Auckland Airport charges are too high, says Commerce Commission

Amidst the ongoing battle with airlines and Auckland Airport costs — the Commerce Commission says the airport's targeted returns are "in excess" of what it considers reasonable.

In February, 1News reported Air New Zealand lodged an official request with the Commerce Minister Andrew Bayly, seeking an "urgent inquiry into the regulation that is failing to constrain overspending by Auckland Airport".

The airport has proposed a $7-to-$8 billion investment plan over 10 years, which included a new domestic terminal and transport hub.

Air New Zealand responded to the investment plan by saying: "This will be paid for by airlines through steadily increasing aeronautical charges, leading to unaffordable airfares for some Kiwis".

While reviewing the airport’s pricing decisions for the five-year period from July 1, 2022 to June 30, 2027, Commissioner Vhari McWha said the commission considered whether the airport’s pricing decisions and expected performance were likely to promote the long-term benefit of consumers.

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

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

"These charges are a cost to airlines and, while it is up to each airline to manage these through airfares, we are conscious that travellers are likely to bear much of that cost when using Auckland Airport – and they don’t really have a choice, which is why we have a role as regulator in reviewing pricing," said McWha.

Auckland Airport was targeting a return of 8.73% from priced aeronautical activities — for example, aircraft landing and passenger terminal charges.

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

"The return targeted by the airport means it will earn about $200 million in excess profit, compared to the Commission’s benchmark over the five-year period."

The commission also reviewed the process followed by Auckland Airport to set its capital expenditure plan, including the factors it took into account and the evidence it considered.

“While the airport’s customers agree that there is a need for investment, there are differing views on the type, size and timing of the solutions. However, based on the information presented to and analysed by the commission, the airport has followed appropriate processes, considered a diverse range of options for its new terminal building, and applied rigour in costing its investment plan.”

Among Auckland Airport’s projects was a new domestic terminal to replace the existing 57-year-old Domestic Terminal Building. Integrated with the international terminal, the airport said it would improve service quality and customer experience, especially for transit passengers, and provide capacity for long-term growth in passenger numbers.

The commission's other key draft conclusion related to the airport's approach to depreciating its new investment. This affected how the capital cost was recovered from airport charges over time. A different approach could be used to smooth price increases over the lifetime of enduring infrastructure assets.

"We are not convinced the straight-line depreciation approach best promotes the long-term benefit of consumers, when the significant upfront investment is likely to be used by a growing number of passengers in the long run."

The airport consulted stakeholders on its Draft Capital Plan in 2022 and shared a revised version in February 2023 — with a $430 million reduction in spend over the five years to June 2027.

However, the cost over the 10-year investment programme has increased, largely driven by rising construction costs due to inflationary pressures and the increased cost of capital. The planned investment totalled $6.6 billion over 10 years, with approximately $5 billion to be spent during the 2022-2027 period.

McWha added the findings were issued in a consultation paper as an opportunity for all stakeholders to provide feedback before the commission’s conclusions on the review were finalised.

In a joint statement, Air Chathams, Air New Zealand, Barrier Air and Jetstar all welcomed the Commerce Commission's findings.

"Today's report shows that Auckland Airport is targeting excess profits between $193.4 million and $226.5 million over PSE4. The Commerce Commission previously found that Auckland Airport was targeting excess profits of $53m in PSE3 (2018 to 2022).

"When airports make excessive profits, it's ultimately airline passengers who are paying.

"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 airlines called on the Government to urgently commission an independent inquiry into airport regulation.

"This can be conducted under s56G of the Commerce Act, at the Minister's direction."

Air Chatham's chief operating officer Duane Emeny said: "An inquiry into airport regulation is a crucial opportunity to establish a regulatory environment that more effectively protects consumers and ensures that airport investments are made responsibly and affordably."

Air New Zealand chief executive Greg Foran said: "New Zealanders are in the midst of a cost of living crisis and businesses are cutting costs, the last thing they need is 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."

Meanwhile, Barrier Air chief executive Grant Bacon said: "The currently proposed redevelopment at Auckland Airport still has turboprops in another terminal, meaning smaller carriers and regional passengers need to walk to another terminal and get very little from the large-scale development, but we'll still be paying for it. There is also no new runway factored in to the large spend."

Jetstar Group chief executive Stephanie Tully said: "As a low cost carrier, Auckland 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."