Richard Inder: Auckland airport desperately needs a rival

Auckland International Airport's plan to return as much as $300 million to shareholders underscores the need for another airport to service the Auckland isthmus.

The payout is proof positive of the airport's free hand in charging airlines and the public for use of New Zealand's main gateway to the world.

It is all the more remarkable because it comes with the additional promises to lift its dividend from 80 per cent of net profits to 90 per cent and a programme of upgrades to its terminals.

The works include: a $28 million project to allow for the scanning of baggage stowed in aircraft holds; a $27 million development preparing the airport for the arrival of the Airbus A380 super jumbo; and costly projects to separate arriving international passengers from those departing.

All of this can be achieved using its cash flow and a modest increase in debt.

A cursory glance at the airport's half-year results, also disclosed this week, shows how it is able to achieve the feat.

Its "airport development" charges levied on international passengers and "terminal service charges" - which sound like charges for the same thing - combined with property rentals and car parking, amount to almost two-fifths of its $142.65 million sales.

It is also worth noting that the planned upgrades are largely defensive. As the company notes, if it did not make room for the A380s, it risked "Auckland becoming a second-tier destination relying on feeder links from the main Australian airports".

The separation of passengers and the baggage screening are required to comply with new security measures.

Features of the operation that might sway a passenger's choice to use Auckland airport are poor. Sure, the international terminal is easy to navigate, but the Air New Zealand domestic terminal is a cramped, dingy, rabbit warren of worn carpets and often ramshackle gates.

The airport tips its hat to claims that investing large sums in the domestic terminal is uneconomic as a new terminal is planned, once a second runway is built.

But as work on the second runway is not planned to start until 2010, a new terminal is some way off.

Meanwhile, parking a car for an extended period costs a small fortune and taxi fares are raised by the levies the airport imposes.

The airport also said it would split its shares into four in April in order to ensure they remain attractive to its 50,000 small investors.

It need not have bothered. Investors seem to be well aware of the airport's attractions, as its shares were this week trading at more than 24.3 times prospective earnings.

This reflects investors' recognition of the value of the airport's monopoly position rather than any skill it has in appealing to travellers' needs.

The Government has within its grasp a proposal that could make the airport more attentive to its customers and reduce its economic drag on the region - the redevelopment of the Whenuapai airbase. Such a move would have seen an immediate plunge in charges and much improved service as the airport tried to see off a competitor.

Economic Development Minister Jim Anderton tried to kick the matter into touch in December, claiming the Government did not need to make a decision on the plan as the Air Force would not leave until at least 2010.

But this is a fig leaf. Civilian traffic shares airport facilities with the Air Force at Woodbourne in Blenheim and in Christchurch. And low-cost airlines in Europe have carved out new business opportunities doing just this. (Given the age of the Air Force fleet, some revenue from the private sector may not go amiss.)

The other, much less palatable alternative would be regulation that allows the airport a return on its investment commensurate with the risks.

Feeling the heat

Finance Minister Michael Cullen's planned new presentation of the national accounts at May's Budget will fool nobody. As well as discussing the surplus as operating balance before revaluations and accounting changes, or oberac for short, Cullen will also split out the net cash position. He claims, but actually hopes, the latter measure, which showed a surplus of $520 million in the year to June, will dispel the "illusion" that the Government could cut taxes without slashing services. The oberac measure, in contrast, showed the Government sitting on a $6.6 billion surplus in the June year.

To a certain extent, the new figure should be welcomed as both measures are worth considering. Sharemarket analysts value companies on judgments about just how much cash they produce.

But focusing on cash generation alone ignores the argument that some items of Government spending, such as student loans and infrastructure assets, can be debt-financed. Costs of servicing the debt are matched with loan repayments or road user charges.

The move has echoes of the dotcom boom, when companies chose the number on their profit and loss that put their performance in the best light, even if that meant emphasising sales.

Cullen's move should encourage those pushing for tax cuts to argue harder, as he is clearly rattled.

* Richard Inder is editor of the Business Herald.