IBA are one of only a very few appraisers recognised for airport slot valuations, having completed a variety of assignments at airports including LHR and LGW. These valuations have been for various purposes including slots securitisations, balance sheet purposes and for disposal/acquisition of slots.
Case Study – Virgin LHR slot securitisation to invest in Boeing 787-9s
In 2015, IBA was involved in Europe’s first ever bond tied to airport slots where Virgin Atlantic Airways secured a £220 million secured note transaction using the airline’s take-off and landing slots at London Heathrow Airport. The bond was used to invest in new Boeing 787-9 aircraft and had a tenure of 15 years. The notes were split between two tranches: £190 million A1 notes and £30 million A2 notes. The A1 notes have a weighted average life of 12 years, while the A2 notes have a weighted average life of 10 years. This was the first time in European air travel history that airport slots have been leveraged in this way and claimed the Deal of the Year in 2016.
What is a slot?
An airport slot is a permission given by an airport coordinator to use runway and airport infrastructure at slot constrained Airports (Level 3) on a specific data and time.
What makes an airport slot constrained?
- Opening and closing times – night jet bans, curfews, quota limits
- Airport Infrastructure
- Weather and Environment (fog/monsoons – i.e. India)
- Airport congestion
- Runway Use (e.g. LHR has 2 runways, LGW is single-runway operation airport)
- Annual Movement Quota (AMQ)
- Hourly Runway Movement Limits
- Terminal Flow Limits (check-in, security, baggage, customs, immigration etc.)
London Heathrow Airport has a combined movement limit of around 9,500 (combination of summer and winter limits) movements per week. On a per hour basis, this equates to an average of around 40-45 movement limits per hour. Operating capacity at London Heathrow Airport is now at 99% of that total capacity and with no additional capacity available, and constant high demand, airlines resort to buying slots at significant prices for their preferred times.
Although London Gatwick Airport is not as congested as London Heathrow Airport, it is still heavily congested in the sense that it is a single-runway operation, along with its geographical location i.e. a very busy built up airspace. London Gatwick Airport has grown throughout the years and the rate of growth is a key indicator for demand at the airport, for both airlines and the potential to acquire new slots.
Who allocates slots at airports?
Airport slot allocation is governed globally by the IATA Worldwide Slot Guidelines and, within the EU, by the EU Slot Regulation 95/93. Slot allocation occurs at constrained airports that are designated as coordinated (Level 3) – an airport where there is a significant and lasting shortfall in capacity and, in order to land or take-off, it is necessary to have a slot allocated by a coordinator.
At LHR (like many others), the slot allocation, exchange and trading is coordinated by Airport Coordination Limited (ACL). Airlines can earn historic rights or grandfather rights to a series of slots, provided they operate the slots as allocated by the coordinator at least 80% of the time during a season – the use-it-or-lose-it rule. Airlines can lose historic rights to slots for repeated and intentional slot misuse.
Can slots be traded?
Unless prohibited by the laws of a country, airlines can trade their rights to historic slots in a secondary market. These trades may be accompanied by monetary or other types of compensation. Within the EU, slots are traded by way of a slot exchange – slots are swapped between airlines on a one-for-one basis. The exchange may involve swapping two existing slots, or swapping a historic peak-time slot for a newly allocated off-peak slot. LHR and LGW are prime examples of airports actively involved in slot trades for monetary compensation. It is also important to mention that only airlines can hold and trade slots i.e. a bank or a leasing company cannot own a slot.
What affects slot value?
The main factors include:
- Constraint level
- Economic Cycle
- Time of day – for example, a 06:00am arrival at LHR is worth considerably more than a 10:30pm arrival
- Frequency of slot pair – a daily slot pair (operating 7-days a week) will be worth more than a once-a-week slot pair)
- Turn-around time
- Seasonal differences (applies mainly to LGW where summer slots are worth considerably more)
How much are slots traded for?
One of the main factors influencing slot value is the level of constraint i.e. capacity at the airport. If the airport is operating at 100% with no available slots in the pool, then this will by far drive up values as a result of supply and demand.
Hundreds of slots are traded weekly between airlines, some having a financial compensation in place whilst others being done for strategic/network purposes only. In 2015, American Airlines reportedly purchased one slot pair from SAS for US$ 60,000,000. In February 2016, Oman Air purchased one slot pair from Air France-KLM for US$ 75,000,000. In 2017, SAS sold two slot pairs to American Airlines for US$ 75,000,000. All of these were LHR transactions.
It is important to note that ultimately, a slot’s value will lie on the basic principle of how much an airline is willing to pay for a slot. This has the potential to result in pricing wars if the carrier sees a strong strategic gain that would justify the high investment. For example, the Oman Air transaction (which holds the record for the highest paid slot transaction in LHR history) was closed at the same time in 2016 when Oman launched its 25-year National Tourism Strategy with the aim to increase its international arrivals and to boost the country’s GDP. We believe the high transaction cost of 2016 for the daily slot pair may have been directly linked to this initiative.
The graph below illustrates IBA’s average market value for an individual slot (not a pair) at LHR from between 06:00 and 22:00 UK time. Please note that this is an average for arrivals and departures and actual values for each one will vary depending on the time of day. For example, we would typically ascribe a higher arrival value between 06:00 and 10:00 for arrivals due to the strong influx of North American traffic. Vice-versa, we would ascribe a higher value for a departure slot at mid-day due to the strong demand for transatlantic services. Please treat the graph below as representational and indicative only, as each portfolio will vary depending on the aforementioned factors.
If you have any further questions, comments or feedback on the above please contact: Youcef.Berour-Minarro@iba.aero
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