The Commerce Commission is inviting feedback on its draft conclusions released today that, while Auckland Airport’s revenue and targeted returns are in excess of what the Commission considers to be reasonable, the Airport’s planned investment appears appropriate, based on the information the Commission has received.
In reviewing the Airport’s pricing decisions for the five-year period running from 1 July 2022 to 30 June 2027, Commissioner Vhari McWha says the Commission considered whether the Airport’s pricing decisions and expected performance are likely to promote the long-term benefit of consumers.
“Some price increases are necessary to fund the investment needed to improve customer experience, build more resilient infrastructure and add additional capacity. However, in our view the Airport’s charges over the five-year period are in excess of what is reasonable to achieve these outcomes.
“These charges are a cost to airlines, and while it is up to each airline to manage these through airfares, we are conscious that travellers are likely to bear much of that cost when using Auckland Airport – and they don’t really have a choice, which is why we have a role as regulator in reviewing pricing,” says Ms McWha.
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,” says Ms McWha.
The Commission also reviewed the process followed by Auckland Airport to set its capital expenditure plan, including the factors it took into account and the evidence it considered.
“While the Airport’s customers agree that 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,” says Ms McWha.
The Airport consulted stakeholders on its Draft Capital Plan in 2022 and shared a revised version in February 2023, which saw a $430 million reduction in spend over the five years to June 2027. However, 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 $5 billion to be spent during the 2022 – 2027 period.
Ms McWha says the consultation paper is an opportunity for all stakeholders to provide feedback before the Commission’s conclusions on the review are finalised.
Submissions on the Commission’s draft conclusions are due by 5pm, on Tuesday 27 August 2024 to . Depending on the extent of submissions received, the Commission’s final report will be published no later than Q1 2025.
View the .
Background
Christchurch, Auckland and Wellington international airports are subject to information disclosure regulation under Part 4 of the Commerce Act. The regulation improves transparency of the airports’ performance around profits, investment, pricing, and service levels.
The Commission does not regulate the prices charged by the three airports. Under the Airport Authorities Act 1966, the airports set prices as they see fit, but are required to consult substantial customers, like airlines, on charges and any major capital expenditure plans.
After prices have been set by the airports, the Commission publishes its reviews of the outcomes so that the airports’ conduct and performance can be scrutinised by interested parties, including the public. This can influence the airports’ behaviour and decisions. To date, the airports have been responsive to the Commission’s review conclusions. For example, in 2019 Auckland Airport reduced its charges by $33 million following the Commission’s review of its third price setting event.
In setting out its draft conclusions in the consultation paper for Auckland Airport’s pricing decisions for the five-year period running from 1 July 2022 to 30 June 2027 (PSE4), the Commission assessed material and inputs relating specifically to profitability, investment plans, pricing efficiency and innovation.
