Auckland Airport charges too high, Commerce Commission says

Wednesday, 17 July 2024

The Commerce Commission said in a draft decision that Auckland Airport’s targeted returns exceed what is “reasonable”.

The airport said it would consider cutting charges as a result.

Domestic airlines have welcomed the commission’s findings and called for an independent inquiry into airport regulation.

Auckland Airport says it will consider cutting charges after a draft Commerce Commission decision found its targeted returns exceed what is “reasonable” - a move that could offer travellers some relief in terms of airfare pricing.

Auckland Airport had announced plans to increase aeronautical charges to airlines for the next five years to help fund its multibillion-dollar redevelopment plan, including the construction of a new domestic terminal.

Airlines argued that passengers would foot the bill with higher airfares if the airport went ahead.

Commerce Commissioner Vhari McWha said the commission looked at whether the airport’s pricing decisions and expected performance were likely to be of long-term benefit to travellers.

“Some price increases are necessary to fund the investment needed to improve customer experience, build more resilient infrastructure and add additional capacity,' McWha said.

'However, in our view, the airport’s charges over the five-year period are in excess of what is reasonable to achieve these outcomes.”

While it is up to airlines to manage such charges through airfares, travellers are likely to bear much of the cost when flying into or out of Auckland Airport, McWha said.

The commission estimated that Auckland Airport could generate “excess profits” of between $193.4 million and $226.5m as a result of its weighted cost of capital (WACC) estimate of 8.73%.

The commission’s estimated reasonable return was between 7.28% and 7.51%.

“Our draft conclusion is that Auckland Airport’s estimate of WACC is not justified and is inconsistent with the purpose of the (Commerce) Act.”

Auckland Airport chief executive Carrie Hurihanganui said the airport would consider the commission’s feedback and provide additional context in its submissions ahead of the final report.

“If the final report continues to say that our WACC is too high, we will adjust our pricing – consistent with the approach we took in the previous pricing review. We will confirm the details of this after the commission’s final report is released.”

Domestic airlines including Air New Zealand, Jetstar, Air Chathams and Barrier Air, in an ongoing battle with the airport about the charges, welcomed the Commission’s findings, saying in a joint statement that it’s ultimately passengers who end up paying when airports make excess profits.

“Domestic carriers have expressed concern for some time about the scale and cost of the current Auckland Airport redevelopment, which would ultimately leave the travelling public footing the bill and domestic travel becoming less affordable for many,” the statement read.

“While the Commerce Commission’s draft suggests that the investment in Auckland Airport’s development may be appropriate, this is not a view shared by many of (Auckland Airport’s) aeronautical partners and that will be a strong feature of the response to this draft report.”

Air New Zealand CEO Greg Foran said the last thing New Zealanders in the midst of a cost of living crisis need “for more costs to be piled onto travel because Auckland Airport isn’t acting in the best interests of New Zealanders”.

“We agree some development is needed, but we’re ready to get back to the table with Auckland Airport to ensure that the airport has an affordable and enduring plan that helps connect New Zealanders with each other and the world. The right regulatory framework will allow us to do that.”

Jetstar Group chief executive Stephanie Tully said the airport’s proposed redevelopment “would result in steep increases to passenger charges, impacting demand for air travel and our ability to offer the low fares we know Kiwis really value.”

Auckland Airport said it welcomed the Commission’s findings that its planned expenditure, including on the new domestic terminal, appears reasonable and benchmarks well internationally.

“Our goal is to deliver this infrastructure in a way that keeps travel affordable, while adding the necessary resilience and capacity the airport needs,” Hurihanganui said.

When setting charges, the airport must balance the need to keep charges fair to consumers with supporting investment in infrastructure, she added.

“A major factor in how the airport sets prices is its WACC, which is calculated with reference to a methodology established by the Commerce Commission…

“Today’s draft report shows a difference in how the commission considers we 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.”

Stakeholders are able to provide feedback on the draft decision before a final one is made.

In the meantime, domestic airlines are calling on the Government to commission an independent inquiry into airport regulation.