Scott Tasker, chief customer officer Auckland Airport shares details of redevelopment projects. Video / Michael Craig
The Commerce Commission says Auckland Airport’s revenue and targeted returns are excessive but its planned investment appears appropriate.
In a decision released this morning, the commission says the five year pricing path is not reasonable and the airport was on track for an excess profit of $200m.
“Some price increasesare necessary to fund the investment needed to improve customer experience, build more resilient infrastructure and add additional capacity,” Commissioner Vhari McWha said.
“However, in our view the airport’s charges over the five-year period are in excess of what is reasonable to achieve these outcomes.”
Auckland Airport says it will consider cutting charges for airlines after the commission releases its final report.
McWha said these charges were a cost to airlines, and while it was up to each airline to manage these through airfares, the commission knew travellers were likely to bear much of that cost when using Auckland Airport.
“They don’t really have a choice, which is why we have a role as regulator in reviewing pricing,” she said.
Auckland Airport is targeting a return of 8.73% from priced aeronautical activities - for example aircraft landing and passenger terminal charges - compared to the commission’s estimated reasonable return of between 7.28% and 7.51%.
“The return targeted by the airport means it will earn about $200 million in excess profit, compared to the commission’s benchmark over the five-year period,” said McWha.
The commission also reviewed the process Auckland Airport followed to set its capital expenditure plan, including the factors it took into account and the evidence it considered.
“While the airport’s customers agree there is a need for investment, there are differing views on the type, size and timing of the solutions.
“However, based on the information presented to and analysed by the commission, the airport has followed appropriate processes, considered a diverse range of options for its new terminal building, and applied rigour in costing its investment plan.”
Among Auckland Airport’s projects is a new domestic terminal to replace the existing 57-year-old Domestic Terminal Building.
Integrated with the international terminal, the airport says it will improve service quality and customer experience, especially for transit passengers, and provide capacity for long-term growth in passenger numbers.
The commission’s other key draft conclusion relates to the airport’s approach to depreciating its new investment.
This affects how the capital cost is recovered from airport charges over time. A different approach could be used to smooth price increases over the lifetime of enduring infrastructure assets.
“We are not convinced the straight-line depreciation approach best promotes the long-term benefit of consumers, when the significant upfront investment is likely to be used by a growing number of passengers in the long run,” McWha said.
The airport consulted stakeholders on its draft capital plan in 2022 and shared a revised version in February 2023, which mentioned a $430 million reduction in spend over the five years to June 2027.
Auckland Airport is the biggest in the country and a hub for Air NZ. Photo / Michael Craig
But the cost over the 10-year investment programme has increased, largely driven by rising construction costs due to inflationary pressures and the increased cost of capital.
The planned investment totals $6.6 billion over 10 years, with approximately $5b to be spent during the 2022–2027 period.
McWha says the consultation paper is an opportunity for stakeholders to provide feedback before the commission’s conclusions on the review are finalised.
Submissions on the commission’s draft conclusions are due at the end of August.
Forsyth Barr says there is a “real risk” that Auckland Airport would need to lower its pricing in “Price Setting Event 4″ (PSE4) which runs from 2023 to 2027 as it did for the last pricing period.
With a more subdued passenger outlook, this increases the likelihood of an equity raise.
Commerce Minister Andrew Bayly said earlier this year he was “concerned” about increased fees at Auckland which will nearly triple for some flights in the current five-year pricing period.
Air New Zealand and the Board of Air Line Representatives (Barnz), representing most airlines operating here, want a new regime covering how Auckland Airport can set prices.
They want a negotiate-arbitrate system that is used for some airports in Australia. While airports here must disclose what is driving prices in set periods, they can ultimately set them as they see fit.
Last June the airport released its proposed charges, which included:
Domestic jet travel (Auckland to/from main centres):
Airline domestic jet charges will average $11.85. Charges will initially rise $3.50 from $6.75 to $10.25.
Auckland Airport says this is lower than current charges at Wellington Airport ($15.20), and at Christchurch Airport ($14.60). Prices will then reach $15.45 by the 2027 financial year (FY27), the final year of PSE4.
Regional airline charges:
Airline regional charges will average $8.15 over the five-year PSE4 period. Regional charges will initially increase by $2.70 in July from $4.40 to $7.10.
Auckland Airport says this is $3 to $4 cheaper than comparable current charges at Wellington Airport ($11.20) and Christchurch Airport ($10). Regional charges will reach $10.70 by FY27, the final year of PSE4.
Airline international charges will average $37.25 over the five-year PSE4 period. International charges will initially increase by $9.40 from $23.40 to $32.80.
Auckland Airport says this is lower than current published equivalent charges at other major international airports in the region including Sydney ($42.20), Melbourne ($35.90) and Brisbane ($56.70). International charges will reach $46.10 by FY27, the final year of PSE4.
Barnz says that to consider if an additional form of regulation is warranted, the commission must hold an inquiry, either on its own initiation or if required by Bayly.
Following the draft there will be more submissions and then a final report expected towards the end of the year.
Although airfare increases are moderating, Bayly is also worried about them. In May he said he hadn’t ruled out a market study into the sector.
Grant Bradley has been working at the Herald since 1993. He is the Business Herald’s deputy editor and covers aviation and tourism.
