...runways and gates) is a scarce resource and, at key airports, airlines are scheduling more flights than that capacity can support. As a result, more and more flights are delayed, even under normal weather conditions, and considerable costs are imposed on the traveling public. Passengers are paying, in effect, a much higher total price than the dollar price of their tickets.

Solutions for ameliorating an increasingly untenable situation are needed, especially as more airports are forecast to be capacity-constrained in the near future. Airlines' private incentives to schedule flights to serve more destinations and offer passengers more choice in departure times do not take into account the delays that their many flights impose upon other airlines because airlines do not face the proper price incentives to use scarce airport capacity efficiently. Consequently, airlines schedule too many flights, generating delays that ripple across the highly integrated airline network and adversely affect all passengers.

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To address this problem, one approach, implemented by the Federal Aviation Administration at O'Hare Airport in Chicago and, in late 2007, at John F. Kennedy Airport in New York City, is to get the airlines together and have them collectively hammer out a solution. This, however, requires the airlines to make individually costly compromises on a multitude of scheduling decisions. Each airline in the end agrees to abide by a settlement only if the settlement leaves the airline better off than not agreeing, and the system thereby favors incumbents over entrants. Such collective decisionmaking does not necessarily benefit consumers. Indeed, collective decisionmaking by actual and potential rivals raises serious risks to competition.

Other proposed solutions to the airport delay problem seem to have a common theme: eliminate the problem by expanding the airports and improving the air traffic control systems to, in effect, eliminate the capacity scarcity. For example, current popular proposals include the spending of billions of dollars to add runways and expand other physical capacity (such as gates) at airports to accommodate more concurrent flight operations, and to improve air traffic control systems to allow for more intensive usage of existing capacity (by, e.g., shortening the distance between aircraft in airspace). Those methods of dealing with the problem are, as their price tags indicate, costly, providing a prime illustration of the economic axiom, "There is no such thing as a free lunch." Moreover, plans to expand capacity will not--under even the most optimistic projections--ameliorate the problem of delays in anything but the very long term.

We propose a complementary approach, one that uses basic economic and market principles to help allocate existing scarce assets more efficiently. Only by allocating existing assets efficiently can society squeeze the greatest possible value out of its scarce resources. Moreover, failure to do so may well result in capacity expansion plans whose costs do not justify their benefits. In brief, we advocate a market-based approach to the allocation of scarce takeoff and landing rights at airports where the demand for those rights at a zero price exceeds the ability of the airport to handle that many takeoffs and landings during some time period.

MORE AND MORE DELAYS

The rising number of delays has been reported widely in the popular press and it is easily confirmed by viewing delay statistics collected by the Department of Transportation's Bureau of Transport Statistics (BTS). In July 2007, for example, the BTS reports that 30 percent of the flights in the U.S. domestic market arrived late, up from 20 percent in July 2003. Performance at the most capacity-constrained airports is significantly worse: at JFK, for example, 43 percent of the arrivals were late in July 2007, while at LaGuardia, 40 percent were late.

This rise in delays, not surprisingly, correlates with a significant increase in the number of flights across the United States. Currently, no efficient constraint is imposed on the number of flights that can be scheduled at a given time at an airport where scheduled flights would exceed the maximum number the FAA would allow for safety reasons. In fact, at heavily demanded airports, as explained in more detail below, either no mechanism is being used to ration demand or the rationing mechanism has allocated too many landings and takeoffs.

Some of the recent increase in the number of flights is due to rising demand for air travel. But the vast majority is coming from substitution away from large aircraft in favor of more frequent operations of smaller planes, regional jets in particular.

Figure 1 illustrates this point, showing that the number of departures has skyrocketed by 35 percent in recent years while the total number of seats has risen by less than 6 percent. This implies that the number of seats per aircraft has declined dramatically. At some airports, and especially at those airports reporting the most...

NOTE: All illustrations and photos have been removed from this article.



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