Auckland Airport’s $3.9b domestic terminal: What it means for travellers and why are airlines so upset?

Auckland Airport has unveiled more details of its plan to build a new domestic terminal, replacing a building nearly 60 years old that is not fit for purpose. Up to $3.9 billion will be spent on the new terminal and associated projects. But airlines say they’ve been blindsided and warn airfares will go up.

What’s the plan?

In what will be the single-biggest development since the airport opened in 1966, a new domestic terminal will be built on to the international terminal for domestic jet operations. After more than a decade’s planning and 21 concept designs, the airport pressed go on this today. It comes at a cost of at least $2.2b but the company, owned 18 per cent by Auckland Council, says it has allowed $3.9b that allows for construction cost escalation and holding costs for the domestic baggage processor and associated ‘’consequential’' infrastructure projects. The terminal will have 12 new domestic aircraft gates (20 per cent more than at the current domestic terminal) catering for the more efficient and larger passenger capacity domestic jets.

Regional turbo-prop flights to and from smaller town centres will remain in the existing domestic terminal for now, with Auckland Airport currently consulting with major airlines and the Board of Airline Representatives (Barnz) on the future location for regional travel.

The international terminal was flooded badly in the January 27 rainstorm and the airport company has said it is reassessing its climate change resilience and is confident stormwater upgrades built into all new projects should minimise the chances of a repeat. Up to 2000 workers will be employed at the height of construction, scheduled to finish by the end of 2028 or in 2029.

While there’s a labour shortage at present, the timing could be good as the construction sector weakens and looks for work. And there are signs of increases in building supply costs easing.

What does it mean for passengers?

There’s just a five-minute, indoor domestic to international transfer walk - at the moment it’s 10 minutes outdoors or you have to wait for a bus. There’s more dwell space and, inevitably, more room for shops. The airport says the check-in area will be state-of-the-art including the ability to check in and store your bag at any time throughout the day. Any travellers who have suffered missing bag misery this summer can look forward to a smart baggage system. And the new $300 million transport hub under construction with a multi-storey carpark is at the doorstep and adjoining land has been set aside for mass transit if light rail ever makes it to the airport.

What does it replace?

By any standard, the domestic terminal is well past its use-by date. It’s cramped and security requirements mean queues can be long at peak times. Built as an international terminal when the airport opened but has been refreshed, renovated and remodelled countless times to serve domestic passengers. As the airport’s chairman Patrick Strange says, “It’s nearing capacity and it’s no longer fit for purpose and hasn’t been for some time.” Company chief executive Carrie Hurihanganui says renovations just won’t cut it anymore.

A graphic showing how the Auckland Airport redevelopment will result in the domestic and international terminals coming under one roof. Image / Auckland Airport

Why airlines are so upset?

Analysts at Jarden have said the capital expenditure (which with other projects could stretch to $7.3b by 2032) can be funded out of debt. Another analyst said dividend reinvestment is another option.

But airlines point out that in the end it is passengers who pay, by way of higher fares. Barnz executive director Cath O’Brien says the impact of price rises will be felt most by those seeking budget fares - and airlines are annoyed because they pointed this out to the airport last week. While airlines have accepted the need to build the new terminal, she says they were ‘’flabbergasted’' by the announcement. Airlines had agreed in principle to original plans for the terminal in 2021 but this was at a much lower cost than revealed on Friday. In previous reports, the airport had said the cost of the terminal would be around $1b. Final submissions weren’t due until next week.

“Prices set on the basis of this scale of capital investment risk damaging the aviation market to, and within, New Zealand,” she said. ‘’The airport is a monopoly. No company should be able to engage in monopolist behaviour in an economy like New Zealand.”

Airlines within the last week presented views on the risk of increased airport charges - which are always passed on to passengers - hitting demand for air travel.

“Instead, Auckland Airport is pressing ahead with capex decisions, ignoring airline concerns and the required process. Airlines consider this is both unwise and unjust .’’

She said it was best if multi-generational investments were done over a longer period. Instead of the big “bow wave” of costs airlines and their passengers face, it would have been better to have started the terminal 15 years ago.

Air New Zealand said that just three days ago, along with other airlines it had provided economic analysis to the airport, revealing concerns about the cost of the capital plan, which would lead to airport charges that increase airfares to the point that “they become unaffordable for a significant number of Kiwis”.

Investment in Auckland Airport is required, but not at the expense of customers’ ability to afford to use it, said a spokesman.

“Air New Zealand had hoped the airport would be open to solutions for an improved airport that considers what customers need and what they can afford.”

Board of Airline Representatives executive director Cath O'Brien. Photo / Dean Purcell

Braced for blowback

Anticipating pushback from its airline customers, in its release to the NZX the airport details consultation with them to date and points out that because of the lack of investment in the domestic terminal, charges were low by international standards.

While future airline charges will have to increase, they will be coming off a very low base due to the age of the existing domestic terminal. Auckland Airport will only begin to recover the cost of infrastructure investment once commissioned and airport users (airlines and travellers) are enjoying the benefits,’’ says Hurihanganui – a former airline executive herself. Her last job was chief operating officer at Air NZ.

“We recognise that in today’s environment price changes are challenging. We are ambitious but mindful of cost, ensuring our infrastructure programme is fit for purpose.”

Those charges to use the ageing domestic airport mean passengers now pay about $7 – making up about 3 per cent to 4 per cent of the cost of an average domestic airfare in 2022.

Strange says Auckland Airport has been consulting with its major airline customers since May 2011 on a replacement for the ageing domestic terminal and plans to build an integrated terminal. Over that time 21 concept designs have been developed by Auckland Airport and discussed with major airlines as part of the consultation process.

“We have worked with major airlines for over a decade on this. We’ve considered all feedback, including potential alternative locations and even further delays to infrastructure development. All of this has been carefully thought through and we have made changes where appropriate, but now we need to get on with it.”

Setting the price

Traditional battlelines over price setting between airlines and airports are back after they spoke with a united voice to the Government early on in the pandemic. Now they get down to the serious business of setting aeronautical charges to run to 2027.

While airlines say they effectively have to pay what they’re told to, the airport stresses charges will be set with reference to the Commerce Commission’s current information disclosure framework, with target return parameters updated at the start of each pricing period.

Because of the scale of the project and the time it will take to deliver, the airport’s terminal integration programme will straddle the next two pricing periods, together spanning 2023 to 2032.

One analyst says today’s announcement represents a ‘’meaningful part of the [Capex] puzzle.’’

Although light on details, the announcement will be looked at closely by Auckland Council, whose mayor Wayne Brown has raised the possibility of selling the council’s stake to help repay debt. A council decision looms mid-year before public consultation.