The arrivals hall at Auckland International Airport. Air travel is bouncing back strongly. Photo / Alex Burton
Airline passengers face further price rises, with Auckland Airport pushing up fees charged to airlines doubling for domestic flights and international flights during the next five years.
The airport says it needs to increase prices to support major investment in long-life infrastructure, including transport, airfield, stormwater upgrades and a new baggage system. Prices now face Commerce Commission scrutiny.
And in spite of new funding, the airport says an equity raise is still an option to pay for new capital work.
UPDATE: Frenemies unite: Air NZ, Qantas slam price hikes
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.
While airlines pay initially, the charges are invariably passed on to passengers who have suffered a steep rise in airfares during the past 18 months.
Airlines are enjoying record or near-record levels of profitability as the demand for travel exceeds capacity on many routes. Air New Zealand today upgraded its earnings guidance for the current year. It now expects earnings before other significant items and taxation for the 2023 financial year to be no less than $580 million. This compares with the prior guidance range given in April of $510m to $560m.
Airlines have been contacted for reaction to the fee hike.
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 $3.50 from $6.75 to $10.25. Auckland Airport says this is lower than current charges at Wellington Airport ($15.20), and at Christchurch Airport ($14.60). 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. Auckland Airport says this is $3 to $4 cheaper than comparable current charges at Wellington Airport ($11.20) and Christchurch Airport ($10). Regional charges 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. Auckland Airport says this is lower than current published equivalent charges at other major international airports in the region including Sydney ($42.20), Melbourne ($35.90) and Brisbane ($56.70). International charges will reach $46.10 by FY27, the final year of PSE4.
Auckland Airport chief executive Carrie Hurihanganui said these changes have not been introduced lightly, particularly in the current economic environment.
‘‘We are very mindful of cost to our airline partners and ultimately travellers. That’s why we have been working hard to deliver a pragmatic and affordable solution while responding to airline requests for changes as much as possible,’' she said.
“At the same time, we’ve considered what we need to invest to ensure Auckland Airport’s infrastructure is at an appropriate standard, capable of delivering a good customer experience for expected passenger numbers and is resilient for the future. That’s our role. Doing nothing is 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 2023–2027 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, the start of PSE4 and not applying any downward adjustments.
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, 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 a mix of 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.
“This remains subject to a range of future uncertainties including the ongoing recovery in aviation, the future financial performance of Auckland Airport, and the execution run rate for the 10-year capital roadmap.”
Auckland Airport is consulting with airlines on potential future regional terminal infrastructure, the solution for which is currently expected to be in use during the next pricing period. The second runway does not feature during the current period and the project remains on hold.
Hurihanganui 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.
“We don’t think any travellers would say we are making the move to upgrade the airport too soon,” she said.
Auckland Airport’s 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 ten-year development roadmap.
Key projects to be delivered over PSE4 include:
Airlines only begin to pay for new infrastructure once it is complete and in use.
Hurihanganui said the ongoing recovery in aviation is strong, as is the need to invest in critical aviation infrastructure for the future.
“There are now 22 airlines flying to 37 destinations to and from Auckland Airport, up from 12 airlines and 21 destinations during the toughest days of the pandemic.
“In May, international seat capacity recovered to 91 per cent compared to pre-pandemic and domestic recovered to 89 per cent. The return of airlines is also working to support the recovery of trade with 80 per cent of airfreight coming into Auckland in the belly hold of passenger aircraft.”
Hurihanganui said Auckland Airport’s new aeronautical charges would be rising from a very low base, accounting for a small portion of an airline ticket.
“At $7 our current domestic jet aeronautical charges are 40 per cent to 50 per cent lower than comparable airports in our region and have risen just 65 cents in real terms over the last decade, reflecting the ageing domestic terminal,” she said.
Meanwhile, international charges have fallen 10 per cent in real terms over the past decade. Our charges currently represent about 3 per cent to 3.5 per cent of the cost of an average domestic or international fare.”
The airline sold its last slots at Heathrow in 2020.