The latest dogfight between Air New Zealand (and other airlnes) and Auckland Airport has a familiar look about it but the Government’s interest in it gives it a whole new dimension.
Forsyth Barr analysts says the regulatory risk to the airport has been elevated following Air NZ’s plea for a new approach to refereeing airport pricing was made public this week.
Air NZ (and others) accuse the airport of not listening to concerns about overspending and overcharging, familiar claims but the airlines are taking their fight to another level. Pushing on an open door, Air New Zealand wrote a letter to the Government calling for an urgent change to the way the Commerce Act is applied. That’s resulted in Commerce Minister Andrew Bayley getting involved.
While he’s not rushing to launch an inquiry himself, he’s expressed concern about aeronautical charges at Auckland Airport (AIA) and later today will sit down with its boss, former Air New Zealander Carrie Hurihanganui, about them. He wants the airport to “constructively engage” with airlines.
He’s waiting for a Commerce Commission review of prices – which come close to trebling in some cases in the current five years – before any further action. He raises the idea of the commission considering whether there’s a case for moving to a stronger regime and warns he will closely monitor the process.
As airlines put it, airports set prices at will to fund infrastructure that isn’t always what is needed to operate planes (especially the ones each carrier flies), the big builds come in uneven waves and consultation isn’t working. Airports can set charges as they see fit. AIA says investment in infrastruture is essential to keep the country moving and in some cases airlines appear to have forgotten what they’ve already agreed to.
These battle lines are familiar, barbs will be traded, but the bottom line is no matter what, the travelling public pays the cost.
Forsyth Barr analysts Andy Bowley and Paul Koraua say the Air NZ action adds to the risk that the current favourable regulatory backdrop for airports changes in future.
Air NZ and other airlines would prefer the framework to incorporate negotiate/arbitrate regulation. Such a change would shift the balance of power in the current aeronautical pricing framework (which favours airports currently) towards airlines.
“AIA would consequently have less control over its airport development. We caution that there are a number of ‘ifs’ before this would happen. While we acknowledge regulatory risk is rising, our base case assumes the regulatory status quo will continue for the foreseeable future.”
The analysts say airlines are striking while the iron is hot.
“Airlines have sought a move to negotiate/arbitrate regulation for many years. However, their leverage has been limited to date.”
The approach to Bayley reflects AIA’s current elevated aeronautical capex programme, in which it plans to spend around $6.6 billion in the 10 years to June 2032. (Air NZ calculates domestic passenger charges could increase from $9 to around $46 in this period. AIA says this is guesswork).
Bowley and Koraua say the big spending at AIA will drive a significant increase in AIA’s regulatory asset base and aeronautical prices.
Airlines say AIA has not been receptive to lower-cost alternatives as part of the consultation process.
Provisions for an inquiry exist in the Commerce Act and can be triggered in two ways, Bowley points out. The Commerce Minister can tell the ComCom to undertake one. Second, by the ComCom on its own initiative, and Bayley has thrown the ball into its court as it reviews AIA’s current price plans with a decision expected in May.
The ComCom would consider whether, in addition to information disclosure, other forms of regulation should be imposed on airports.
These include the negotiate/arbitrate regime wanted by the airlines.
“A potential move to negotiate/arbitrate regulation would likely lower AIA’s capital development programme spend levels, and consequently slow its RAB [regulatory asset base] growth outlook,” the analysts say.
“Lower RAB growth would lead to lower future aeronautical earnings and a lower RAB multiple. Valuation would suffer, but we believe the impact would be modest, not significant.”
Airlines for Australia and New Zealand (A4ANZ), an industry lobby group, has entered the fray, chair Graeme Samuel venting about one of his least favourite airports which he labelled a “national disgrace” in 2018 .
The former chair of the Australian Competition and Consumer Commission says: “I am constantly bewildered by parties simply saying there is nothing to see here and don’t look. And that’s what the Auckland Airport is saying.
“We’re not looking for heavy-handed regulation of airports and airlines, what we want is some transparency and ultimately an independent commercial arbitrator to be able to sit down and work out what’s fair and what’s right rather than simply having the monopoly airport simply saying we will assess the charges that we think ought to be imposed.”
Air NZ’s chief executive Greg Foran, speaking after the airline reported an interim result – hit by cost increases including landing fee hikes – said it wasn’t so much AIA that was the main target but the system.
“This isn’t just an Air New Zealand thing with the airport. In fact, it’s not even about the airport, it’s about the regulations.”
Air Chathams is the latest airline to speak up, saying the increases already seen in this price period are extremely challenging, at a time when it faces an almost 50 per cent increase in commercial leases for hangars needed to service its Auckland-based fleet over the past decade.
Duane Emeny, chief operating officer of Air Chathams, says the airline is worried about the effect of even higher prices on the future viability of what is a family business. The airport says it’s been a big supporter of the airline.
