The Commerce Commission is concerned Auckland International Airport (AIA) is planning to make $47 million more profits on its regulated assets than it should, and that customers will get overcharged. But for the time being its hands are tied in terms of doing much about it.
Under a light-handed regulatory framework designed to curb price gouging in markets with little or no competition (like airports), Auckland Airport has to disclose its present and future profit expectations and the Commerce Commission periodically reviews them. Ironically, however, it can’t force airports to change the amount of money they intend to make, or impose penalties.
In an initial finding published this morning into AIA profits between July 1, 2017 and June 30, 2022, the competition regulator says it is concerned about excessive profits. Auckland Airport is targeting a return on its regulated asset base of 7.06 percent, against the commission’s mid-point benchmark of 6.41 percent.
“This difference in target returns could result in customers paying an additional 61 cents per flight over the next five years. Or put another way – Auckland Airport earning an additional $47 million in profits after tax,” says the commission’s deputy chair, Sue Begg. It would also mean the assets the airport holds for construction of a second runway being overstated by $8 million.
The valuation of regulated assets drives ultimate returns.
“There may be legitimate reasons for Auckland Airport to target higher returns than our benchmark,” said Begg. “However, based on the information they have provided to date, we are yet to be satisfied that they will be acting in the long-term interest of consumers and limited in their ability to earn excessive profits.”
A report in NBR suggested the airport generated a 10.8 percent return in the year to June 2017, compared to the commission’s estimate of its weighted average cost of capital that year of 5.9 percent.
AIA’s chief financial officer Phil Neutze says the airport is heartened by the extent to which the commission had accepted that its risk profile would change with additional investment, and that there were “a lot of areas of analysis that we can bolster, particularly as the commission has been good at setting out what they require”.
“We believe we can provide a lot to give more comfort.”
Neutze could not comment on the potential for the commission to eventually agree a higher rate than its target returns mid-point, but lower than what AIA is currently seeking.
Based on the information they have provided to date, we are yet to be satisfied that they will be acting in the long-term interest of consumers and limited in their ability to earn excessive profits.
If the two sides can’t agree, it’s not clear what, if anything, the commission can do. The theory behind the light-handed regulation is to shine a light on companies seen to be exacting excess profits, with the idea they will then back down, under the threat of more punative legislation being introduced.
A ComCom spokesperson says airports have been responsive to the incentives created by the information disclosure regulation.
“For example, Wellington Airport reset its prices after concerns were raised during our review of prices in 2012. Today’s report on Auckland Airport is a draft report and we are seeking further information ahead of making our final report in September.”
However, the Commerce Amendment Bill currently before Parliament proposes amendments to improve the effectiveness of the regulatory regime for airports.
Submissions on the draft report are sought by May 25, including comment from airlines, which are likely to accuse the airport of ramping up profits to the detriment of airlines and their passengers. In November, Air NZ CFO Rob McDonald told the commission both Auckland and Christchurch airports were looking at excessive profits.
Neutze could not comment on the potential for the commission to eventually agree a higher rate than its target returns mid-point, but lower than what AIA is currently seeking.
In a March 9 letter to the commission, the airport’s head of economic regulation and pricing, Adrienne Darling, said the company’s “decision on the appropriate target return … was informed by our understanding of the systematic risk to Auckland Airport that would flow from the major step-change in our capital expenditure programme relative to historic levels”.
The airport has plans to spend $1.8 billion on terminal and infrastructure development.
The Commerce Commission will publish its final decision in September. Its last report came out in 2013 and was happy with the airline’s level of profits.
AIA is New Zealand’s second-largest listed company by market capitalisation, at $7.46 billion based on Tuesday’s closing share price of $6.20. However that price has slid 9.6 percent in the last year and has fallen 15 cents in the last 11 days.
