Auckland Airport has reset its aeronautical charges for Price Setting Event Four (PSE4), the five-year period spanning the 2023 to 2027 financial years, causing big airlines to speak out.
The new charges will take effect from July 1, 2023, ending the year-long price freeze that Auckland Airport adopted to help airlines rebuild following the pandemic.
Auckland Airport chief executive Carrie Hurihanganui says Auckland Airport has set its new charges following consultation with major airlines – something that happens once every five years in accordance with the Airport Authorities Act.
The new charges will fund part of the much-needed investment in infrastructure that is underway at Auckland Airport. For PSE4, this amounts to $2.5 billion of commissioned infrastructure, focusing on important airfield, terminal, baggage and transport improvements to be completed and in use by airlines by the end of the five-year period.
This change has sparked Qantas and Air New Zealand to speak out against the proposed changes.
Qantas and Air New Zealand, the two largest customers of Auckland International Airport Limited, have united in their opposition to the scale and cost of Auckland Airport’s planned redevelopment and are calling for an urgent rethink of the plan.
Air New Zealand and Qantas have each provided AIAL with details of their network impact, underpinned by independent economic analysis. This shows the cost of the Airport’s planned redevelopment is predicted to increase airport charges to the point that air travel may become unaffordable for a significant number of travelers. This would impact both airlines, including Qantas’ subsidiary Jetstar.
“We all agree that some investment in Auckland Airport is necessary,” says Air New Zealand chief executive Greg Foran.
“However, this is an enormous spend over a short period of time that adds almost no additional capacity. All it is expected to result in is more costs for everyone who uses, relies on, or passes through the airport, including the aviation industry, the tourism industry, the whole economy, and Air New Zealand’s passengers.”
“Airlines accept that investment is needed, but what AIAL is proposing goes far beyond what is needed or affordable,” says Qantas chief executive Alan Joyce.
“Based on Qantas’ experience, the necessary first phase of this redevelopment could be delivered for significantly less than $3.9 billion, and we’re conscious that the final number will probably be higher, with cost overruns common to most large infrastructure projects.”
Both airlines are calling on Auckland Airport to reconsider its approach, and their joint statement states industry analysis shows the longer-term pricing outlook for airfares is downwards as capacity constraints ease globally. However, cost pressures for the airline industry are increasing, limiting how far airfares can fall.
“Auckland Airport is disappointed by the airline response, and we reject any claims that our infrastructure investment will hurt the travel market. Our independent studies show it’s not true,” says an Auckland Airport spokesperson.
“Airlines have suggested that we keep travellers in the existing Domestic Terminal for longer. Travellers don’t want that, and it’s not the right outcome. The terminal is 57-years old and needs replacing. It will not get any easier or cheaper.
“The fact is airlines have long enjoyed very low domestic charges that fairly reflect the age and condition of the domestic terminal, and it’s in their financial interest to hang on to that for as long as possible. We get it.”
Air New Zealand and Qantas have come forward and suggested the following changes:
- • A pause on major growth programmes and their enabling projects while an affordable plan is developed, either through reducing cost or exploring a more workable funding and pricing model. There is a solution that provides a basis for sustainable growth and improving amenities over the medium term for AIAL, the airlines, and a better result for New Zealanders and the travelling public;
- • Investing some of the profits AIAL earns from other services like parking and retail to pay for some of the project; and
- • Prioritising reducing the impact of the cost of infrastructure so passengers and those who use airline services can afford to keep flying.
“Major airlines are reporting very healthy or even record profits, with some committing to multi-billion-dollar investment in their own fleet and airport hangars,” says an Auckland Airport spokesperson.
“We need to do the same to ensure travellers have a great experience when they travel through Auckland Airport. The domestic terminal was already under significant capacity strain in 2019 and then the pandemic came. We can’t delay this any longer.”
Carrie says the increase in PSE4 airline charges also reflected the higher cost of capital in the current economic environment compared to the previous price setting event.
“Travel is back, and the recovery is taking place more quickly than anyone expected. Now is the time for investment in Auckland Airport if we are to deliver the resilience and customer experience travellers want and the gateway New Zealand needs for the future.
“Our domestic terminal is 57 years old and needs replacing. We know travellers are fed up with the domestic travel experience – they’ve told us that clearly. Other key aeronautical infrastructure also needs replacing. The pandemic meant we had to put much of this investment on hold and we are now in catch-up mode.
“We don’t think any travellers would say we are making the move to upgrade the airport too soon,” she says.
Auckland Airport’s pricing announcement is the result of 24 months of extensive consultation with major airlines regarding aeronautical investment in Auckland Airport over PSE4 to support their business operations, as well as consultation over the airport’s wider ten-year development roadmap.
Airlines only begin to pay for new infrastructure once it is complete and in use, the airport says.
Carrie says the ongoing recovery in aviation is strong, as is the need to invest in critical aviation infrastructure for the future.
