Passenger numbers are quickly recovering through Auckland Airport. Photo / Michael Craig
Auckland Airport’s plan to more than double some landing charges during the next five years has drawn fire from airlines, spurring rivals Qantas and Air New Zealand to unite and call for a complete rethink.
They warn that the increases “could close the door” on New Zealand and that travel will become unaffordable, especially for those who want to fly on the cheapest fares. However, the airport says it needs to increase charges to pay for essential infrastructure and claims its prices are comparatively low and end up being only a small part of an airfare. Each side’s position over a five-year price reset period is predictable, but this year the dispute comes with an extra frisson as redevelopment costs spiral and airlines are in recovery from the pandemic.
After suffering near-catastrophic losses, airlines including Air NZ and Qantas, are enjoying record or near-record profitability, and are themselves under fire for pushing up fares well above pre-pandemic levels as demand for travel remains high and capacity is crimped. Auckland Airport, the country’s main gateway and domestic hub, is also profitable again and putting its foot down on growth.
All this is being played out against the backdrop of a messy scrap over the future of Auckland Council’s 18 per cent stake in the airport. In interesting timing, the airport chose the day of the high-stakes council showdown to release its plans for pushing up prices after a pause for the pandemic.
And adding an extra twist to the pricing battle is the fact that one central character, Auckland Airport chief executive Carrie Hurihanganui, is a former Air NZ executive - her last job there was as chief operating officer, and in that role she would would have been quick to oppose the price increases.
Early in the pandemic, airports and airlines ceased hostilities as the sector was in freefall. They formed the NZ Aviation Coalition to lobby the Government with a united voice. On pricing at least, that brief union has ended and the gloves are off. This is how the battle lines look now.
What Auckland Airport (AIAL) wants:
The airport says it needs to increase prices to support major investment in long-life infrastructure, including transport, the airfield, stormwater upgrades and a new baggage system.
The new charges will take effect from July 1, ending the year-long price freeze that Auckland Airport adopted to help airlines rebuild following the pandemic. They will span a five-year period.
From July, the following changes will be introduced to aeronautical charges to airlines, which are calculated on a per-passenger basis:
Domestic jet travel (Auckland to/from main centres):
Airline domestic jet charges will average $11.85 over the five-year Price Setting Event Four (PSE4) period. Charges will initially rise by $3.50, from $6.75 to $10.25. Prices will then reach $15.45 by the 2027 financial year (FY27), the final year of PSE4.
Regional airline charges:
Airline regional charges will average $8.15 over the five-year PSE4 period. Regional charges will initially increase by $2.70 in July from $4.40 to $7.10, and will reach $10.70 by FY27, the final year of PSE4.
International charges:
Airline international charges will average $37.25 over the five-year PSE4 period. International charges will initially increase by $9.40 from $23.40 to $32.80. International charges will reach $46.10 by FY27, the final year of PSE4.
Hurihanganui said the airport was “very mindful of cost to our airline partners and ultimately travellers”.
It says the charges make up only a small portion of an air ticket - around 3 to 5 per cent of an airfare in the next financial year.
Doing nothing was not an option.
Hurihanganui said new airline charges for PSE4 are in line with other comparative airports in the region and will also be reviewed by the Commerce Commission.
Auckland Airport’s prices across the 2023–27 financial years target an after-tax return on investment of 8.73 per cent, equal to the mid-point weighted average cost of capital (WACC) calculated by applying the commission’s most recent (2016) WACC Input Methodology, but using updated data as at July 1 last year.
This is consistent with Auckland Airport’s submissions to the Commerce Commission’s WACC Input Methodology review and is supported by independent expert analysis.
During the next five years, Auckland Airport will invest up to $5 billion in aeronautical infrastructure, including work to progress the new domestic facility.
However, the new prices reflect just the $2.5 billion of investment that will be completed and in use by airlines and passengers by the end of that period.
Hurihanganui said Auckland Airport will continue to raise debt funding from both domestic and offshore markets to fund the capital expenditure programme. Because of the large forecast debt-funded “works under construction” balance towards the second half of PSE4, she said new equity may be raised in future.
She said the increase in PSE4 airline charges also reflected the higher cost of capital in the current economic environment compared to the previous price-setting event.
“Travel is back, and the recovery is taking place more quickly than anyone expected. Now is the time for investment in Auckland Airport if we are to deliver the resilience and customer experience travellers want and the gateway New Zealand needs for the future,” she said.
The domestic terminal is 57 years old and needs replacing.
“We know travellers are fed up with the domestic travel experience – they’ve told us that clearly. Other key aeronautical infrastructure also needs replacing. The pandemic meant we had to put much of this investment on hold and we are now in catch-up mode,” she said.
