01 November 2018
Section 53B review of FY18-22 pricing
Auckland Airport has received the Commerce Commission’s final report on the company’s aeronautical pricing for the FY18-22 period.
The Commerce Commission’s report is the culmination of a twelve-month review into the reasonableness of Auckland Airport’s targeted returns, forecast capital and operating spend and pricing efficiency.
The Commission’s report recognises that Auckland Airport is investing heavily in new infrastructure in response to growth and that planned and actual investment is occurring at an appropriate time.
While the Commission has not confirmed it is comfortable with the full extent of Auckland Airport’s targeted return, the report does conclude that Auckland Airport has provided evidence that an appropriate return may be above the Commission’s industry-wide benchmark due to the size and risks associated with Auckland Airport’s investment programme.
The Company was pleased to see that the final report acknowledged the inherent uncertainty involved and that it is not possible to determine a precise measure of the right return for Auckland Airport.
Auckland Airport’s chief financial officer, Phil Neutze, says the Company will review the Commerce Commission’s findings in detail.
“We took an Auckland Airport-specific approach to setting our prices given the unprecedented size of our investment plan over the next five years. Airport pricing is complex and we have provided comprehensive evidence to the Commission explaining why we believe our approach is fair and reasonable. We will need to carefully review how the Commission has assessed that evidence in its final report and how this shaped its findings.”
“Auckland Airport is investing circa $2 billion in long-term infrastructure over this five-year pricing period which is the largest airport development ever undertaken in New Zealand. We are talking about an average price increase over five years of 66 cents per passenger journey.”
Charges over the 2018-2022 financial years contribute to the running of the airport and key infrastructure projects. These projects include:
- The now almost completed international terminal outbound passenger processing and dwell expansion project
- Improving the international arrival experience by expanding the border processing area and public arrivals space
- Upgrading the international check-in area
- Upgrading the roading and public transport options around the precinct
- Rejuvenation of the existing domestic terminal.
“Unprecedented growth in travellers has increased demand on the airport’s infrastructure. We have brought forward our infrastructure investment in infrastructure to support the expected 40 million passengers a year who will travel through Auckland Airport by 2040,” adds Mr Neutze.
Notes to editor -
Commerce Commission pricing backgrounder
- The pricing and regulation of Auckland Airport’s aeronautical business is governed by the Airport Authorities Act and Part 4 of the Commerce Act. Our regulated business comprises core aeronautical services: airfield facilities to enable the landing, take-off and movement of aircraft, terminal facilities for the processing of passengers, and aircraft and freight facilities for the maintenance and service of aircraft and the handling of freight. Auckland Airport’s non-aeronautical business is subject to open market competitive forces and the wider provisions of the Commerce Act.
- The Airport Authorities Act gives airports the ability to set aeronautical charges after consultation with airline customers on prices and capital investment.
- The Commerce Act requires airports to comply with an information disclosure regime set by the Commerce Commission. Airports have to report each year on a range of financial, investment and service quality issues and provide detailed five-year pricing forecasts of capital expenditure, operating costs and target returns ever five years.
- The Commerce Commission monitors this information and assesses whether our target returns are reasonable for each five-year period.
- It’s important to note that the Commerce Commission does not set prices – the regulatory regime is one of information disclosure. However, in practice the Commerce Commission’s views do place considerable pressure on our price setting and form a kind of “shadow price control” for our regulated business.
- This regime was first introduced in 2008. The first pricing decision to be reached under this regime came in 2012. At that time, the Commerce Commission reviewed Auckland Airport’s target returns and it was within an acceptable range.
- During that first five-year period the combination of increased interest in visiting New Zealand, 12 new airlines adding Auckland as a destination, and Jetstar’s decision to add four regional New Zealand routes meant passenger numbers increased sharply, and the airport made the decision to invest 80% more in new aeronautical infrastructure than initially forecast during this period.
- The regulatory regime was updated in December 2016 and the Commission provided new guidance on how it would assess target returns. It reinforced that it would consider airport-specific circumstances when assessing the reasonableness of airport pricing.
- Auckland Airport’s second pricing period began in July 2017 following a year of consultation with our airline partners. Our pricing decision included a circa $2 billion aeronautical investment plan between 2017 and 2022. To recover our operating costs over this period and help support our investment plan, we made some modest price changes. Auckland Airport also sold its investment in North Queensland Airports and reinvested the proceeds into aeronautical infrastructure.
- Over the five-year period, Auckland Airport’s charges will:
- Increase by 80c per passenger (from $5.77 to $6.57) for domestic travellers
- Increase by 16c per passenger (from $23.34 to $23.50) for international travellers.
- The average forecast increase is 66c per passenger (from $15.44 to $16.10).
- After inflation is taken into account, international prices are decreasing by 1.7% per year on average over the five-year period, and domestic prices are increasing by 0.8% per year on average. Overall, our prices are reducing by 1% per year, in real terms, on average over this pricing period.
- The Commerce Commission decision relates to whether it believes this increase is justified, given the specific circumstances Auckland Airport faces.
- In its draft report (April, 2018), the Commerce Commission broadly agreed that our capital expenditure programme could justify a return above its industry-wide benchmark (based on a review of 26 international airports around the world), but was not yet convinced that the return we targeted was fully justified. The Commerce Commission asked us for more information to support our position, information we have since provided.
- It is important to put Auckland Airport’s charge in perspective. Our international charges are middle of the pack compared to our international peers, and our domestic charges are among the lowest in Australia and New Zealand.
- Comparing Auckland Airport’s charges to other charges levied on domestic and international travellers demonstrates that our charges are very good value for money. Our domestic charges are similar to those of the Aviation Security Service (the government agency charged with security at airports), which is proposing domestic charges of $6.28 per passenger from 2019 for its passenger security screening service. Our average charges are about the same level as the border clearance levy charged by MPI and Customs of $15.79 per arriving international passenger. We also note the Government is adding a tourist levy of $35 per international passenger to support New Zealand’s tourism sector.
- Separate to the charges discussed above, Auckland Airport has also signalled that it intends to introduce a Runway Land Charge of $1.19 plus GST per passenger once a decision has been made to start construction of the second runway and over $50m has been spent on the new runway. This charge will recover the cost of holding land for the second runway development, and will be deferred if the need for the second runway can be efficiently delayed.
For further information please contact:
Auckland Airport Public Affairs
+64 27 406 3024