Fierce bidding competition for Air Berlin – why slots boost attractiveness of the insolvent airline

After the insolvency of Air Berlin, numerous parties are fiercely competing with bids for parts of or even the complete group. This is surprising, as the group has accumulated debts exceeding 1 billion Euros und has been overindebted for several years. Still, within just one weekend, the German Government was willing to grant a loan of 150 million Euros as a bridging loan enabling the airline to continue operations until its expected sale. The German ministers responsible for the loan showed confidence that this loan will be refunded using revenues from the sale of the airline group.

What drives the attractiveness of a company that reports such poor economic figures? In this paper, we will show how the strong interest of former competitors to get a share of Air Berlin is determined by airport slots.

Insolvent Air Berlin holds a high number of slots on densely frequented airports in Germany and Europe, such as Berlin-Tegel, Dusseldorf, Munich or Frankfurt. Numerous airlines with strong interests to expand and grow their market position consider these slots extremely valuable. But slot trading is not possible in Europe; slot allocation and transfer follow strict rules. So then, how can prospective buyers obtain a share of this treasure? To answer that, we need to look into the slot regulation in Europe.

What makes slots so important?

Many airports operate – at least in their peaks – close to or even at the capacity limit. In order to secure an orderly operation, times for take-offs and landings are allocated at such airports. Any airline intending to operate a flight requires a permission to take off or land at the planned time – a granted “slot”. If it does not hold a slot, it is not able to operate the flight.

Considering the high impact of slots on the competition between airlines, slot allocation requires fixed rules. Within the EU, these rules are bindingly prescribed by the Council Regulation (EEC) 95/93. The aim of the regulation is to utilize airport capacity at the best possible rate and to ensure competition between airlines through a transparent, neutral and non-discriminating procedure. In order to sustainably meet that target, airlines do not acquire property of slots, but just the right of utilization. This right, as well as allocation and assignment, are regulated. In Germany, the respective reliability is with the Airport Coordinator located in Frankfurt am Main, who is subordinated to the German Federal Ministry of Transport.

Assignment of slots … permitted only between affiliated companies

Slots are no commodity. They can exclusively be assigned between affiliated companies and upon acquisition of airlines. The assignment of Lufthansa slots to their affiliates Germanwings and Eurowings was based on these rules, as was British Airways adopting the slots of British Midland.

Air Berlin was allowed to assign slots to their affiliate NIKI, but an assignment to non-affiliated airlines remains prohibited.

Exchange of slots … this indirect option is not feasible in this case

Airlines are entitled to bilaterally exchange slots on a case-by-case basis. Occasionally, this procedure is also used for an indirect assignment: an airline applies for a slot, exchanges it for a desired slot held by another airline, and the latter forfeits the received slot. This procedure is sufficient for single cases, but is not feasible in the case in question.

Assignment of slots … occurs upon acquisition of Air Berlin by other parties

A prospective buyer intending to obtain slots from another airline needs to acquire the organisation that holds the slots. This means also acquiring the corresponding Air Operator Certificate (AOC) and usually the aircraft, staff etc.

As a result, the intention to obtain slots typically means the acquisition of the complete company or parts being hived into separated entities. However, founding a new company is time-consuming, as amongst others, such entities require an AOC, which demands a lead time of at least several months. Such an approach would hardly be completed prior to the intended sale of Air Berlin – realistically, this option must therefore be discarded.

A partial sale of Air Berlin (comprising slots, aircraft, staff etc.) and/or its subsidiaries – besides the mother company that includes NIKI and LGW – without hiving demands a specific review. In that case, the Airport Coordinator has a certain leeway in decision-making. He could, for example, refuse such an approach if he sees a breach of the slot regulation or expects a disturbance of the orderly operation of the airport.

Assignment of slots as anti-trust regulative obligation

A significant share of last decade’s airline acquisitions was conditional to anti-trust driven obligations. A common obligation was to assign a certain number of slots to new competitor airlines intending to inaugurate competitive flights on defined routes. For example: British Airways was obliged to assign up to 14 daily slot pairs on six defined routes from London Heathrow when it acquired British Midland.

Slots assigned for anti-trust regulative reasons are dedicated to the respective airline and route for a number of schedule seasons (IATA schedule seasons are Summer and Winter, changing at the end of March and end of October). During that time, they cannot be exchanged or used for other routes.

Prospective buyers should be prepared for anti-trust authorities to order them to assign slots to new competitors. Accordingly, airlines like Ryanair, which has withdrawn from bidding for Air Berlin, could, for example, obtain slots for inaugurating flights between Dusseldorf and Munich as a new competitor.

Slot allocation … what happens if the sale of Air Berlin fails?

Should the sales process be unsuccessful and/or Air Berlin fail to utilise slots to a rate of at least 80%, such slots would fall back into the slot pool.

Any airline is entitled to apply for slots from the slot pool. Upon allocation – if demand exceeds the number of available slots – new entry airlines are privileged, as up to 50% of the available slots have to be allocated to them. New entry airlines are airlines that – including the submitted slots – will not hold more than 4 slots on that day of the week und do not hold more than 4% of slots at the respective airport or airport system. The latter condition would, for example, exclude EasyJet from having new entrant status in Berlin-Tegel, even though the airline does not operate from this airport. It does, however, have a significant slot share at Berlin-Schoenefeld, and both airports are part of Berlin’s airport system.

Following allocation to new entry airlines, any residual slots would be assigned to the remaining applicants on the basis of numerous rules, e.g. year-round flights are privileged versus seasonal ones. The local Coordination Committee is entitled to suggest additional parameters to be applied after approval by the responsible authority. If a submitted slot is not available, the Airport Coordinator will offer the closest available one. However, at congested airports, such “closest available slots” could still be a long way away from the preferred time.

Slot allocation rules determine the attitude of Air Berlin’s competitors

For airlines such as Lufthansa or Condor, it will be crucial to obtain the intended share of slots from Air Berlin. EasyJet would not be considered as a new entrant at many airports, so it, too, could only gain respective slots subordinately. From a slot-focussed perspective, it would recommendable for these airlines to bid for Air Berlin or at least part of the Air Berlin group, to secure slots besides aircraft and staff. Such acquisitions must, however, also makes from a commercial aspect.

Competitors who would not experience commercial benefits from an acquisition (e.g. if their fleet is not compatible with Air Berlin’s Airbuses), will hardly be willing to bid. Instead, it might be in the best interest of those airlines if the sales process were to fail, as this would lead to all slots falling back into the slot pool and being distributed to a broad spectrum of airlines. Then, not such a small number of airlines would be strengthened significantly, and the airlines themselves would even be able to obtain a certain number of slots for their own expansion plans.

The affected airports are mostly excluded from slot allocation

The influence of the affected airports on the allocation of Air Berlin’s slots is limited. As members of the local Coordination Committees, they have a primarily consultative function regarding the Airport Coordinator, but are not directly involved in the allocation.

This explains why many airports do not share the airlines’ high acceptance of the existing slot regulation rules.

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