“There are now 22 airlines flying to 37 destinations to and from Auckland Airport, up from 12 airlines and 21 destinations during the toughest days of the pandemic. In May, international seat capacity recovered to 91 per cent compared to pre-pandemic and domestic recovered to 89 per cent. The return of airlines is also working to support the recovery of trade with 80 per cent of airfreight coming into Auckland in the belly hold of passenger aircraft.”
Carrie says Auckland Airport’s new aeronautical charges would be rising from a very low base, accounting for a small portion of an airline ticket.
“Auckland Airport has long been one of the cheapest major airports for airlines to operate from in the region.
“At $7 our current domestic jet aeronautical charges are 40-50 per cent lower than comparable airports in our region and have risen just 65 cents in real terms over the last decade, reflecting the ageing domestic terminal. Meanwhile, international charges have fallen 10 per cent in real terms over the past decade. Our charges currently represent about three to 3.5 per cent of the cost of an average domestic or international fare.”
From July, the following changes will be introduced to Auckland Airport’s aeronautical charges to airlines, which are calculated on a per passenger basis:
Domestic jet travel (Auckland to/from main centres):
- • Airline domestic jet charges will average $11.85 over the five-year PSE4 period. Charges will initially rise $3.50 from $6.75 to $10.25 – lower than current charges at Wellington Airport ($15.20), and at Christchurch Airport ($14.60).
- • Prices will then reach $15.45 by FY27, the final year of PSE4.
- • Regional airline charges:
- • Airline regional charges will average $8.15 over the five-year PSE4 period.
Regional charges will initially increase by $2.70 in July from $4.40 to $7.10 – this is $3 to $4 cheaper than comparable current charges at Wellington Airport ($11.20) and Christchurch Airport ($10).
- • Regional charges will reach $10.70 by FY27, the final year of PSE4.
International charges:
- • Airline international charges will average $37.25 over the five-year PSE4 period.
International charges will initially increase by $9.40 from $23.40 to $32.80 – this is lower than current published equivalent charges at other major international airports in the region including Sydney ($42.20), Melbourne ($35.90) and Brisbane ($56.70).
- • International charges will reach $46.10 by FY27, the final year of PSE4.
“These changes have not been introduced lightly, particularly in the current economic environment,” says Carrie.
“We are very mindful of cost to our airline partners and ultimately travellers. That’s why we have been working hard to deliver a pragmatic and affordable solution while responding to airline requests for changes as much as possible.
“At the same time, we’ve considered what we need to invest to ensure Auckland Airport’s infrastructure is at an appropriate standard, capable of delivering a good customer experience for expected passenger numbers and is resilient for the future. That’s our role. Doing nothing is not an option.
“Our new airline charges for PSE4 are in line with other comparative airports in the region. They will also be reviewed by the Commerce Commission.”
Auckland Airport’s prices across the 2023–2027 financial years target an after-tax return on investment of 8.73 per cent, equal to the mid-point weighted average cost of capital (WACC) calculated by applying the Commerce Commission’s most recent (2016) WACC Input Methodology, but using updated data as at July 1, 2022, the start of PSE4 and not applying any downward adjustments. This is consistent with Auckland Airport’s submissions to the Commerce Commission’s WACC Input Methodology review and is supported by independent expert analysis.
Over PSE4, Auckland Airport will invest up to $5 billion in aeronautical infrastructure, including work to progress the new domestic facility. However, pricing for PSE4 reflects just the $2.5 billion of investment that will be completed and in use by airlines and passengers by the end of that period.
Key projects to be delivered over PSE4 include critical infrastructure that will pave the way for construction of a new domestic facility to be integrated into the existing international terminal and replace the ageing domestic terminal. This includes:
- • $1.5 billion in enabling works for the new integrated domestic facility, including the largest expansion of Auckland Airport’s airfield in history at 250,000m2 or 23 rugby fields; providing new remote stands for jet aircraft; new fuel infrastructure; and stormwater capacity enhancements.
- • New baggage system to transform luggage handling at Auckland Airport.
- • A new experience for arriving and departing international travellers, with a new public drop off and pick up area on the doorstep of the international terminal as part of the Transport Hub development. Other roading and terminal forecourt upgrades are taking place to support terminal integration.
- • Expansion of the international check in area to accommodate more travellers for when the new integrated terminal opens.
- • Upgrades to improve the customer experience in the existing domestic terminal while the new integrated domestic terminal is being built.
While Auckland Airport is building a new $2.2b domestic facility integrated into the international terminal, the facility itself won’t be complete and open to passengers until 2028 or 2029 (beyond PSE4), meaning those costs will be reflected in the next pricing period (PSE5).
Carrie says Auckland Airport will continue to raise debt funding from a mix of both domestic and offshore markets to fund the capital expenditure programme. Because of the large forecast debt-funded ‘works under construction’ balance towards the second half of PSE4, she said new equity may be raised in future.
“This remains subject to a range of future uncertainties including the ongoing recovery in aviation, the future financial performance of Auckland Airport, and the execution run rate for the 10-year capital roadmap,” she says.
Auckland Airport is continuing to consult with airlines on potential future regional terminal infrastructure, the solution for which is currently expected to be in use during PSE5. The second runway does not feature during PSE4 and the project remains on hold.
