Air Mauritius’ move from Heathrow to Gatwick

Fouad-Diouman

In an official press release dated 17 March 2023, Air Mauritius (MK) announced that, as from this Northern Winter schedule starting 29 October, it will switch its operations from London Heathrow Airport (LHR) to Gatwick (LGW). This will see an increase in weekly frequency from five to seven (i.e. daily). An airline is characterised by its Routes Network, as implemented by the Schedule it flies. A flight cannot be dispatched without the appropriate slots at the departure and arrival airports. This monograph aims to explain the fundamentals of Airport Slots, the LHR specificities and concludes on related questions.

(1) Various people have voiced concerns that ‘Heathrow slots are expensive’. In general, there should be no such things as ‘expensive slots’ since slots are not technically and officially paid for – initially. However, a secondary market for slots exists at congested airports (see point 6).

(2) Slots can be defined as the right to land and take off at an airport at specific times, on given days of the week and for a given calendar period. The pair of slots is distributed freely to airlines (as per availability) initially on a ‘first come, first served basis’ by Slots Coordinators (the airport, or as outsourced to specialised organisations, esp. for large and congested airports).

(3) These slots, once allocated, HAVE to be operated a minimum of 80% within a season by the airline, as per the ‘Use it or Lose it’ IATA rule. If an airline abides by this rule, slots cannot be taken back, barring exceptional circumstances such as war, airport works, COVID, etc., and this too only during the specific period of the force majeure. However, should an airline wish to cease operating its slots, the official rule is that it has to give them back to the Coordinator – with advance notification so that they may be allocated to other carriers. The practice of holding slots in perpetuity (as long as they are operated) is known in aviation as ‘grandfather right’. It is controversial. Thus, it is considered by some that BA has an unfair advantage at LHR as it holds a very high proportion of slots there (obtained mostly historically). But the same could be said for Air France at Charles-de-Gaulle, Lufthansa at Frankfurt, etc.

(4) A point often not realised by the layman, slots are not merely a function of runway utilisation. The Coordinator is careful to plan slots based on numerous criteria such as aircraft parking space, passenger terminal space, luggage carousel capacity, rate of passenger throughput within the terminal, possible bottlenecks at Immigration and Customs. Indeed, Dubai Airport (DXB), as gigantic as it is, is seeing increasing congestion (and hence scarcity of new slots) due to its… limited airspace relative to its very high volume of air traffic.

(5) It follows that ‘old’ airlines were in a privileged position to scoop valuable slots decades ago. The economic value of which has kept increasing due to almost exponential growth in air travel. The venerable airlines have obviously held on to these slots as gold nuggets in a safe. This is what makes a premium airport like LHR special. Rumour has it that Lufthansa even acquired the much smaller British airline BMI only… to grab its portfolio of prized LHR slots. British Airways acquired BMI from Lufthansa subsequently (BBC News, 22 Dec 2011), with Virgin Atlantic promptly protesting that the stronghold of BA at LHR will get even greater.

(6) Even if slots are not technically paid for to an airport, the governing body for Slots Coordination, IATA, accepts a grey (not to be confused with ‘corrupt’) market for slots amongst airlines. Whilst this may sound surprising, it should not be, in pure economics terms, due to the very fundamental law of Demand and Supply – hence, the need to optimise scarce resources to extract marginal gains. In plain English, it is in the interest of every stakeholder (passengers, government, airports, airlines and other indirect businesses impacted such as taxis, hotels, retail, etc.) that a slot is fully utilised. Hence, it is better for a highly valuable LHR slot to be operated with an A380 carrying 500 passengers rather than an ATR with 50 passengers.

(7) This brings us to the thorny issue of the financial value of a slot at very congested airports. It concerns an infinitesimally small number of slots available worldwide. As per the secondary, grey market transactions between two airlines, the value of these slots is usually confidential. Even at the same airport, they also vary based on the arrival and departure times. It has been unofficially reported that a pair (arrival and departure) of prime time slots may have changed hands for tens of millions of USD.

(8) If an airline is moving from a premium business airport like LHR to a more leisure-oriented airport like LGW, one would hope there are some strategic reasons, translating into tangible economic value. These could be more slots, flexibility for better timings, cheaper airport operating costs (again, not to be confused with the price of the slots per se), an airport more adapted to the airline’s passenger profile, enhanced connections, faster or cheaper transfer to the city centre, a new catchment area more relevant to the airline’s positioning, a new terminal offering better passenger experience, etc…

(9) Questions –

1. a) Do some of the above reasons apply for the move by MK from LHR to LGW?
2. b) If the 5-weekly LHR slots were swapped straight for daily slots at LGW (i.e. the slots were given back and not sold to another airline, in lieu of the new LGW slots), are 7 weekly slots at LGW equivalent in value to 5 at LHR?
3. c) If the slots have been sold, was it at ‘fair value’? Financially, as explained above, slots are held in perpetuity. Hence, is the value received from the transaction today (which technically becomes the ‘Net Present Value’) financially equivalent to the value of the series of future cash-flows resulting from operating at LHR, in this case here, a Perpetuity (i.e. the perpetual value that MK would have extracted from these slots)?
4. d) If the slots have indeed been sold, will the funds received show in the Annual Report – and under which item?

(10) These questions are neither a judgment nor a criticism as we are not privy to the elements of the transaction – and not even to the current and future strategy of the airline.