Commerce Commission concerned Auckland Airport's profits too high

The Commerce Commission is concerned Auckland International Airport’s profits may be too high over the next five years, and is not convinced it is targeting appropriate returns.

The corporate watchdog, which released its draft report this morning on its review of Auckland Airport’s pricing decisions from July 1, 2017, to June 30, 2022, says returns over this period may be too high.

Auckland Airport is subject to information disclosure, which is a light-handed form of regulation that makes sure excessive profits are apparent.

The Commerce Commission regulates the airfield, passenger terminal activities and aircraft and freight. It does not regulate retail facilities, car parking and transport access.

Auckland Airport can set prices as it sees fit but must consult with substantial customers, such as airlines, on charges and any major capital expenditure plans. The commission then reviews airport pricing decisions but does not regulate them.

Deputy chairwoman Sue Begg said the airport has not yet satisfied the commission the returns it is targeting on its regulated asset base are appropriate.

Auckland Airport is targeting a return of 7.06%, which is above the commission’s mid-point benchmark of 6.41%. (In the year to June 2017, the airport generated a regulated return of 10.8% after tax compared to the commission’s estimate of its weighted average cost of capital that year of 5.9%.)

“This difference in target returns could result in customers paying an additional 61c per flight over the next five years, or put another way – Auckland Airport earning an additional $47 million in profits after tax,” Ms Begg says.

The commission also considers the higher return targeted by Auckland Airport will mean the value of the assets held for the second runway the airport proposes to build in 2028 might be overstated by $8m.

“There may be legitimate reasons for Auckland Airport to target higher returns than our benchmark,” Ms Begg says.

“However, based on the information it has provided to date, we are yet to be satisfied that it will be acting in the long-term interest of consumers and limited in its ability to earn excessive profits.”

Airlines are already of the view Auckland Airport is making too much money.

In a submission made at the end of last year, the Board of Airline Representatives said “Auckland Airport is targeting excessive profits” and its inflated weighted average cost of capital results in a transfer of wealth from passengers and airlines to the airport of more than $65m over the next five years.

In a letter to the commission in November, Air New Zealand chief financial officer Rob McDonald said Auckland and Christchurch airports were both targeting excessive profits.

“This statement is reinforced by observing the extraordinary total shareholding returns achieved by Auckland Airport over the past 15 years,” he said.

“As the lightest of regulatory tools, information disclosure is not able to restrain such profit taking.”

Changes to funding infrastructure
As part of the Commerce Commission’s review, it looked at the forecast cost, timing and consultation for the airport’s planned $1.8 billion terminal and aeronautical infrastructure redevelopment.

The airport made price changes last year to pass part of the cost of its infrastructure spending programme on to airlines.

While the average annual international passenger charge was cut by 1.7%, the equivalent domestic fee was hiked by 0.8% to help fund three more contact gates for international aircraft, a new domestic jet terminal, expanded border processing area and public arrivals space, and upgrades to international check-in.

The planned redevelopment is significantly higher than historic investment, responding to growing demand.

“We do not have significant concerns about these redevelopments and recognise strong passenger growth is putting pressure on their facilities and expenditure,” Ms Begg says.

“We note the challenges the airport faces in maintaining a working airport during construction but look forward to the level of service quality improving over the long term as a result of these significant redevelopments.”

She says the draft report provides an opportunity for stakeholders, including the airport, to provide further information. Submissions are due by May 25 and cross-submissions by June 8.

The commission expects to publish its final report in September.

Auckland Airport’s profit after tax for the six months to December 31 was up 17% to $165.9m while underlying profit after tax increased 7.8% to $133.1m. Revenue increased 6.9% to $332.4m.

Full-year underlying profit is expected to be in a range of $250-257m. This will deliver underlying earnings per share growth of between 0.6% and 3.5% compared with the 2017 financial year.

Its share price has fallen 9% in the past 12 months to $6.20.