, 6, 9??] to redistribute airport landing and departure slot resources. However, very little is known about how an airline (or administrative player) would like to interact with such an exchange. Realistic valuation models and valuation expressions do not exist, and would be proprietary information even if they had been devised by airlines. This lack of bidder input makes exchange testing more difficult, since exchange properties may depend on the semantics and valuation of a bid.

In this work, we propose one conceivable valuation methodology and expression language, and provide a problem generator based on these ideas. To create as realistic a system as possible, we imagined ourselves into the role of an airline manager tasked with participating in a particular slot auction of our own devising. While our system is currently being used to test an iterative combinatorial exchange, our contribution should be viewed as a “first step” in realistically modeling the players in a combinatorial slot exchange.

1. Introduction

According to the Federal Aviation Administration's annual industry forecasts, passenger traffic aboard US airlines is growing at an estimated rate of 4% per year. However, due to the difficulty of the government investing adequately and on a timely basis in airport expansion, airports that are currently busy need to make use of their runway capacities as efficiently as possible.

While it is debatable whether or not it is the responsibility of the government to regulate airport departure and landing slots, there are currently only four airports in the US whose landing and departure slots are pre-allocated. These are the "High-Density Rule" airports: Kennedy (New York), LaGuardia (New York), O'Hare (Chicago), and Reagan (Washington DC). Actually, this has changed; google for FAIR-21; I went and read about this some time ago at the DOT web site I think. I believe that these restrictions have been eliminated at 2 of these airports (wasn’t that whole Donohue lecture about how bad LGA was because of eliminated controls?) and that HDR airports go away entirely in 2007? I don’t think FAIR-21 has been amended. Add FAIR-21 to reference list. All other airports in the US allow aircraft operations on a first-come, first-served basis. The airports at which landing slots are pre-allocated were not chosen with regards to traffic congestion, however, and the High-Density Rule will be eliminated in 2007.

(Note, though, that HDR has nothing to do with congestion, as ATL is a prime example.) That is, you may want to say that: Government intervention at these four airports is based on old data; the recently released from slot control airport, XYZ (pick one of the four above)

At some of the nation's busier airports, airlines are facing difficulties because of a shortage of adequate slots to cope with demand at peak hours. This has led to airlines' needs being unsatisfied and has put increasing pressure on slots at congested airports and on an efficient slot allocation system.

The traditional, IATA (International Air Transport Authority)-based, system of slot allocation acknowledges an incumbent airline's "grandfather right" to a particular slot time at an airport where that slot was used in the previous equivalent season. These grandfather rights continue until an airline ceases to use a slot or surrenders it. Slots that are not “grandfathered” are allocated by a scheduling committee in accordance with IATA guidelines.

The secondary trading of airport slots is not officially regulated but does exist. An open market that provides for secondary trading of slots would help to encourage growth opportunities for incumbents while providing an opportunity for new entrants to gain access if they are prepared to pay an adequate price.

The IATA has nothing to do with U.S. Air Slots, right? In this case, move to literature review.

Is the Commission on Air Transport a U.S. thing? (I wish I had Internet right now!) If not, move below with the IATA discussion. I’m guessing yes since I don’t think the Commission on Air Transport isn’t really dealing with slots right now?

The Commission on Air Transport has expressed concern that it may be wrong for airlines to receive payment for slots for which they had not been required to pay. However, in practice, airlines that sell slots are effectively giving up their own revenue opportunities.

A possible solution that would address the problem of air traffic congestion at airports would be to remove ownership of all, or a large percentage of, all landing slots from the airlines currently scheduled to use them. Then, the remaining slots could be allocated as decided in a combinatorial exchange.

The exchange of slots in a market-type setting could add flexibility to the current slot allocation system and reduce air traffic congestion during peak hours at airports. An exchange mechanism can redistribute scheduled air traffic by allocating slots based on participating airlines’ value and “willingness to pay” for particular slots. However, there are a number of issues to consider when predicting how actual airlines might participate in such an exchange.

2. Problem Definition

In order to assess the feasibility of an airport slot exchange mechanism, we must be able to generate models of how actual airlines might participate in such an exchange. There are a number of factors that must be determined in doing so, such as how the exchange should be structured - what, exactly, are the goods in such an exchange? How many landing slots should be made available, and how should they be split up?

This project is an attempt to develop a valuation model that incorporates real-world characteristics, and compare it to other, existing models, as well as real data showing airport traffic patterns throughout a 24-hour period. The goal is to have a model that can reasonably accurately estimate what value an airline might apply to a particular landing slot at an airport at a given time; or, rather, what price an airline might be willing to pay for such a landing slot were it a good in an auction. Some factors that need to be taken into account in creating this model include: the revenue an airline can generate from a flight at a certain time; the cost to the airline of a flight; the range of the flight; and the number of passengers aboard a flight. By factoring in as many variables as possible, we can generate a fairly accurate model that could estimate how an exchange of airport landing slots might occur.

