Commission reports on Christchurch and Auckland Airports

1 November 2018
Release No. 65

Commission broadly satisfied with Christchurch Airport but concerns remain with Auckland Airport’s targeted profitability

The Commerce Commission has released its final reports on Christchurch and Auckland Airports’ pricing decisions for the period 1 July 2017 to 30 June 2022.

Auckland and Christchurch Airports are subject to a form of regulation called information disclosure, which involves the Commission shining a light on the airports’ performances – their profit, investment, pricing, and service levels.

Deputy Chair Sue Begg said the Commission’s view remains that the returns targeted by Christchurch Airport are generally acceptable, but that Auckland’s targeted returns are not fully justified.

“As signalled in our draft report, the returns Christchurch Airport is targeting for most of its regulated services are reasonable and consistent with promoting the long-term benefit of consumers,” Ms Begg said.

“We had no significant concerns with Christchurch Airport’s expenditure and demand forecasts, or the efficiency of its prices.”

In response to the Commission’s draft report, Auckland Airport submitted that its targeted returns were justified given the risks associated with the significant investment programme it plans to undertake to manage passenger growth.

“We acknowledge that Auckland Airport’s passenger numbers have grown significantly in recent years and could continue to grow. In this regard we believe its planned $1.8 billion terminal and aeronautical infrastructure redevelopment is likely to benefit consumers long-term by reducing congestion and improving service quality,” Ms Begg said.

“We consider that the risks associated with the investment programme could justify a return that is slightly higher than our benchmark estimate. However, we aren’t persuaded that the full extent of Auckland’s targeted return is warranted.”

The Commission estimates Auckland Airport would earn an additional post-tax return of $37 million on the majority of its regulated services – the equivalent of 50c per passenger per flight over the five years – compared to the Commission’s benchmark.

Not all of this additional return necessarily represents excessive profits, as Auckland Airport has provided some evidence that an appropriate return may be above that benchmark.

The Commission considered the efficiency of Auckland Airport’s pricing and its forecasts of operating and capital expenditure as part of its overall assessment of performance and found no major concerns in these areas.

The Commission also noted that the incentives from the information disclosure regime have strengthened over time, as both airports’ target returns are significantly lower than when they previously set prices.

Copies of the final reports for each of Christchurch Airport and Auckland Airport can be found here.

Background

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

Under Part 4 of the Commerce Act 1986, which regulates markets with little or no competition, the three 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. See an infographic detailing airport regulation.

Expected profitability for the period 1 July 2017 to 30 June 2022

“Priced services” include the use of airfield runways and taxiways, air bridges and baggage handling services. “Other regulated services” may include terminal lounges, and facilities and services for the operation of customs, immigration, quarantine checks, security and Police services, refuelling of aircraft, and storage of freight.

The Commission’s mid-point weighted average cost of capital (our benchmark WACC) for airports is 6.41%. The actual WACC for the airports is unobservable to both us and the airports themselves. Airports do not have to apply our WACC estimate when setting prices or for disclosure purposes. However we apply our WACC estimate to monitor and analyse information disclosed by the airports. We consider our mid-point WACC estimate of 6.41% to be the appropriate starting point when assessing returns. The onus is on the airports to provide sufficient reasoning as to why their targeted returns may be different to this estimate, which we publish in advance. Any reasoning needs to consider the long-term benefits of airport consumers.

Although the expected returns for “other regulated services” at both airports are above our mid-point WACC, these services are priced under individual contracts with varying terms and lengths. We consider these returns would be better assessed over a longer timeframe.

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