Passengers face increased fares regardless of whether the airlines or Auckland Airport comes out on top in the continuing battle over prices.
And for now, at least, Commerce Minister Andrew Bayly is staying on the sidelines.
The Commerce Commission today issued a draft report on the airport’s aeronautical charges that found its work programme and consultation with airlines were reasonable, but it is targeting excess profits of more than $226 million over five years.
The commission said the airport’s weighted average cost of capital (WACC) 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 company’s share price tumbled 21c to $7.69 in early trading but had recovered to $7.79 by market close.
Airlines have also been under fire for hiking fares but an industry body, the Board of Airline Representatives, said the commission had “denounced” excess profit taking by Auckland International Airport Limited.
“Unfortunately, these excessive prices have already been paid by airlines since July 2023,” said the board’s executive director Cath O’Brien.
“It appears that airlines and travellers are stuck with paying for Auckland Airport’s excess profits until at least July 2025 before any re-pricing event occurs.”
A final report is due before the end of the first quarter of next year and if the commission maintains its view on the airport making an excessive return on WACC, the airport has said it will review prices and new ones will come into effect mid-next year.
The airport had planned to nearly treble some aeronautical charges which feed into prices for travellers. Asked what the impact of a cost cut would be, an airport spokesperson said: “Today’s report from the commission is a draft. Auckland Airport has said that based on the draft we will consider reducing charges once a final report is issued. Right now, we are focused on reviewing the report in detail and engaging in the submission process.”
O’Brien said the regulatory regime for Auckland Airport allows the company to set prices as it wishes, even where they are considered excessive and unjustified.
“For two periods running, Auckland Airport price setting has been found to be excessive, and for two periods running, Auckland Airport will lower those prices after regulatory examination,” she said.
“Airlines will have paid prices including these excess profits over 2023 and 2024. Come 2025, some airlines may reduce their number of services to Auckland Airport, while some may have to leave the market altogether which will have significant knock-on impacts across the economy.”
A late period re-price in 2025 means some airlines will have paid higher prices during 2023-24 and will miss out on eventual price reductions.
Airlines have renewed their call for an inquiry into how Auckland Airport is regulated. They want a negotiate/arbitrate system.
O’Brien said the information disclosure regime is backward-looking, “nudging the door closed” on prices already set too high.
The regime can’t consider the impacts of future capital costs on prices and airlines fear this will markedly push up costs for them and passengers. One airline leader has described the airport’s near-$4 billion integrated terminal as being like the Taj Mahal.
O’Brien said it was “clear that the regulatory regime is not fit for purpose when it comes to ensuring oversight of such a significant capital plan – a plan much larger than any other infrastructure investment in New Zealand”.
Airlines today appealed to the commission and Bayly, who earlier this year said he was concerned at prices, to hold an inquiry into the regime. Through a spokesman, Bayly said today he welcomed the consultation paper and looked forward to receiving the commission’s final report.
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.
In response to airline criticism, it said the 26% extra domestic capacity Auckland Airport is building will promote competition and put downward pressure on airfares.
The airport’s domestic jet charges represent 4-6% of an average domestic airfare and have increased by $5 since 2019.
Airline domestic jet charges will average $11.85 over Price Setting Event 4 (PSE4), regional charges will average $8.15 and international charges will average $37.25.
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,” said Hurihanganui.
“The commission recognised that while Auckland Airport’s charges are increasing, domestic and regional prices across PSE4 will remain at or below other regulated New Zealand airports.”
A major factor in how the airport sets prices is its WACC, which is calculated by taking cues from 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.
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 falling to 3.14% after tax, less than half of the returns forecast for that five-year period.
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.
Auckland Airport is continuing its infrastructure development programme, with more than 1000 people currently working on the build – making it one of the Auckland region’s most active construction sites.
Shane Solly, portfolio manager at Harbour Asset Management, said the commission’s interim report hadn’t been as negative for the airport as some forecast. There has been speculation the company may need an equity raise in the face of the ruling and subdued passenger demand.Solly said the company may want to wait until there is a final determination.
“If there were to be an equity raise it may be well supported. Certainly a lot of investors have been waiting for the opportunity to get on board.”
Grant Bradley has been working at the Herald since 1993. He is the Business Herald’s deputy editor and covers aviation and tourism.
New seats, bigger screens and legroom plus a luxury business premier option.