Rachel Reeves is backing a controversial third runway at Heathrow. Good. After years of dithering, we may finally see real progress on expanding scarce airport capacity in the southeast. Yet a towering question remains: how to cover the £14 billion to £20 billion price tag?

Tim Leunig, the former government economist, has a good idea: let Heathrow auction off its new take-off and landing slots (the rights to land or take off at specific times). It might sound like a textbook fix for allocating scarce resources, but Reeves should heed it. Slot auctions could both help fund the investment and, if rolled out more widely, boost air travel efficiency.

For years the Competition and Markets Authority (CMA) has encouraged the government to adopt competitive slot auctions for Britain’s busiest airports. Right now, the allocation method under EU-inherited rules is deeply inefficient. Airlines cling to valuable “free” inherited slots through an old-school “grandfathering” system whereby, as long as you use the slot 80 per cent of the time, you effectively own it forever. Any new or available slots get assigned by Airports Coordination Limited, with new entrants prioritised via planned competition.

This system provides airlines with stability. Yet it tilts the playing field in favour of legacy incumbents, while distorting the industry’s efficient scale. British Airways (through its parent company, International Airlines Group) controlled about 55 per cent of Heathrow’s slots pre-pandemic; 62 other airlines held less than 1 per cent of slots in 2019, leaving no chance of competing with BA as a “hub” airline. Worse, the “use it or lose it” rules incentivise carriers to fly low-demand routes to simply avoid surrendering valuable slots.

This allocation method discourages airlines from switching between airports, gives beneficiary airlines less reason to want capacity expansion, and encourages inefficient industry mergers to obtain slots. An opaque, illiquid secondary market indicates the value lost. Leunig recalls that Oman Air paid the equivalent of £78 million in today’s money for a single coveted slot pair in 2016. Even though most slots are worth less, the estimated 356 slot pairs from new runway capacity could therefore be worth many billions alone.

Allowing airports the right to regularly auction slot times could therefore bring significant economic benefits. Instead of letting incumbents park themselves on prime morning departures, slots would go to whichever airlines value them most. An airline that can run a jam-packed New York flight at profitable fares will outbid a carrier filling seats for half the price on less popular routes.

Allocating by price would intensify competition within airports and between them, by encouraging switching. Suddenly, low-cost airlines and new entrants would have a level-playing field for expansion. Over time, passengers should see more variety, more convenient schedules, and lower fares as efficiency improves. Of course, this requires politicians not meddling to ensure their favoured flight routes have guaranteed slots or micromanaging airline allocations, but letting prices do their magic.

Crucially, if done right, auctions could provide significant additional revenues to help cover airport expansion costs, adding to funds from landing charges and retail rents. It’s a market-led, self-financing mechanism — airlines desperate for Heathrow slot access would part-fund the new infrastructure.

Slot allocation reform is a potential Brexit benefit that the government to date has ignored. Ideally they’d bestow property rights for airports to allocate their own slots. If not, the second best solution would be to mandate auctions for new and existing slots in a transparent bidding process, free from hidden deals or carve-outs, with an open secondary market with full trading rights.

A few weeks ago, Reeves was reportedly so unimpressed with the CMA’s ideas for growth that she ousted its chairman, Marcus Bokkerink. On airport slots, however, the CMA has been ahead of the curve. Auctioning slots wouldn’t simply better allocate them; it would raise crucial funds for airports’ expansion. It’s time to let this pro-market reform idea fly.