Hurihanganui says the pricing announcement was the result of 24 months of consultation with major airlines regarding aeronautical investment in Auckland Airport over PSE4 to support their business operations, as well as consultation over the airport’s wider 10-year development roadmap.
Airlines will only begin to pay for new infrastructure once it is complete and in use, she says.
It’s been vociferous. In a rare joint statement, “frenemies” Qantas and Air NZ said the steep price rises over the next five years will push up the price of travel, and tourism and trade will suffer.
Qantas and Air New Zealand are the airport’s two largest customers and are calling for an urgent rethink.
In the statement, the two airlines said they had each provided the airport company with details of their network impact, underpinned by independent economic analysis.
“This shows the cost of the airport’s planned redevelopment is predicted to increase airport charges to the point that air travel may become unaffordable for a significant number of travellers. This would impact both airlines, including Qantas’ subsidiary Jetstar.”
(But airlines have themselves been under fire for hiking fares steeply during the past 18 months, with Qantas and Air NZ enjoying record or near-record levels of profitability. Air New Zealand today revised up its pre-tax profit forecast for the year to at least $580m, its second upgrade within six weeks.)
Qantas and Air NZ say that given AIAL’s intention to spend billions more, there will have to be further significant increases to follow in the next pricing period, the extent of which AIAL has remained silent on.
“Airports should be building their assets to fulfil the needs of their customers and the two major airline customers don’t agree with the scale and cost of the current plan.
“It’s also important to note that AIAL may have only released the first phase of the redevelopment plan, and it appears that the costs will keep climbing.
“We all agree that some investment in Auckland Airport is necessary,” says Air New Zealand chief executive Greg Foran.
“However, this is an enormous spend over a short period of time that adds almost no additional capacity. All it is expected to result in is more costs for everyone who uses, relies on, or passes through the airport, including the aviation industry, the tourism industry, the whole economy, and Air New Zealand’s passengers.”
Qantas chief executive Alan Joyce says airlines accept that investment is needed, but what the airport is proposing goes far beyond what is needed or affordable.
“Based on Qantas’ experience, the necessary first phase of this redevelopment could be delivered for significantly less than $3.9b, and we’re conscious that the final number will probably be higher, with cost overruns common to most large infrastructure projects.”
Both airlines want:
A pause on major growth programmes and their enabling projects while an affordable plan is developed, either through reducing cost or exploring a more workable funding and pricing model.
They also suggest investing some of the profits the airport earns from other services like parking and retail to pay for some of the project, and prioritising reducing the impact of the cost of infrastructure so passengers and those who use airline services can afford to keep flying.
The airlines also describe as a “myth” the airport’s contention that it has to pass on costs to airlines because of the regulatory regime.
Current rules mean Auckland Airport is allowed to pass on all costs (plus a premium) for any investment in the terminal/airfield/roading and other aeronautical assets to airlines by way of increased charges.
The airport can keep all profits from the other things passengers pay for - parking, taxis, airport retail and commercial property interests (totalling over $3.3b in dividends to shareholders since 2000).
“There is nothing in the regulatory regime that stops AIAL from spending less or using all of the funds at its disposal, AIAL simply chooses to operate this way,” the airlines added.
“Over 68 per cent of the airport’s revenues come from activities that only exist because passengers fly. It could use some of the profit from those activities to limit the negative impact on New Zealand.”
While Qantas and Air NZ compete strongly on international routes, a 2018 deal resulted in a codeshare agreement for each other’s domestic operations. Joyce and Foran have a good working relationship.
The lobby group representing nearly every airline flying here, the Board of Airline Representatives, says that enabled by legislation, the airport sets prices as it sees fit, following a “consultation” period with its substantial customers.
Executive director Cath O’Brien said “consultation” deserves to be in inverted commas.
“The airport has not listened to concerns of its substantial customers as it has set costs of capital investment, as flow through to prices. Some weeks ago, AIAL announced that its board had taken final decisions on $3.9b in capital costs – and it has refused to engage with substantial customers on this decision in the remaining consultation period.”
She said the board agreed that investment was needed. “Unfortunately, we have a regulatory regime that does not ensure airports are of good quality, and AIAL has been allowed to ‘sweat’ their aeronautical assets to the point of near-failure.”
The domestic terminal was almost unchanged since it was first built, and the international arrivals hall was far too small.
“Airports should make sustainable investment over time, and should not be allowed to generate price shocks – where prices rise sharply to catch up on investment that should have occurred over decades,” she said.
“Travellers of the next five to 10 years will now pay for this failure – and will now pay higher landing charges while the airport construction process makes it an even more difficult place to travel, and to work. Higher charges are likely to damage demand for air travel, particularly in domestic New Zealand,” said O’Brien.
Barnz wants the Commerce Commission and the Ministry of Transport to ensure oversight of AIAL is sufficient “to ensure this failure to care for our airport can never happen again”.
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