3. Literature Review
See Section 7 Down Below for more notes on this. You could move this section to Section 7 after doing the discussion that is required in Section 7.

The literature on airport slot auctions and exchanges considers two major uses of the auction/exchange mechanism. One application is in allocating slots dynamically on a real-time basis as proposed by various Ground Delay Programs [1] and the other application is in allocating slots on a long-term, strategic basis [4, 6, 9]. The dynamic allocation application utilizes a marginal cost method in valuing slots [1]. In the marginal cost method, the value of a slot is estimated by computing the additional cost (due to delays) incurred by adding an extra flight to a slot [2]. This method is particularly suited for valuing slot values in the dynamic allocation problem in which the efficient allocation depends on the properties, such as the number of passengers, of the flights in queue at a particular moment in time. As such, this approach is not very useful in valuing slots on a long-term basis.

The method used in valuing slots for long-term allocation problems is based on contribution (or profit) of the use of the particular slot to an airline [6, 7]. In this method, each airline values a slot differently from its competitors and an exchange mechanism will allocate the slot to the airlines that value the slot the highest. The existing literature on this method makes simplifying assumptions in modeling how airlines value the slots. For example, in [7], it is assumed that an airline’s demand for a slot is independent of demand for other slots. We can easily think of situations where adjacent slots are substitute for one another, and demand for each slot is dependent on whether the airline acquires usage rights for one slot or the other. (I know this is some comparison, but I want the columns from Allan’s slide! See section 7.For a discussion of a more detailed comparison of the models, please refer to section 6 “Comparison with Other Work”)

Pasted from up above; if you agree with the move text decision, need wrapper around this IATA discussion with a reference to the right paper. (This is the British air system paper, right? This should be seen as a model for slot stuff, but we didn’t really do anything with this paper.)

Our project will build on the existing work on profit-based valuation schemes by proposing a novel bidding language structure to express the valuation tree and generating valuations based on more realistic assumptionsmodels.

4. Bidding Language and Valuation Model

4.1 Bidding Language

In a combinatorial exchange, bidders place bids on combinations of goods and it is important that bidders be able to express their preferences using a bidding language. A bidding language needs to strike a balance between expressiveness and simplicity [8].

We propose that an airline should use the XOR- (AND, OR) – XOR bidding language. where In this language, the first XOR is at the business plan level (entire package of bids for the exchange), the (AND, OR) is at the flight level (scheduled times) and the XOR on the right is at the slot level (alternatives for a scheduled time). The AND in the (AND, OR) allows us to express dependencies, such as sets of flights/slots that must be acquired together. The OR in the (AND, OR) allows us to express combinations of flights/slots that the airline would like to acquire. It also keeps the size of the bid from blowing up exponentially because we do not have to enumerate all of the possible combinations. The final XOR is over the possible slots for a particular flight.

Example:

Consider the following (simple) hypothetical case:

· Airline with 5 planes available at Atlanta (ATL) airport

· Airline only bids for departure slots

· Airline wants to offer on-the-hour morning commuter service to La Guardia (LGA)

· The “ideal” scheduled departure times are 7:00, 8:00, 9:00 for the commuter service to LGA

· Maximum tolerable deviation from ideal departure time is +/- 15 minutes (1 slot) for the commuter service flights

· It is critical for the airline to acquire the appropriate slots for all the commuter service flights (in other words, unless they can offer the 3 hourly flights, their “morning commuter service” business is not viable)

· Airline also wants to offer some service to the West Coast (either to San Francisco or Los Angeles, or both), but the airline can tolerate not acquiring the necessary slots

· Airline has more tolerance for deviations from the “ideal” departure times for the flights to the West Coast

Slot ID / Slot Window / Flight 1
ATL-LGA / Flight 2
ATL-LGA / Flight 3
ATL-LGA / Flight 4
ATL-SFO / Flight 5
ATL-LAX
0630 / 6:30-6:45
0645 / 6:45-7:00 / 100
0700 / 7:00-7:15 / 100
0715 / 7:15-7:30
0730 / 7:30-7:45 / 30
0745 / 7:45-8:00 / 100 / 40
0800 / 8:00-8:15 / 100 / 50
0815 / 8:15-8:30 / 40
0830 / 8:30-8:45 / 30 / 40
0845 / 8:45-9:00 / 100 / 50
0900 / 9:00-9:15 / 100 / 60
0915 / 9:15-9:30 / 50
0930 / 9:30-9:45 / 40

In terms of this bidding language, the three flights for the commuter service are AND’ed because the airline must acquire slots for each of the flight. The West Coast flights are OR’ed because these are flights/slots that the airline would like to acquire independent of other flights and the failure to acquire slots is not critical to the business plan.