Jim Eagles: Can a monopoly company be trusted?

Here's a little quiz. Which airport ranks as the most profitable? No, not Heathrow, Los Angeles or even Sydney. The most profitable airport in the world, according to the 2005 airport benchmarking report by Transport Research Laboratory, is Auckland International Airport.

Another New Zealand first along with Richard Pearse's powered flight, giving women the right to vote, the ascent of Everest, various Olympic gold medals, the Netball World Championship and the inaugural rugby World Cup. Something to be proud of.

Well, unless you fly overseas from time to time and have no choice but to contribute to those fat profits. Because then you might start to wonder, if the airport company is so profitable, how come the Government requires us to give it a $25 departure charge every time we fly overseas (yes, all of that goes to the airport company)?

You might question why, since it's making so much money, it keeps putting up fees like its parking charges at a lot more than the rate of inflation.

And you might well ask how come this monopoly company, which faces no competition in its core business, has been allowed to generate such enormous profits without falling foul of, say, the Commerce Commission.

To get the answers it is necessary to go back to the way airports were privatised some 15 years ago.

The governments of the day believed enthusiastically in light-handed regulation - much as they did with telecommunications - so they saw no great need to control the airport's monopoly activities.

Airports were required to consult their airline customers before setting landing and terminal fees, but having done so were free to decide what they thought was fair.

They were also required to publicly disclose the level of profits being made from their monopoly aviation activities, presumably in the belief that they might be embarrassed if they were seen to be making too much money.

Maybe that would have worked. But even that level of control was undermined by the fact that - unlike the situation in, say, Britain - the definition of monopoly aviation activities was limited to just the strictly aeronautical stuff like runways, air bridges and departure lounges but excluding all the highly profitable associated activities like the terminal cafes and shops or the carparks and taxi fees which depend entirely on the flow of customers attracted by the planes.

This allows airports to put out disclosure statements which give a slightly onesided picture of what they're earning.

For instance, for the financial year to the end of June 2005 Auckland International Airport issued a disclosure statement which showed it made an after-tax return on the value of its aeronautical assets of 7.3 per cent. Rather more than the after-tax return you'd get if you left the money in the bank.

But if you set those figures alongside the company's annual result you can calculate that on its remaining supposedly contestable non-aeronautical activities it must have made a tax-paid return of a rather fatter 18.8 per cent. That paints a somewhat different picture of how well the airport company is doing.

On top of that there's a complex but crucial argument over the valuation of the aeronautical assets on which that rate of return is based.

The airport company argues that increases in land values, construction costs and so on entitle it to regularly increase the value of the airfield, runways and terminals.

The airlines maintain that it would be fairer if their charges were based on the money actually spent on the facilities rather than what it might cost to create them from scratch today.

That matters because it has a big effect on how much money the airports have to extract to get a given rate of return on those assets.

For instance, if last year's figures exclude the airport revaluations, the company's after-tax return on aeronautical assets goes up to 10.9 per cent and the return on the non-aeronautical activities becomes a whopping 34.9 per cent.

If that all sounds a bit technical, no problem, an independent opinion is available from the Commerce Commission which spent four years looking into aeronautical charges at the main airports.

Even though it was prevented by law from taking into account the profits made on the associated airport activities like cafes, shops and carparks the commission still came down on the side of the airlines.

Its decision, issued in 2002, concluded that specialised assets such as runways should be valued for charge-setting purposes on their historic cost.

By basing charges on replacement values it found Auckland airport was overcharging airlines by $4 million a year and Wellington airport by about $700,000 a year.

The commission concluded it wasn't economically worthwhile imposing price controls at Wellington but controls were justified at Auckland.

However, the commission doesn't have the power to regulate airports; only the Government can do that, and after thinking about it for a few months the Commerce Minister decided price controls would do more harm than good to the wider economy.

So in the past few years it has been business as usual for the aviation industry.

Our national carrier Air New Zealand has barely made a profit. By contrast things have gone from good to fantastic for the airports.

A couple of months before the ministerial decision Wellington airport increased landing fees by 27.6 per cent and terminal charges by 311 per cent.

Partly because of that its EBITDA margin (earnings before interest, taxes, depreciation and amortisation as a proportion of turnover) has risen to 75 per cent.

That is nearly double the sort of returns airports get in Europe (where the EBITDA margin averages 36 per cent) or the United States (38 per cent).

Indeed, it's interesting to note that Prestwick airport in Scotland, in which Wellington airport's major shareholder Infratil has a big stake, has an EBITDA margin of only 13 per cent.

Auckland airport hasn't increased its landing and terminal charges because it can do that only every five years.

But of course it has benefited from the growth in aviation traffic and, in particular, Air New Zealand's low-cost New Zealand Express service which boosted patronage by 40 per cent, and by the fact that instead of all the extra customers producing economies of scale and lower prices for, say, carparking or taxi pick-ups they have actually gone up.

As a result it is rated as the most profitable airport in the world.

In the 2005 rankings produced by Transport Research Laboratory, Auckland airport had the highest EBITDA margin of all, 80 per cent, ahead of Sydney (78 per cent), Atlanta (72), Johannesburg (74) and Melbourne (71). It was also top when assessed by other profit measures.

Wellington wasn't included in the study but obviously would have rated among the most profitable.

Concerns about the monopoly profits being made by Sydney and Melbourne airports have led Australia's Treasurer Peter Costello to instruct the Productivity Commission to conduct a review of how well their light-handed regulatory regime is working.

Meanwhile, on this side of the Tasman, Auckland airport has just announced it is increasing the book value of its assets from $1.3 billion in 2002 to $2.7 billion.

That has produced apoplexy on the part of the airlines because they are just about to start the process of consulting the airport company on what landing and terminal fees should apply from September 1 next year.

The airlines' fear is that, to put the issue simply, if the company found it necessary to charge airlines a total of $80 million in landing and terminal fees to achieve that 7.3 per cent rate of return last year, it would need to take $172 million a year in fees to maintain the same rate of return on the higher-valued assets next year.

That's a prospect that should concern anyone who expects to make an overseas trip in the years ahead, because, like the airlines, we have no choice but to use Auckland International Airport no matter what they charge.

Like it or not, if we want to fly there's no alternative but to give the airport $25 a time for the privilege of sitting in the departure lounge and boarding via the air bridge.

There's no option but to pay top dollar for parking in the carparks, buying coffee in the cafes and shopping in the stores.

And there's no way to avoid picking up the bill if the airport company increases what it charges the airlines.

Unless, of course, the Government takes the same approach it recently did with Telecom and decides a monopoly company cannot be trusted to monitor its own activities.

* Jim Eagles is the Herald's travel editor.