And Qantas today said the airport’s plan threatens Jetstar’s ability to offer low fares and competition to the market.
Auckland Airport has in the past year been pushing back harder on airline criticism. Last year as it faced complaints about congestion it took the unusual step of making public the operational performance of its key customers – airlines – revealing only half were arriving on time last winter.
And this week AIA returned fire on Air NZ, pointing out the airline’s dominance of the domestic market and its steep fare increases during the past four years. It says landing charges are only 3 per cent to 5 per cent of an airfare.
It’s encouraging the Government to do what’s done overseas and actively monitor fares and the performance of the market.
It has a point. Aside from broad figures on air transport’s contribution to CPI movement, there’s a dearth of data on airfares and nothing official on airline service levels in New Zealand, which has some of the weakest protection for air travellers among comparative countries.
Just as regime change to use a commercial referee to help turn down the heat (rather than light) generated by inevitable airline v airport spats would be useful, so would a spotlight on the airline pricing and performance.
Air New Zealand’s $185m interim pre-tax profit was down 38 per cent on last year as it faced more competition and higher costs. While there’s still some Covid flight credit legacy affecting the airline and it continues to be affected by post-pandemic supply chain problems, the six-month result and a gloomy full-year forecast compared to last year’s extraordinary profit looks more like the usual volatility for an airline.
Chief executive Greg Foran started work in February 2020, his arrival coinciding with the start of the pandemic, the worst commercial crisis in airline history. Big airline jobs are always busy but in the past four years the airline newcomer has experienced more than most industry executives would in an entire career. Now Air NZ is in a relatively steady state, does he feel it’s mission accomplished?
Not by the sounds of it.
Foran, 62, says there’s still work to do. He’s happy with improving customer satisfaction, has no regrets about sacrificing $40m or more of profit to improve service levels, but is unhappy with any cancellations or aircraft changes.
(And it appears some regional routes are particularly affected as the knock-on affects of jet aircraft engine issues will hit for 18 months. If the airline’s departure board out of Auckland today is an indication, there’s a tiny proportion of flights cancelled - four out of around 120 flights - but that’s cold comfort for those affected. A Kerikeri flight is cancelled and some locals in the north say that’s a growing problem.)
Foran says he’s not happy with the financial outlook for the second half but he’s confident about the strategy (which included putting up domestic fares) and says there’s no shortage of other projects – a long-awaited revamp of Airpoints (the technology engine should be ready for trials in May), new hangars and offices to build a Dreamliner cabin revamp to start mid-year and taking delivery of the first of eight long-delayed new 787s, now scheduled for later next year.
On that hold-up, he says he’s more frustrated than disappointed but not surprised. The problems Boeing now faces with its 737Max aircraft are adding to the plane maker’s production problems.
In spite of what’s confronted him throughout the past four years Foran has been unruffled – in public at least – and remains typically stoic about the Dreamliner delays. More leased planes will help fill gaps.
“You can control the things you can and with the things you can’t, you just have to get on and work with them. It just means that we have to work a little bit harder and scramble.”
He’s said before he’s in Air NZ until the board wants a change. Is that still the case?
“Absolutely.”
Departing Virgin Australia boss Jayne Hrdlicka is best known in this country for her brief but lucrative stint as managing director and chief executive of a2 Milk which she left in December 2019 after less than 18 months in the job.
Late in 2018, she drew flak after selling about 340,000 shares in the company, worth $4.3m, just a few months into her time there and then quit a year later to join Virgin. But she also had a key role in a happy period for air travellers in this country when she headed Qantas subsidiary Jetstar.
It was under her tenure the Aussie budget carrier launched flights to Napier, Nelson, New Plymouth and Palmerston North. For four years Jetstar was critical in dragging down the cost of notoriously high fares on regional routes. It didn’t make money so was pulled the pin in late 2019.
Hrdlicka joined Virgin Australia after it had collapsed into administration as the pandemic hit and it had been recapitalised by its new Bain Capital owners who want to relist. She said this week “the time was right” to leave but she will stay as chief executive while a search for her replacement is on.
Virgin pulled back from international routes during her tenure, including connecting main centres in New Zealand and Australia, leaving a big gap in the transtasman market. But the focus on Australian domestic has paid off with the airline back in profit and its private-equity owners keen to relist it on the stock exchange. Commentary across the Tasman suggests her departure could further delay the IPO.
While it’s a global hunt for her successor, one name reported as a candidate is close to home. Former Qantas loyalty boss Olivia Worth announced she was leaving that airline after missing out on the top job at that airline to succeed Alan Joyce and is tipped as a candidate for the top job at Virgin.
Grant Bradley has been working at the Herald since 1993. He is the Business Herald’s deputy editor and covers aviation and tourism.
The airline sold its last slots at Heathrow in 2020.