Auckland Airport prepared to lower prices after ComCom ruling

Auckland Airport will consider cutting charges following a final ruling by the Commerce Commission, a move that would mean some respite for air travellers.

In a draft decision today, the commission found the airport is targeting a weighted average cost of capital (WACC) that is higher than what it considers to be reasonable.

In the current pricing period Auckland Airport’s charges could generate excess profits of between $193.4 million and $226.5m, the commission says in its 93-page interim finding.

An inquiry into how it sets prices was a possibility but this hasn’t been recommended and one analyst says the ruling is more positive for the airport company than some had been forecasting.

The commission said Auckland Airport’s WACC estimate of 8.73% differed from its mid-point estimate of 6.98%.

“Our draft conclusion is that Auckland Airport’s estimate of WACC is not justified and is inconsistent with the purpose of the (Commerce) Act.”

The airport had planned to nearly treble some aeronautical charges which feed into prices for travellers.

Auckland Airport said it welcomed the interim finding that its planned capital expenditure, including on the new domestic jet terminal, appears reasonable, has had significant rigour applied to it and benchmarks well internationally.

“We respect the role the Commerce Commission plays, and we will review their feedback and provide additional context in our submissions for consideration in the commission’s final report. If the final report continues to say that our WACC is too high, we will adjust our pricing,” said the airport’s chief executive Carrie Hurihanganui.

The airport cut prices in the previous Price Setting Event (PSE3).

“When we set charges we carefully balance the need to keep charges fair to consumers while supporting investment in nationally significant aeronautical infrastructure. The commission recognised that while Auckland Airport’s charges are increasing, domestic and regional prices across Price Setting Event 4 (PSE4) will remain at or below other regulated New Zealand airports,” said Hurihanganui.

A major factor in how the airport sets prices is its WACC, which is calculated with reference to a methodology established by the commission.

“At the time of our price setting the commission’s methodology did not contemplate the impacts of the global pandemic on aviation. Our pricing decision took this into account and the commission recognised that there were legitimate reasons for doing this.’'

Hurihanganui said the report showed a difference in how the commission considers the airport should have treated the pandemic as part of setting prices.

“It has relied on its updated methodologies in its assessment. These were released after our prices were set, and we could not have anticipated the approach the commission took at the time our decision was taken.”

Any changes to charges would take place from July 1 next year and apply for the remainder of the pricing period which ends in June 2027.

Any reduction in prices would consider the overall financial return targeted across the entire 5-year pricing period, with the adjustment in the final two years to balance out the charges in place for the first three years of PSE4.

In 2019, Auckland Airport lowered airline charges following feedback from the commission, and this included reducing its target return from 6.99% to 6.62%.

It says the impact of the pandemic on passenger demand resulted in investment returns for all of PSE3 to fall to 3.14% after-tax, less than half of the returns forecast for that five-year period.

Auckland Airport has not sought to recover any of the pandemic induced losses from PSE3 in its latest pricing decision, it says.

Hurihanganui said she welcomed the commission’s conclusion that the airport had undergone extensive consultation with airlines on its capital plan, that planned expenditure appears reasonable and acknowledges the importance of the timing of vital runway and resilience upgrades.

The commission said: “We consider that the process and rigour Auckland Airport applied to planning and costing the investment plan was reasonable. When identifying the needs for investing in a new domestic terminal, Auckland Airport had adequate regard to the current service quality issues, asset maintenance, and capacity requirements in the long run. It considered a wide range of options.”

Hurihanganui said Auckland Airport is progressing its infrastructure development programme, with over 1000 people currently working on the build – making it one of the Auckland region’s most active construction sites.

“Over one third of the integrated terminal is currently under construction, with 20% of the build already complete. We are confident the 26% extra domestic capacity it is adding is in the best interests of the flying public.”'

The total cost of a the new integrated terminal is close to $4b.

“Our goal is to deliver this infrastructure in a way that keeps travel affordable, while adding the necessary resilience and capacity the airport needs.”

The commission will release its final report before the end of the first quarter of 2025.

Grant Bradley has been working at the Herald since 1993. He is the Business Herald’s deputy editor and covers aviation and tourism