Airport adopts 10 yr asset revaluation moratorium

Auckland Airport adopts 10 year asset revaluation moratorium

Auckland International Airport Limited (AIAL) has implemented a 10 year asset revaluation moratorium for aeronautical pricing purposes until 2017.

AIAL announced today that landing charges for airlines will rise 2.5% per year for the next five years from 1 September 2007. The Airport Development Charge (ADC) will remain the same at $25 (inclusive of GST) per departing international passenger 12 years and over until 1 July next year. The ADC will be renamed the “Passenger Service Charge” (PSC) and will be levied on the airlines. This will remove the need for passengers to pay the ADC at the airport, bringing the approach into line with almost all other international airports around the world.

From 1 July 2008, the PSC will be split between departing and arriving passengers and will increase 50 cents (per international departure and arrival) each year for three years. As currently applies, there will be no charge for children under 12 years of age.

AIAL’s chief financial officer, Robert Sinclair said the approach to asset revaluations in determining aeronautical prices had become a key issue between airports and airlines in Australasia. AIAL has chosen to address the airlines’ concern by agreeing to a moratorium on asset revaluations for aeronautical pricing purposes for the next 10 years. This significant change in approach is in line with the pragmatic solution proposed by the Australian Productivity Commission in its recent report into the price regulation of airport services in Australia.

‘We hope that this approach will remove much of the uncertainty and tension in the price setting process going forward.”

“In addition, in settling prices for the next five years, we have recognised the unanticipated large increase in our airfield land values over the last pricing period by crediting $99 million to the airlines. This represents more than half of the unanticipated increase in airfield land value. We have also elected to retain the 30 June 2006 values for pricing purposes, as opposed to updating them to current values.”

“We have also adopted an opportunity cost approach to airfield land valuation based on Market Value Alternative Use (MVAU) rather than the previously used Market Value Existing Use approach which has historically been adopted by airports in New Zealand, and which is supported by valuation and legal precedent.

“Furthermore, we have moved away from the Avoidable Cost Allocation Methodology approach to allocating common costs, to a simpler and more transparent allocation based on terminal space.”

“These are some of the significant concessions made as part of the aeronautical pricing process. In setting our prices, we have also been very conscious of acknowledging the latest regulatory thinking in Australasia, including the Australian Productivity Commission and the New Zealand Commerce Commission.”

Mr Sinclair noted that these concessions will result in aeronautical revenue per passenger at Auckland remaining at similar levels to when the company was corporatised in 1988, on an inflation adjusted basis.

The details of AIAL’s approach include:

 Optimisation – AIAL has been cognisant of the Commerce Commission’s approach on which land should be included for pricing purposes and has optimised the seabed, Wiroa Island, certain portions of the approaches land and a significant amount of the second runway land.

 Valuation – AIAL has adopted the opportunity cost method of valuing airfield land based on Market Value in Alternative Use rather Market Value in Existing Use.

 Revaluation gains – AIAL has credited $99 million to the airlines with respect to unanticipated revaluation gains over the last pricing period.

 Valuation moratorium – AIAL has agreed to a moratorium on asset revaluations for aeronautical pricing purposes for the next 10 years.

 Cost allocation – AIAL has allocated common costs based on share of space rather than the avoidable cost allocation method used previously.

 WACC – based on advice from Dr Alastair Marsden, a weighted average cost of capital range for the five year period of 8.67% - 10.88% has been adopted for both the airfield and terminal based on an annualised risk free rate of 7.26%, market risk premium of 7.0% to 8.0% (mid-point 7.5%) and asset beta of 0.50 to 0.70 (mid-point 0.60). From FY09, this will change to a range of 8.76% - 11.00% based on an updated corporate tax rate.

Mr Sinclair said the aeronautical pricing consultation process between AIAL, BARNZ and the airlines has been extremely thorough and transparent. Common ground has been reached in quite a number of areas.

AIAL has also had its approach peer reviewed by a highly regarded international agency, Frontier Economics. Frontier Economics has confirmed that AIAL’s aeronautical charges are reasonable.

“We have acknowledged the latest regulatory thinking and proactively incorporated significant concessions with a view to reaching a very sensible and pragmatic outcome. In effect, there is no increase in aeronautical charges per passenger in real terms despite substantial increases in capital expenditure. The process has shown that the current light handed regulatory approach works well.

Most importantly, we now look forward to continue working with BARNZ and the airlines to develop a framework to enhance and add greater certainty to the aeronautical pricing process going forward. We believe the current process, which has involved many concessions on both sides, provides a strong foundation for the development of such a framework.”

ENDS

See... Frontier Report Summary (PDF)

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