The Commerce Commission has today published its final report on Auckland Airport's 2022 – 2027 price setting event, concluding the Airport's forecast revenue is excessive and its targeted returns are unreasonably high, but its forecast investment falls within a reasonable range.
Commissioner Vhari McWha says that while the Commission does not regulate the prices set by the Airport, the review helps determine if the Airport's pricing decisions and expected performance promote the long-term benefit of consumers.
"The Airport is targeting excess profit of about $190 million and its charges are too high, with businesses and consumers likely to end up carrying much of the cost-burden."
The excess profit represents a targeted return of 8.73% from priced aeronautical activities — for example aircraft landing and passenger terminal charges — compared to the Commission's estimated reasonable return of between 7.3% and 7.8%.
"Price increases will fund investment needed to improve customer experience, build more resilient infrastructure and add additional capacity, but the increases are higher than what is needed to achieve these outcomes," says Ms McWha.
Among Auckland Airport's projects is a new domestic terminal to replace the almost 60-year-old existing domestic terminal building. Integrated with the international terminal, the Airport says it will improve service quality and customer experience, especially for transit passengers, and provide capacity for long-term growth in passenger numbers.
When it comes to costing its investment plan, Ms McWha says the Airport followed appropriate processes.
"While views on the type, size and timing of the investment differ among the Airport's customers, our analysis shows Auckland Airport engaged multiple third-party experts to assist with costing its investment plan and considered a wide range of options for its new terminal building.
"There are a range of investment outcomes that are consistent with what we'd expect to see in a competitive market. This range reflects uncertainty about future demand and choices about factors such as service quality. We are satisfied that Auckland Airport's decision is within this range."
The Commission also concluded that a different approach to recovering depreciation of the new terminal infrastructure would better serve consumers' interests. Depreciation refers to how capital investment is recovered through airport charges over time. This approach would lower charges in the short term and be more consistent with outcomes in a competitive market. Auckland Airport has signalled it will reconsider this issue when it next sets prices and the Commission is satisfied this is sufficient to capture most of the investment value.
The Commission's final conclusions are largely in keeping with its draft conclusions, which were published in July last year.
View the final report.
Background
Auckland, Christchurch and Wellington international airports are subject to information disclosure regulation under Part 4 of the Commerce Act. The regulation improves transparency of the airports' performance around profits, investment, pricing, and service levels.
The Commission does not set the prices charged by the three airports. Under the Airport Authorities Act 1966, the airports set prices as they see fit, but are required to consult substantial customers, like airlines, on charges and any major capital expenditure plans.
After prices have been set by the airports, the Commission publishes its reviews of the outcomes so that the airports' conduct and performance can be scrutinised by interested parties, including the public. This can influence the airports' behaviour and decisions. To date, the airports have been responsive to the Commission's review conclusions. For example, in 2019 Auckland Airport reduced its charges by $33 million following the Commission's review of its third price setting event.
In setting out its final conclusions for Auckland Airport's pricing decisions for the five-year period running from 1 July 2022 to 30 June 2027, the Commission assessed material and inputs relating to profitability, investment plans, pricing efficiency and innovation.
