Commission concerned about Auckland Airport's profits

Commission concerned Auckland Airport's profits may be too high
The Commerce Commission is concerned Auckland International Airport’s profits may be too high over the period 1 July 2017 to 30 June 2022.

The Commission made the initial finding in its draft report released today on its review of Auckland Airport’s pricing decisions for the five years from 1 July 2017. Auckland Airport is subject to information disclosure, which is a light-handed form of regulation where the Commission reviews pricing decisions to provide greater understanding about the airport’s performance.

Commission Deputy Chair Sue Begg said the airport has not yet satisfied the Commission that the returns it is targeting on its regulated asset base are appropriate. Auckland Airport is targeting a return of 7.06%, which is above the Commission’s mid-point benchmark of 6.41%.

“This difference in target returns could result in customers paying an additional 61 cents per flight over the next five years, or put another way – Auckland Airport earning an additional $47 million in profits after tax,” Ms Begg said.

In addition, the Commission considers the higher return targeted by Auckland Airport will result in the value of the assets held for the second runway Auckland Airport is proposing to build in 2028, possibly being overstated by $8 million.

“There may be legitimate reasons for Auckland Airport to target higher returns than our benchmark. However, based on the information they have provided to date, we are yet to be satisfied that they will be acting in the long-term interest of consumers and limited in their ability to earn excessive profits. That’s why the draft report provides an opportunity for all stakeholders, including Auckland Airport, to provide further information.”

As part of the review, the Commission looked at the forecast cost, timing and consultation for the airport’s planned $1.8 billion terminal and aeronautical infrastructure redevelopment. The planned redevelopment is significantly higher than historic investment, responding to growing demand.

“We do not have significant concerns about these redevelopments and recognise that strong passenger growth is putting pressure on their facilities and expenditure. We note the challenges the airport faces in maintaining a working airport during construction, but look forward to the level of service quality improving over the long term as a result of these significant redevelopments,” Ms Begg said.

Submissions on the draft report are due by 25 May 2018 and cross submissions by 8 June 2018 toregulation@comcom.govt.nz. We expect to publish our final report in September 2018.

The draft report can be found here.

An infographic explaining airport regulation is available here.

Background
Previous reviews of Auckland Airport’s pricing
The Commission’s review of Auckland Airport’s prices is the second of its kind since information disclosure requirements were set under Part 4 of the Commerce Act. The first was undertaken in 2013-2014 and concluded that Auckland Airport was limited in its ability to earn excessive profits.

Auckland International Airport
Auckland International Airport is New Zealand’s largest airport and one of the country’s largest listed companies. It is considered New Zealand’s gateway, with more than three-quarters of international visitors to New Zealand and around 19 million passengers passing through its gates over the past year.

Airport regulation
The Commission does not regulate the prices Auckland, Wellington, and Christchurch International Airports charge. These airports may set prices as they see fit but must consult with substantial customers, like airlines, on charges and any major capital expenditure plans.

Under Part 4 of the Commerce Act, which regulates markets with little or no competition, the 3 airports are subject to information disclosure regulation for certain key airport facilities and services to get people and cargo on and off aeroplanes, including take-off and landing of aircraft. These services include aircraft, freight, airfield, and passenger terminal activities. The regulation does not cover other services such as car parks and retail facilities.

The Commission expects to release its draft report on Christchurch International Airport’s pricing in June 2018. The review of Wellington International Airport’s pricing will take place after it sets its prices in 2019.

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