The Commerce Commission is concerned Auckland International Airport is planning to make excessive profits on its regulated assets, but the country's largest airport says it's optimistic it can convince the regulator that its plans to earn returns above a target benchmark will be successful.
The airport is arguing its risk profile has changed as it enters an extended period of major new capital developments.
But in an initial finding published this morning, the competition regulator says "Auckland International Airport's profits may be too high over the period 1 July 2017 to 30 June 2022", with the airport targeting a return on its regulated asset base of 7.06 percent against the commission's mid-point benchmark of 6.41 percent.
"This difference in target returns could result in customers paying an additional 61 cents per flight over the next five years, or put another way – Auckland Airport earning an additional $47 million in profits after tax," the commission's deputy chair, Sue Begg, said in a statement. It would also result in the assets the airport holds for construction of a second runway being overstated by $8 million.
The valuation of regulated assets drives ultimate returns.
Speaking to BusinessDesk, AIA's chief financial officer Phil Neutze said the airport was heartened by the extent to which the commission had accepted that its risk profile would change with additional investment, and that there were "a lot of areas of analysis that we can bolster, particularly as the commission has been good at setting out what they require".
"We believe we can provide a lot to give more comfort."
Neutze could not comment on the potential for the commission to eventually agree a higher rate than its target returns mid-point, but lower than what AIA is currently seeking.
"There may be legitimate reasons for Auckland Airport to target higher returns than our benchmark," said Begg. "However, based on the information they have provided to date, we are yet to be satisfied that they will be acting in the long-term interest of consumers and limited in their ability to earn excessive profits."
Submissions on the draft report are sought by May 25, with a final decision to be published in September.
AIA is New Zealand's second-largest listed company by market capitalisation, at $7.41 billion based on this morning's opening share price of $6.16, although that price has slid 9.7 percent in the last year and has fallen 19 cents in the last 11 days.
In a March 9 letter to the commission, the airport's head of economic regulation and pricing, Adrienne Darling, said the company's "decision on the appropriate target return ... was informed by our understanding of the systematic risk Auckland Airport that would flow from the major step-change in our capital expenditure programme relative to historic levels".
In a statement to the NZX this morning, Neutze said the commission's report "broadly supports" the airport's pricing decision as it recognises it is "investing heavily in new infrastructure in response to growth and that planned and actual investment is occurring at an appropriate time".
The commission was seeking further justification of the pricing decisions that had flowed from that investment programme, noting that the commission had previously said it expected regulated airports to "consider their own airport specific factors when determining their target return". In real terms, airport charging would reduce by 1.7 percent over the next five years for international passengers and increase by 0.8 percent for domestic passengers, with a $1.19 per passenger runway landing charge also signalled from 2021 to help fund the second runway.
Begg said the commission did "not have significant concerns about these redevelopments and recognise that strong passenger growth is putting pressure on their facilities and expenditure".